Guest Post: Would You Go To A U2 Concert Without Bono?

From Peter Tchir of TF Market Advisors

Guest Post: Would You Go To A U2 Concert Without Bono?

It will be interesting to see what happens with Apple over the next few days and weeks.  Clearly Mr. Jobs did not do it alone, but on the other hand, he didn't just create the best products, he created new product categories.  I think it will come down to Apple people trusting themselves and doing what they know how to do.  The only thing I know for sure is that Apple is almost 15% of QQQQ and just over 3% of the S&P 500.

Today all the CDX credit indices are doing well globally.  Italian and Spanish bonds remain stable, with 10 year yields right about 5%.  The only obvious problem in credit this morning is Greek 2 year bonds which are trading below 60% of par.  If you assumed a 60% recovery for Greece that now implies a 100% probability of default.  The market is clearly ignoring this latest downturn in Greek bonds, which is on low volume, but with growing disagreement amongst the European governments, it is worth remembering this problem.

IG16 is definitely outperforming stocks today.  It is about 3 tighter, at 122, while stock futures are a tiny bit lower.  That CDX indices are coming back into line makes sense, since credit largely ignored almost 60 points of the S&P run-up.  It looks like IG16 is trading as much as 6 bps rich to intrinsics.  Earlier this week, I mentioned that we don't usually see the end of widening until the indices trade very cheap.  It is now actually trading very rich?  It could be a sign of more to come.  It is hard to think of a rally from 130 to 122 as creating very overbought conditions, but it is possible.  The indices are the pain tool.  Long biased cash bond holders who have been using index to manage disaster protection have been working hard to avoid getting whipsawed.  Playing the most liquid part of the market to protect against illiquid positions is a difficult trade to manage well.  The indices tend to overstate how good or bad the market feels, and with big bid/offers in the actual bond world, it is hard to get a true read from the cash markets.  I suspect that people are getting long credit again, first by taking off their hedges, but will actually try and sell some bonds into any strength rather than using the index - if they get the chance.

HYG has been fairly stable and the shares outstanding haven't changed much in the past week.  Both positive signs for credit.  LQD actually saw some inflows.  I guess that the move in treasuries pushed some people down the credit curve in an attempt to retain yield. 

Gold.  After a 3 day beating where it is down almost 200 from the highs, it seems awful.  Except that it is still higher than it was on August 8th.   And it is 250 higher than it was at the start of the quarter.  Margin requirements went up (seems like it was leaked).  Previous margin hikes on commodities have had limited long term impact on price direction.  Gold should be no different.  It makes sense for the exchanges to increase margins as the daily vol seems to be increasing.  $25 a day change now seems about normal, so the increased protection to participants in the market that is provided by increased margin seems reasonable.  I cannot imagine many people using a lot of leverage to play this market given the extreme swings.  I think margin calls will be met as no one is playing this market that levered so they have the cash on hand.  Also, the biggest gold bugs in the world all seem to want to own physical gold.  That, I assume, is a no margin business, another reason not to get too worried about the margin hikes if you are long gold.  Gold will continue to be far more impacted by global economic conditions, central bank and government rhetoric, and central bank actions (I'm assuming governments aren't doing anything, anytime soon).

That just leaves Jackson Hole.  I think this will be a yawn.  Any big new programs announced or hinted at could help the market, though even that feels partially priced in.  Anything pretty generic has already been said and is unlikely to help the market.  If he comes out attacking the government, that could actually spook the market.  By and large I don't think he will say anything that helps the market.  My sense is that a lot of people are saying that they don't expect him to do anything, but are positioned for him to do something.  It reminds me a lot of the behaviour ahead of the debt ceiling limit. Lots said that the government might not come to agreement, but they all bet that they would.

And from jobs to jobless.  Claims once again higher.  Last week's number once again revised higher.  Once again I am left wondering how after so much weakness we can still pretend that even 400k would be a good number, let alone 417k.


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