Flight From Risk: Treasury Plummets To Record Low Yield As Gold Surges

Thursday, May 17th, 2012

Now its getting interesting. 30Y yields fell the most in 5 months today back to 5 month lows, 10Y yields crashed to all-time closing lows, and Gold surged by its most in 4 months (and 2nd most in 7 months) as stocks started to accelerate lower. Gold is unch on the week now as 30Y is -21bps and 10Y -14bps – incredible. Between the Philly Fed’s confirmation of deceleration in US macro data and Europe’s increasingly crescendo-like implosion, is it any wonder that the decoupling thesis has given way to reality. S&P 500 e-mini futures repeated the early rally late fade pattern of the last 8 days but this time it was more aggressive as ES pushed towards 1300. CAT was a dog today accounting for 25% of the Dow’s losses and AAPL tumbled further – heading towards a 20% retracement off its highs. Financials tumbled further with Citi inching very close to red YTD (and JPM falling rapidly). Credit markets, which led the selloff, continue to slide but this time with equities in sync. Equities went out at their very lows of the day – at 3.5 month lows as VIX soared over 24% to close at its highest in 5 months.

Is BTFD DOA?

30Y Treasuries plunged but 10Y fell to record closing low yields!!!

and Gold is back near unch of ther week as the PMs soared today…

Financials are rapidly losing ground with Citi and JPM about to go red YTD…

Tags: 4 Months, 5 Months, 7 Months, Aapl, Confirmation, Credit Markets, Crescendo, Deceleration, Dow, Futures, Jpm, Losing Ground, Lows, Macro Data, Pms, Retracement, Selloff, Treasuries, Unch, Ytd
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Has JPMorgan Already Unwound Its Losing Trade?

Sunday, May 13th, 2012

On Thursday night, after it became clear that JPM has lost at least $2 billion on what is most likely an IG9 Index skew (Index less Intrinsics) trade gone horribly wrong, we first predicted (and promptly were piggybacked on by other various financial blogs) that based on various factors, there is about $3 billion more in the pain trade coming in JPM’s general direction, once IG9 blows out to catch up to a fair value not supported by JPM(artingale’s) infinitely backstopped prop desk. Sure enough, by closing on Friday, IG9 (and the entire IG curve), had blown out wider, by a whopping 10 basis points: one of the biggest intraday moves in nearly a year. In P&L terms, by close of Friday, all else equal, JPM had lost another $2-3 billion on the same trade it had lost over $2 billion since the beginning of April. We expect to hear confirmation of this shortly. Which however brings another question: has JPM closed out its losing trade, or is the entire move in the index (and to a far less extent in the intrinsics) due to hedge funds who have piggybacked on the “crush JPM” trade? The truth is we don’t know, and until we get the latest weekly DTCC data on CDS notional outstanding we won’t know. However, our gut feeling is that it would have been virtually impossible for JPM to lift every single offer in unwinding a $100+ billion notional position without sending the entire IG curve multiples wider. Which is why keep a close eye on the IG9 10 Year skew – this is where, as ZH first noted, the action is. If the skew soars, it is likely that the runaway train will keep going and going, until JPM issues a formal announcement that the firm is fully out of the trade, together with a final tally of its losses, which will probably be double the reported loss as of Thursday. At which point IG9/18 will see an epic ripfest as those short risk will scramble to cover.

As the chart below shows, as of Friday, the index was still 7 bps rich to intrinsic, however the spread collapsed by nearly 50% from the day before. If and when the skew goes positive, would be our all clear to get out of dodge. Until then, JPM will likely see far more pain, even if, technically, it won’t, following rumors its entire London CIO desk may be now in jeopardy, meaning it will be up to the middle office to unwind, at an even greater loss to the firm. And compounding the issue will be the general risk off nature in capital markets over the next few days, following a plethora of European sovereign bonds, and, oh, the little issue of the Eurozone potentially falling apart in a few weeks. All of which will likely see the continued widening in various IG points, until JPM issues at least some more color on its current involvement in the trade.

IG9 – 10 Year Skew: ripfest, but still a ways to go:

Someone else who believes that the trade is now over, is Peter Tchir. We don’t quite agree, but we do believe IG9 (and 18 by proxy) longs should be careful – very soon covering an IG long CDS position may well be the pain trade.

From Peter Tchir of TF Market Advisors

The Coolest Trade I Ever Saw!

On the coolest trade I ever witnessed, I was an unwitting participant. In the end, I don’t know if any of it is true, but this is the story I saw and was a part of, and the firm’s P&L seemed to back it up.

I only mention it now, because I can’t help but think Jamie Dimon is pulling something similar.  With Sarbanes Oxley and everything else, I’m not sure he could be, but there is a nagging doubt in my mind about “piling on” being the right trade.

I also can’t help but remember back in 2008, where Citadel had a conference call.  That was unusual enough.  More unusual was how easy it was to get the number.  Ken went on about the basis (long corporate bonds vs short CDS).  I remember liking the basis at that time, even had on a tiny bit, but I wanted to buy because I figured it was at ridiculous levels, the funding the Fed was supplying would help the market, and by the time Ken was so openly talking about it, you had to know the unwind was almost over.

So, anyways the trade I remember as the coolest trade was way back in the early 2000’s.  I was at DB at the time doing some HY CDS, Synthetic CLO’s, Total Return Swaps and a few other things that most people hate.  But the big story at the time was talk that the government would stop issuing the long bond.

The bond was going up almost daily.  There was talk about the scarcity and that it could go a lot higher in price.  The rumor was that DB was short.  It started as a small rumor, but got around.  One morning, the long bond opened up more than a point.  It kept grinding higher.  It didn’t matter who you were at DB, you were being asked by the street, by clients, by competitors about the trade.  Everyone thought DB was short and getting killed.  The size was supposedly large (by the standards of the day which are a fraction of what they are now).  I remember being nervous about my bonus.

What the heck was going on?

Then it happened.  Edson Mitchell or his assistant came out of “mahogany” row and called the head of rates (who oversaw treasuries) off the desk.  Myself and countless others were immediately on the phone and Bloomberg messages telling people what just happened.  Holy cr*p this must be bad.  The head of rates was called off the desk.  That NEVER happens.  And it was not to celebrate.  Wow.  The long bond spiked further, I think at one point it was up over 3 points – a huge move.  The rumors of losses were growing by the second.  People were wondering if they should trade with DB.  The “usual histrionics” that were blowing the situation way out of all proportion.

According to legend, and the P&L seems to have backed it up, the rates desk was actually LONG treasuries.  That extra 2 point gap made 100’s of millions of dollars for the firm.  Whether they had ever been short, I don’t know, but they had turned the position and were now massively long and profiting from the move.  How they didn’t just take the money  and be happy I will never know.  But to go through the charade of calling the head of trading off the desk and causing an immediate spike that they sold into, has to be the single coolest trading thing I’ve ever seen.

Be careful betting against JPM and the trade they allegedly have on and allegedly still need to unwind and might allegedly lose a lot more money on.  I’m not saying this is a head fake and I haven’t recommended closing the trades in TFMkts Best Ideas™ that benefit from the unwind, but I really don’t believe, that in spite of Sarbanes Oxley, we are getting the full story, and not possibly being played a bit.

Tags: Amp, Basis Points, Blogs, Bps, Chart Below Shows, Confirmation, Curve, Desk, Extent, Formal Announcement, Gut Feeling, Ig, Jpm, Losses, risk, Runaway Train, Soars, Tally, Thursday Night, Truth
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Jesse Livermore’s Seven Trading Rules

Sunday, November 1st, 2009

Minyanville’s Quint Tatro has assembled a great summary of seven trading lessons from one of the greatest trading legends:

Lesson Number One: Cut your losses quickly.

As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.

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There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade –  never when it goes against you.

Lesson Number Three: Watch leading stocks for the best action.

Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game.

Lesson Number Four: Let profits ride until price action dictates otherwise.

“It never was my thinking that made the big money for me. It always was my sitting.”

One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position.

Lesson Number Five: Buy all-time new highs.

The psychological merits of buying all-time or 52-week highs are immense and shouldn’t be discounted as a part of your overall strategy.

Lesson Number Six: Use pivot points to determine trends.

When going long, traders are continually looking for confirmation by assessing the strength of a move. Higher highs and higher lows are a solid indicator that a current uptrend is merely taking a slight pause, and the odds of higher prices are in their favor. These same pivot points are integral to drawing support and resistance lines to give traders their line in the sand. Taken together, trend lines and pivot points can enlighten a trader to a change in momentum, which may change the character of a trade.

Lesson Number Seven: Control your emotions.

Our goal as traders should be to also make a critical yet honest assessment of the areas we can improve so the bottom line will support our claims of truly being seasoned traders. Adhering to the time-tested rules of Jesse Livermore would be a great start for anyone.

Read the full article here.

Tags: 52 Week Highs, Breakeven, Confirmation, Initial Entry, Jesse Livermore, Judgment, Legends, Lows, Merits, New Highs, Number Six, Odds, Overall Strategy, Pivot Points, Point In Time, Quint, Racetrack, Several Ways, Tatro, Thesis
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How to interpret the Dow Theory bull signal, according to Richard Russell

Tuesday, July 28th, 2009

There was a great deal of interest in my recent post “Dow Theory calls a bull market“. Readers had many questions on what brought about the Dow Theory bull signal, and specifically whether Richard Russell, “Mr Dow Theory” and author of the Dow Theory Letters, was the last bear standing when he replaced the bear on the first page of his daily newsletter with a long-horned Texas bull.

Who better to ask for more background on his thinking than the R man himself? The paragraphs below are excerpts from his latest newsletter.

“For four frustrating months or ever since the March lows, this writer [Russell] has been in a state of perplexity, better known as confusion. Now, at last the picture has clarified. I would like my subscribers to study the following explanation carefully. I’m going to explain why the trend of the stock market has turned clearly bullish under Dow Theory. The fooler was that this pattern did not occur immediately off the March lows – but it took place part-way up the rally and four months after the March lows.

“Please, refer to the charts of the Industrial and Transportation Averages below.

(1) The Industrials (top chart) recorded a low in May at 8230.

(2) The Transports also established a low in May at 2971.

(3) Next, both Averages rallied to June peaks, the Dow to 8877 and the Transports to 3434.

(4) Both Averages then turned down, with the Dow breaking support and declining to 8087. But important – note that the Transports held support and did not confirm the Dow weakness.

(5) After the Transport non-confirmation, both Averages rallied, and both Averages broke out above their June peaks.

“This was a classic Dow Theory bull market signal! To review – we saw the two Averages decline with one Average (Industrial) breaking to a new low while the other Average (Transports) refused to confirm. Next, we witnessed a rally with both Averages breaking out to new highs.

“Note – Both Averages are now overbought, based on the level of the RSI.”

Source: StockCharts.com

Source: StockCharts.com

“The trend of the stock market is now bullish. But this is where interpretation is critical.

“Nowhere during 2008 or 2009 did we see anything typical or characteristic of a major bear market bottom. However, recently we witnessed a Dow Theory bull market signal. My interpretation? We are now in a cyclical bull market as opposed to a secular or primary bull market. In effect, we’re in an extended bear market rally. The true bear market bottom lies somewhere ahead.

“There is no way of knowing how high this bear market rally might carry. The question – is it worth playing this cyclical bull market? My answer is yes, but play it very conservatively and carefully.”

And that is the word according to a long-timer that has spent more than half a century following the ticks on the tape.

As an aside, I have been subscribing to the Dow Theory Letters for more than 26 years and highly recommend them for the stimulative nature of the content.

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Tags: Confirmation, Confusion, Daily Newsletter, Decline, Dow Theory Letters, Excerpts, Four Months, Industrials, Lows, Market Signal, New Highs, Paragraphs, Perplexity, Rally, Richard Russell, Stock Market, Subscribers, Trend
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Richard Russell: Are we in a bear market rally or a new bull market?

Sunday, April 26th, 2009

Richard Russell of Dow Theory Letters, provides the following note April 20, 2009:

“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither – no indication of accumulation. And that bothers me.

“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).

“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.

“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.

“(5) The rally moved up ‘too fast’ – action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.

“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).

“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.

“All of the above have kept me skeptical and cautious about this rally.”

Source: Richard Russell, The Dow Theory Letters, April 20, 2009.

Hat Tip:

Hat tip: Investment Postcards

Tags: Accumulation, Alan Abelson, Bull Markets, Confirmation, Consumer Cyclicals, Dividend Yields, Dow Theory Letters, Lows, Major Bear Market, Market Bottoms, Market Rally, Momentum, Money Manager, Money Managers, One Thing, Plodding, Retail Buyers, Richard Russell, Short Covering, Sidelines
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Technical talk: Bounce not that impressive …

Sunday, March 8th, 2009

The comments below were provided by Kevin Lane of Fusion IQ.

Analyzing yesterday’s [Wednesday] activity two things jumped out first, after a recent aggressive multi-day sell off (and multi-week for that matter) the market could not hold on to a lousy 240 point gain, shaving off 100 Dow points in the last 1/2 hour. Second, was that the internals on the move were average, not stellar, with NASDAQ up to down volume very good at 4.75:1 but its advance decline ratio only registering a 2:5 to 1 ratio. On the NYSE the ratios were as bit better at 2.53:1 and 4:29 to 1 respectively.

However neither of these were what we would expect to see on a rally cementing a low, rather they were numbers that looked more associated with short covering and trader interest (not investor interest). Typically on days in the past that have been up real thrusts (bottom confirmation days) off real lows the up to down volume ratios are closer to 10:1 or greater with accompanying advance to decline ratios of at least 5:1.

When people are looking for lows or so afraid of missing the bottom (or a rally) then you can almost always count on it not being the real deal. Real rallies start when all hope is lost and investors become mentally worn out from calling for the bottom (so often) and being wrong that they finally stop trying.

Any rally at this point is an opportunity to make some short-term trading profits until market breadth stats improves measurably.

Source: Kevin Lane, Fusion IQ, March 5, 2009.

Tags: Advance Decline Ratio, Bounce, Confirmation, Dow Points, Down Volume, Internals, Investor Interest, Iq, Lows, Market Breadth, Nasdaq, Nyse, Point Gain, Profits, Rallies, Rally, Real Deal, Short Covering, Thrusts, Volume Ratios
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