Tuesday, July 31, 2007

I wasn't going to let you buy all the credit and take all the reward

Quite a rally yesterday. We started out weaker. The CDX-IG was as wide as 94-98, which is about 20bps wider, then traded to unchanged. Rescap CDS was 160bps tighter on the day. GM and Ford CDS were both more than 100bps tighter. Brokers were in as well after Morgan Stanley was upgraded to AA- by S&P. I guess S&P doesn't think much of broker-related contagion, but then again, the ratings agencies aren't known for being forward thinkers.

My sense from talking to people was that yesterday was a lot of short covering. That doesn't bode well for follow-through. Doesn't mean we sell off a ton, just that short-covering rallies don't usually last long. We need to see real buyers come in, which would suggest that someone sees value at these levels, in order to have a sustained rally. The story that Goldman is raising a new credit fund is good news along these lines, but we'll have to wait and see.

Meanwhile, MBS were on fire. Conventional 5.5%'s outperformed the 10 and 5 year by about 1/4 point, which is impressive given that swaps were only in about 1bps. This wasn't short-covering. I heard many real money accounts coming in for MBS all day, with 6% coupons being most popular. I note that the bond nearest par (currently the 6%) is always popular among your
mid-sized money manager as well as accounts where capital losses are a problem. So seeing that the middle of the stack is leading the way is a very good sign.

Today stock futures are up about 4 points as of this writing. One nice thing about being such a morning person is that you get to see the overnight activity first hand while you eat your Cheerios. Anyway, Pre-market activity has been very spotty, which suggest to me that Asian and European players are more interested in getting long US stocks than we are. Dunno what that means, just observing.

2 comments:

Anonymous said...

What a dope you are. The people who are getting long U.S. stocks right now are hedge funds that borrow yen, not Europeans.

Why would Europeans want to invest in stocks of a sinking currency?

JUST WATCH! Yen weakens, U.S. stocks go up. Yen strengthens, stock go down. It's getting close to a 1.0 correlation.

If you think the yen carry trade, as practiced by highly leveraged and high-risk hedge funds, is sustainable, then BUY STOCKS! You'll make money. But right now, weak yen is the main prop under the U.S. stock market. To me, that's about as scary as it gets.

What I am telling you is that Japanese liquidity doesn't just have to prop up the long side of the U.S. market. In a heartbeat, a lot of that money can go net short. If you have yen liquidity drying up at the same time that remaining yen liquidity is going short, you will have a U.S. equity meltdown.

TDDG said...

You aren't invited to comment on this blog again. If I see you writing again in this manner, I'll just delete it.