This summer the monster rally in European bond markets pushed yields down to all sorts of “never seen before” levels. We hit record low yields in almost all the various EU member nations. German ten year paper is yielding under 1%. French notes are only 35 basis points higher at a mind boggling low 1.3%. Even Italian and Spanish paper is trading just over 2%. Dutch bonds which have traded for four centuries hit all time low levels.
Yet it was only three shorts years ago that Europe was in the midst of a credit crisis that threatened to bring down the entire global financial system. At the time, most of these same sovereign nations couldn’t get funding at any price. During that dreaded summer of 2011, every day brought lower and lower bond prices for the stressed nations like Italy, Spain, Portugal and Greece. Eventually the bond market closed for these nations, and they couldn’t fund themselves. Leveraged market players that were long these bonds found themselves in a vicious circle of being forced to sell, which sent the bonds lower, which made them have to sell even more. Germany, who held all the power to fix the situation, continued to play hardball, refusing to easily yield to those that wanted the ECB to come to the rescue. In those dark days, it looked like the whole European Union would collapse.
In the previous year, former Goldman Sach’s CEO and New Jersey Governor, Jon Corzine had surprisingly taken on the role of CEO of MF Global. Market watchers were taken aback by this decision because MG Global was generally considered a second tier broker and a big step down for Corzine after being CEO of Goldman Sachs. But Corzine had plans to turn MF Global into a global powerhouse to rival the bigger Wall Street firms. So good ole’ Jonny went about doing what had made him so much money at his previous job – he strapped on risk. He deduced that there was no way that the Europeans would let their beloved union fall apart, and so he started buying high yielding Italian, Spanish and other PIIG country bonds. The problem was that he was no longer at Goldman Sachs.
When the shit start hitting the fan, the spiralling losses cascaded his firm through their margin buffer. Goldman Sachs had the capital and the stomach to sit through these kinds of market moves, but small MF Global did not have the same ability. Before he knew it, Corzine had run out of money and he was busy furiously borrowing from customer accounts trying to meet margin calls on his proprietary positions.
We all know how it ended. MF Global was forced to declare bankruptcy and the receiver sold off Corzine’s positions.
Today as we sit with yields hitting record lows, it is easy to forget how scary the fall of 2011 was for European bond holders. Many pundits were saying that the breakup of the EU was a foregone conclusion and that Italian and Spanish bond holders were going to be paid back in hugely discounted Lira and Pesatas. Into this fear, the MF Global receiver was forced to auction off the Corzine portfolio.
And guess who was one of the biggest buyers? Even though at 80 years old you would think he would be more intent on relaxing, George Soros showed why he is the greatest trader that has ever lived. In the midst of all this fear, with nothing but offers as far as the eye could see and no bids in sight, George stepped up and bought a huge chunk of Corzine’s portfolio.
The ironic thing is that Corzine’s analysis was spot on correct. There was no way that the Europeans were going to let their union fall apart. The ECB did indeed step in and eventually stabilized the situation, and the vicious circle of selling was halted.
Stock market sentiment
There is no fear in the market today. The only worry is not being long enough. All financial assets are heading straight up. Whether it is European bonds, US stocks, or emerging market high yield paper, it is all on a rocket ship to the moon.
Yet, what is that cagey old bugger George Soros doing? Yes, he is indeed long financial assets. But he has started hedging his book. Big time.
In his latest filing, George divulged that he has bought $2.2 billion dollars of US stock market puts.
This is the largest amount of puts that George has owned in recent memory.
Smart guys like Soros are quietly picking up hedges, but in the mean time, everybody else is getting more and more bullish.
The bulls are vastly outnumbering any bears. And there is more and more evidence that everyone is “all in”.
Ugly looking charts
This morning we are getting another stock market gap up on the ECB news of the cut in interest rats. We will see how long this rally lasts.
Yesterday, for the first time in a long while, we got some selling in key stocks. Apple made a new high, and then quickly plunged over 3%.
Same deal with Tesla.
Yesterday we had a big gap up in the stock market on the supposed cease fire news, but instead of building on those gains (like we have done for the past couple of months), the market sold off all day. This was a dramatic change in character.
It is easy to assume that the trends will continue forever. In the summer of 2011 it seemed that the selling would never end. As we wind down the summer of 2014 it feels like the buying will last an equal eternity. But my money is on the octogenarian being right once again…
Puking out my grains
I have still not written up my long term bullish grain thesis, but it is probably better that I haven’t as the selling has been relentless. There is nothing to say except that I sure got this one wrong. This illustrates the problem of trading a long term thesis in the midst of a perfect growing season. I am still long term bullish, but I am going to the sidelines for a bit while this crop comes to market.
Right now I feel like I know even less about the grain market than this guy…
I have been lucky enough to be long Input Capital, which has traded more like a stock than a grain play. In addition to puking out my grain positions (probably into the short term lows), I have sold some of my Input. This has been a stellar performer for me, but I am worried that the carnage in the grain markets is going to weigh on this stock in the next few months.