Peering Beneath the Bond Market Iceberg By Bill Fleckenstein 08/01/2003 05:13 PM EDT . . . I would note that in a delayed reaction to what's happened in the bond market, financials were the leaders to the downside. Everyone talks about how the market anticipates, and while that was certainly the case throughout the earlier part of my career, the modern-day market doesn't seem to anticipate anything. All the momentum chasers do is just react to price and reinforce the prevailing "trend," regardless of the news, until the "trend" changes. . . . Regarding the ongoing debacle in the bond market, I had been canvassing my best sources there to try to figure out where the "dead bodies" are (the firms that have been blown up by the move-in rates). Thus far, I'd been unsuccessful in learning anything useful until I was able to track down a friend who just retired. He was a knowledgeable bond-market trader who'd been at his post for the better part of 30 years, and is on record for having predicted this wipeout. In answer to my query, he sent me an interesting email (realize that this is one man's opinion, and not fact) that I would like to share with readers, in uncut, uncensored form: He begins: "Dead bodies are hiding behind the Mark to Market. The curve has killed all the wise guys as the two- to 10-year spread went out 70 in the last few weeks. Fannie Mae and Freddie Mac are staggering nightmares, and I think the Fed is buying their paper on the open market. You see what Lehman Brothers did, bought Neuberger to "lower profile in bonds" where they can't make any money. Look at Merrill's earnings 57% from proprietary trading, meaning carry trade! Look at the footings of LEH, MWD, JPM. They are staggering. They all are on one side of the trade. Institutions can't get out now because Wall Street is not bidding, and what is coming down the road is the most violent bond market you will ever see. I got out because they did not need smart salesmen. The SEC has changed the rules. There is a new trading system called Market Access. Gives bond prices transparency, and every idea I gave out had to be put in competition. It is over for bonds. Bill Gross has nowhere to sell his bonds because Wall Street is now going to be his enemy. He has to put his stuff on Market Access, and Wall Street is going to front-run it all. I will add more later, but rates are going up a ton. I see 6% 10-year notes by December. There is no money for the Treasury. They have worn out the welcome this time. But dead bodies? Not for a while. The Fed and Treasury will cover it up as long as possible. LTCM is going to look like a hiccup. The key is liquidity. There is none, which is why I am shocked the dopes at Treasury did not offer $30 billion in 30-year bonds. They have no clue. Bond management is now a race among the mediocre. Indexing and consultants have forced even the smart guys to capitulate and buy stuff that makes them gag. It is going to evolve into a lemming mentality. And the moves are going to be enormous. Look, the long bond contract fell what, 18 points in a month? That is real money. But you still have an economy that is not borrowing, and you can't make people borrow. Going to get wild. If we don't have a depression caused by enormous debt defaults, the other side is gold at $3,000 an ounce." . . .
I notice that the bears on the economy are prevailent most of the time. They seem to be proven wrong most of the time too.
i agree.interesting read though. something big is happening to interest rates. when you have something happening in the market that has never happened before (the speed of the bond crash)we need to take notice.
We've had a runaway one way up long bond market, now followed by a severe one way down run. What does that lead to? nervousness (i.e., fear!) which means tighter and tighter swings, producing a contraction/consolidation period at these lower levels. Sure we're due for an oversold bounce, but I also think that Friday's 104/105 area (USU) needs a successful retest first. As the press will now spew tons of 'expert analysis' of the recent bond collapse, we also have to be careful and don't fall in the trap of 'this time it's different'.......I'm looking for some very tradeable swings these next few weeks.
and does it start as early as sunday night? "Sure we're due for an oversold bounce, but I also think that Friday's 104/105 area (USU) needs a successful retest first." if this is a real move ... it would try not to let others on board by staying above 106 in the sept 30 yr monday any other guesses? my calc of the TD pivots for monday are 107 . 07 High 105 . 03 Low
I dont agree. I think the veterans, like the fellow you referenced from the Fleck article, are just fed up with all the blatant attempts to re-liquefy the markets at every juncture. Fleck, Noland, Gross, Rogers, Soros, etc, etc...have a very good pulse on things because they have been around awhile and know how these inter-correlations pan out in the long run...In the interim, the data comes back and gets released one way, only to be revised 3,4,5 months later the other way as a footnote in the back of the WSJ. Either way, my opinion is immaterial to this discussion obviously. The important thing is that the bond market had a stealth like crash in a matter of 6 weeks. And from what I gather in the papers and from the financial media, its as if bond markets dont matter, its just this national obsession with every 1-2 percent move in the equity markets. But, its safe to say, the bond market doesnt crash in the course of 6 weeks and not royally f*** up things or at least shake things up in the equity markets in a relatively short juncture. Anyone heard a financial media monkey mention 1987 lately!!!
Vhehn: oops, I apologize. I meant to respond to the Trade4Success post about the economic bears being wrong the majority of the time. I agree with your referenced quote....