Yesterday, we reported that at least one prominent money manager, Geneva Swiss Bank, had called “time” on the bear market rally, and after scooping up a 7% profit following the post-February 11 short squeeze, cashed out.
This followed another post of ours from yesterday morning, in which we showed quite vividly that while stocks are surging on the latest algo-driven stop hunt and CTA squeeze, bonds could care less.
It appears at least one trader read between the lines of what was happened. As Bloomberg’s Richard Breslow wrote in his overnight note, he was one of the few who were not fooled by yesterday’s price action. Below he explains why.
Don’t Chase Parked Cars
There was such a strong emotional pull yesterday to get swept up in the feel-good atmosphere. Equities were flying, oil prices looked robust, top line credit spreads looked to be tightening after a horrible week and China had a new securities regulator to sort everything out. G-20 is coming and they are promising global cooperation. Sure, the U.K. might be blowing up the European Union, but that’s four months off.
What kept me from totally losing my heart was, yet again, the bond market. If animal spirits are alive, and the underlying fundamentals improving, how come bond yields are struggling to make even a dead-cat bounce? U.S. 10-year yields are at what I’d still call crisis levels. The comparable Japanese yield is higher today at 1 basis point
It seems there are trading vehicles and ones for investment (survival). It gives an interesting slant on how we define assets. It’s not just liquid and illiquid, but house money and rent money. Equities clearly fall into the former camp: chasing the latest news without caution. Bonds on the other hand are ignoring today’s emotions and asking what has fundamentally changed. And the answer they’ve settled on is “nothing”
The same phenomenon is clear in the credit market. Synthetic indexes race back and forth while the cash stays put. And at worrisome levels. It’s a world where everything seems correlated, yet Markov state transitions are functioning in multiple dimensions. Traders are getting caught with bad day trades with increasing frequency
The reality is there is a demand-side problem. It’s wishful thinking for global policy makers to be banking on the consumer to bail out overly leveraged companies and countries. Someone has to do the savings, even if forced to do so under the mattress. Getting oil higher may help oil producers and banks who lent too freely, but it’s a tax on the consumer. How broad do we expect their shoulders to be?
It wasn’t a compliment when James Carville said he wanted to be reincarnated and come back as the bond market. But if that means with greater perspective and discipline, it wouldn’t be such a bad thing
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Oh, and incidentally, that stock-bond disconnect we noted yesterday – it has quite a bit more more to go…