The T Report: What Now? And is There Anything New to Talk About?

So now what?

Greece. Will they pay the bond due today or not? Will they form a new government or not? Does anyone care? That is becoming the question. The market is gradually becoming numb to the news. I don’t think Greece can leave just yet. It would cause too much confusion, and no one within Greece or outside has done enough to prepare. They will get some concessions. They will stick to the program for now. Europe needs an organized exit. A lot comes down to the ECB. They could make a lot of concessions, at almost no cost in their fantasy world of accounting, and take a lot of pressure off. Without a government, Papademos will continue the existing plan. The PSI bonds continue to be weak and are trading to epic disaster levels, but I guess they are about the only Greek thing out there that has enough value left to be worth shorting.

JPM has the shareholder meeting today. Never has there been so much noise over an announcement that isn’t even a full month’s worth of income. The other Morgan, MS lost money in Q3 and Q4 of last year and yet Gorman isn’t being asked to resign? Which is worse, to have 6 months of losses, or 1 month of breakeven? The entire conversation has become devoid of reality. The fact that it is CDS, Europe, Volcker, and Fortress involved has created a frenzy around the story that is blown all out of proportion. I have heard all the arguments about how the issue is bigger than the money, but that is a feeble argument. In a month, once the story has played out, people will look at the earnings, how little they play in the DVA game, how conservative their reserves seem, that they are buying back stock, and get a nice dividend yield, and like the stock. TFMkts Best Ideas took off the IG 9 10yr versus IG18 short and is likely to leg out of the HY17 versus HYG trade which at least in part had to do with JPM’s alleged position.

Spain and Italy are still real problems. Their economies remain weak and their banks are a total mess. We didn’t need Moody’s to tell us that (I guess better late than never on the part of Moody’s, though more and more people would like to see Moody’s and Never be a used together a lot). In spite of how bad it is, we seem to have reached a crescendo for this round of selling. Without ECB intervention in the bond markets, I don’t see any catalyst for a big move tighter as there are no natural buyers, but there are also few natural sellers left, other than shorts, and certainly Spain is getting to the point that fear of ECB intervention makes piling on a very dangerous proposition. A period of stability could cause a nice wave of CDS selling as the short base has grown and the reality of how expensive it is to short these countries kicks in. There was some talk about smashing together 4 bad banks and making one gigantic bad bank. I really have no clue what that would do, but it would be viewed as “taking some action” and markets like “action”. Although nothing is resolved, and I think most scenarios lead to another round of weakness, the current sell-off seems to have reached a peak and is likely to rally on any good news, no matter how feeble. With Spanish stocks being universally shunned, TFMkts Best Ideas has on IBEX versus the DAX. TFMkts Best Ideas covered Italian short yesterday and is now completely out of Spanish and Italian bond shorts. It is short the 10 year bund, and really thinking of selling CDS on Spain.

China had mediocre data all last week that didn’t seem to come into play. China eased and no one seemed to care. As talk about JPM and Europe winds down, China could have a big influence on the market again. Again, I doubt the rate cut will do much, but since that is recent, the market may gravitate to that, especially if they are able to conjure up some data that the “soft landing” crowd can glom on to. I remain relatively neutral on what sort of landing China will have, but after the rate cuts, and last night’s bounce, China may help any rebound story.

The U.S. economy, only a few weeks ago was at the core of the bull story. Now no one is talking about it. For those of us who thought the 1^st quarter data was overstated and wasn’t reflective of the real economy, it looks like we were right. The economy is allegedly slowing down on many fronts. I use the term “allegedly” because I think it was never that strong, and might not be quite this weak, so the slowing is a function of data adjustments. The economy, I believe has been more stable than that, and chugging along at a mediocre, but stable pace. The data is weak enough to keep ZIRP in place even if not weak enough to warrant QE3. But not so bad that companies can’t generate some profits. High Yield and Leveraged Loans remain attractive to me though expect a bit more volatility as the JPM unwind continues. While the IG9 long position has attracted the most attention recently, there were positions across a variety of indices across the globe, including positions in the high yield market. They may also have loans they choose to sell to monetize some gains and because they had to reduce the size of the hedge against them. TFMkts Best Ideas has longs in S&P, IG18, and a treasury short. If anything I will be looking to add risk here.

The morning trading is half hearted at best. Early rally, faded, re-rallied, re-faded. I think that description applies to virtually every “risk-on” asset out there. The markets are still a little better across the board, but no enthusiasm. With all the uncertainty, and the weakness over the past week, that makes sense. I’m not sure the market is going to be squeezed higher without some real news or big liquidity injection, but right now, it feels that a lot of the bad news has been absorbed to the point that a drift higher is the next direction, though with some headline induced gaps up and down.