The T Report: Long and Prepared to React

Posted by on Jun 20, 2012 in Uncategorized | No Comments

There is not a whole lot to write that I haven’t written already. Today will largely be about reaction. We should finally get some answers to some big questions. Reacting to them will be key.

FED

I expect that the Fed will actually surprise and announce some new version of real QE. Mortgage purchases with balance sheet expansion. That is not expected and would be a big boost for “risk on” with banks doing especially well.

The consensus seems to be some form of operation twist. I don’t think twist accomplished anything and this is already priced in. Whether the market responds positively or negatively will depend largely on the comments and just how dovish the Fed comes across. I wouldn’t be surprised to see the market sell-off after the announcement, only to retrace the losses during the Q&A when Ben can be extremely dovish.

No new balance sheet usage will tough for the markets. Expect an instant sell-off, but I think it will be more muted than many believe, because the Fed will be extremely dovish. The initial reaction will be a “I can’t believe they did nothing” wave of selling, only to be bought as the Fed makes it clear they are prepared to act on a moment’s notice and don’t even have to wait for the next meeting.

Long into the Fed, and will look to add if we have an initial negative reaction, as I don’t think the damage by the end of the Q&A will be as bad. I will re-assess after the Q&A and depending on the language in the 12:30 statement.

G-20 & EU

Europe and the ECB need to act. Something concrete has to come out of the G-20 meeting. Without a doubt we will get some mumbling of support and another all will be good moment. What the markets need is real action and real plans that can be evaluated.

It does look like Germany is relenting on some issues. I have thought they will because Merkel is finally realizing how much she is already on the hook for. Germany has already committed to huge costs if the problems worsen, so spending a bit more to delay those costs and have a chance of fixing things is the course of action I think she will choose.

If Europe demonstrates a real willingness to change and aggressively attack the problem the markets will be cheered, at least temporarily, but the market is running out of patience on the pure fluff. By the weekend, without any real announcements or new programs, markets will return to a state of nervousness.

I believe that the will is finally there and we will see new programs so remain constructive. I am also trying to figure out whether this rally can convert from one that is based largely on short covering and hope into one where investors feel left behind and get scared they will miss out on the next leg.

The May 10th JPM Moment

The JPM moment has largely played out. We still don’t know the final loss in the CIO’s office, but I expect after unwinding a lot of the trade and the AFS book the damage will be minimal and far less than some of the outrageous numbers thrown out.

JPM, IG18, and Spanish bond yields have not gotten back to their May 11th levels; whereas the S&P 500 and HYG have. With IG and Spain leading the way today and outperforming and seeing some steepening, I think the momentum remains positive.

I continue to believe that the “whale” trade influenced markets far more than most people realize. The actual unwind, fear of the unwind, and front-running of the unwind was brutal for all risk assets which I why the May 11th levels are so important to me. We are seeing things normalize – even IG9 problem child MBIA is back above $10 and its May 10th close of 9.82. I think it will take time for markets to settle down, but getting the “whale” trade behind us, is a key component of the risk-on trade, and it has been for the past week, but after yesterday’s testimony can be a catalyst for more gains, particularly in the banking sector.