All day and every day, some of the stock market's best and
brightest traders and money managers share their ideas, insights,
and analysis in real-time on Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
All Eyes on the Fed
This week is starting off nicely. The
(INDEXNIKKEI:NI225) rallied nicely spurring a rally across global
stock markets. What is most important in our opinion is the
strength of treasuries.
The 10 year treasury is pushing towards 2.10%. Some might argue
that stocks are doing well "in spite of" the move in treasuries,
but we remain firmly convinced that treasury strength is crucial
for stock market strength here.
We saw Thursday as a make or break point for the markets and turned
neutral and Friday we became bullish as we saw that Ben has our
Credit Markets Should Outperform
While we see support for treasuries as crucial for all markets we
are looking for credit markets to outperform.
We finally started to see positive flows into the big fixed income
ETF's and assume that mutual funds started to see the same.
CDS has the all important roll coming up which should offer some
further support for that market.
Dividend Stocks Remain Our Weak Link
We think that the "cascading yield sell-off" is over for now.
Whether that lasts a day or a week is largely dependent on the Fed,
but we see dividend stocks as a particularly weak link in the
market right now. They remain a crowded long that investors chased
into, that just don't look that attractive under most scenarios as
credit is looking cheap on the one side and growth is compelling on
the other side.
I Prefer Shark Week to Fed Week
I would rather be watching "Shark Week" but this week we are stuck
with a focus on the Fed. Wednesday's FOMC decision and press
conference should provide some clarity over the Fed's intention. We
expect commitment to 0% Fed Funds for some time to come, but an
attempt to reduce actual QE purchases sooner than later.
The size of purchases never seemed to be meant to be as explicitly
tied to the economic data as the fed funds rate was. Also, whether
the Fed will admit it publicly or not, there are growing signs that
they are nervous that both their treasury purchases and their
mortgage purchases have started to distort the markets more than it
We will be sending out our in depth analysis on what we see as
likely to occur. We also need to decipher how the market will
react, but we think that finally more investors are realizing that
tapering is as bad or worse for stocks as it is for bonds anyways,
which is a relatively new dynamic for the market.
ICE CDX Futures Begin Trading Today
We are watching this development closely (CWIU3 on Bloomberg). We
published our guide to trading the futures on Friday. It will be
interesting to see if volume grows but in the very near term we are
looking for some pricing anomalies that could be traded profitably
as the market determines the appropriate value of a "When Issued"
portfolio of CDS.
Context on Housing Recovery
I wanted to give some context to the housing recovery and mortgage
rates. The NAHB housing market index rose to a seven-year high this
morning as real rates (TIPS rates) go back into positive. If the
housing market recovery was predicated on negative real rates
because of artificially low rates, and they are no longer negative,
it doesn't paint a pretty picture.
Click to enlarge
Biotech Says "Be Careful!"
Hoofy's certainly got the mojo this morning given the liftage in
the major market averages. You have to respect that, as Todd's been
writing about this morning.
I'd be careful not to get carried away, though. I've got a fair
amount of red on my screen in biotech land, and rarely will the
major averages continue with their jiggy ways when biotech is red.
There are some reasons why biotech might be red on its own (index
rebalancing and sector seasonality), which is why the relationship
between biotech and the major averages is not perfect.
Just providing Minyans with one more set of eyes on this whippy,
Good morning -- fairly quiet on the credit front after a decent day
of new corporate bond issuance. Buyers came back for two large
issues, $6 billion by
) and $1.55 billion by
). And with a few more smaller sellers, they walked away with
$8.875 billion worth of bonds. High-yield spreads tightened a
little as well, despite yet another lousy day for Treasuries.
PIIGS bonds and CDS are a little wider this morning, large US
financials' CDS are a tad better and the 2-year swaps are trading
between 15.75 and 17.5bps. The latter's level is fine, but there's
a lot of jumping around there, which in and of itself is a sign of
a bit of jitters.
The sore thumb this morning is the US CDS which has risen from
27.5bps to 30.5 bps. Not sure if it has to do with pre-Fed
positioning or what, but if it is more than a couple of days thing
it would mark a "change of character", even though the absolute
spread is still near all time tights.
Long-term Treasuries, which after a rally in spite of the horrible
30-year auction, appear to be snatching defeat from the jaws of
victory. Daily TD Ref Close Down for today sits at 138-24 (Sept
contract), and there's a daily unmet TD Prop Exhaustion Down target
of 138-17 after TD Prop Momentum Down was qualified yesterday.
After covering my short post 30-year auction, I'm sitting tight
until the technicals become a little clearer.
Market breadth is balanced; no tell there.
The banks opened green -- hence the green tint -- but have since
come for sale. Note Goldman (
), which is dancing in Red Dye, as it's been our single best tell.
N's over S's early, as tech has a better tone, paced by
(AMZN). The homebuilders, meanwhile, are giving back some of
(INDEXSP:.INX) 1648 remains a huge level for both the bulls and
bears. The bears will lean against it on the short side; the bulls,
meanwhile, will try to put it in the rear view for the first time
I am trading around some small
SPDR S&P 500 ETF
(NYSEARCA:SPY) exposure as a function of time and price, with every
intention of being out of the way by the time Big Ben chimes
tomorrow. That's why you see the position below; if I take a stand
or make a bet, which I don't expect to do in front of the FED,
you'll be the first to know.
Keep half an eye on
SPDR Gold Trust
(NYSEARCA:GLD) as it continues to struggle; $1325 remains an
important technical level for those involved in the yellow metal.
I'm still there in
(FB); again, not big, but directionally there, as the trendline
below continues to hold.
It's my wife's birthday today and I promised her an afternoon with
the kids, who leave for the summer this Friday. I could tell you
that I've got all kinds of meetings to attend but that's not so; I
am going to focus on the important stuff -- her -- later this
afternoon, as she most certainly deserves it (she puts up with
As always, I hope this finds you well.
Has the Yen Started a New Downleg?
So far, the action off of the May 22 high in USD/YEN is following
my preferred price path relatively closely, which called for the
conclusion of the correction off of 103.70 in the 93.75-92.25
Last Friday's low at 93.79 followed by a strong upside reversal to
today's high at 95.76 has the right look of the end of the decline
and the start of a new upleg.
That said, should we expect a powerful new upleg that rockets
USD/YEN above 103.70 towards my next optimal target zone of 107 to
110, or a back and forth type of move that carves out a 6 or 7 big
figure range for several weeks ahead of a thrust to new highs?
Right now, I really don't know, but the reaction to Wednesday's
FOMC announcement might provide us with valuable clues about the
forthcoming path of USD/YEN.
In any case, my near-term work points to 97.50-99.50 prior to more
technical information about the underlying strength of the upmove
off of last Friday's low. ETF traders may want to watch the
ProShares UltraShort Yen
Click to enlarge
Wednesday, June 19
Time to Short Homebuilders
The housing market recovery is going to take it on the chin as
10-Year US Treasury Yield
(INDEXNYSEGIS:AXTEN) jumps 4.7% today.
(NYSEARCA:XHB) are weakening. Resistance is 31.46 (stops), and XHB
could retrace all of 2013 if it closes below 30.49.
Click to enlarge
Treasury Curve Flattening Hard
Notice the activity in the Treasury curve, flattening
significantly. The back end is lagging in a large way while the
belly's getting annihilated. A few reasons:
- Bullard dissenting on "who believed that the Committee should
signal more strongly its willingness to defend its inflation goal
in light of recent low inflation readings" is very significant to
me, and rhymes with our
idea that the Fed may abandon its goal of stoking
- Inflation forecasts were lowered significantly, 2013
inflation lowered by 0.50%!!!
- Unemployment forecasts were lowered steadily into 2015, not
that these might have any accuracy, but it's causing rate hike
projections to be drawn closer and validated at their current
early 2015 idea. That's what the belly is pricing in.
- To reiterate, the selloff in bonds has essentially nothing to
do with tapering, if anything QE is probably going to go on
longer than everyone expected (end of 2014).
Overall, marginally less dovish, presser on deck in a few minutes.
Suffice to say, the steepener that I had in mind is not working at
This is your friendly Minyanville reminder to
put limits on your orders;
you can drive a truck through some of the option spreads I'm
monitoring. THIS wide.
Walking through our checklist, as the first
move is lower.
: muted to lower.
: lows of the session but thus far above the lower band-tag of the
pennant formation. Goldman remains a primary tell.
: 2:1 negative.
The DXY is grinding lower; still below the 200-day moving average
Up north, but not out of the picture yet; let's revisit on the
What have I done?
As discussed, I was skewed short as a function of my gamma and I
offered some of my puts on the news; they went bid, but I have yet
to get a report, but that's what I'm trying to do (cover some on
the dip and keep my gamma in play).
Lemme hop; good luck!
Cooper Tire Now 7% Below Offer Price; Interesting Options
Cooper Tire & Rubber Company
as a stock to exit after Apollo Tyres of India announced a
Apollo's stock got crushed by a quarter in India on the
announcement due to concerns over the debt load (and has since
fallen even more), and Cooper's stock has continued to drift lower.
Now Cooper is now trading at about $32.56, which is 7% below the
Note -- we're not finding any news outside of the lawsuit filing
regarding investigations of the deal, which is not unusual, so it
is possible that someone somewhere is hearing something fishy.
One thing to note: today 3,499 Cooper put options have traded, with
71% of them being done at the ask or above. Just 610 calls have
traded, with 77% happening at the bid or below.
There was a transaction at 11:22 a.m. (just as today's decline
really started) in which someone bought 520 June $30 puts for a
nickel -- a $2,600 outlay that could turn into $260,000 if this
deal got killed and Cooper traded to $25 by Friday. (where it was
before the deal).
There is also some heavy action in the July $30 puts, with many
trades going through at the ask.
Stay tuned -- could be trouble brewing here!
Thursday, June 20
A Potential Tail WAGging the Market Dog
While everyone has been talking about the Fed, tapering, and what
that means for stocks, I've been looking at the bond complex. We're
seeing lots of selling across the board on Treasuries, and we've
been seeing it for the past month. To put in perspective just how
much, we've seen the 10-year back up in yield from about 1.6% in
mid to late May to nearly 2.4% now, a near 50% back-up in yield in
You know what else has been gaining steam? The rumblings of
short-term liquidity issues in China. With the Chinese government
trying to drain excess liquidity and speculative lending out of
their market, we're seeing dramatic increases in short-dated rates.
Wall Street Journal
this morning, I'm reading that 1-year Chinese government paper is
at 4% while 10-year paper is at 3.75%. The curve over there is
inverted. On top of that, 7-day repo was at 12.36% midday Thursday
on a weighted average basis. It was at 8.22% just Wednesday.
I can't believe for one second we're not seeing spillover in
Treasuries from that. After all, they're one of the biggest buyers
of our debt. But the problem is we don't know who or what kinds of
entities in China have been buying our paper. But if liquidity is
this tight, they're bound to be selling anything they can get their
hands on just to convert it into Yuan. And Treasuries are deep and
Let's assume this is the case, just for a second. If you're on a
bank balance sheet management desk responsible for asset-liability
management, what do you do? You'll need to go in and place bids at
some point if for no other reason than to defend your bank's
holdings. The question is when.
So, this may not be a question of a Fed exit. This may be a
question of how long the bloodletting goes on over in China.
Where Have I Seen This Movie Before
Wednesday, Thursday, Friday options expiration tumble…Monday,
mother of all hangovers?
There have been a handful of these setups since 1987, where Mr.
Market failed to have a tantrum.
But it is interesting that this first half spread between the
performance in equities and bonds is the greatest since…1987.
Round number psychology: 1987 - 300 S&P 500, 2013 - 1,600
I'm not sayin'; I'm just sayin'.
For several years, I have held onto this quote from the European
debt team at
The bonds of several peripheral countries, while still being
government bonds in name, no longer offer the advantages of a
government bond -- safety, liquidity, low volatility and a negative
correlation with risky assets. Hence, investors running a
traditional government portfolio are exiting those markets. In
short, peripheral government bonds have become an asset class in
search of a new investor base.
I bring this quote forward today to remind Minyans that every
investment has a story behind it. Why we buy or sell something
Over the past thirty years, the story for sovereign debt has
evolved to "safety, liquidity, low volatility and a negative
correlation with risky assets". But I would note that those
characteristics aren't just a story at this point but a promise.
The traits are bonds' "brand" as it were and as a result, bonds are
the yin to the equity market's yang. It is why most institutional
investors have balanced portfolios.
I don't pretend to know where things are headed from here, but one
thing I am watching closely is whether bonds' promise holds true.
As the folks from Morgan Stanley rightfully pointed out for
periphery sovereign debt, when an investment's promise fails to be
true, whatever it is - a particular company stock, a commodity, a
sector, or a market - the investment becomes an asset class in
search of a new investor base.
From my perspective, we have just witnessed that with gold. I would
pay close attention as to whether bonds are next.
I hope not. But given how elevated bond prices became, and how much
everyone believed the brand at the peak, it is a distinct
Friday, June 21, 2013
The Morning Dew!
Click to enlarge
More than $1.8 trillion of global equity market value was lost
yesterday. The sell-off cut deep, it cut hard, and it cut fast. The
question on every-body's lips is "will it cut more?"
We dove deep yesterday in
an attempt to navigate our forward path
, mapping levels of lore, catalysts du jour and perhaps most
importantly, the psychology surrounding the issues at hand.
To top-line a topic that is anything but a quick at-a-glance, I
will offer the following observations:
- Everyone seemingly pointed to Ben Bernanke and his tapering
agenda. I would offer that China--and Chinese interbank lending
rates, or Chibor--was an equal of larger catalyst for the
sell-off. Some liken this Asian juncture to the early stages of
stateside situation in 2007
. It's too early to tell if that will play through--there are
many moving parts--but the global marketplace began to discount
that, in my view. It should be noted that the
Chinese government took steps
to alleviate fears overnight, which is helping to shape market
- The long-standing S&P uptrend--in place since November,
generating 25% of upside return--broke with vigor yesterday,
shifting the technical landscape in one fell swoop. In the
absence of clarity--
it's difficult to have too much confidence in
the system formerly known as capitalism
--traders and investors alike embrace metrics that are definable.
If the trend is your friend, this progression warrants attention.
- Today is expiration Friday (index options expire on the open;
single stock options expire on the close), which pushed the tape
around yesterday (expiration influences tend to manifest, through
increased volatility, in the days prior to the actual expiry). It
felt like the tape tried to pin
--where there is out-sized open interest--and once that gave way,
lower strikes served as a price magnet. It should be noted that
this dynamic will disappear after stocks open this morning.
, and the rest of the commodity complex, took it on the chin.
This is a continuation of a preexisting trend, but the price
action was notable nonetheless. I offered
my humble take on the forward direction of
; in short, if monetary policy was going to drive gold higher, it
would have done so long ago. Opinions aside, we would be wise to
note the correlation between Gold and the S&P, per the second
- Social mood continues to sour. This wasn't a "Thursday
topic," but it is relevant to this conversation as
social mood and risk appetites shape financial
. With social unrest sweeping streets the world over--and that
was with the stateside tape near all-time highs--the mindset of
the masses will be put to the test as risk assets decline, even
if the wealth gap represents a slimming margin of society.
Click to enlarge
So what now? Expiration, for starters, which is happening as we
speak. Traders who are short gamma--
click here for that conversation
--are hedging their risk, which is impacting the early morning
price action, and will continue to drive single stocks through the
day. These flows are difficult to monitor, but they should be
Following an out-sized move, such as the one we had yesterday, the
tape tends to probe that direction at least once the following
session. As such, while the futures are green, I would expect a
downside test, from which we will monitor our tells for guidance.
Yes, we're short-term oversold--the Dow Jones Industrial Average
lost +/-600 points, the S&P lost +/-70 points and the NASDAQ
lost +/-100 points since the FOMC, but we remain +/-5% from recent
and in some cases all-time highs.
I've been trading around a short bias
, with 50% of a full position in December SPY puts against a few
long positions, including Facebook with a tight stop. Rather than
cover my S&P short, I gently nibbled on my longs into the close
(full disclosure: I'm actively trading them both ways). Water
pistol to my head,
, which is +/- a 10% correction from recent highs,
remains viable, perhaps probable
, although I've rolled down my stops on the S&P (to the other
side of the trend-line) in an effort to manage risk, rather than
Lemme get this to you; I'll be back!
XHB Trade Update
Closing the remaining SPDR S&P Homebuilders short position at
29.05 (initiated at 31.30). There is no need for greed. This was a
very nice trade taken right after FOMC announcement. Closing too
soon always makes money in the long run.
Warning: Liquidity Problem in US Treasuries
I have heard from six different people today that they are having
liquidity issues in the US Treasury (cash) market and that dealer
inventories are all full. This is a warning sign to avoid taking
risk when possible in the near future. Remember that the biggest
complaint over Dodd-Frank is that it cut dealer inventories by 90%
and penalized them for taking risk. Now we're seeing it show up in
Additionally, the Brazil Treasury just held another $2 billion FX
swap line after $3 billion yesterday.
Better hope the Fed does some FX swap lines because this is getting