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Peter Tchir
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Peter started TF Market Advisors in 2011 as a platform to trade and provide market information. The trading strategies are macro, but the direction and value decisions are based on insights into the credit markets. The firm’s commentary has been gaining respect and Peter has become a recognized... More
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  • The Weekly T Report: BJ And The Bear

    CB's, CB's, CB's, everywhere you look people are writing or talking about central banks. The last time CB's were this omnipresent in America, BJ and the Bear was on TV, Convoy was the movie, people had cool "handles" and said think like roger that, and 10-4 big buddy. Now it's twitter "handles", CYA's and LOL's, with Hunger Games as the movie, and the Kardashians on TV, but we are once again a CB culture.

    The first part of the week was fun. Stocks seemed to move on the basis of earnings and guidance. AAPL had a wild ride, dragging the market around with it, but at least it could be explained by fear of an earnings miss, followed by exhilaration of crushing earnings. The outlook wasn't great, but there was enough evidence of stocks reacting to company and industry specific news, that it briefly felt normal.

    By Wednesday afternoon, it was back to the "new" normal. Not the one with 2% GDP growth (which got) but the one where markets are dependent on central banks for support and liquidity. From the moment the FOMC minutes hit the tape, the market reverted to looking to central banks for guidance on how soon we get another big shot of liquidity. Every slightly hawkish expression was met with selling, only to be followed up with buying on any hint that the Fed retained its extremely dovish sentiment.

    Thursday mornings miss on jobs, a big miss, and much closer to the dreaded 400k number than the mythical 350k prints we were getting (mythical because none withstood the test of revisions). There was enough strength in the housing data that stocks didn't sell off much, but the reality is that hopes of QE overshadowed the data. The belief that the Fed is watching every tick in the stock market and is ready to unleash a wave of liquidity at any moment prevailed. Who needs jobs when you have helicopter Ben? Actually, who even wants jobs when you have helicopter Ben? Hiring actually involves expenses, and means you need to produce more, and maybe even risk the Fed's wrath. Much easier to not hire and let the Fed boost stock prices.

    The irony of this is that virtually all the people who want QE for what it will do for stocks have no faith that QE does much for the economy. Bennie and the Feds (and maybe Krugman) are the only ones left who believe this Fed policy is truly benefitting the economy. The rest of us just try and figure out what it will do for stock prices - in the short term.

    Not to be outdone, the other CB, the ECB, decided it needed to get involved to slow down the drubbing in European stocks and the bonds of Spain and Portugal. The economic data out of Europe was abysmal. France is seeing its economy falter, and Spain seems like it is tired of playing second fiddle to Greece and Portugal and came up with an unemployment number that is, frankly, shocking. 1 in 4 people are unemployed. I'm assuming there are some structural reasons for that, since their goal is to be at 22% by 2015, but it is still scary. The regions are a mess, and the plans they are coming up with for the banks and caja's are somewhat laughable. I never thought the good bank/bad banks solutions would work, but the "sweep it under the rug and hope it goes away" bank/mediocre bank strategy seemed even more doomed to failure.

    So what, when, where, and how will the CB's and governments intervene?

    That is once again the big question. You could know every bit of economic data coming out this week in advance and it might not make a difference. The market will be driven by central banks and governments and the amount of liquidity they throw at the market.

    The Fed is the easiest to understand. We are not getting QE any time soon. The best we can hope for is that the data is weak enough that some new form of operation twist is launched, where the Fed sells treasuries to buy mortgage backed paper. That will be very good for all those institutions that have loaded up on mortgage backed bonds in advance of this, and it might briefly help stocks, but the impact on both housing and stocks will be minimal. Operation Twist showed that stocks respond much better to new purchases rather than shifting around existing positions. It may not be obvious given where stocks are now, but if you try to adjust for how much of the stock move is since LTRO came out, which is real serious money creation, then it seems more obvious that operation twist isn't as important to stocks as real QE. It may take longer to figure out what that it won't help the mortgage market or housing markets. Initially mortgage rates will move lower and the markets will cheer. The reality is that the Fed program won't do much to encourage banks to create new mortgages. If you weren't lending at 4%, why would you lend at 3.75%? Demand for mortgages will increase, but that has hardly been the problem. It is the supply, and there is no reason to see why that would increase at a lower rate. What will happen is that banks will trade mortgages around more aggressively. Existing mortgages will increase in price as investors trade around waiting for the Fed to step in and overpay. It is far easier to trade something when there is a big buyer, on a set schedule, who isn't price sensitive (and in fact may want to overpay to give the perception that things are even better than they are). So mortgage trading will be profitable, those funds that loaded up on them will do well, and then, the economy will realize that nothing really makes it way down to them.

    The ECB is much harder to figure out. It was rumors of some new program, or some new version of an old program, or something, that encouraged stocks to rebound fiercely off the lows (I do think Spanish stocks are oversold relative to German stocks). But what will the program be, and how long will it work?

    I don't think it can be another version of LTRO. Two large Spanish banks have already said they are limit long. Those banks that are willing to add to their exposure are already in so much trouble that they have no choice but to keep playing the game. There is growing reluctance by banks to buy debt of foreign countries. The "nationalization" of debt, where more and more sovereign debt is held by the banks, insurance companies, and pension funds within that country makes the path to exiting the Euro that much easier. Plan A may still be to keep the Euro, but some of the actions make a Euro break-up much less painful that it would have been 2 years ago (though back then, no one really thought Spain and Italy were in trouble).

    LTRO has one set of problems, but the secondary market programme (NYSE:SMP) has its own problems. Greece remains very disappointed with the stance that the ECB took on its Greek exposure. The unwillingness of the ECB to accept anything other than par is one of the two big reasons the post PSI Greek bonds trade as poorly as they do. The ECB was not willing to participate in any form of debt restructuring and that was and is a problem. Although Spain and Italy may be publicly saying that they have no intention of leaving the Euro, it would seem foolish to believe that they aren't at least examining the possibility. They may be less excited to have direct ECB intervention than in the past, and may want to form some side deal with the ECB before encouraging them to buy bonds in the secondary market. That is very possible, but will take time. I don't expect significant SMP activity this week.

    That leaves the EFSF to pick up the slack. The EFSF is meant to take over the SMP anyways. While the ECB may not be willing to accept less than par in a restructuring, it is easy for the EFSF to agree to some loss. I expect the EFSF will buy some bonds, possibly as early as this week. It will be announced with much fanfare since it will be a new venture for this "illustrious" vehicle. In the end, it will stem the tide for a bit, but will increase the awareness that having the EFSF participate rather than the ECB makes it easier for these countries to restructure or leave the Euro. It is also makes it harder to hide from the citizens of Germany and France that they are funding the other nations.

    The pink elephant in the room is what to do about bank recapitalizations. The banks need new capital and they are going to need to get it from a deep pocketed investor who isn't too risk averse (ie, happy to throw some taxpayer money at the problem). The ECB isn't really allowed to do this directly. Even the EFSF is only supposed to lend money to sovereigns who in turn recapitalize the banks. The problem with this strategy is clear. The countries and banks are both in trouble and forcing sovereigns to take on more debt to support the banks has been a failure. The amount Greece has to borrow from the Troika to recapitalize the banks is the other big reason post PSI debt trades so poorly. A big portion of the PSI debt reduction is being replaced by debt taken on at the sovereign level to give to the banks. Ireland has this same problem - I wonder if the crisis in Ireland would already be fully over had the citizens not taken on the obligations of the banks? The rules restricting the EFSF from a direct bailout of the banks could be eliminated, but citizens of Germany, already nervous about lending to the government of Spain may draw the line at using their countries remaining credit to zombify banks in Spain (or Italy). A solution to this problem would be big step for Europe in the near term, but the problem is very difficult, and the best the market can hope for is some headline that sounds great, but has zero chance of being implemented.

    The governments appear to be taking two paths. There is a growing national movement in France and it seems elsewhere. While the elite, and those employed by the EU, may still want unity, there is growing discontent with the system. Hollande specifically wants to restrict travel and work within the Eurozone. If you ask most Europeans, they care more about easy travel and no limits on where to work, than the currency itself, so Hollande's plan may be more dangerous than people realize. If they make movement within the Eurozone more difficult, the desire (or need) to stay in the currency union would drop quickly. Another small piece of the puzzle fitting together that makes the break-up of the Euro look more likely, if not inevitable.

    Then there is the war on austerity and focus on spending. I am not sure when Austerity Died or when Austerity became a 4 letter word, but there is a vigorous attack on austerity (I'm also not sure when our website broke, and am trying to fix that). Somehow, the problem in Europe isn't debt, it is the austerity programs that countries allegedly went on.

    This attack seems wrong in so many ways. Just because someone says they are going to eat better and exercise, doesn't mean they will. Buying a gym membership isn't the same as going to the gym. I think blaming the deepening of the crisis on the alleged austerity programs, is like going to the gym once and wondering why you aren't "ripped". Austerity has not been implemented in a big way, and most of the austerity measures have a bigger longer term impact, so stop blaming them. The global economy is a mess. The Fed's policy of easy money keeps the Euro artificially high, making Europe's problems more difficult to deal with. It is a complicated problem, and no obvious right answer, but blindly dropping austerity is not the solution.

    Furthermore, if it is so easy to achieve growth, why are we in this problem in the first place? Growth is not easy to attain. Growth worth more than the debt spent to create it is even harder to achieve. Using GDP growth as the whole measure of success leads to one obvious conclusion - spend - since it increases GDP. This is a debt crisis, where the amount of debt relative to GDP is out of control, and the current cost of servicing debt is hampering economies. Any GDP growth from spending must outweigh the cost of paying back that debt and servicing it. Virtually all of the debt accumulated in Europe (and the U.S.) was taken on in belief that it was doing some good for the economy and for growth. It is naïve to suddenly think that a problem created by poorly spent money will suddenly be fixed with the same people spending more money. The market is cheering "growth" but I don't think we will see results, and we may find out that the austerity that is supposedly hurting the economy was never really enacted, and that the growth from new spending is hard to see (if not non-existent).

    So if only we could go back to the beginning of last week, when it felt like earnings and economic growth were the key, but now it is back to anticipating the next CB announcement, and what the actual impact will be once the glowing press release is digested. Over and out.

    E-mail: tchir@tfmarketadvisors.com

    Twitter: @TFMkts

    Apr 29 8:00 AM | Link | Comment!
  • The T Report: Europe Has Its Parti Quebecois Moment

    I have said and written that I expect to see more nationalism come into play as the crisis continues. I may have been a bit early, but we are seeing growing signs of it, with Marine le Pen's strong showing in yesterday's French election being the most obvious example. The Dutch Parliament's failure to approve "austerity" is another sign of growing skepticism of a one size fits all Euro solution.

    In Canada, the Parti Quebecois always did better in tough economic times. When times are good, people like to hang out, talk about vacations, what they bought, which was the best Habs team of all time, and why the current version of Les Canadiens is underachieving. In tough times, people are eager to hear why the problems are someone else's fault. Good times are always a direct result of one's own actions; whereas, bad times tend to be blamed on someone or something else. Now they can talk a bit about how things would be better if those someone's or something's would change, before moving on to the best Habs player of all time, and what the current team should change to be like the old teams.

    Away from the election results, more economic data came out of Europe, and it is all bad. PMI missed. Spain is clearly in a recession. Bank stocks are getting hammered. The S&P futures are sitting just above 1,360. We tested the 1,358 level last week and had a strong bounce. The week before saw one sell-off get as low as 1,355 before bouncing. I think the combination of weak data, strange votes, and the realization that the firewall has no immediate impact will weigh on the market and we will break through and trade below 1,350 before we see another round of support.

    AAPL is definitely a wildcard. It is the cheapest it has been in 40 days. Yes, that is the problem. The sell-off has been dramatic, but after a parabolic move higher, we are only back to prices last seen on March 14th. It was at $455 on February 1st. I will be watching this closely as it is so big in the indices that it could be the catalyst for a bounce, or the trigger for a bigger sell-off towards the 100 day moving average.

    CDS indices are weak across the board. In Europe, MAIN is at 148.5, 5 wider on the day, and bid/offer spread is increasing as liquidity evaporates again. IG18 is relatively strong, only 2 bps wider at 102, but with fair value being at least 105, there is some room for this index to move wider. I think Europe was just scared to push futures below that 1,360 support, and if we break that this morning, IG can quickly move to 104 bid. If HYG or JNK opens anywhere within a ¼ or possibly a ½ point of Friday's close, it is a good sale, as they are overbought, trading at a premium to NAV, and this latest round of weakness in Europe will put pressure on all the credit markets.

    French bond yields are actually a little better on the day (somewhat surprising to me given the election results, but I guess they still capture some "flight to quality" bid, but they are not as strong as German bunds. Italian and Spanish 10 year bonds are both weak, hitting yields of 5.71% (+6 bps) and 5.96% (+3 bps) respectively. They have bounced off the lows, but I think we will see a capitulation move lower with Italy getting to 6.25% and Spain to 6.5% before any serious ECB intervention occurs.

    Buy the dip has worked well, almost too well, so I am not going to do that. I believe we break this support level and see one more significant downward move before we see real support in any of the risk markets.

    Apr 23 8:11 AM | Link | Comment!
  • The T Report: Weekly Firewall Edition

    Volatile or Not?

    It is strange to start a weekly update and not be sure whether the week was volatile or not. North American stock indices ranged from -0.4% for Nasdaq to 0.6% for the S&P. Not much to look at there.

    U.S. fixed income finished with small weekly gains. The 10 year treasury was 2 bps better. Fixed income ETF's like TIP, TLT, LQD, HYG, JNK, and MUB all had small gains. Even the CDS indices, IG18, and the underperforming HY18 saw some small spread tightening over the course of the week.

    Looking at Europe and we start to see some more volatility and divergence. The DAX was up 2.5% will the IBEX was down 2.9%. Spanish bond yields were mixed to better on the week, but Italian yields were worse. In a week of obvious attempts by governments and central banks and the IMF to calm markets, they had limited success with the smaller and more easily manipulated Spanish bond market, and failed in Italy. One scary undertone developing in the market is the concern about France and the potential impact of the French election. French 10 year yields moved 14 bps, and it wasn't because the situation was improving, because German 10 year yields moved 3 tighter on the week. Germany continues to have a flight to quality bid, but France, not so much.

    Maybe it is the activity in Europe that made the markets feel more volatile than the weekly changes show. Or maybe it was that the futures traded in an almost 3% range - from 1,359 to 1,390 with several 0.5% swings during the course of most days. Market darling Apple isn't helping calm the market either. That can reverse on a moment's notice, or a great earnings release, but the momentum that was dragging more and more hedge funds into the trade, is now working in reverse as stop losses are being triggered.

    So often lately, the bulls are able to point to a decent tape in face of weak data and no stimulus, and this week ended with the opposite. Bulls will be nervous that decent earnings and a mega-plan from the IMF failed to provide strength to the market.

    So, it was a strange week that was more volatile than the weekly changes show, and where some real cracks are being exposed.

    Politicians and the Markets

    In a week where the Birkin wielding head of the IMF went from G-20 delegation to delegation asking for them to commit their taxpayer's money to another illusory firewall, it is important to focus on what was accomplished and what wasn't.

    By all accounts, the IMF has received commitments to increase the "firewall" by some amount, possibly as much as $500 billion. The politicians expect the markets to be excited about this "heroic" effort and the guarantee that no debt problem is too big that it can't be solved with more debt. In spite of the headlines, I'm being asked
     

    • How will the countries honor their commitments?
    • Where will the money come from? Especially the European portion?
    • How would the money be used? For countries? For banks?
    • If commitments made in 2010 haven't been approved, what good are these commitments?
    • What does this do to help the countries that are in trouble? Why does the IMF think it is safe to lend when real investors won't lend?


    The list is long, but is also accurate.

    The entire IMF Firewall is being run as though it was an election. The leaders use the same slogans over and over. They say the money is needed to avoid calamity. They say the money will help. No evidence of either is provided, but who needs evidence when you are just running a campaign. So they campaigned, and in their view, they "won" the election, by getting these commitments.

    That is the big disconnect. Politicians are sitting around Washington convinced that they have won. They fought a hard campaign to convince people that the Firewall was needed and would be good, and they got the job done. What they haven't done, is seen how the market will react.

    Unlike a real election, the market doesn't give the winner a free pass for a certain amount of time. You haven't won until the next election, you have merely won until the market tests your resolve.

    That test will come quickly, quite likely this week. Markets will likely put pressure on Spanish and Italian yields, and possibly French yields depending on the election results. Nothing about the firewall changes a thing about the current situation these countries find themselves in. That is the key. If the firewall actually did something for these countries, we might be able to stage a strong rally, but the firewall doesn't have an immediate impact. The firewall just ensures that these countries can borrow more money. That when the markets shut down on their ability to borrow, the IMF will lend to them. Your best hope as a current lender, is to hope you own short enough dated bonds that the IMF is still being generous and lending to the country to pay you back, rather than having gone into PSI mode.

    Spain and Italy need to reduce the current interest burden, the total debt, make long term adjustments that while technically austerity, can have minimal near term impact, and they need to embark on some growth policies. A debt restructuring can accomplish the first two items. Policy and some IMF money can help on the all important growth issue. Without some form of PSI, the firewall at best will shift who countries owe money to, and at worst will discourage banks from lending to anyone other than sovereigns.

    The markets will test the resolve of the EU, ECB, and IMF this week. They will see how readily "commitments" turn into "actions". Once again, the smug victory speeches being made by the politicians are likely to look very wrong, and possibly before they have even finished their victory tour.

    Last chance to QE?

    I think we have one group within the Fed that is desperate to do QE and wants to do it now. There is another group that believes the economy should be left alone, unless the data deteriorates significantly. As we head towards the election in November, the hurdle of what constitutes "weak" economic data will increase. Right now, Benyellen might be able to argue "only" 120,000 NFP jobs is enough to launch QE. I don't think they would have a chance of launching in August with NFP numbers like that.

    So, Benyellen will push hard at this meeting. I think they will still face too much resistance. It is only one bad NFP number and 2 bad "initial claims" numbers. Not enough for the last defenders of anything resembling a free market at the Fed. Housing has been weak too, but again, permits were up, and although not bouncing, there does seem to be some stability returning to the housing market.

    I don't expect QE this week. I think the statement will be slightly more dovish than the last one, but that is priced in as the market does often seem to take the "bad news" as good news path. Realistically, the next meeting is the most likely one to see QE announced since it would only take a few more data items confirming recent ones to let Benyellen railroad the rest into one more round.

    Earnings, just how good?

    I was frustrated and disappointed with BAC and MS. They aren't the only ones (GS and C did accounted for things similarly), but for whatever reason, they caught my eye, and convince me that this is what is wrong with the market.

    Last year, when DVA and FVO were big positives, those numbers were not only included in the headline, but in the case of Gorman at MS, were trumpeted as he pounded his chest that MS beat GS in Q3 2011. The quality and wisdom of DVA accounting has been questionable at best and the FVO adjustments are staggering in the ratio of the magnitude of the amounts versus the amount of disclosure.

    I would much rather have seen headline numbers consistent with 2011. Then we could focus on how they did that quarter. What the business outlook is. Instead, it looks like they are trying to trick the media and investors and make the story better than it is. Investors aren't stupid. They will do the work. They will figure out the differences in how Q3 2011 and Q1 2012 were reported. Then, not only will they be disappointed with what the firms tried to trick them on, they will question what else is being done. If you are willing to "massage" (sounds better than manipulate) the way you report each quarter's earnings to make it seem the best, what else are you willing to "massage"? Banks are opaque. On 100's of billions of assets, what's a bp or two here or there?

    All companies should lay it on the line. Report what happened in the way they always do, then rely on themselves and their conference calls and good analysts to figure out the longer term picture. Companies have to trust in the intelligence of investors and investors will have trust in the companies.

    Apr 21 9:48 AM | Link | 1 Comment
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