The Credit markets continue to get worse and liquidity in the corporate cash bond market is simply dreadful. The chart above is the basis spread between the individual cash bond members of the IG CDX Generic 5 Year CDS Index and the Index itself. What the basis is saying is that the derivative instrument (1st chart below) is trading more expensive to the cash basket in the index because it is more liquid than the bonds themselves. This spread is now at all time wides of negative 17 basis points. The basis at the October wides was 5.5 basis points and the IG CDX at the October wide was about 95 bp. Added together the cash wides were 100 bp in October. If you apply the same math to today and add 86 IG CDX and 17 bp we get 103 bp for the cash members. So basically we are wider today than at the October stock lows but yet the S&P is 10% higher. So while on the surface it appears that IG CDX CDS has not reached the October wides it is not good underneath the hood. Additionally the VVIX (volatility of the volatility) broke out today and closed at 10 week highs (second chart below). When I see the VVIX explode like this it suggests to me that someone somewhere is struggling behind the curtain and that counter party risk is becoming elevated.
My message is quite simple. Credit needs to improve pronto or the same conditions that existed in August for a rapid repricing of equities exits. However, we also have the FOMC meeting next week and I also think we need one more lower high before a big correction can take place. Either way my bias has been and continues to be that this is a bear market rally that is about to fail. At the very least avoid all over levered companies until the dust clears.
Always great insight. I appreciate and look forward to your updates. Thanks
Great read blue. Thanks for the update.
Agree on avoiding over levered companies .
Had I done that I would be plus for year.
I saw 5 nice charts to short for Christmas elsewhere on this site. Aapl was one.
I took short profits at 6100 (Ftse), and now loaded up long gold and its miners for a rip.
Before Fomc I think things get smelly, and smellier when they stand pat again.
Blue,
Great write up as always. Quick question: do you think the ThirdPoint bond fund news today is a “sell the news” type event? or do you think HY has further to fall? thanks for any input.
Today the VVIX remained well bid even during the rally in the afternoon. I smell a potential flush coming.
BillieJones,
The problem here is that they threw up gates because they can’t get bids on their paper. The rumor of these gates will spread quickly. Clients of other hedge funds may pull the plug in an effort to get their money out before there is a problem. This will actually cause a problem. A run on the Junk Bond bank. If this happens credit markets will completely freeze.
Worth a glance…OR MORE:
http://www.acting-man.com/?p=41909
http://www.nytimes.com/2015/12/11/business/dealbook/high-yield-fund-blocks-investor-withdrawals.html
As for Exclamation Point Nut above, I sense that bulls fear they are about to find that their ass is in a sling. Thanks for posting, !Nut!
Wow Bionut. Time to up your meds.
This is a “Get your own damned blog comment” for sure, but oh well. Here is as good a place to post it as any:
I don’t go in for conspiracy stuff. But to think that the USA doesn’t actively engage in loads of ridiculous propaganda is naive. Arguably, the last century will not be remembered for anything so much as how propaganda techniques were perfected.
Consider VOA. Haven’t listened in a while, but they have (or had) this old lady on there that is practically an archetypal grandma. Grandma wouldn’t lie, would she? And it is effective. During conversations with my former CEO – a highly intelligent individual and VOA listener – he had bought into every one of their “lines”. I was reminded of the Joseph Goebbels dictum: “Operate without seeming to have any purpose.” That they do, and very competently.
Which brings me to the Saudi line. If I got it right, the Saudis weren’t satisfied with $120 oil so they decide that by temporarily wrecking the fracking industry, they will benefit in the future. To achieve this chimerical goal, they must, however, suffer MUCH lower oil prices for years. Then, presumably, they will get $150 for their oil til the end of time. Because there is no possibility whatever that fracking will revive at that price.
The reality is that Bernanke’s efforts to sustain the unsustainable have pushed the entire globe towards a deepening recession that is going to result in a lot of defaults, sovereign and otherwise. The price of oil reflects falling demand. If the sheep realized the truth, they would dump their stocks, corporate bonds, real estate, etc in a deflationary asset spiral of epic dimensions. The lies are just beginning.
The spiral is going to happen, is in fact happening. As the inveterate confabulator Martin Armstrong likes to say, “It’s just time.”
They happen every 4th generation, like clockwork, since time was. That’s how long it takes for people to forget entirely what happens when debt reaches a level way beyond any possibility of servicing it. This time is not different.
Bionut
You are banned
Well now I’m wondering what Bionut said
Blue,
That reminds me; did you ever figure out who the “Old Maids” are this time around? I’d like some of that insight por favor… I’ll ponder on it a bit as well.
Hey Blue.
I guess bionut really hit a nerve there, as not only did you ban him, you deleted his comments.
Guess they hit the spot?
Feel free to ban me too, further evidence of your ….. Not sure what to call it really….. Weak character, lack of humility, arrogance, cowardice, wrongness for 15 months, yes, all of those fit.
Good luck.
dyer440,
DB has the maid. Its going to zero
I knew you would post today. Good post bro. Time to “shoot the market in the back”? You covered the puts right?
Freebie,
Check the date you tool. I was up Nicely today.
To the bulls: I’m rooting for you; but betting against you.
Fleck – http://kingworldnews.com/bill-fleckenstein-12-12-15/
Good stuff BlueStar!
Agree on DB does not look good
Great post man –
Always learn something new in each read.
I have 2 articles myself (doing 1 a week). http://pro-bucks.tumblr.com (may switch to probucks.wordpress.com)
I’m still just a jr. out here but with the highest respects keep up the relevant analysis information sharing.
Regards,
ProBucks
GM,
Market sideways for 18 months. Hardly wrong. Made lots of money on stock shorts and some good timing and gave some back as well. I won’t ban you unless you start swearing and and raging incoherently. I don’t have time for that nonsense. And no I don’t care what anyone thinks of me but I like to keep the conversion reasonably polite.
Did you really buy in when the msm told you that various airline and stock market “outages” in the past were due to internal glitches?
If, or should I say when, push comes to shove, do you really think our leaders have put systems in place to protect our infrastructure (banking networks, cellphone networks, electrical grid, water / sewer systems, traffic control systems) from cyber attacks?
http://www.caseyresearch.com/my/the-casey-report/by-far-the-biggest-threat-to-your-wealth-in-2016
oil
http://cms.sprottglobal.com/thoughts/articles/how-oversupplied-is-the-oil-market-really/
total fuckery in the “markets”
No one knows which way is up. Or at least I don’t; in the short term.
Longer tern – this will not end well.
‘ just buying pm stocks