Behind the Market Headline News

One of most intriguing event, which barely got any attention in the market, was that, for the first time in the history, 30 year USD swap spread dropped into negative territory today. The US treasury 30 year bond traded at 4.027% and the same maturity US dollar swap traded at 4.051%, i.e, 30 year swap spread was about -2.4 bps (see attached Bloomberg chart below) . The 30 year swap rate only go back to early 1994 in Bloomberg data base, in the last 14 years, swap curve was always and should traded at discount to the treasury benchmark, "risk-free" bogey. So what is mean for the equity and credit market? Or most importantly, is the swap market trying or pricing the much deep recession or an early signal of Japanese-style deflation market has feared in 2003? Is the US treasury credit quality put into challenges? Or just the abnormally due to temporary market forces? Isn't the market facing the greatest CREDIT crisis we ever face since the Great Depression? Should we expect...

Today's dramatic 1000 point reversal of Dow 30 may be just the capitulation point that market has been looking for in this free fall market. Many other sentiment indicators, such as AAII bull and bear readings, VIX and 52 week high/low also point to the extremes. Underneath this gloomy and Armageddon scenario, one of most significant and interesting piece of data is in the futures market, specifically speculator's reading in this scary market. According to today's data release from CFTC, it looks that speculators have positioned for market (S&P500) turnaround. As this past Tuesday, speculators have built more than 102,000 long S&P500 positions, a highest in last five years. More importantly, the speculators also have reduced the bearish bet, short positions to just about 43,000, a lowest level in two years. Without questions, in the last few weeks, the equity market was the darkest period for the long side, but the end may be in sight at least in the short term. Th...

The credit scare/crunch may present a great opportunity for many independent banks who depended on regional home bank system for the funding. This morning Fed funds traded at only 0.25-0.75%, plenty liquidity for banks if you can access it. At the same time Libor 1M and 3M rates went up over 10 bps at 4.11% and 4.33%, indicating extremely tight credit markets. Due to the enormous liquidity Fed has pumped into the system, the funding cost from FHLB , like FHLB Boston, are significantly cheaper than Libor markets. For example, FHLB Boston this morning offered 0.85%, 0.95%, 1.19% and 1.75% for 1 week, 2 week, 1 month and 2 month fundings for its members. On the asset sides, agency (Fannie , Freddie and FHLB ) debts were priced at level never seen before in term of spread to treasury in history. Two year agency yield spread is 100 bp over same maturity treasury, historically it has been only between 20 - 30 bps (see the first chart from Bloomberg ) and 2 year swap spread had widen ov...

The momentum darling, RIMM, gave up over $20 after releasing the Q2 financial results (missed by a penny vs expectation, $0.88 vs 0.89), and lower Q3 bottom line and margin on Thursday after market closed. The management downplayed AAPL eroding its profitability and attributed the disappointment to shrinking margins due to increase SGAN and R&D to expand its market share. It is quite interesting even RIMM has shined for so long in the last two years and certainly a bright star among analysts and investors, underneath this seemingly unstoppable bull run, there have been gradual but significant build-up of doubts and worries when we examined the derivative markets. After RIMM skyrocketed about five-folds from fall 2006 t0 Oct 2007, and peaked about 133 in Nov 2007, the bearish sentiment began to emerge. We can assess the sentiment by studying the relative positions of the underlying call and put option open interests during the period. The open interests of call option began to slide...

Michael Masters , the hedge fund (Masters Capital Management LLC .) manager, made some headlines in the Hill and markets for his champions that speculators cause skyrocket high prices for commodities from agricultural grains to metal zinc. Media has raised the questions regarding Mr. Masters's motive because of his investments concentration in transportation. I pull out the his q2 13F regulatory filings via Bloomberg (see the chart below from Bloomberg ), it is interesting to note that he increased weights on industries and utilities, two sectors by 6.1% and 5.8% respectively over 1st q this year. Not surprisingly, two of his top 5 holdings, Delta and US Ariways , make up 33% portfolio. During the quarter, US Airways positions were increased from 2 millions to 4 millions shares, and Delta was almost double the positions too (from 1.05 to 2 millions shares.) I guess the pain must be unbearable when the benchmark crude rocked to over $140 from less than $100 during the quarter. Cer...

According to latest Q2 SEC 13F filings, institutional investors (hedge funds, pension funds and endowments and banks) increased their positions in 4 out of 10 S&P economic sectors, namely energy, material, information technology and utilities. Most notably, the 3.0% energy sector incremental increase over the 1st quarter, and significantly underweight in financial and consumer discretionary (see the chart "% weighting changes from 1st Q" on the right panel.) The dramatic market sell-off we experienced lately, especially last two sessions, caught many people by surprise, especially the pounding on technology sector and small cap sectors. If we compare the institutional investors' holdings and sector performance, we would not have much difficulties to find that current market behavior may be largely driven by the asset allocations and "locking-in" gain on the 1st half's best performers, namely energy, materials and technology. As the chart on the left show...

In my previous post on Q2 SEC quarterly filings from a limited numbers (182) of available hedge funds, we noticed that hedge funds had significantly over-weighted energy and material sectors, two of best performing groups among the 10 S&P sectors. It might be purely coincidental but we can not help to ponder the implications for these two tumbling sectors. As today (8/27), almost 1000 hedge funds filed their last quarter's 13F based according to Bloomberg . The screen below from Bloomberg shows that hedge funds as a group places their biggest bets on energy as we discussed previously. Considering the short term natural of their holdings, it should not surprising many that the unwinding process of energy names will continue in the current quarter. We probably won't see much improvement until the end of next month when the "window dressing" is finally over.