Posted 2007-06-07 16:01
by Karl Denninger
by Karl Denninger
That got ugly.
Volume was also extremely heavy, and the selloff accelerated in the last hour, taking out an attempt at a rebound in the early afternoon.
What blew up the party, and promises to crap all over any attempt to re-ignite the liquidity bull? This:
5.099% eh? That's not good, and this is two parabolic moves in the last week. This is not over; the momentum indicators I use show there is no way in hell that this is done; there's going to be more of this to come, even if the bond consolidates a bit before the yield marches even higher.
What lit it off today was a bunch of hedgies who started trying to sell their way out of some trouble they've been having with mortgage securities (especially the junkier tranches!) as rates started to tick higher. Suddenly, what was a fairly orderly move up became a virtual stampede! Amusingly the ABX spreads didn't react much - yet. The CMBX (commercial) showed a bit of a hiccup but nothing major - again, yet.
I expect we will at least ping 5.25% in the short term and we may blow through it.
Pimco's Bill Gross, in a stunning announcement this afternoon, shifted off his long-term (25 year!) bond bull market call to one of a bear market in bond prices. Bill isn't a guy to bet against. He's targeting 6.5% on the 10 within the next 12-18 months! If we get there that puts 30 year mortgage rates in the upper half of the 7% range which will destroy what's left of the housing market.
You know how people (including me) have been saying "we're in the second inning of this mess guys"? Well, now you've got one of the most-respected bond traders and a huge bond fund manager who is predicting that the next few innings are going to have several grand slams hit by the opposing team! If Bill is right this is going to positively POUND interest-rate sensitive stocks, the LBO and private-equity guys!
The bad news here is that these guys need to syndicate about $250 billion worth of new issues in the next couple of months - for deals that were announced and priced, but haven't been closed and syndicated yet. This could cause real trouble - there is no "red letter" warning yet, but you've got a number of these - Chrysler, Sallie Mae, TXU - all of which are not yet really done!
In addition all of my indicators in the Canary have now gone below the line, meaning that he's dead. My update earlier today said that the Cat's Jaws snapped shut - intraday I saw this, and jumped into the QIDs; I had picked up short-dated PUTs on the Qs this AM and also jumped into SDS. In addition I shorted LEN today, bringing my direct shorts in the home builder space to LEN, BZH and HOV. (I also have mid-dated PUTs on Lennar.) Finally, I picked up short-dated ITM PUTs on CFC and IMB today; rising interest rates can't possibly be good for lenders!
On a macro level we got consumer credit this afternoon; I had originally gotten a bad copy (old) but the real data, once I had time to read it in detail, is worse! Credit card debt actually fell, which is the first time that has happened since March 2006. This is extremely bearish for the consumer as we also, this week, had refinancing applications drop, productivity down and wage gains down. This means less real money in consumer's pockets, whether they do so on credit or otherwise, and that will translate directly into less consumer spending!
Non-revolving credit rose somewhat - auto loans primarily. After having gone in the ditch last month, this may or may not mean anything. But in a sign of serious trouble among that number, interest rates ticked up by more than one full percent, or a 25% increase from last month, while maturity time went DOWN, which means that in real terms interest rates went up by even more than reported!
In addition I'm smelling a slowdown in corporate america. Hiring has definitely slowed and I suspect intended inventory builds are too. Unit labor costs are up and productivity down, which spells wage inflation. CFOs keep talking about M&A being just simply overheated - the prices are just too high and have been enabled by those low interest rates, which are evaporating. All of this is quite bearish!
The SPX, Composite and DJI also took out first-level support from the wedge they had been in. The SPX took out an additional support level at 1500, tried to come up above it, but didn't hold. So we had a failed retest of what became resistance. This is a clear indication that more selling lies ahead on a technical basis. The next serious level for all three indices are in the 50DMA, which lies just under the current levels for the Composite and SPX. Essentially ANY lower close in these indices tomorrow will take out that key technical level.
THE SPX, IN ADDITION, POSTED A SHORT ENTRY SIGNAL ON MY INDICATORS. The other two indices came within a hair-breadth of doing so. I shorted the SPX this morning (via SDS) and the Composite around lunch (via QID); yes, I know I may be ahead of the game here.
If I'm wrong this is going to sting, but I don't see that scenario given the 10 year bond signal - so I went ahead and pulled the trigger.
If you look at Fibs from the low in February this targets 1476 for a midterm level (61.8%). That's between the 50 and 100 DMA. I think that's being kind and we should be looking at the summer lows as the target, which puts us right up against the 200, or right around 1412, and this assumes the 5.25% level holds on the 10 year bond.
If it does NOT hold (and it might not!), or we get some sort of credit market disruption as a result of the market's action, then last summer's lows are absolutely in the realm of possibility and even that may be generous.
IMHO to hold long here you have to have a time horizon exceeding 5 years. If you're not inclined to short there's nothing wrong with cash!
I have no long positions except for a metals stock and my Muni fund at this point. Everything else is gone and has been replaced by either a leveraged short or cash.
Note that, as the disclaimer says, this is not "investment advice". Its what I see and what I've done. I could be wrong and we could get a snap reversal from here.
I don't think so however, and I've put a whole shizload of money behind my mouth on this one.
One final note. I see a lot of notes around on the message boards and such talking about "The Fed", "The PPT", "Market Manipulation", etc.
Guys and gals, let me be blunt here and say something you probably don't want to hear. So long as you find reasons other than your own failures as a trader, whether it be analysis that turns out to be wrong or the most deadly sin of all - bad money management - you will not make money in the markets.
Indeed, of all of the discipline factors in trading, money management is absolutely the most important. Without it you are destined to wind up broke. You will have losing trades - plenty of them - so if you're not comfortable with the potential loss you're exposed to at any given point in time you're putting too much of your money into one transaction. Trade smaller amounts! Most traders both exit winning positions long before they should and fail to cut off losers quickly enough. If you're wrong its not the PPT that is screwing you up, its simply that you were wrong - either you got the direction or timing incorrect - and the correct move is to exit, take a small loss, and try to figure out how you screwed it up, because it was you, and only you, that did! You missed something - if you're using technical indicators there's one you didn't know about or weren't watching; if you're reading fundies you left something out, etc.
As an example two days ago I executed four separate trades in the Q PUT options. I was wrong on the turns three times in a row and took very small losses each time. The fourth time I was right and made money. Yesterday I executed a couple of trades and on balance was right enough to buy beer - my error was exiting too early then chasing it back!
Today I revised my indicator screen a bit, learning from the previous two days, and left the PUT position open all day long. It is massively profitable right now and my read on it was that I should leave it open overnight, so I did (which I don't normally do.)
We'll see how that works out in the morning - but if it turns out I leave money on the table I could have had this afternoon its not anyone's fault but mine!
Put the responsibility back in your own head where it belongs, analyze your mistakes, then fix them so you don't screw it up a second time, and you will start making money instead of losing it. Realize that you can be right 30% of the time and make money hand over fist so long as you cut the losers off fast but let the winners go to their fullest extent!
One final thing - people have asked "when is it over". Here's a way to know - when you see the VIX come back down to 12 or 13, and stay there for a week or so, then and only then is bottom fishing a reasonable exercise. Do it before that and you're asking to get slaughtered.
Good luck with tomorrow folks - I'll update this if there's anything that comes across my screen that looks interesting......
Volume was also extremely heavy, and the selloff accelerated in the last hour, taking out an attempt at a rebound in the early afternoon.
What blew up the party, and promises to crap all over any attempt to re-ignite the liquidity bull? This:
5.099% eh? That's not good, and this is two parabolic moves in the last week. This is not over; the momentum indicators I use show there is no way in hell that this is done; there's going to be more of this to come, even if the bond consolidates a bit before the yield marches even higher.
What lit it off today was a bunch of hedgies who started trying to sell their way out of some trouble they've been having with mortgage securities (especially the junkier tranches!) as rates started to tick higher. Suddenly, what was a fairly orderly move up became a virtual stampede! Amusingly the ABX spreads didn't react much - yet. The CMBX (commercial) showed a bit of a hiccup but nothing major - again, yet.
I expect we will at least ping 5.25% in the short term and we may blow through it.
Pimco's Bill Gross, in a stunning announcement this afternoon, shifted off his long-term (25 year!) bond bull market call to one of a bear market in bond prices. Bill isn't a guy to bet against. He's targeting 6.5% on the 10 within the next 12-18 months! If we get there that puts 30 year mortgage rates in the upper half of the 7% range which will destroy what's left of the housing market.
You know how people (including me) have been saying "we're in the second inning of this mess guys"? Well, now you've got one of the most-respected bond traders and a huge bond fund manager who is predicting that the next few innings are going to have several grand slams hit by the opposing team! If Bill is right this is going to positively POUND interest-rate sensitive stocks, the LBO and private-equity guys!
The bad news here is that these guys need to syndicate about $250 billion worth of new issues in the next couple of months - for deals that were announced and priced, but haven't been closed and syndicated yet. This could cause real trouble - there is no "red letter" warning yet, but you've got a number of these - Chrysler, Sallie Mae, TXU - all of which are not yet really done!
In addition all of my indicators in the Canary have now gone below the line, meaning that he's dead. My update earlier today said that the Cat's Jaws snapped shut - intraday I saw this, and jumped into the QIDs; I had picked up short-dated PUTs on the Qs this AM and also jumped into SDS. In addition I shorted LEN today, bringing my direct shorts in the home builder space to LEN, BZH and HOV. (I also have mid-dated PUTs on Lennar.) Finally, I picked up short-dated ITM PUTs on CFC and IMB today; rising interest rates can't possibly be good for lenders!
On a macro level we got consumer credit this afternoon; I had originally gotten a bad copy (old) but the real data, once I had time to read it in detail, is worse! Credit card debt actually fell, which is the first time that has happened since March 2006. This is extremely bearish for the consumer as we also, this week, had refinancing applications drop, productivity down and wage gains down. This means less real money in consumer's pockets, whether they do so on credit or otherwise, and that will translate directly into less consumer spending!
Non-revolving credit rose somewhat - auto loans primarily. After having gone in the ditch last month, this may or may not mean anything. But in a sign of serious trouble among that number, interest rates ticked up by more than one full percent, or a 25% increase from last month, while maturity time went DOWN, which means that in real terms interest rates went up by even more than reported!
In addition I'm smelling a slowdown in corporate america. Hiring has definitely slowed and I suspect intended inventory builds are too. Unit labor costs are up and productivity down, which spells wage inflation. CFOs keep talking about M&A being just simply overheated - the prices are just too high and have been enabled by those low interest rates, which are evaporating. All of this is quite bearish!
The SPX, Composite and DJI also took out first-level support from the wedge they had been in. The SPX took out an additional support level at 1500, tried to come up above it, but didn't hold. So we had a failed retest of what became resistance. This is a clear indication that more selling lies ahead on a technical basis. The next serious level for all three indices are in the 50DMA, which lies just under the current levels for the Composite and SPX. Essentially ANY lower close in these indices tomorrow will take out that key technical level.
THE SPX, IN ADDITION, POSTED A SHORT ENTRY SIGNAL ON MY INDICATORS. The other two indices came within a hair-breadth of doing so. I shorted the SPX this morning (via SDS) and the Composite around lunch (via QID); yes, I know I may be ahead of the game here.
If I'm wrong this is going to sting, but I don't see that scenario given the 10 year bond signal - so I went ahead and pulled the trigger.
If you look at Fibs from the low in February this targets 1476 for a midterm level (61.8%). That's between the 50 and 100 DMA. I think that's being kind and we should be looking at the summer lows as the target, which puts us right up against the 200, or right around 1412, and this assumes the 5.25% level holds on the 10 year bond.
If it does NOT hold (and it might not!), or we get some sort of credit market disruption as a result of the market's action, then last summer's lows are absolutely in the realm of possibility and even that may be generous.
IMHO to hold long here you have to have a time horizon exceeding 5 years. If you're not inclined to short there's nothing wrong with cash!
I have no long positions except for a metals stock and my Muni fund at this point. Everything else is gone and has been replaced by either a leveraged short or cash.
Note that, as the disclaimer says, this is not "investment advice". Its what I see and what I've done. I could be wrong and we could get a snap reversal from here.
I don't think so however, and I've put a whole shizload of money behind my mouth on this one.
One final note. I see a lot of notes around on the message boards and such talking about "The Fed", "The PPT", "Market Manipulation", etc.
Guys and gals, let me be blunt here and say something you probably don't want to hear. So long as you find reasons other than your own failures as a trader, whether it be analysis that turns out to be wrong or the most deadly sin of all - bad money management - you will not make money in the markets.
Indeed, of all of the discipline factors in trading, money management is absolutely the most important. Without it you are destined to wind up broke. You will have losing trades - plenty of them - so if you're not comfortable with the potential loss you're exposed to at any given point in time you're putting too much of your money into one transaction. Trade smaller amounts! Most traders both exit winning positions long before they should and fail to cut off losers quickly enough. If you're wrong its not the PPT that is screwing you up, its simply that you were wrong - either you got the direction or timing incorrect - and the correct move is to exit, take a small loss, and try to figure out how you screwed it up, because it was you, and only you, that did! You missed something - if you're using technical indicators there's one you didn't know about or weren't watching; if you're reading fundies you left something out, etc.
As an example two days ago I executed four separate trades in the Q PUT options. I was wrong on the turns three times in a row and took very small losses each time. The fourth time I was right and made money. Yesterday I executed a couple of trades and on balance was right enough to buy beer - my error was exiting too early then chasing it back!
Today I revised my indicator screen a bit, learning from the previous two days, and left the PUT position open all day long. It is massively profitable right now and my read on it was that I should leave it open overnight, so I did (which I don't normally do.)
We'll see how that works out in the morning - but if it turns out I leave money on the table I could have had this afternoon its not anyone's fault but mine!
Put the responsibility back in your own head where it belongs, analyze your mistakes, then fix them so you don't screw it up a second time, and you will start making money instead of losing it. Realize that you can be right 30% of the time and make money hand over fist so long as you cut the losers off fast but let the winners go to their fullest extent!
One final thing - people have asked "when is it over". Here's a way to know - when you see the VIX come back down to 12 or 13, and stay there for a week or so, then and only then is bottom fishing a reasonable exercise. Do it before that and you're asking to get slaughtered.
Good luck with tomorrow folks - I'll update this if there's anything that comes across my screen that looks interesting......
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