Dell bonds: too good to be true?

Spooz go up, Spooz go down.  Sometimes good news is good news (yay! no recession!) and sometimes it's bad news (boo! the Fed might hike!)  Yesterday was the latter on both counts, as  higher than expected headline CPI, housing starts, and industrial production prompted white eurodollars to their lowest close of the month and sent Spooz back towards the bottom of the last few weeks' range. 

Depending on your (most likely predetermined) view, you could read the chart as bullishly or bearishly as you like.  On the one hand, the SPX is tracing a nice flag-like channel that's just begging to be broken to the topside....


...and on the other, it's now in the process of threatening a little head and shoulders neckline.

Small wonder there's so much indecision in the market!

Of course, corporate supply is another issue hanging over the fixed income market.  After a torrent of issuance last week, Dell dropped the second largest offering of 2016 yesterday, raising $20 billion (increased from its initial size of $16 bio) from a book of bids reportedly totaling $87 billion.   And small wonder, too.  Ten year bonds at a juicy 425 bps over Treasuries (tightened from an initial indication of 475!) and 30 years at a whopping 575 over T (again, tighter by 50 bps from the initial indication) offer fixed income and credit investors something that they've seen precious little of: yield.   Indeed, these issues are all a lot wider than comparable bottom-of-the-investment-grade-barrel debt, which makes things look even better.

Of course, we've learned in the (by now seemingly distant) past that if something seems too good to be true, it probably is.  While that remains to be seen with these Dell bonds- because big tech mergers never go wrong, do they?- existing issues from Dell haven't all been smooth sailing, have they?  Here's an interesting thought experiment: would you rather own 10y Dell at 6% or 10y Greece at 7.25%?   Greece is more likely to default....but they're also much more likely to still exist in 10 years' time.


Elsewhere, the contrast between US and Uk CPI is really quite interesting.  Yesterday's US headline CPI surprised to the upside while that in the UK surprised to the downside.   One might normally expect that goods prices, many of which are traded on global markets and/or affected by global factors, would exhibit similar dynamics, whereas many services are non-tradeable and thus impacted by local dynamics.

Except in the case of the US and UK, the trend has been virtually identical for the past couple of years:


Clearly the issue with the UK is goods prices (as well as relative weightings within the CPI basket): as you can see, UK goods prices remain in deflation, essentially dragging down both headline and core from their US counterparts.

The divergence between the two headline measures over the past six months is notable.  Perhaps it's down to idiosyncratic factors (relative weightings, the elasticity of retail petrol prices to changes in crude prices, etc.)  One does wonder, though, how much Mark Carney or any other central banker can influence good prices.   There's little doubt, on the other hand, how much they can influence the price of (and demand for) bonds, and not just Dell's...
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Polemic
admin
May 18, 2016 at 7:23 AM ×

I'd had that thought about who will be around longest, corporate or country, myself and it opens lots of room for analogy, but the direction my thoughts headed off in were is it possible for a corporate to have made so much money it no l9nger needs a product and buds off into a self supporting universe - effectively a closed end investment trust producing healthy dividends just from its investments but not actually providing any services or products. But then this is what a holding company effectively is, a fund with limited investments in other companies.
But anyway, it was just a path of thought to thinking Dell may be around for years even if they gave up on shitty computers tonorrow.

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Nico G
admin
May 18, 2016 at 7:55 AM ×

"Greece is more likely to default....but they're also much more likely to still exist in 10 years' time." haha

a black swan swam by my boat in Koukounaries yesterday. I took it as the right omen

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Anonymous
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May 18, 2016 at 8:11 AM ×

Why do you call it indecision? Market has been in wide agreement over what the fair price is for a long time now.

It's a trend that qualifies as "indecision" or "wrongness". The market's looking comfortable at this level, just waiting for the future to turn up.

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May 18, 2016 at 8:31 AM ×

I love playing "Financial Would-You-Rather"...

In ruminating about the longevity of the nation-state, it's worth noting that Brexit seems to be at odds with the strong directional pull of the river's current which is the diminishing role of nationalism in one's identity (thank heavens!). Nationalism is the well-worn stuffed rabbit that lil 'uns turn to in moments of insecurity. But it's temporary relevance cannot stop the pull of time that will see them outgrow it. I never once saw a union jack in Star Trek! Even the Klingons would chuckle in amusement...

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checkmate
admin
May 18, 2016 at 9:04 AM ×

How did you know it was a "Black Swan" with 6 immigrants clinging to it's back?

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Rossco
admin
May 18, 2016 at 11:21 AM ×

With the curve as flat as it is, will the fed really risk hiking to create an inversion and everything that implies. Personally I think not

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Bruce in Tennessee
admin
May 18, 2016 at 12:26 PM ×

http://www.bbc.com/news/business-36319141

The US has raised its import duties on Chinese steelmakers by more than fivefold after accusing them of selling their products below market prices.
The taxes of 522% specifically apply to Chinese-made cold-rolled flat steel, which is used in car manufacturing, shipping containers and construction.

...If you can go to NIRP as a sound policy, you can also get involved with a tariff war. Seems to me to be a first cousin of currency wars....or perhaps a result.

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TraderJim
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May 18, 2016 at 2:56 PM ×

MM - but if you chart SPOOS on weekly bars going back two years you see its failed to break 2100 meaningfully since it topped in Q2-2015

Actually shape looks ominous - failed to break 2100 in h2-2015 and just tested same level last month and now here we are at 2043

Current levels of QE are priced in and the market looks exhausted since Q2-2015

I know Janet's ready to prop the market up one more time, along with her NIRP pals in Europe/Japan and China's credit stim, so timing's a nightmare, but I'm on the short side now.


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Anonymous
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May 18, 2016 at 3:13 PM ×

If everyone is short, how will the market go down without a catalyst? Nico just saw the same black swan that he saw the last time he was anchored in the same spot. Not saying that there isn't a new black swan out there, but all the ones you can see have been there for years and logically should already be in the price.

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amplitudeinthehouse
admin
May 18, 2016 at 3:22 PM ×

"Dell Bonds: too good to be true?"

I don't know, but you were spotted after the data release, and I know how you feel..@ 3.00min

https://www.youtube.com/watch?v=v2J1Pa1PiuY

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Anonymous
admin
May 18, 2016 at 3:27 PM ×

Looks like someone is desperately trying to pump up equities this session...

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Anonymous
admin
May 18, 2016 at 3:54 PM ×

Stan Druckenmiller at the Sohn Conference on May 4th...
The obsession with short-term stimuli contrasts with the structural reform mindset back in the early 80s. Volcker was willing to sacrifice near term pain to rid the economy of inflation and drive reform. The turbulence he engineered led to a productivity boom, a surge in real growth, and a 25 year bull market. The myopia of today’s central bankers is leading to the opposite, reckless behavior at the government and corporate level. Five years ago, one could have argued it was in search of “escape velocity.” But the sub-par economic growth we are experiencing in the 8th year of a radical monetary experiment and in Japan after more than 20 years has blown that theory out of the water. And smoothing growth over a cycle should not be confused with consistently attempting to borrow consumption from the future. The Fed has no end game. The Fed’s objective seems to be getting by another 6 months without a 20% decline in the S and P and avoiding a recession over the near term. In doing so, they are enabling the opposite of needed reform and increasing, not lowering, the odds of the economic tail risk they are trying to avoid. At the government level, the impeding of market signals has allowed politicians to continue to ignore badly needed entitlement and tax reform.

And if this wasn’t disturbing enough, take a look at the use of that debt in this cycle. While the debt in the 1990’s financed the construction of the internet, most of the debt today has been used for financial engineering, not productive investments. This is very clear in this slide. The purple in the graph represents buybacks and M/A vs. the green which represents capital expenditure. Notice how the green dominates in the 1990’s and is totally dominated by the purple in the current cycle. Think about this. Last year, buybacks and M&A were $2T. All R&D and office equipment spending was $1.8T. And the reckless behavior has grown in a non-linear fashion after 8 years of free money. In 2012, buybacks and M&A were $1.25T while all R&D and office equipment spending was $1.55T. As valuations rose since then, R&D and office equipment grew by only $250b, but financial engineering grew $750b, or 3x this! You can only live on your seed corn so long. Despite no increase in their interest costs while growing their net borrowing by $1.7T, the profit share of the corporate sector peaked in 2012. The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness. And we are paying 18X for the asset class.

The full transcript: http://www.valuewalk.com/wp-content/uploads/2016/05/The_Endgame_Sohn.pdf

Slides: http://www.valuewalk.com/wp-content/uploads/2016/05/The_EndGame.pdf

American corporate self destruction.

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TraderJim
admin
May 18, 2016 at 4:03 PM ×

@anon 3:13

Yes, the obvious catalysts have been discussed Ad Nauseam. Sure they are priced in. I have no idea which one could actually happen. But look at the balance of probabilities, Spooz has failed to break far above 2100 for nearly 18 months, despite all that the CBs had to offer during that period. And that level has been tested repeatedly.

So on the balance of probabilities, short plays from close to 2100 can catch some points, that's all I'm seeking here.

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abee crombie
admin
May 18, 2016 at 4:07 PM ×

itchy finger to go short here... earnings are done, not a big catayst to go up, though they could easily start grinding higher as I do agree positioning is rather unlikely to pedal to the metal long. But that doesnt mean that if we break below 2020 CTA's/Risk parity etc wont pile on short.

if you wait for the catalyst you will miss half of the move

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Anonymous
admin
May 18, 2016 at 5:17 PM ×

This morning is good for my positions so far.

Short REIT ETF, short CAD, long GBP, long VXX...

The Fed minute is a concern. But it might be a short term event: after the minute, it is June meeting everyone will pile on. I actually do not believe that Fed will do anything in June. But market should have some hiking probability priced in.

As for catalyst, China is on the list: the liquidity is really tight right now, based on the recent loan data and anecdotal conversion with some bankers. What's more: Beijing's top leaders are still in in-fight mode, and there is Taiwan, there are also some political sensitive events coming up. The risk of something going wrong is pretty high IMO. So we need a much higher risk premium in asset prices.

EU and EU banks, a black box to me. But from comments here I feel that they are time bomb waiting to explode.

Venezuela is going to fall, right? I wonder what impact it might have: bullish event for oil, bearish event for EM credit, maybe?

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Anonymous
admin
May 18, 2016 at 5:34 PM ×

Fed jawboning yesterday used to run stops. My view, they've told big money that there will be no hike tonight, hence equities etc are bid.

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Leftback
admin
May 18, 2016 at 5:46 PM ×

We know there is no hike today b/c there isn't a meeting today .... silly chap.

Hikes and other Fed policy changes always FOLLOW the market. Remember the Taper Tantrum? All over BEFORE Big Ben's Fed made the actual announcement. Remember Dame Janet learned from him regarding "forward guidance".

Now, let's say that June is OFF, b/c of Brexit fears etc.. Dame Janet may be thinking July. B/c she doesn't like the Fed to shock the market they will begin hand signals soon, in her speech June 2 or even sooner as Fischer and Dudley speaking tomorrow.

The dollar and the short end will lead market expectations, and the adjustment will be in place before the hike. It's going to be July.... get long July dollars, September dollars, even June dollars.

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Leftback
admin
May 18, 2016 at 6:03 PM ×

I do wish the Anons would use a handle so we could distinguish who they are and what their leanings are. JBTFD leaves little doubt as to his philosophy for example. Amps is mainly into the horses, despite his handle.

Crude is stretching credibility and the upper Bollinger band is threatening to snap here as stocks of crude and gasoline swell to gargantuan proportions, even relative to the stocks that existed last summer before the waterfall in oil prices. Are we witnessing stockpiling for a reason here? Is the US preparing for a War of Words with the Saudis or an actual shooting war? Absent something as sinister, the oil price must fall, and if the dollar moves up sharply, the selling could become disorderly.

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Anonymous
admin
May 18, 2016 at 6:20 PM ×

LB, forget the Saudis Watch Russia. F22's have been sent to Romania and a 800 million dollar Aegis system activated. Poking Putin in the eye.

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Justabeancounter
admin
May 18, 2016 at 6:40 PM ×

Stan is the man.

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Anonymous
admin
May 18, 2016 at 6:47 PM ×

Speaking of the Saudis...

BBG: SaudiArabia Considers Paying Contractors With IOUs

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Anonymous
admin
May 18, 2016 at 7:11 PM ×

damn that was hawkish as fook.

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Anonymous
admin
May 18, 2016 at 7:12 PM ×

Japan’s Vice Minister of Finance threatened imminent intervention to weaken the Japanese yen.

Rumors of a June Fed interest rate hike are pouring fuel on the fire.

Keep up that drumbeat, and the (FXY) will be trading in the mid $80’s in no time.

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Skt
admin
May 18, 2016 at 7:56 PM ×

I won't say I told you so......Thumb on nose,and wiggle instead. :)

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Nico G
admin
May 18, 2016 at 8:11 PM ×

it is really a real black swan - shame i cannot post photos here

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Tonto
admin
May 18, 2016 at 8:39 PM ×

For you Nico..

https://www.tripadvisor.ca/Attraction_Review-g1191737-d2328510-Reviews-Koukounaries_Beach-Koukounaries_Skiathos_Sporades.html#photos;geo=189499&detail=2328510&ff=156388916&albumViewMode=hero&albumid=101&baseMediaId=156388916&thumbnailMinWidth=50&cnt=30&offset=-1&filter=7

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jbtfd
admin
May 18, 2016 at 8:45 PM ×

Nico... after a strong start today, spooz looking sh*t here... should have followed your advice. Hope you're making some +ve P&L at least.

(Still on the sidelines here)

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Anonymous
admin
May 18, 2016 at 8:47 PM ×

Nico, google images of Koukounaries and there they are.

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Macro Man
admin
May 18, 2016 at 8:49 PM ×

The irony, of course, is that today's moves are because of what should be the whitest of white swans...the Fed suggesting that they might raise rates from quasi-zero with unemployment and inflation both near target.

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johno
admin
May 18, 2016 at 9:16 PM ×

Stock market flat. Breakevens flat. Two new telephone polls showing a sizable Remain margin. All supportive of a June hike.

If someone clued into why NOK traded so weak after the Fed, I'd be happy for any insights. Oil isn't the answer. Something else ... some hedging flow?

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Eyjafjallajökull
admin
May 18, 2016 at 9:21 PM ×

Will be interesting to see if the Chinese stop weakening the yuan against the basket. If they don´t, new highs in USDCNY/CNH will probably been seen in the not so distant future. USDCNH now at the sama level as in early February (around 6,56), has been creeping higher for the past few weeks.

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Whammer
admin
May 19, 2016 at 12:57 AM ×

I got yer Koukounaries black swans right here: https://www.tripadvisor.com.pe/LocationPhotoDirectLink-g1191737-d2328510-i145529944-Koukounaries_Beach-Koukounaries_Skiathos_Sporades.html

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Anonymous
admin
May 19, 2016 at 1:26 AM ×

MM is right; that was a white swan. Black swan monsters cannot be predicted, especially when everyone is on the short side of the boat looking over the side with binoculars for the next black one.

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