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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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  • NFP day 0 comments
    Aug 5, 2011 7:12 AM | about stocks: SPY, DIA, IWM, HYG, JNK, SJB
    Look a the trader sitting to your left, and look at the trader sitting to your right, and the odds are that all 3 of you are long. For all the bearish talk, it feels like most people are still long. Even the bears seem to be trading from the long end looking for the bounce. I have a tiny short right now, my plan is to cover and get long for a trade. I just can't find many people who have the opposite view. That scares me. You would think after the 2 weeks we have had, after the day we had, that more people would be getting extremely bearish, and I just don't see people postioned that way.

    And its not just from talking to people. IG16 was out 6 to 7 bps yesterday, but so were intrinsics. I see IG16 basically trading on top of fair value. In the past, it was usually a reliable indicator that we were nearly done with the sell-off when the CDX indices traded extremely cheap. We don't have that right now. In theory, SNAC helps a lot as the arb is easier to put on, but I can't imagine anyone was executing the arb in yesterday's frantic illiquid trading, so the index is trading close to fair value because investors weren't desperate to hedge. I would be happier getting longer for a bounce in markets if the indices showed more evidence of panic and investors getting to short. Instead, they indicate investors are still being careful about cutting positions and don't want to miss any rally.

    I also wish this move had occured on huge outflows. AMG showed an outflow of $800 million last week, but that was after a month of significant inflows. Neither HYG nor JNK showed a significant decline in shares outstanding. They are both much closer to the number of shares outstanding they had from February to June, rather than the July lows, or their January levels. I find it hard to believe that the moves of the past few days won't shake out some more sellers, so I think over the near term, the market will be pressured by outflows.

    Some high yield credit focused funds must have taken a beating yesterday, even if marked to the offer side. Assuming they were buying 7% paper, they need to be 2:1 levered to generate 10% after fees. They probably had a down 3-5% day and had to go home knowing if they hit bids, the real mark was more like down 5-8%. Some funds were long higher yielding paper, with less leverage, but even less liquidity if they wanted to sell. I am sure, and hope, some funds traded this very well, had some good shorts on, etc, but I suspect there were more that had been complacent and were enjoying the carry and discussing all the reasons why high yield was safe. HY16 is also not trading particularly cheaply, which again seems to indicate that no one got overly concerned. Maybe I should interpret that as funds were lightly positioned and well prepared for the sell-off, but deep down I believe that it is a sign no one believes the weakness is real and Uncle Ben will come to the rescue with QE3.

    Over the short term, the moves of the past week, and yesterday in particular are likley to impact positioning. Investors have to cut back risk unless they are willing to live with much larger P&L swings than they previously estimated. I can't take credit for this idea, I owe it to someone else, but they always argue there are 2 types of credit losses. Credit losses coming from bad decisions where the company you lent to defaults. Investors work incredibly hard to avoid those losses. The other form of credit loss is when you have to sell bonds below your cost because you geet stopped out or just can't handle the P&L volatility. Investors consistently do a worse job managing that form of credit loss. That is the unexpected credit losses that portfolio managers are currently dealing with. Maybe we get a great NFP number and the central bankers of the world unite and give us a great rally that ends the pain and stops the stop loss selling in its tracks, but that is a tough bet to make.

    Speaking of NFP, I think the number will be horrible. I actually think we could see a negative headline number, but I'm worried about all the previous numbers that have been printed. A big portion of the YTD employment gains have come from the birth/death calculation. I understand why they do it, but given the massive revisions to Q1 GDP, I wonder if any of the data we have been relying on is valid. I just have a really bad feeling about this number. Not so much the headline, but that something else will come out in th details that really spooks the market. I am not an economist and this is just a feeling, but I can't shake it.

    The one true positive is that Europe is reacting well today. MAIN was as high as 139 this morning, and now is back to 133 (virtually unch'd on the day). 10 year Spanish bonds are 30 tighter and 10 year Italian debt is 10 tighter. Those are encouraging, but the liquidity is so thin, it feels it could move back to the wides in a nano-second and CDS liquidity away from MAIN is non existant. I've seen names that normally trade in 5 or 10 bp wide markets, quoted 40 or 50 wide. And it seems like every time a bid is hit, it becomes the offer and vice versa. Hard to judge too much from that sort of price action.

    So in the real world, I think we will see real selling pressure over the next few days. I can only imagine the fear at some Monday morning sleepy bank meetings. But in the meantime, I will likely cover my short and go a bit long, even though it feels like that is what everyone is doing. Since QE3 is the most likely event to save the market (I don't think a good NFP can do much of that), I'm leaning more towards commodities and commodity related stocks for longs as the next round of "transitory" inflation should give those a good boost.  
    Stocks: SPY, DIA, IWM, HYG, JNK, SJB
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