High Yield Land Getting Dicey?

A quick observation -

The high yield bond market has been taking in money like there's no tomorrow as people reach for Fed-underwritten credits with high yields.  The market has become incredibly frothy, and risk premiums are miniscule.  Now that the EU has stabilized, global (especially US) money is starting to flow back to the continent in search of yield.  The EU crisis helped drive money out of EU paper, and into US paper as a haven...now things (read:  "money flows") are reversing.  

The fact of the matter is that there are some dicey, dicey high-yield credits in the US that have benefited from the international hunt for yield - especially as the EU crisis sent money screaming to the US.  The flow was like the tide that lifted most HY boats.  Now that risk premiums have been decimated, and the EU paper sings its siren song to yield chasers, people will start to question their holdings of US HY paper...given the opportunity to hold something else (something even being sovereign in nature - with the implicit guarantees that sov. paper holds) exists.

 I do not like the US HY market in aggregate here (use ticker "HYG" as a proxy), and think that the tide will go out during Q2-Q3 '13 for this space.  Spreads will blow out and these shady credits will experience turbulence.  Brace for impact.   

A [Socially-Based] Short Thesis For Petsmart, Inc.

A total put-down to pets everywhere

Petsmart, Inc. (ticker "PETM") has seen its shares appreciate over 350% since early 2009.  Recent time series action is setting off some warning signals, and it's time to take a good, hard look at this company.  What will drive sales for Petsmart?  Increased pet ownership and increased per-pet spending.  What if we're beginning to see a structural shift in ownership rates (a negative shift)?  The above graphic depicts Google search trends for "put my dog to sleep," and "put my cat to sleep."  The grim reality of the situation is that more people are searching for this option.  So what?  Could be coincidental.  These searches are likely slightly-tainted by people who have insomniacs for pets, but we can live with this assumed noise.

The delta for pet euthanasia is positive.  Let's look at the delta for the puppy/kitten refresh rate:

Search terms "buy a puppy," (blue) and "buy a kitten" (red)

 I must say that trend for puppy/kitten love isn't as strong as the anti-puppy/anti-kitten trend.

PETM's last three quarters have seen decelerating sales, gross profit, and net income for PETM.  There's a your fundamental chink if you were looking for one.  When we combo this with the recent time series weakness and the Google provided [negative] social factors - we begin to see a story emerge of a dog...an equity dog. 

How would one play [hypothetically of course] a potential breakdown in the stock?  Hypothetically, one could buy an April '13 55/60 put spread for about $1.78 (or $2.00 if you have zero patience) if you're an options lover.  If one doesn't have the dexterity to write options, one can purchase the April '13 60 put for 2.25.  If one prefers short sales (as I often do), then sell PETM on a break below $64.80 (stop at $67.80) .  If 11/14 earnings come in weak, you're almost guaranteed a quick 12% drop (with realistic expectations of 21% downside over the next few months).  The bubble-ish nature of this stock means the downside move could be very brisk, very dramatic, and quite profitable for those who are positioned for the fall.

This Structural La Nina

A quick observation:  It looks like we can expect this structural La Nina event to persist for years to come.  When I say "persist," I do not mean in an uninterrupted manner...this makes no sense.  What I do mean is that when the ENSO Index swings back positive (marking a return to El Nino territory), these swings will have smaller amplitudes than their female counterparts.  There will also be less time spent in El Nino territory in the coming years.

For illustrative purposes, and to lay out the basis of my analysis, I'm embedding a graphic of a structural ENSO index that I created.  Non-standard signal processing methods were used, and the results are free of noise, lies, and bias.

What are the implications?  Well, for starters:

1) Persistent grain market volatility
2) Upwardly-flexible grain prices (buy them dips)
3) More (hard to imagine any more) angry peoples from high-MPC, cereal-consuming nations
4) Persistent drought conditions in the lower US states
5) Increased water infrastructure investment/enhancement/expenditure in the southern US
6) Increased protectionism
7) A burgeoning water-rights market
8) Growing amounts of political disenchantment

The Next VIX Move

CBOE's S&P 500 Implied Volatility Index (VIX) has a very high likelihood of making a run at the $60 level in the next few quarters...a very high likelihood, indeed. 

That is all.

Occupy Wall St. / Tea Party Nash Equilibrium

Let's envision a hypothetical synopsis (read:  "hypothetical game scenario Nash equilibrium") where Occupy Wall St.'ers (player OWS) and the Tea Party (player TEA) found common ground...at least enough ground to strategically bargain over a few of their important policy items.

Aside:  For a prior example of our Nash Eq. analysis...see here.

If we presume that each group had a bifurcated agenda that included only two items (1:  end [or not] the Fed, and 2:  raise [or not] taxes), we can create a simple game scenario to analyze the probable outcome of this hypothetical coordination.  First, we must make some further assumptions as to the ordinal preferences of the two groups:

Assumed Preferences of player TEA (preferentially ranked by our subjective, empathy-based assessment)-

1. End Fed / No Tax Raise = [TEA success / TEA success]
2. No End Fed / No Tax Raise = [No TEA success / TEA success]
3. End Fed / Raise Taxes = [TEA success / No TEA success]
4. No End Fed / Raise Taxes = [No TEA success / No TEA success]

Assumed Preferences of player OWS (preferentially ranked by our subjective, empathy-based assessment)-

1. End Fed / Raise Taxes = [OWS success / OWS success]
2. No End Fed / Raise Taxes = [No OWS success / OWS success]
3. End Fed / No Raise Taxes = [OWS success / No OWS success]
4. No End Fed / No Raise Taxes = [No OWS success / No OWS success]

2*2*2 = 8 possible outcomes

When the analytical smoke clears, we find the Nash equilibrium (read:  "most probable outcome, given the givens") to be the scenario where:  1) The Fed is ended, and 2) Taxes aren't raised...period. 

Will any of this actually happen?  Likely not, as our "leaders" (as they exist in their current form) will play OWS and TEA off of one another, sensing that strategic cooperation between the two groups might signal the terminal end of their own status quo chicanery  "leadership" (as it exists in its current form).  But - in case of the rare event that there was a mass cooperation of OWS and TEA members - you know the likely outcome.

IM(1)PETUS

I cannot believe the growth that is occuring in the monetary aggregates (M1, M2, etc.).  It looks like the Fed is targeting the aggregates now that policy rates are drunk and lying on the dirty kitchen floor.

Ben Bernanke = Paul Volcker * (-1)

Is China Preparing to Debase the Yuan?

It seems that the recent China currency bill passed by the US has done exactly what we though it would:  piss off China - royally.  We laid this out there a few weeks ago, and aren't surprised by the reaction. 

What's the likely next step?  Read this post (paying particularly close attention to the final paragraph), and you should get a better idea.  Please, don't take our word for it - PBOC has already begun increasing the yuan's daily trading ranges...and I'm sure it's [NOT] for the sake of a brisk yuan rally.

Timmy G:  Eat your tiny, marbled heart out...you walking calamity, you.