Guest post by Gold Silver Worlds.
Michael MacDonald and Christopher Whitestone did a superb Q&A with GoldSilverWorlds. In their book “The Silver Bomb” (available on Amazon.com), they wrote about their views on the world and the markets. They have summarized it and enriched with recent facts and figures.
The markets are completely bought and paid for, corrupt, and manipulated … “a farce”. We are in a corruption bubble, the largest corruption bubble the world has ever seen in modern history and perhaps in all history. This is the first time that the world has been united within instant communication, instant information, instant deposit or receipt of funds into any bank account or financial institution. Michael says: “I believe that we are already a one world order. I actually think we are already there, electronically certainly. I also think that a lot of the debates, wars and conflicts are manufactured, very similar to the presidential debates which are also manufactured. I believe we live in a one-world system, which financially is already completely manipulated.”
We don’t live in a free market. We haven’t lived in a free market for decades, if not since 1913. We have the most powerful agency in the world, the Federal Reserve, setting the interest rates and the value of the world’s reserve currency. Everything that stems from that is built upon deceit and fraud. This doesn’t bode well for the entire financial system as a whole and right now, we are seeing the ramifications of that deceit.
We are in the lengthening of this financial market topping. A lot of things are happening that point to any one of several large enough dominos falling over which is going to have a splash and pullover effect. Within three years we are going to see this farce imploding. Michael thinks that we will have something completely different and unrecognizable to what we currently have.
Good recap by Peter Tchir.
Too Early To Dream of a Fix, but Worth Reviewing what has happened
If “buy and hold” and the “carry trade” is the dumb money, it has done pretty well, even in Spain of all places. There have been opportunities to short Spain and make a lot of money, but it is worth pointing out how resilient it has been.
The best total returns for buying the Spanish 5 year were just over 13%, back in November of last year and this July. Had you bought at the peak of LTRO fever you are still down about 1%. I don’t do buy and hold, and was extremely bearish leading into LTRO, but it is a stark reminder that being short pits you against uneconomic buyers with deep pockets. I am now neutral at these levels, and will go into detail when I examine the risks of “Outright Monetary Transactions” or OMT.
Guest post by Peter Tchir.
I remain confused at these levels. I continue to look at the various markets and come away without a strong opinion. Over the course of the year I have had strong opinions. They have worked out, though I got short too early and long too early, the trades worked well. So not having a strong opinion is unusual.The two exceptions are when I look at CDS and when I look at Apple, but my conclusions there come out completely contradictory.
IG18 at 85. I’ve written about this many times and have been right. I even managed to call the bounce off of 98 back to 102 (it went to 103.5) and back tighter. I find the reasons for that call to continue to play out, and as we approach the September roll and the often disappointing September new issue calendar there are more reasons for this tightening to continue. The problem is that it will not tighten if Apple weakens significantly.
Apple is a Macro Asset Class. We seem to be in one of those periods where Apple has transcended just being a single company, and is an asset class of its own. This isn’t just because it is such a big portion of U.S. indices, though that is a part of the story. What I’m seeing is bears buying into Apple to cover some of their shorts. They are getting hurt on shorts in virtually every area. They hate the market and the economy, but the pain on shorts is too much so they have to cover. Many can’t bring themselves to buy anything since the stench of slow growth, failing Europe, fiscal cliff, etc., is so overpowering, except in the case of Apple. They can bring themselves to buy Apple. It is loved, has done well, investors don’t look at you like you have 4 eyes if you say you own Apple.
Guest post by Peter Tchir.
I liked the book. It was a good read. It is also a compelling strategy. Find something that costs next to nothing to put on with huge potential gains. The big short was the ultimate elephant hunting or lottery ticket.
The beauty of the big short is that some investors found some obvious flaws in a market. They thought the deals themselves had problems and the structure of the more complex deals was also done incorrectly. They went against the grain, they used logic and intelligence to find an opportunity, and in turn crushed it. It really is a great story and is incredibly compelling.
The problem is that things mostly trade rich, because they don’t have much value. CDS, contrary to popular opinion, doesn’t typically have big payouts. It often trades tight because most companies don’t run into trouble.
It is exciting to spot trouble, huge amounts of money can be made getting short, but it isn’t easy. More often than not, companies wiggle out of trouble and it is easy to be bled to death on carry. I like being short, it can be a great strategy, but it isn’t easy.
That to me is one of the biggest problems in the market. Investors, many of whom have underperformed, and are all looking for the big kill to make up the year. Everyone is looking for that one trade that will result in stellar returns, and as far as I can tell, most have come to the conclusion that being short is that trade. As volatility (VIX) has collapsed and stocks have marched higher, many have continued to look at CDS and the credit markets as an ideal short. “It doesn’t cost much” and “can have a huge payoff” is the rationale. To a large extent that is true, but so far it hasn’t worked.
Guest post by Peter Tchir.
The one source of sellers that is missing, is the correlation desk. With that gone, you miss the leverage of some “less than smart” bank selling $100 million of mezz protection that turns into $1 billion of the sketchiest names out there, but the situation on bank hedging is interesting. Need to get through ECB this week, and some realistic quantification of LIBOR liebility, but CDS seems set to outperform stocks and bonds.
Is IG18 going to zero?
Probably not, but I think we could see an “eclipse” this week where IG18 trades lower than HY18. That has often been a sign of continued bullishness (though it failed in March) and I think IG could set new tights for the year.
I don’t particularly like U.S. equities here. I don’t like the ETF’s or liquid bonds. I like less liquid bonds as the liquidity premium is too high right now. I continue to think that High Yield High Beta CDS can be Highly Rewarding as we sent out on July 13th. But I’m becoming more convinced that IG CDS can perform extremely well here.
Before explaining my rationale, it is worth looking at this chart.
Guest post by Lance Robert of Streettalklive.
At the end of last year we began discussing the issues of the excessively optimistic views of the mainstream media and analysts, who were confusing a skew in the seasonal data caused by an unseasonably warm winter and global Central Bank interventions with an organic economic recovery.(See the report “Pollyanna Meets the Economy” for a primer - free membership required) The problem with maintaining an “optimistic bias”, which attracts readers and viewers for media driven outlets, is that it fogs the lens of logical thinking. The recent releases of consumer sentiment and retail sales are clearly a story of an economy that, while statistically growing, remains in recession for Main Street America.
Personal consumption expenditures drive a little more than 70% of economic growth in the U.S. as shown in the first chart below. Therefore, it is no surprise that watching consumer confidence, retails sales, personal savings rate and changes in credit can tell you a lot about the real state of the consumer and the likely impact on the economy in the future.
Peter Tchir has been rather spot on regarding the markets lately. Here are some weekend thoughts worth reviewing.
You can read about Europe from a lot of other sources this weekend. I maintain that when a Grexit became a real possibility, they finally looked at what it would mean and became scared of the risk. Since then there has been a change of attitude. I saw it in the Spanish bailout, and I continue to see it. You can debate all day long about what Merkel says, or what the facilities can or can’t do, but if the EU has changed their approach, and has the will, they can find a way to give this one heck of a kick down the road.
High Yield is positive for the year no matter which day you bought it
Why would retail investors switch to equities when they have found a new and underinvested asset class that yields 7%? I’ve pulled up HYG here to show that there is now not a single purchase that would have a negative total return. Even if you top-ticked the market in February, the coupon income has saved you. This is true for the mutual funds I looked at as well.
Some market reflections by Peter Tchir of TF Market Advisors.
Credit Markets Mixed: Spitaly vs Corporates
The first thing most people are noticing today is the weakness in Spanish and Italian bond yields. Spanish and Italian CDS are both wider as well. There is a lot of talk about what it means to hit 7% on 10 year bond yields. For Portugal, Ireland, and Greece that was more or less a trigger of worse to come. Ireland actually crossed 7% again in May having been below that since January. Since it spiked above 7% on the 15th it has been stable. Italy, last year’s poster child, went above 7% are returned below multiple times. Yes, 7% does make a nice headline, and it is the pre-fee return a hedge fund has to make before the investor starts earning more than the fund, but it is far from clear that it is the point of no return for bondholders, especially after the EU and ECB apparently learned their lesson last year.
Peter Tchir of TF Advisors gives some color on the JPM Trade.
We have talking about what may or may not have happened at JPM for the past week, and by “we” I mean the entire market. We do not know the exact nature of their trades, but as far as we can tell from what we read and the rumor mill, JPM had a series of complex trades, though the overall ideas seemed to be “short high yield” and cover the costs by being “long investment grade” with a particular emphasis of jump to default risk over pure spread risk (though spread risk played a big part).
They were short various XOVER and HY indices, both outright and in tranche form. They were long various IG indices, both outright and in tranche form, though with a few additional curve trades to manage the jump to default risk.
We have tried to estimate the scale of the positions by asking “how much would JPM want to make if HY sold off 10%”. Using that, and a guess of $5 billion, it gives you a reasonable guess that the HY short had to be the “delta equivalent” of $50 billion. The term “delta equivalent” is important, because a $1 billion move in the index, can have a “multiplier” effect on the price move in the tranche. In general, the first loss tranches will move much more than the index, so a $1 billion position in a tranche can behave like a $10 billion index position. A bit confusing but if you think of it if terms of how a “deep in the money” an “at the money” and a “way out of the money” option react to the price moves of the underlying stock, it is somewhat similar.
Spanish economy slipped back into recession in the first quarter of 2012, making the government’s job of meeting the deficit targets even tougher amid the public anger against the deepening austerity and record-high unemployment.
Gross domestic product contracted 0.3 percent quarter-on-quarter in the first quarter, the statistical office INE said Monday. This followed a 0.3 percent fall in the fourth quarter of 2011, which was the first decline in activity since the final three months of 2009.
The country is now in a technical recession, which is commonly defined as two consecutive quarters of economic contraction.
However, the latest result was better than the 0.4 percent decline estimated by the Bank of Spain last week. Economists had expected a 0.5 percent drop.
Annually, the GDP fell 0.4 percent following a 0.3 percent expansion in the previous quarter. Economists had forecast a 0.6 percent fall. Bank of Spain had estimated a 0.5 percent annual fall in GDP. ( full reading here.)
Meanwhile, Mr Rajoy warns of new reforms to be announced every Friday, as the economy is in such a bad shape. Truly extreme measures are needed if the Spanish economy is to be saved. From El Pais.