Afternoon T: Bulls in Ruby Red Slippers Clicking Their Heels

The market is struggling to shake off 3 days of mediocre US data, bad data out of Europe and China, and renewed signs that all LTRO did was temporarily suppress yields while fixing nothing.

IG18 became the “clever” trade with bulls actually waiting for the roll to go long credit. The richness, and willingness to sell seemed a clear indication that we were in midst of a capitulation for bears. IG18 is now trading at 90, up from a tight of 85.5 in about 30 hours.

HYG is almost miraculously higher today while JNK is at least attempting to reflect reality. These are both shorts at these levels in this market.

The decline in Spain is problematic, and I’m hearing that ECB won’t intervene at these yields, so I would look for the breakout there to continue. There are few shorts to be covered, and I don’t yet think we have seen a move driven my “speculators”. This move has been because some longs got greedy and are now nervous – why they aren’t labelled as speculators, I will never know.

Stay away from banks. European banks are going to be asked for more sovereign debt forgiveness. Portugal is likely next, but Greece, with new bonds trading at an embarrassingly low 20 cents on the euro will be back. Spain and Ireland cannot be far behind. The lessons learned from Greece is sovereign default does not “wipe out” banks as the CEO’s have told the politicians, it just hurts equity valuations, which are only this high because of government and central bank support – which won’t go away. The other even more important lesson is that delaying the inevitable is far far far worse for the country. How much better off would Greece be if they had defaulted in May 2010? And stop with all the “firewall” preparations stuff. Don’t be a muppet, the LTRO could have been put in place in a moments notice since it has been an on again, off again program for a decade. When realization hits that the only way to move on is to restructure and write off debt, it will happen and the banks will bear the brunt of the pain – hopefully the weakest and dumbest of the banks – but even good European banks will get hurt initially and that will drag down US bank share prices as well.  It also seems like there is growing discontent with the bank settlement on mortgages – which makes sense because the banks can make others take almost all of the pain.

AAPL could get scary.  Not because anything is wrong with it, but if the sell off gathers steam, people have a tendency to sell their winners and cling to their losers.

I am not looking for good overnight action. It’s not obvious what changes, and if anything, the sell-off so far has been less than the data warrants. Buy the dip is now a failed strategy for an entire week. That does mean there will be some week longs.

Also, thanks to Matt Miller and Bloomberg Rewind for getting the chance to talk about Spanish bond yields leaking as a potential “canary in the coal mine” last Friday night.