I’m back home from overseas, though a bit tired after running the gauntlet of cattle pens and inquisitors that has ruined the air travel experience. It’ll never be like this again:


Here’s a quick look at the pattern in the long bond, noting a possible 12-13 day high/low cycle:


I see the Yen is still moving in tandem with bonds:

VIX cycles

No strong conclusions here, just some food for thought:


You can also see a possible 30-day pattern: 30 days down, then a ramp. Let’s put this in perspective. Here’s a 5-year weekly chart. All I can note here is a divergence on the RSI over the last few months:


I’ve also noticed how Treasury bonds have resembled the VIX for some time (I put in those RSI buy/sell signals just for fun — not as effective here as in the 60-min chart of Dow futures, but not bad either):


Just goes to show, when you think you’re trading US stocks, Chinese stocks, commodities, bonds and options, you’re really just trading global patterns of fear and greed. It doesn’t matter what market you choose these days. They’re all the same.

Yen and bonds, two of a kind

I don’t know exactly what to make of this pattern, but it is not unusual to see these two move together. As forms of cash, they each tend to do well when the deflation trade is on. In fact, other than short positions, they are the only things that beat the dollar when everything else falls.


I don’t know what it means that the Yen has been doing so well even as stocks have risen over the last year. Perhaps it’s a vote of no-confidence.

Even if stocks and commodities roll over hard, I actually wouldn’t count on the Yen rallying as powerfully as of 2008, or even at all. Its long-term trend has been weakening.

SPX ready to rebound? (updated after the close)

We nearly have an upward cross on the 30-min RSI:

UPDATE: Of course, the other alternative is that each little bounce gets sold and the oversold condition lasts for another day or so and takes us down another 1-2%, as in the decline from 1100 in early February. The easy answer to this problem is to keep ratcheting down your stops or set a loose trailing stop.

UPDATE 6:20: Well, we got a bit of a bounce in the afternoon, then a sell-off into the close, followed by a rebound in the futures after-hours. If this were like January, we might gap up tomorrow and rally to challenge the highs, but RSI is looking a lot weaker and lots of other markets are acting bearish. Bonds in particular had a very strong day and did not give back any of their rally:



On the 30-day view of SPX, you can see that RSI is deteriorating faster than in January, so perhaps any correction of today’s drop doesn’t challenge the highs:


If indeed this is intermediate wave 3 (of minor 1 of primary 3), as a third wave, we shouldn’t expect much in the way of countertrend action.

Almost every city and state is bankrupt.

Mish has been swamped lately, posting what seems like at least two stories a day about the insolvency and incredible stupidity of state and local governments.

See these stories for examples:

School Crisis in Nevada: Governor Seeks to Cancel Collective Bargaining With Schools Because the State is Broke

Economically Illiterate Quote of the Day 2010-02-03: This Quote Concerns the LA Budget

Neil Barofsky Promises Handcuffs; Police Pay Dispute In Miami; Workers Protest In NM; California Muni Bond Outlook, Other Potpourri

During the boom, as tax receipts increased, it became the norm for state and local governments to inflate their budgets by five, eight or ten percent per year, mainly in the form of guaranteed pay raises and defined benefit retirement plans for goverment workers, as well as excessive hiring for jobs that have no use or would be better left private.

I can’t tell you how many times I’ve read about little towns paying mid six figure salaries for cops who’ve only been on the force for 5-10 years, or 100-200k for firemen or mid-level admininstrators. Even secretaries for city executives often make 80-150k, and most of these people get to retire with guaranteed cushy benefits at a much earlier age than in the private sector.

Many public employees belong to what have become the most powerful unions in the country. Their pull with politicians delivers fat pay raises and insurance benefits that almost nobody else gets these days. It used to be that government jobs were the worst — where the class idiots ended up working, but now it seems like the joke is on the high-achievers, since government unions have become the best racket in town.

The Ponzi is over.

What all of this has lead to is states taking on incredible amounts of debt to cover these costs, while counting on increased tax reciepts forever. Now that the real economy is hurting and taxes are down, governments find themselves struggling pay. They are using all kinds of gimmicks to keep the game running, like accelerated tax payment schedules, higher fees on car registration, public transit, toll roads and the like, and installing more of those Orwellian traffic cameras.  They are also making a big stink about how essential services like schools (better left private anyway), police (too many bullies with war toys), fire (better all-volunteer) and trash pickup (why on earth not fully private?) will be cut unless they pass tax increases.

These threats are all nonsense — governments always cut the stuff that people notice in order to show how important they are to daily life and to trick the public into assenting to taxes, when the real problem is the outlandish pay of the tax-feeders. Think about it: do you get more from your government than 10 years ago? Better roads, more frequent trash pickup, cleaner parks, better schools, safer streets? I doubt it, but I bet your state and local governments are spending twice as much as they were in 2000 (7% spending increases for 10 years doubles the budget).

The gimmicks aren’t going to last. The debt is unpayable unless the federal government covers it (since the feds have a Fed to buy unlimited debt with funny money), and I doubt that this is going to happen. It is just not a priority for the individuals who control Congress and the White House. They need the Treasury’s last bit of credit to keep the wars going, backstop the next round of banking losses, and to keep the unemployment, medical and social security checks flowing (if entitlements are halted, things will get ugly).

Cities can declare bankruptcy, and they have from time to time. States cannot declare bankruptcy, but they can sure default.

Joe Q. Investor is certain that bonds are safe.

This whole situation seems lost on the investing public, which piled into municipal bonds during 2009′s credit binge. After all, stocks are too risky! Municipal and low-quality corporate debt is likely to be one of history’s major crashes, and these markets seem to be rolling over already. Debt investors looked into the abyss in 2008, but in this climate of record complacency, people have forgotten how little is backing up these securitized promises.

This is not an easy sector for retail investors to short, but there are some instruments available. I’m either short or planning to take short positions in the following ETFs: HYD (high-yield munis), JNK (junk corporates) and LQD (investment-grade corporates). This is not a short-term play, but with patience this market should roll over big time.

Here’s a chart (click the image for a larger view):

Source: yahoo! finance


A pure play on wider credit spreads could be made by also going long Treasury debt at durations that match the average in these bonds. IEF is a 7-10 year Treasury ETF, TLT is 20-30 year T-bonds, and of course there are very liquid futures markets in 2, 5, 10 and 30 year Treasuries.

Another good week for bond spreads

Bonds are a key indicator of the health of the risk trade. So long as treasuries are shunned and junk is bid, it is likely that stocks and the commodity complex hold up. This week, long-dated Treasuries have gained a couple more points as junk bonds continued to lose their mojo:

Source: google finance

Here are the same ETFs going back to the start of the bear market in stocks. You can see that despite a huge correction in 2009, treasuries are still over 20% ahead of junk:


The collapse of the long bond has been eagerly awaited since 2007, and TBT (the 2X short bond fund) is still often mentioned in online chatter. The crowd is almost never right about these things, so I suspect that T-bonds will remain strong for the next leg down in stocks.

2008 was just been the “first look” at what can happen in the aftermath of a debt bubble — why couldn’t the same price action continue as risk in priced in again? Even if 2008 turns out to have been the “Prechter point” of greatest recognition and panic (and not what is coming), I doubt that many final price extremes were set last year.

For the yeild on the long bond, at the very least I expect another dip into the sub-3.5% area (it’s 4.5% now, and it touched 2.5% a year ago). Then we can talk about setting up long-term short positions for a secular (15-30 year) bear market.

At any rate, if think yields are going up from here, you’ve got much better odds with shorting corporate or municipal bonds, since those things are priced for perfection and defaults are going to be rampant. Even if treasury yields stay flat or go up, weak credit should collapse.

Oh, and if you just can’t wait to short long-dated sovereign debt, how about Japan at 2%? Or Greece at 6%? Or Spain, Italy, Ireland… all of this stuff is in trouble. Why pick the senior currency?

Holding dollars, profits taken on bonds

That was one heck of a reversal in bonds today off a beautiful double bottom Wednesday and Thursday. Here’s TLT:

The move was so extreme for bond-land that I sold all of my June 90 calls bought under 91, though I’m holding my unlevered TLT.

The dollar extended its decline, though it is looking every bit like the terminal stages of a panic. Just look at the spike tops being formed in the Euro, Pound and silver. I’m also eying crude suspiciously, though the rally has not quite formed a spike.