The T Report: Run, Don’t Walk
Why Can’t We Have A Correction?
The very fact that virtually everyone says we can’t have a correction probably means we can.
I see complacency. The VIX is low and no one cares. Performance chasing is the latest excuse for analysis on why stocks HAVE to go up. People look at a treasury curve that is totally manipulated by the Fed’s 35% holding and clear intention to buy and pretend like relationships between dividend yield and treasury yield should match historical averages. Apple can only go up and any sell-off is a buying opportunity. There is a lot of complacency.
I’ve been bearish, but not maximum, table pounding, bearish, but I’m getting there.
Reach for Yield – Real or Myth?
Ah, the retail investor who is going to chase yield.
HYG shares outstanding have been stable for 4 straight days. JNK shares outstanding have actually gone down 3 days in a row and are lower than they were on September 17th. LQD shares outstanding have been stable and are back to where they were on September 7th.
If the reach for yield was in full swing, I would expect the shares outstanding to have increased dramatically for all of these.
JNK is back to September 10th prices. HYG is back to prices not seen since September 6th. LQD is better, but largely because of treasury yields than spread. No obvious signs of reaching for yield
Finally, I’m seeing both HYG and JNK closing at a discount to NAV. We had a late day sell-off so that discount could be a function of bonds not getting marked, but it is worrisome.
If you have time, read Corporate Bonds, ETFs, and Feedback Loops. It was from last week, but I think there is a real risk that we enter this phase. Everyone is long high yield. Everyone has viewed it as safe. There is no liquidity and possibly no new money. Retail is full.
If you think there is liquidity, take a look at Spanish bond prices or even the long bond the day after QE3. Spanish 10 year bonds have dropped 2 points already this week.
There is limited liquidity in even the most active bonds let alone high yield.
No CDS Hedges
Investors haven’t been using CDS to hedge. We took off our bullish call on CDS awhile ago. While long term, the reasons for CDS to go tighter and outperform remain, but for now short seems the way to go.
I would actually hit bids on bonds first because I think the liquidity there will evaporate and the bonds won’t be as hard to buy back as people think, but if you can’t bring yourself to sell your precious bonds, it is time to short either CDS or the junk bond ETF’s. I would lean towards shorting JNK because I believe they are far looser on the redemption process than Blackrock (which manages HYG), giving the chance to benefit from the short side from that potential tracking error/sloppiness.
E-mail: tchir@tfmarketadvisors.com
Twitter: @TFMkts