Monthly Archives: October 2012

Epic Fail ?

The uninterrupted coverage of Sandy and the constant flow of "information" in social media is testimony to man's desire to fill the broadband pipe. As a trading firm, we pondered a more selfish aspect of the story : why were markets disrupted at all?

9-11 markedly sped up the dismemberment of centrally located price discovery. The CME Group was located on the vulnerable Chicago River  and had, years earlier, been closed when a barge accidentally crashed into the wall and flooded the city's massive underground tunnels. Any registered firm was tasked with building and regularly testing a redundant operation away from its main address. Reports  have to be filed that sights are operational even though dormant. So, with a massive but well advertised storm heading to the financial district,  NO contingency operational plan was executed. Huge capacity and office space cost was left "on deck." There has to be a reason and the Exchanges are at the heart of it.

The other, as it appears now more important, structural change in the post 9-11 capital markets was the move to for profit status. The utility function of market providers was obliterated for shareholder homage to profits. A failure of the back up system (or a hurricane of flash crashes and melt ups)  must have been judged as more detrimental than closure. So why are we required to have back up plans? What event are we supposed to be preparing for if Sandy does not qualify for implementation? Clearly, the executives do not trust the dis-intermediated and special interest price discovery electronic arcade they have constructed enough to flip the switch. Could it be that in a completely electronic environment during a disaster, the customers may have better things to do and only the handful of advantaged players would be left? Would trading "get loose" or perhaps stagnate from lack of exploitable order flow?

The bottom line is Sandy was a prime example of what redundant systems are built and maintained for. The utility function of exchanges is dead. Want better markets? Have the Government recognize the systemic importance of functioning markets and take the exchanges into GSEs for security reasons. The transaction tax idea would be killed once and for all, the budget deficit would improve overnight. (Yes, I'm being provocative)  There's a reason the markets were interrupted lately. If you interact with the market in any way, you should want to know why that was.


Hooper Quant Model Equities & ETFs

The Hooper Quantitative Equity/ETF Model covers the Standard & Poor's 500 Index distributed among the 10 S&P Market Sectors. In addition, 25 Major ETFs rounds out our coverage of the equity space. Below is an online Excel applet that can be expanded (lowermost right hand side button) or downloaded by clicking on the Excel icon.

IMPORTANT: Once a buy/sell signal is triggered, executing that signal between the trigger price and the mid-point with stop at opposite trigger is the prime objective. More about the Hooper model here: Hooper 101


What is the TLT ? The iShares Barclays 20+ year Treasury Bond Fund is an exchange traded fund that seeks to track the Barclays US 20+ Year Treasury Bond Index. The Fund  has 18 securities, some cash and 3+B in assets. It was born on July,22, 2002 and sports a 8.6% inception return. The Fund lost 21+% in the 2009 retreat from the abyss and  had a whopping 33+% gain in 2011. The securities have an average effective duration of 17.63. The coupons range from 2.75 to 4.75.  The market "pundocracy" and equity-centric celebrity day traders have anointed it "The Bond Market."

Thus, a plethora of chartists, fruit worshipers, hyperventilating former hedgies and JV Bill Gross wannabes see the fixed income universe in the easily digestible ort that is the TLT. In relation to the actual Bond Market, the TLT represents a not so impressive .00003658 % of the total. Here's the money shot : The Fund (or more directly its fickle investors and its psycho cousin the TBT) scares the heck out of us.

We spend much of our research time on the financialization of commodities and the socialization of credit. The equitizing of fixed income has now popped onto our radar. The long term obligations of your Uncle Sam aren't going to be the source of the next financial crisis despite the vocal hopes of many a Fed detractor. The exodus of the TLT renter class could cascade through fixed income with nasty results, however. Think of it as a pebble that causes a boulder sized ripple. We are watching and listening and on the look out for signs that the acronym doesn't stand for what happens to  pinball machine systems when things start shaking.

Tuesday, October 23rd

On the economic calendar:-

07:45 ICSC-Goldman Store Sales

08:55 Redbook

10:00 Richmond Fed Mfg Survey (Consensus 6 v Prior 4)

11:30 4 Week Bill Auction

13:00 2 Year Note Auction

Operation Twist:-

10:15 - 11:00 Fed Outright Treasury Coupon Sales up to $8.00 billion

Secular and Cyclical

September 25, 2011:" The secular bull market in bonds may be ending. The only factor correlated to long term interest rates is core inflation.  Bonds have delivered inflation + 2% or more for 30+ years. FTQ has to be present , as investors feel they "must" be in there. " Thus spoke David Rosenberg a tad over a year ago making the case for equities. What you got was an unwanted volatility trip under the auspice of Central Bank "stability" objectives.

Secular market moves must carry certain long term characteristics that separate them from the cyclical. The key component of the secular bull market in bonds was the universal disdain with which they were held into the mid -1980's. In other words, the mistakes of the 60's and 70's had to culminate in the complete rejection of long term fixed interest obligations as an investment before they could reverse. Even Volcker admitted in his memoir that he never imagined that rates would need to be pushed so high (or social costs so devastating) to break the inflation expectation credit cycle.

 A secular bull market in stocks shows an increase in acceptable P/E multiple. For bonds, yields would be substituted for capital appreciation and the belief that one would know when to punt. Gold, the so called inflation hedge, has been in a decade plus advance as the world teetered on the edge of debt deflation abyss. Beyond negative yields, both real and nominal depending on the country, yellow metal shows the persistence of memory and the behavioral economics of expectations.

 The Treasury market, in the form of the Classic futures contract, hit its high on July 25, 2012. 13 weeks and nearly 9 handles later, peeps are starting to wonder about bonds.  The Fed is on a PR campaign Lindsey Lohan would kill for to mitigate the cyclical nature of rates. As we've opined many times before, nothing changes minds like the price. Money always chases the asset with the rising price. For over 3 decades, that asset has been bonds. Exchange traded vehicles have proliferated to absorb the public's infatuation with allegedly risk- less fixed income. The secular bull market in bonds is over because the cornerstone of its advance (generational dis-inflation ) has been replaced by Central Bank commitment to the opposite.

Don’t Bogart that Yield, Dude

Since mid-September we have noted the increase in our favorite credit market designer drug - the PIK Toggle Div Recap. The issues have continued to litter the field in Oct.

Now, a new ETN has crawled out of the sludge factory that is the "Exchange Traded" next disaster called (cleansing breath) ETRACS Monthly Pay 2x leveraged Mortgage REIT. A derivative mess offering 2x the Market Vectors Global Mortg REIT Index (hold on, gotta catch my breath) a 8x piece of toxic waste. So, with rates on the floor and run spreads on the forever lows (QE doesn't work though,,they said) the suits are offering John and Jane Q a 16 x bet. The pitch probably starts with a casual reference to famous West Coast bond royalty "buying what the Fed is buying." You can tell your grandkids you were there. Keep in mind the sub-2% pools being geared didn't even exist prior to the second decade of the new millennium. They call this a "search for yield."

We call the promulgation of these types of products (and a single digit swap spread) a return to the credit market stupidity of the glory days of the credit super cycle. One important caveat, that cycle ended in 2007. We view this garbage as two more anecdotal examples that the 30 year bull market in bonds has reached its apex.


thanks to MBS guru David Schawel and Business Insider for highlighting us to this product