The T Report: Thanksgiving Day Catch-Up

Happy Thanksgiving!

I will be brief, and mostly use recycled material today before I attempt to use the chain saw to do some hurricane Sandy clean up. If I don’t write tomorrow, it is far more likely because of that, than overindulging.

My Main Points

On Bloomberg TV yesterday, we hit a lot of the talking points. We wound up talking about a few ways to play Europe, and not just through bonds, and even briefly hit on China, which I guess I should have been more aggressive on by the looks of overnight price action and the PMI data there. We also talk about the “perfect storm” where we could get some resolution in Europe and avoid the fiscal cliff, sparking a very nice rally here.

This is the note I sent to customers yesterday morning:

I am the most bullish I have been since the summer….

 

1) Fiscal Cliff – everyone realizes it is austerity in one way or another. No one wants austerity – we will get some wishy washy compromise that cuts very little in the near future – nothing that can’t get delayed when the time comes – even the Fed is pushing congress to kick the can

 

2) The French downgrade is hopefully the catalyst that brings programs like OMT and debt forgiveness to fruition. I like Spanish 3 year bonds and Greek bonds. While the ECB cannot act like the Fed, or BoE, or BoJ, it can act and I think Scheuble pointing out the profits the ECB has made is paving the way for some more aggressive policy or debt forgiveness in Greece

 

3) Sentiment seems to have gotten too bearish and forgot just how motivated central bankers are

 

4) Housing is doing a bit better. Not gangbusters, but that improvement is really and is going to be pushed.S

 

1,450 is my target in fairly near term, and I would own Europe here as well.

 

CDS should continue to do well now that some bad hedges are in place, and there is no evidence that the longer term “Chase for Yield” is over.

 

This is the note I sent to customers on Tuesday morning when yields were 3.86% as opposed to 3.63% now:

TFMkts Best Idea: Buy Spanish Debt

 

I think it is finally time to add back Spanish debt.

 

I like the 3.75% of 2015. It is back to a 3.86% yield. It peaked at 3.3% when everyone got too excited, too early, about OMT.

 

I like these bonds because they will fall within the maturity horizon that the ECB will buy. You can go longer than that, to pick up some duration, but I think there is a real risk those bonds don’t respond that well, because people will remain concerned that OMT won’t solve anything and that the end result (within a year) will be the subordination of all non OMT bonds or all longer dated bonds. I don’t hate the longer dated bonds, I am just being a little cowardly here.

 

I also think the “target” for OMT or the ESM’s new issue purchase will fall somewhere between 2.75% and 3.25% at the 3 year point in the curve.

 

I believe that the downgrade of France may be a catalyst for action in Europe. From a market perspective this isn’t news. The 5 year french bonds already yield 0.8% which is 40 bps more than German 5 year debt at 0.4%. The psychological shift within France might be more important.

 

While the French will deny they are anything less than perfect, on virtually every subject, but in this case their debt rating, they may want to push the ECB to be more aggressive.

 

So Spain is progressing on its budget and the bank recap, including encouraging steps like making sub debt holders take some pain so the governments borrow less. Greece, with help from the IMF, seems closer to getting another round of concessions. The concessions are more important than the aid itself. As France and Germany (on the economic front) get dragged down by the continuing morass that is European bailouts, they may finally be willing to be more aggressive.

 

An OMT, with minimal new conditionality (other than enforcing existing budget measures) would give Spain a nice backstop. ESM could be set up as a “revolver” to be drawn on if they can’t price an auction at a satisfactory level.

 

Then with thin markets we could see levels not seen since OMT. I have almost talked myself into longer dated bonds, but for now remain with the 3 year, but certainly could see the 5 or 10 year making sense.

 

I would take the FX exposure here. If Europe gets more aggressive, and Fed continues to add to its “unlimited purchase programs” the total return of the bonds should be enhanced by the FX move.

 

A Brief History

I covered shorts and got bullish too soon after the election. I was surprised how far we declined. That lead to a apologetic, after the close, “crowded trade syndrome” on November 9^th which left me being mildly bullish and heavy on regret that I had closed a good contrarian short call too early.

Anyways, I largely licked my wounds and dealt with more market weakness, but the closed end debacle really started the decision to get more aggressively long.

In our analysis of that analysis of ETF’s, closed end funds, and CDS which first went to customers and then was more broadly distributed, we came to the conclusion that it was time to add high yield.

Then last Friday morning we came to the conclusion that we had Obottomed and we got far more aggressive in our fixed income strategies, including having recommended some closed end funds earlier in the week.

Finally, after sitting through the Bernanke speech on Tuesday (and it was interesting to hear him in person), I came to the conclusion that this Fed would keep the punchbowl filled for a long long time making any potential rally that much stronger.

Have a great day and I look forward to writing tomorrow, though already dreading being forced to watch interview after interview done in some mall in an effort to make it seem even more in depth and up to date on Black Friday sales.