Hodgepodge, Seven Notes

When I wrote for RealMoney, I would do a number of “Miscellaneous Notes” posts, because I had something to say on a lot of topics.  In the blogosphere, that doesn’t play so well, so I try to avoid it.  This post is an exception to that rule.

1)  Let’s start with my knockoff of the S&P oscillator that Cramer likes to cite.  It is in buying territory now, and I have been adding to positions on net.  This level of selling pressure is tough to maintain in the short run.

2) Bill Rempel said that he likes high yield here.  I agree.  I was talking to a high yield manager friend of mine today, and asked him what they were doing. He said, not much, his main client was scared. (I know this client, you can time the market by doing the opposite of what they do.) So I asked him what he would do if he got a fresh allocation, and he said “leg in over the next ten months.” I think that is a reasonable strategy, because we haven’t really seen defaults yet. Defaults may come later this cycle, because covenant protection was lousy, but that will likely mean that severity will be higher when defaults come. He and his assistant suggested focusing on the higher quality “BB” bonds for now.  Maybe leg in over 18 months… or 24.

I learned a lot from this guy, especially trading tactics. It might surprise you, but as a bond manager, I was an aggressive trader. There are many micro-level opportunities to add value.

3) Look at the TED spread.  It was over 3% today, indicating a lack of confidence in the banking system.  We have not seen levels like ever, including 1987.

4) The Fed announced another new program today.  This is the first Fed where their creativity exceeds their balance sheet, and there’s the rub.  Here’s an FT Alphaville summary of the program.  But the best summary comes from Alea’s jck:

the fed is running of t-bills therefore they cannot sell t-bills in order to drain excess reserves resulting from their liquidity operations, enter treasury selling t-bills to the people and depositing the cash at a fed account, the net result being drain of excess reserves resulting from …etc…

The Fed is running low on T-bills, and doesn’t want to expand the monetary base, so, they want the Treasury to do their dirty work for them.  Why not?  They are partners in crime.

I don’t see this ending well.  The Fed has applied to be able to pay interest on reserves now, as opposed to 2011, as passed by Congress.  Perhaps we need to think of the Fed as unitary with the Federal Government, and not possessing independence, except to the degree that the Federal Government itself lacks explicit authority, and so the Fed can act in ways that the Federal Government can’t, thus extending the power of the Federal Government in implicitly unconstitutional ways, though not explicitly.

5) There was some misunderstanding over my post last night over 99.5%.  What I mean is not 99.5% of days, but years.  I’m talking about protecting yourself against all but 1-in-200 year (not measured by normal distributions) threats.  We diversify against those threats, and some major threats — war, plague, famine, aggressive socialism, are not diversifiable.

6) One reader asked. “David, why do you think the AIG preferreds will have any value? Two years without a dividend, and a senior creditor who is committed to an orderly sale of all the assets, and the prospect of even worse CDS problems as they try to unwind the book… sounds like there is ample reason for the preferreds to trade to very near zero.

That might be so.  I don’t know, and when I wrote last night I had less detail than I have now.  I don’t like preferred stock, and it is difficult to tell what any security in the middle of the capital structure is worth in a stressed situation.

7) We face the continuing laxity in bank capital requirements.  I would support laxity if I knew that in the bull phase that capital requirements would get tighter.  But that has not been the case in the US.

That’s all for now.  Be wary, and be willing to commit some, but all of your funds in the present panic.