Trader Note

Post-Christmas Monday: Slow trade in Asia to EU when move starts and continues lower (Rally Reversion).

2017-11-27 Week

Thanksgiving Carnage. Bonds. See: EVENTS

This Week

Fed Chair Yellen testifies in Congress. She will not say anything of value to effect markets, but it is often a fun show to watch. This is because we get to see how truly dumb these elected officials really are. I am still shocked that when Bernanke testified, the Congressmen asked him, "Why didn't you do more against Libor?" He then had to explain that it is "London Inter-Bank Offered Rate". He then had to explain that London is NOT in the USA. Sadly, he had to do that more than once when he testified in the Senate. So the testimony is mostly an opportunity to gawk at the stupidity and ignorance of politicians.

There are not many releases to trade this week. Maybe you can find something here worth trading for a scalp:


Thanksgiving Carnage

As Americans recover from a tryptophan hangover, we should look back at the history of Thanksgiving. In 1621, Pilgrims were so excited that they had managed to grow some food that they were shooting off guns. Ninety warriors of the Wampanoag Nation went to check out what was happening and since the Pilgrims were outnumbered, they offered them some food.

Later, in 1636, Thanksgiving was declared for 100 years to celebrate a battle victory, which was actually the massacre of the Pequot people. That happened because the Pequot people were blamed for a dead guy in a boat. This population was already decimated by plagues from Europe before an additional 400 people were put to the sword or burned to death. As you can guess, the Native Americans were not so quick to celebrate the date.

When Lincoln needed to calm unrest during the Civil War, he pushed the idea of Indians and Pilgrims eating a happy meal. So this propaganda was spread (Fake News), and now Americans save the date to eat too much turkey with family and fall asleep in front of the football.

In the modern era, Thanksgiving has come to symbolize the start of Black Friday and Later Black Monday. Black Friday is when brick and mortar retailers use specials to lure in shoppers, because with enough sales their books move from the red to the black for the year. Black Friday has also come to represent massive brawls at stores, and can be view by typing "Black Friday fight 2017" into Google. So the traditional history has nearly come full circle, from a massacre to a massive brawl with only the occasional death.

Black Monday is a more recent event. This is when people return to work and do their Christmas shopping online. For retailers like Amazon and Ebay, it can provide massive boost to their revenue streams. If cyber-attacks occur, it can also decimate a company's bottom line. Keep an eye on Black Monday numbers because with higher numbers, it implies that brick-and-mortar retailers will be suffering by the end of the year.



High Yield Bond prices are often correlated with stock prices. A selloff of High Yield Bonds implies that there will be corresponding selloff of stocks.

High Yield Bonds are not called "High Risk Bonds" because that name doesn't sell as well. This is also why traders don't want you to call them "Junk Bonds." However, junk is what they are and high risk is what they return. The yields are high because there is a very high risk of default.

When junk bond investors exit these markets, it is an indication that these markets are in trouble. Every investor is hunting for yield, so it takes a lot of fear to give up 10% over a government bond of 2% yield (usually less). Most junk bonds are not sovereign bonds but municipality and business bonds. Many municipalities are having problems covering pensions, salaries and roads so they have issued high rate bonds in many areas where taxes are not sufficient to pay off those bonds. Corporations (like frackers) have issued bonds for continued production in an environment that has lower prices and demand. So the future of junk bonds is bleak when you look at fundamentals.

Some bonds considered junk are issued by governments. For high risk locations, these bonds pay a premium over locations that are considered stable. However, after Venezuela defaulted, there comes the likelihood that other locations will follow suit, like Turkey.

When we look to stable locations (EU, Japan) that have been able to issue negative rate bonds, it is easy to see why investors would want High Yield. Negative rates mean that you are giving a government your money, and paying them to hold that money. For a country like Austria to issue a 100 year bond at minuscule rates means that some idiot is betting that his grandchildren will be able to cash in a bond in 100 years where the face value may actually hold value. To say that in another way: These long dated low rate bonds imply that buyers think that governments are not going to devalue their currency and that the investment may at some point be worth more. Since that has NEVER happened in the history of central banks, I often wonder who are these idiots?

This exodus from Junk Bonds is an indication of investor fear. Bond holders like consistent yield, so this implies those investors will shift assets to more stable sovereign bonds (Bund, T-Note). This will make for some disjointed correlation trades between stock and bond markets in the near term. It will also push down the short end of the yield curve as buyers flock to short-dated bonds to grab minor yields as they wait for more stability in the junk market. Most High Yield speculators are not buying the long end of the yield curve because it carries too much risk, which is ironic when you consider the risk in the junk market.


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