Timely thread by Josh on back of a piece by @andykessler in the WSJ. My thoughts:
- the absurdity noted by Andy and Josh is the reflection of a market where duration is now the single most important factor in explaining fwd PEs, much more so than in recent past
1/3
- margins are the second most important factor, contrary to what most believe (and not growth or growth stability). With input price inflation unhinged and wage inflation starting to run higher, the reflexivity between these two factors (duration and margins) is about to 💥
2/3
- as is always the case, when long periods of leverage build-up and easy financial conditions age, liquidity, volume, skews, etc…are all very stretched and factors of instability. When the music stops and the rush to the exit happens, the doors will shut quickly
3/3

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More from @INArteCarloDoss

15 Sep
Many loud voices been clamoring for a while now that Evergrande is isolated and no ripple through. Here is a quick demonstration of how out of (market) touch these statements are. As explained in many previous posts, China HY stress started with Construction and spread.
1/N Image
As is evident, China HY is breaking down. But the denialist argument is that no ripple through has been observed. You can see on the chart that the same index (ICE - BoA HY) for the US is disconnecting. But is it so? Let’s look at the 3m RoC of of the option-adjusted spread
2/N Image
That moved up to positive territory…it does show that things have been moving under the surface for a while. Now let’s see how the same option-ad spread has been doing in terms of correlation with $VIX - and we have a corr break that usually heralds move up in spreads
3/N Image
Read 5 tweets
1 Sep
The smell of Napalm - Evergrande is collapsing, a story everyone is familiar with by now. Question is, will it have any systematic contagion effects? For that we have to dust-off the Casio and get straight into it. This is the 8.75% 6/25 - a thing of beauty yielding > 50%
1/N
And of course, reversely the stock has collapsed accordingly. What’s new this week is that the company warned of a default risk. So carrying either these securities is becoming unpalatable.
2/N
And to be perfectly honest, this is a certain default at this stage. The reason this is a certainty is two-folds. 1- while overall leverage is high, the real issue is almost Yuan 1 tn owed in trade payables. 2- asset side not looking pretty
3/N
Read 12 tweets
24 Jul
This headline raises many questions and gives some clues:
1- Treasury is close to $ 700 bn TGA target ahead of the debt ceiling rollover - why chose to run it down so aggressively, especially in tte 3 months ahead of the deadline Yellen is giving?
1/N
2- isn’t it all too convenient that the significant issuance that Yellen is hinting at (whatever outcome of rollover) will be happening against a backdrop of much lower duration yields?
3- net UST issuance will have to pick back-up towards $ 210-220 bn per month
2/N
4- That is assuming no change in current QE pace. Any taper, more on that in the coming weeks, will see net issuance at higher monthly pace
5- don’t get too hang-up on the $ 700 bn TGA, that won’t cover current cash burn for long if no rollover
3/N
Read 4 tweets
22 Jul
Bonds: update on where I stand after last week’s curve jump. Bottom line: I was proven wrong by last week’s move but my position did not change. 3 key reasons: 1- this is supply/demand driven issue 2- the whole curve shifted, 5/30s actually moving up 3- positioning
1/N
Supply/Demand: refer to my previous post outlining the maths. This is a transitory air pocket in supply. Free-float of USTs been stagnant since Apr 20 while reserves kept growing relentlessly. This is explained by TGA drawdown and unexpectedly lower net issuance.
2/N
The move last week was a shift of the whole curve which signals some duration adjustment, without any effect on YC. During the June capitulation, steepeners got obliterated. During this sell off, they stayed ranged and the 5/30 ended-up breaking-out to the upside.
3/N
Read 10 tweets
14 Jul
Here is the promised thread on oil supply shock risks. I want to start with this slide from my last week’s #OOTT thread. US Oil production recovery is underwhelming. Why and what are the factors underlying this? Then, we will cover the implications for energy and inflation.
1/N
First of all, let’s look at how investments have been faring. This is Capex for MSCI ACWI Oil & Gas since ‘12. Clearly the investment picture keeps deteriorating and have shown little to no price elasticity.
2/N
Why is this chart crucial? Because underinvestment coupled with steep shale declines are conditions that seem to have already gathered for a skyrocketing energy price in the next year or two. What are the root causes of this underinvestment?
3/N
Read 12 tweets
9 Jul
Lots of questions on China liquidity and whether it matters or not. Here are some thoughts to help you think about it. First and foremost, cutting RRR is NOT a measure that will boost the volume of credit but rather it’s price.
1/N
While China’s economy is more sensitive to credit volume than credit price, this measure should have been expected, yet bonds had their single largest yield drop this year on back of the announcement!
2/N
While not a volume measure, you would be ill advised to discard the move as small. It will release roughly yuan 1 Trillion in funds. While this might not be the first step to open liquidity floodgates, it is a policy turning point, and the timing carried some signaling.
3/N
Read 6 tweets

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