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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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  • Window Dressing - You May Be Naked In Front Of That Window
    I have heard so much about "quarter end" window dressing, and have to admit I never understood the theory. It sounds like managers who weren't fully invested in a good quarter are supposed to buy stocks so they can show they were fully invested?

    Which would you rather send to your clients:

    Dear investor, we are now fully invested but underperformed the market, so either we piled in at the last minute or our investments all sucked.


    Dear investor, we were up, but not as much as the market. We remained cautious and continue to do so, here are the reasons why….

    Anyways, here are the last 7 quarters. It includes some big positive quarters. In the 3 prior quarters that had greater than 10% gains, the index did nothing or actually sold off a little in the last 5 days.

    QuarterS&PQtr RtnLast 5 Days

    So I'm not sure where the quarter end window dressing argument comes from, but it doesn't seem to based on facts.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 29 8:12 AM | Link | Comment!
  • "Faux" Income - Be Careful What "Fixed" Income You Are Buying Or Selling
    I am just getting up to speed on this, but the story scares me. It seems like banks and investment banks are working on ways to satisfy their customer's demand for yield. I am hearing there is a big push to get these complicated products out. They should come with a warning that "yields in hindsight may be smaller than they appear".

    If you are being asked to sell or to buy "fixed" income products that are anything but "fixed", you need to dig deeper. What are the alternative investments. Anything where a coupon seems high relative to the market means you are taking a leveraged bet, including selling options. BE VERY CAREFUL as some of these products have return profiles that would make sitting in cash look attractive in the not so distant future.

    At this point, I haven't been able to confirm which particular bonds are being sold to retail or how much has been done, but I decided to poke around in some bonds listed by Citibank - mostly because somehow they seemed to have needed more support from the taxpayers than any other bank (except for BAC which I have picked on too often).

    So let's take a look at what appears to be a Citibank NA Certificate of Deposit - how dangerous could that be?

    It seems a bit long for a CD - 2032 final maturity, especially since it is callable at any time. According to this it hasn't been issued yet, so maybe this is all a bad dream, but since I was able to find it on Bloomberg, it probably is something they are trying to sell.

    So on any "fixed income" product, the big question is what is the coupon? It pays 6%!

    Ok. I could buy Citigroup Inc 5.85% bonds with a 2034 final maturity. They are non-call and priced around 103.5 to give a yield of 5.57%. So stop right there. The CD may be marginally higher in the capital structure and slightly safer, but for 20 years I would much rather have 5.57% non callable bond rather than a 6% bond callable at any time. I would spend more time working out the value of the call and if the trade-off is even remotely fair, but there is no point, because the coupon isn't "fixed" it resets annually.

    So after 1 year, the coupon will be 5% minus 6 month LIBOR at the time. If today was a "setting" date, the coupon would be only 4.25%. So as short term rates rise in the future, this coupon on this Inverse Floater will go do. If 6 month Libor is ever at 4% or above on a setting date, then this bond will have the "floored" coupon of 1%. So if the Fed starts raising rates or LIBOR goes up because bank credit risk deteriorates, you own a low coupon bond in either a high rate environment, or weak bank credit environment.

    But this "Certificate of Deposit" looks tame compared to another they seem to be marketing at the same time. Again, I don't know for certain that they are marketing this, but it does show up on Bloomberg under a list of Citi bonds, so I have to assume it isn't there by accident.

    So this one is a "dual range accrual". So it look like you have to track the number of days in a period where 3 month Libor is between 0% and 5% and the Russell 2000 is above 75 (maybe they mean 750?). If both conditions are met for the entire period, you get a 4.25% coupon. So a Citibank CD that is callable at any time, has a best case coupon of 4.25%, and could be 0% in either a high rate environment (libor above 5% or in a weak stock market the RTY is below the threshold). Retail investors are selling options hand over fist with the promise of some decent yield in the first year. I find it hard to believe they understand the options they are selling, and I find it impossible to believe that they are selling the options at anything close to fair value.

    Stop tomorrow's problems today, but if you are shown a "fixed income" product where the coupon is too good to be true, it is too good to be true!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 25 8:01 AM | Link | Comment!
  • Tommorow and Tomorrow and Tomorrow
    As Macbeth said, It is a tale told by an idiot, full of sound and fury signifying nothing.
    Fading the “Grand Plan” rally worked very well.  There was a couple days of pain and then generally the market followed a nice path lower.  Last week the market had felt oversold and was looking for a reason to rally.  I thought that Monday was overdone, and that Wednesday was extremely overdone, but I started cutting shorts yesterday, and am now getting long.
    This is the first time I have been long at these levels, and it scares me, but unlike the “Grand Plan” rally, I am not sure what I am fighting here, other than bad positioning.
    Everyone seems to understand that the “globally coordinated rate cut” plan was not a big deal in of itself, yet the market didn’t give up any of the gains.  Even some of the perma bulls downplayed the move.  I think the move was meant to be more pre-emptive than a strong show of future support, but Ben is not dumb, and he has seen the outsized impact such a simple move had.  He may be tempted now to follow up, even if he hadn’t been.  I could see him building a case that this is the opportunity to push the market and economy over the edge in the right way.  QE1 and QE2 were launched when things were weak.  Maybe he will push to launch a mortgage based QE3 when the market as a whole isn’t bad?  Maybe he will try and build on the momentum.  It would certainly help European banks deleverage.
    Yesterday’s headlines seemed marginal at best.  It felt to me that the market should have been disappointed.  Even data was only okay, yet the market hung in.
    Merkel gave a speech today that should have caused the markets to sell-off, instead they held onto gains.
    Too many moves like that indicate that maybe someone knows something.  There are way too many government agencies involved for someone not to know something.  If the market isn’t making sense, then that is a logical conclusion.
    Unlike EFSF, which was easy to see that it was a flawed plan from the start, it is hard to find a flaw with the “current” plan.  That is because there is no current plan.  Every time a plan is floated and is found lacking, another one is put up.  There are too many potential options, and although none may work, the market is clearly looking for an excuse to rise.
    Finally too we have seen follow through in the assets that should benefit – Italian 5 year bonds are up 4 points in the past 2 days.  Back to levels last seen in early November.  Even the basis swap improved by 36 bps over 2 days, so it picked up a good portion of the 50 bp cut made by the central banks.
    As I wrote this, the IMF came up with some plan to work on central bank loans.
    I don’t believe this is going to work long term, but right now, the market seems too short and the politicians and central bankers seem to sense it and are finally throwing some fuel onto the fire.
    Maybe now China will even throw the EU a bone and promise a hundred billion or so.  The weakness in their own economy might prompt them to get involved finally, especially now that it seems minimal amounts might generate a big move.
    Since I don’t think this actually fixes anything this isn’t a big global recovery rally trade.  This is a massive short covering rally trade.  Look for the ugliest, most beaten up names.  JEF, Citi, and JPM are prime candidates. BAC and MS could run, especially if the Fed pushes ahead with a mortgage based QE3.
    HY could do well, but even there it feels like time to close your eyes, and plug your nose, and but the dodgiest of credits because in a week someone else will buy it from you much higher.  HYG and JNK should do well.  I think JNK has higher beta right now, so could outperform briefly, but at these levels I like the fact that HYG does a better job forcing the portfolio to be less concentrated and to match the index better. 
    I don’t like LQD outright.  I think IG spreads can tighten here, but would prefer bank bonds on a yield basis, and corporate credit on a spread basis, but again, leaning more towards the BBB credits as the high quality names have been picked over and this feels like a rush to risk is in the works near term.
    I still like Italian bonds.  They could squeeze even further.  People who shorted 5 and 10 year bonds are now experiencing the pain of big mark to market losses and are thinking about the cost of carrying the position at these yields, especially if the actions are going to buy a month or two before the next obvious problems arise.

    Could the treaty talks next week fail?  Sure, but won’t they just come up some new plan?  It just seems that right now there are too many alternatives and the market is too short to fight them all.  If we get a good payroll number, 1300 seems easy for SPX.  We have the seasonality, etc., and underperforming hedge funds seem much happier to push on markets to the upside than they do to the downside.  We may finally get a rally in the big cap stocks that everyone complains have been lagging.  If I am correct and we get a pop in the beaten down stocks, the big caps might be where funds go to next to put capital to work quickly.
    As the market is moving up, we will here story after story about how well the consumer is doing, how the seasonality is great for stocks, how hedge funds and mutual funds are chasing performance, how stocks are CHEAP by any measure, and that Europe really isn’t so bad, that Italy is running a primary surplus, etc.  Every month without a default gives the banks more coupon income.  I don’t believe anything is really fixed, but this feels too much like post Bear Stearns to ignore.  I haven’t been long stocks above 1200 on SPX or HYG above 85 since July (and then only briefly). It still feels strange, though the IMF announcement makes me feel better about the position. 
    Cracks will appear in this rally, and we will ultimately figure out the problem with the current attempts to fix Europe, but right now it is too vague to fight, positioning has been too extreme, and Bernanke and Draghi have to see the opportunity to push things forward while the market is behaving positively.
    It would also help, in my opinion, if they took the opportunity to get banks to spend the month of December reducing derivative notionals.  Any attempt by the regulators to regulate (rather than just print money) would be met with cheers by the market.  A concentrated effort to reduce gross notionals in all derivatives would not hurt bank profitability and would allow investors to become a little more calm on systematic risk.  They may have created a window to do this, and since banks don’t seem to be trading much as it is, and volumes will be even lower in December, they have the time to do it.  This doesn’t replace real regulation or moving towards clearing but would do a lot to calm the markets. 

    And yes, this may be a tale told by an idiot, but that doesn’t mean it’s wrong.  I do wish I had managed to send this out before the IMF announcement.
    Dec 02 8:08 AM | Link | Comment!
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