I will be at the Masters the rest of the week, the newsletter will be back on Monday
In Today’s Issue:
Looming regional bank crisis
Grant Bailey stock analyst gives his picks, he’s only in 11th grade
Treasury Bond basis trade unwind causing problems
Fed in a no win situation
Best way to play this market is not to play at all
and more……..
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News & Noise
🧠 News:
Episode 8 is out, we interview stock analyst Grant Bailey, he’s an 11th grader…..
I think if this market selloff continues, and especially if turmoil continues in the bond market, he will cut.
The VIX has been the best hedge here. My tool of choice is calls on the VIX index directly. Wouldn’t be buying them now though.
Not that you can really buy anything here, but when the dust settles I love the coal names.
Then they weren’t really haven assets.
❌ Noise:
Not exactly the smart money.
What Wall Street Is Saying
Jefferies on the Treasury market….
It looks like we start to have Liquidity problems. There appears to be a liquidation ongoing in US Treasury securities which is causing a liquidity issue for the banks and the financial system.
As explained in the write up from August below (see bottom e-mail), the Basis trade includes hedge funds buying US Treasury, selling the same duration Treasury future against as a hedge and make a small margin on the price difference. Given the small price difference, the trade includes a significant leverage. According to a report by FED, the average leverage in 2019 was 21x for the larger participants in the basis trade. The trade is today estimated to be roughly 1tUSD, about 2x from what it was going into the Covid sell-off. And it’s a concentrated trade, with less than 10 institutions active in the trade according to Brookings Institute.
Jonathan Krinsky, BTIG
We think this set-up is likely this time around in that we are seeing 'a' bottom for stocks and peak for VIX, but then re-test and possibly break to lower lows over the coming weeks/months. How far could the bounce go? All four of the prior dates saw SPX recover at least 50% of the drop before moving lower. That would imply SPX could reach ~5500 before turning back lower.
Whipsaw
The past two days are great examples of why I continue to say there is no playbook for this market and that you should probably not be trying to trade it unless you are an extremely nimble intraday trader. Monday we opened down big and closed near flat, yesterday we opened up big, got bigger, and then closed down over 1%. One thing I like about candlestick charts is they can put things in perspective. The top of a candle is the high, while the bottom is the low, so that larger the candle the larger the intraday move. Just look at the last three days, and if you though Monday was a big move, see what happened yesterday…..
We also closed below the August low, so no more undercut and rally on SPY.
Jefferies highlighted the unwind in the basis trade last night as a possible cause of the Treasury selloff, which could turn into a big problem. I started picking up gold miners Monday and yesterday, which looks to be the play now as Treasuries aren’t a safe haven anymore.
I apologize to anyone tailing me on TLT, for a couple of days there it was great but didn’t see that selloff coming. Further reason why you should stay away from this market until everything settles down. Also further reason why bonds aren’t a hedge. Anyone sitting in a 60/40 portfolio the past couple of days isn’t happy right now.
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