JPM, Just the Facts, Ma’am.
Some details on the JPM situation by Peter Tchir of TF Market Advisors.
I wish we could go into just the facts, but frankly we don’t know the facts, so here is my best guess at piecing together what happened and what some of the consequences might be. I hope it is mostly correct, which means it is balanced and not sensationalized like so much else that is out there on this subject.
Short High Yield Market
Last year, I think they went short the high yield market globally, primarily through CDS. They generally wanted to buy cheap jump to default (“JTD”) risk, so they focused on the short end of the curve, and on first loss tranches. This created trades in a variety of series of XOVER and HY.
The trade worked well, and defaults in names like Eastman Kodak and American Airlines came quickly and helped make a lot of money. Some other distressed names saw a flattening or even inversion of their curve on the back of that, generating yet more money.
Chart Update
As frequent readers of The Trader know, we have been rather bearish on the markets over the past months. The formation we wrote about during the “topping” out phase, all broke down, and have now reached crucial support levels. We are not suggesting this is the all in bottom, but from a trading point of view, many European indices are reaching support levels and we are probably looking at an aggressive boune to the upside. Our long term view is still with a bearish bias, but in the short term time frame, we expect the support levels to hold.
Essential chart update below.
Inside the CPI
Guest post by Doug Short.
The Fed justified the previous round of quantitative easing “to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate” (full text). In effect, the Fed has been trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level — specifically to your household?
Let’s do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I’ll refer to hereafter as the CPI.
Spain’s Economy minister blames Greece (and the market)
The Trader has covered the topic of how Spanish banks value properties. The Spanish economy is in a free fall mood, but things aren’t helped by the great denial, stretching from the average Joe to the Economy minister. We are now hearing it is all Greece’s fault, and the market is pricing unrealistic assumptions. Just like the imaginary world of Don Quijote, this is just another sign of the great denial in Spain. From El Pais.
“Greece has a contract: in exchange for assistance it has to put in place certain economic policies, but without a government that is not possible,” De Guindos said. “We have to think about the future steps that have to be made in Greece. We have to analyze what has been done in the case of Greece for the implications this crisis has for the rest of the Union. Greece doesn’t want to leave the euro. On this there has to be coordination; governments have to do their homework but the EU also has to do its homework.”
The government has said it will appoint two independent appraisers to carry out the valuations. “There are doubts about the Spanish banking system,” De Guindos said. “The government maintains that the perception of the reality the markets have is worse than the reality. That is why we have undertaken this exercise in transparency.”
A Look at the Pullbacks of the 2009-2012 Bull Market
With the market “stubbornly” drifting lower and more and more people stuck with the long positions, let’s review the pullbacks. Guest post by Vix and more.
At various times over the past three years, I have been posting a table that I call the VIX and More 2009-12 SPX Peak to Trough Pullback Summary, the most recent version of which can be found in a March post, Putting the Current 2.6% SPX Pullback in Recent Historical Context .
This time around I thought it might be of more value to present the same data, which now includes 17 pullbacks over a the course of a 38-month period, in the form of a scatter plot, with the magnitude of the peak-to-trough drawdown on the y-axis (inverted) and the number of trading days from the peak to the trough on the x-axis.
In the graphic below, I have highlighted the current 6.6% pullback from the April 2nd high of SPX 1422 with a solid red diamond. This pullback now ranks as the 6th deepest in terms of peak-to-trough magnitude and 3rd longest in terms of peak-to-trough trading days. Interestingly, the 6.6% pullback over the course of 30 days is well below the (dotted black) linear trend line for the full data set; the trend line prediction for 30 days is in fact a 9.3% pullback, which I have plotted with a hollow red diamond.
For reference, I have also annotated the top two pullbacks during the past 38 months:
- 21.6% over 109 days from May to October 2011
- 17.1% over 48 days from April to July 2010
News That Matters
Ft.com
Shareholders in Europe’s listed companies will be given a binding vote on pay while those who invest in banks will gain powers to set a cap on bonus levels, under plans being drawn up by senior EU officials. The initiative from Michel Barnier, the EU’s top financial services regulator, would hand bank investors the voting power to curb “morally indefensible” pay and limit the gap between the lowest and highest paid. Banks would also be forced to disclose their top 20-30 earners. http://www.ft.com/intl/cms/s/0/35bcd8f6-9ea8-11e1-9cc8-00144feabdc0.html#axzz1v0L4fkM1
Greece is heading for a fresh general election after its political parties failed to form a national unity government because of opposition from the anti-bailout Syriza coalition. President Karolos Papoulias, who chaired three failed meetings with political leaders in as many days, was unable to bridge differences between Syriza and the two pro-euro parties, the centre-right New Democracy and PanHellenic Socialist Movement (Pasok). A caretaker government will be chosen on Wednesday to oversee the election, expected on June 17. http://www.ft.com/intl/cms/s/0/5aa74018-9e88-11e1-a24e-00144feabdc0.html#axzz1v0L4fkM1
The leaders of France and Germany on Tuesday joined forces to urge Greece to reaffirm its commitment to membership of the eurozone, after François Hollande flew to Berlin for talks with Angela Merkel, German chancellor, within hours of being installed as French president. Both spelt out their concern that Greece should remain a full member of the common European currency, while promising to consider new measures to revive economic growth in the country. But they also agreed that Athens must carry out the austerity programme it has agreed with the European Union and the International Monetary Fund. http://www.ft.com/intl/cms/s/0/fa18437e-9ecc-11e1-9cc8-00144feabdc0.html#axzz1v0L4fkM1
Much more reading below.
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