Recap : A Lesson on Positioning


In macro space, the consensus expected a big payrolls print today. In equity long/short space, people were hoping internet stocks would keep going up. Positioning on both views were heavy… and as is often (but not always!) the case, the consensus was wrong.

In terms of yields breaking higher, the third time wasn’t the charm. The 4th time looks more likely. But we could potentially see a 1.55% print on 5y treasuries before then:

The surprise accentuated what up until now was a reasonably orderly Equity Hedge Fund position unwind. The Nasdaq 100, which was full of long/short fund favorites, has underperformed the S&P by 5% since mid April, having given up the entirety of its Nov-Feb outperformance. It’s probably reasonable to say that this is position driven rather than fundamentals driven, so if the backdrop is broadly unchanged when this is over, longer term underlying trends are likely to continue.

Separately, Pimco published a good piece on Leveraged Credit market conditions, which suggested that there is still juice left:

  • The issuance of covenant-lite loans has grown significantly: up from about 6% of total loan issuance in 2010 to 55%–60% in 2013, according to S&P LCD. And as of the end of February 2014, covenant-lite loans represented 51% of the total market outstanding, up from 22% when Yellen spoke about emerging imbalances in 2011
  • In 2013, 10.2% of (leveraged credit) issuance was used for dividend payouts, up from 1.8% in 2008
  • Although leverage is creeping higher, overall levels remain below 2008–2009 peaks. And with low rates, interest coverage remains high and cash flows are strong.
  • with stronger balance sheets, issuers have been able to push out maturities for several years – only 9% of the combined leveraged credit market matures between early 2014 and the end of 2016 (per BofA Merrill Lynch). Therefore, we expect the low-default environment will continue for at least the next 18 to 24 months (excluding a few over levered 2006 LBO deals, which are widely anticipated to undergo restructuring).
  • The share of senior secured debt in a typical leveraged credit issuer capital structure stands at 44% as of February 2014, compared with 53% at the end of 2008. LBOs are also being structured with larger equity components, up from an average of 34% of the total purchase price in 2004–2008 to 40% in 2009–2013.
  • While the Fed has increasingly voiced concerns about the leveraged credit markets, so far its only action, together with the Office of the Comptroller of the Currency (OCC), has been to tighten guidelines for lending by banks… the Fed is trying (via supervisory guidance) to limit the supply of loans that exceed a certain level of leverage, which can also lead to inflated prices of loans in the rest of the market. A recent Shared National Credit (SNC) exam by the OCC “criticized” 42% of syndicated loans.
  • But strong demand and supply that is comparatively insufficient mean that the market can find ways around new guidance and new loans can continue coming with terms that are more aggressive than the Fed and OCC guidelines. Moreover, these loans generally do not remain on the books of the banks that fall under Fed and OCC supervision.

Finally, the NY Fed on Bank Regulation:


  • US Employment
  1. Payrolls rose 192k vs 200k exp. The whisper number was probably 225ish. Net revisions added 37k to the past two months, which is probably also below expectations.
  2. Unemployment was stable at 6.7% vs 6.6% exp and prev. There was a solid 476k increase in Household Employment, which was offset by a rise in the participation rate to 63.2% vs 63.0% prev
  3. Hourly earnings was flat MoM, which took down the YoY figure to 2.1% vs 2.3% exp and 2.2% prev

Canada Employment

  1. Employment jumped to 42.9k vs 25k exp and -7k prev. The beat was driven by a surge in part time employment, more than reversing last month’s drop.
  2. Unemployment Rate declined to 6.9% vs 7.0% exp and prev with the participation rate stable


  1. ECB has modeled bond purchases up to 1Tn Euros
  2. ECB tests should inflation could be boosted 0.2 to 0.8%
  3. ECB wants to work this month with the BoE on the ABS Proposal
  4. ECB member Constancio said he does not know about this

Consumer staples firms forced to aggressively discount owing to slow industry growth. Over a third of packaged food and household products are now sold with discounts – WSJ

JPM on US Banks: for Q1 sentiment is very gloomy w/nearly every sell-side preview and most of the press lamenting soft trading, tepid mortgage trends, flat-to-falling NIMs, and positioning (i.e. the group is a lot more “owned” than it was before).

WSJ discusses the rising use of “acceptance drafts” in China (essentially “IOUs”) as cash becomes scarce. Companies will use the IUOs to pay suppliers and employees and the paper is transferable. The article talks about how bank lending increasingly is drying up. “Driving the exchange of paper, analysts say, is an unwillingness, or inability, by banks to meet demand for cash loans, especially from smaller companies”

prominent former BOJ official criticizes current policies; Kunio Okina delivered a speech Friday dissecting what he called “the Achilles’ heel of Abenomics”; Okina compared current Japanese economic policy to the recent disastrous experience of Zimbabwe – WSJ

Upcoming Data:

  • Mon: BoC Business Outlook Survey, Australia NAB Business Confidence, Japan Eco Watchers Survey
  • Tue: Canada Housing Starts,
  • Wed: German trade Balance, USDA Report, Fed Minutes, Australia Employment
  • Thu: BoE, US Jobless Claims