Credit Markets

     

 

 

Shifts in Credit-Land: Repatriation Hurts Small Corporate Borrowers

A recent Bloomberg article informs us that US companies with large cash hoards (such as AAPL and ORCL) were sizable players in corporate debt markets, supplying plenty of funds to borrowers in need of US dollars. Ever since US tax cuts have prompted repatriation flows, a “$300 billion-per-year hole” has been left in the market, as Bloomberg puts it. The chart below depicts the situation as of the end of August (not much has changed since then).

 

Short term (1-3 year) yields have risen strongly as a handful of cash-rich tech companies have begun to repatriate funds to the US.

 

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The Biggest Crashes in History Happened in September and October

In the last installment of Seasonal Insights we wrote about the media sector – an industry that typically tends to perform very poorly in the month of August. Upon receiving positive feedback, we decided to build on this topic. This week we are are discussing several international markets that tend to be weak during September and will look at what drives this recurring pattern.

 

Mark Twain, a renowned specialist in how not to get rich, opines on dangerous months to invest in the stock market. We should mention that he didn’t have access to the Seasonax app. [PT]

 

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Financial Potemkin Village

A rising stock market has the illusory effect of masking the economy’s warts and blemishes.  Who cares if incomes are stagnant when everyone’s getting rich off stocks?  Certainly, winning wealth via the stock market beats working for it.

 

Learning from history, 2018 style [PT]

 

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Data Interpretation Problems

Oddly enough, these days it has become more difficult to interpret positioning data. We get more granular data than before, such as e.g. the disaggregated commitments of traders reports (CoT – even if they are still released with a three day delay), but at the same time the goal posts in futures markets have shifted greatly. Former extremes in positioning have been left in the dust with the advent of QE (and the associated desperate “hunt for yield”) and the adoption of large scale systematic trading. Here is a glaring example illustrating the point:

 

Speculator net positions in crude oil futures: after decades in which net long positions rarely exceeded 100,000 contracts, a new post GFC era record has been set in the speculative position at 740,000 contracts net long in early February 2018.

 

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Junk Bond Spread Breakout

The famous dead parrot is coming back to life… in an unexpected place. With its QE operations, which included inter alia corporate bonds, the ECB has managed to suppress credit spreads in Europe to truly ludicrous levels. From there, the effect propagated through arbitrage to other developed markets. And yes, this does “support the economy” – mainly by triggering an avalanche of capital malinvestment and creating the associated boom conditions, while “investors” (we use the term loosely) pile into ridiculously overvalued bonds that will eventually saddle them with eye-watering losses.

 

The famous dead parrot

 

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Tightening Credit Markets

Daylight extends a little further into the evening with each passing day.  Moods ease.  Contentment rises.  These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening.  Credit markets are tightening.  The yield on the 10-Year Treasury note has exceeded 3.12 percent.

 

A change in pace: yields are actually going somewhere. There is a fly in the ointment for treasury bears though: the net speculative short position in futures across the yield curve is seemingly establishing new record highs every week. While this is not bullish for treasuries per se, it definitely makes yields vulnerable to a sharp pullback. The question is what might cause such a pullback. Our guess would be that either “unexpected economic weakness” will enter the scene, or crisis conditions in emerging markets will worsen and eventually spark “flight to safety” behavior. [PT]

 

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A Movie We Have Seen Before – Repatriation Effect?

There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.

 

The y/y growth rate of TMS-2 increased from 2.68% in February to 4.85% in March. The 12-month moving average nevertheless continued to decline and stands now at 4.1%.

 

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Lord, Grant us Chastity and Temperance… Just Not Yet!

Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled with staggering losses. In this context we have noticed the emergence of a new consensus in the form of an invocation we hereby term the Augustine of Hippo Plea.

 

St. Augustine of Hippo, here seen doing saintly magic in his later years. In his Confessions the Saint admits that as a “wretched young man” he once inserted a phrase into one of his prayers that has become quite famous for the hopeful qualifier attached to it: “Da mihi castitatem et continentiam, sed noli modo.”, read: “Grant me chastity and temperance, but not yet”. At the time the future Saint feared that he might actually get what he wished for. “Timebam enim ne me cito exaudires et cito sanares a morbo concupiscentiae, quem malebam expleri quam extingui”, as he explains (“I was afraid that you might hear me right away and quickly cleanse me of the disease of carnal desire, which I would much rather have explored than expunged”).

 

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A Warning Signal from Market Internals

Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.

 

HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the zero line shortly before the selling started. They briefly returned to positive territory after the first dip, and after a third or fourth dip in close succession the sell-off commenced. What is currently of interest to us is that the sell-offs themselves generated deeply oversold readings in HLP in excess of -30. Only then did the market bottom and reverse back up. This is interesting because the early February sell-off has only managed to generate a warning signal so far. We have seen two dips below the zero boundary since then, but an oversold reading has not been generated yet. Based on this indicator, we are now merely in the phase prior to the actual sell-off. Looking at the third and fourth panels from the top, note that while the percentage of stocks below the 50-dma (purple line) did reach comparable “oversold levels” in February, the percentage of stocks below the 200 dma (red line) did not. Currently both percentages are almost at the same level they inhabited just before the August 2015 sell-off.

 

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Contradictory Signals

 

Special antennae that help traders catch upcoming opportunities. Available from the same outfit that sells the soup-cooling spoon (Acme Inc).

 

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Another Shoeshine Boy Moment

We recently pondered the markets while trying out our brand-new electric soup-cooling spoon (see below). We are pondering the markets quite often lately, because we believe tail risk has grown by leaps and bounds and we may be quite close to an important juncture, i.e.,  the kind of pivot that can generate both a lot of excitement and a lot of regret all around. Provided one manages to grasp the nettle with the proper combination of preparation and luck, the emphasis may be on excitement rather than regret.

 

Modern soup-cooling spoon for the sophisticated gourmet. We are not the gentleman in the picture, we don’t even know him, we just wanted to show this nifty spoon in operation. Once you have one, you will wonder how civilized life was even possible before it.

Photo credit: Hans Reinhart / Getty Images

 

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A Twitch of a Toe

In our recent update on credit spreads we proposed to use the seemingly deceased  Monty Python parrot Polly as a stand-in for the suspicion of creditors in today’s markets.  The question was whether Polly was indeed dead or merely in a deep coma. Depending on this, one should be able to gauge how powerful a miracle will be required to resurrect her.

 

Meet Polly. Is she alive?

 

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