n var ord = window.ord || Math.floor(Math.random()*10e12); document.write(''); google_protectAndRun("ads_core.google_render_ad", google_handleError, google_render_ad); Beyond 3.5%, The 'Rotation' Becomes Disorderly Submitted by Tyler Durden on 08/14/2013 10:39 -0400 Bond Equity Markets Exchange Traded Fund Institutional Investors Volatility A low cost of capital is the underpinning of much of the exuberance that shareholders are showing for stocks as management are able to lever-up (in the face of deteriorating fundamentals) to reward shareholders (via buybacks or state-sponsored dividends). With rates surging in the last few days, a critical question is how much will it take to accelerate outflows from bond funds and lead to significantly wider credit spreads for corporations? As BofAML notes, the consensus is now that a 3.5% 10Y rate is enough to trigger a disorderly rotation by which institutional investors are unwilling (based on risk expectations) to bid for the yieldier credit market debt as retail flows out. This is crucial since if the credit markets sell-off, firms will be unable to fund the expectations priced into equity markets and lead to a shift back to the sidelines from risk-assets in general. Via BofAML, With a 14bps move higher in 10-year interest rates over the past two days, the key question is how much will it take to accelerate outflows from bond funds enough to lead to wider high grade credit spreads? While we already expect outflows from (non-short term) funds to increase based on the move in interest rates so far (see Figure 4 at the end of this piece), clearly a move to 3.0% on the 10-year over the next several weeks would lead to much more meaningful outflows. Whether such scenario actually leads to wider credit spreads depends on the extent of institutional buying interest at the new more attractive levels. That in turn depends on whether interest rates are perceived to stabilize at the new higher levels – thus the other key variable to watch is rates volatility. Our latest Credit Investor Survey, conducted July 8-11, showed that 3.5% on the 10-year is most commonly thought of as the trigger of a disorderly rotation – i.e. higher interest rates leading to outflows and wider credit spreads – among high grade investors. Put differently, 3.0% on the 10-year will not lead to overall wider credit spreads if there is enough buying interest from institutional investors (though note that the 10s/30s spread curve would flatten further, as mutual fund/ETF holdings are concentrated in the belly of the curve, whereas institutional demand is disproportional in the long end of the curve). However, if the probability of a further move higher in interest rates to 3.5% is high – which will be the perception if interest rate volatility is high – certain institutional investors will choose to remain on the sidelines. Thus there may not be enough institutional buying interest to mitigate retail fund outflows and contain overall high grade spread levels. The bottom line is: if firms are unable to borrow cheap to fund the buybacks and dividends that investors have become so enamored with (and conditioned to); a disorderly rotation from rates will in fact have a major negative on equity prices as capital costs surge making shareholder-friendliness uneconomic... considering by far the greatest aspect of EPS beats has been a reduction in the float via buybacks , the fear should be that the much-hoped-for rising rate scenario (lauded by so many as indicative of great things ahead) is in fact nothing but flow-driven abd will crush EPS . Average: 5 Your rating: None Average: 5 ( 2 votes) From Great Rotation To Disorderly Retreat - Where's The Line In The Sand? The End Of 'Orderly And Fair Markets' Gold Demands Trend (Q1 2012) - Enter The Dragon Guest Post: QE Canaries In The Coal Mine? Guest Post: Of Mountains And Molehills
To Celebrate Snowden's Russian Asylum Request, Here Is Ronald Reagan's "Evil Empire" Speech Submitted by Tyler Durden on 07/12/2013 10:53 -0400 It is surprising how things change diametrically in 30 short years... From the Ronald Reagan address to the National Association of Evangelicals, March 8, 1983. It was C.S. Lewis who, in his unforgettable “Screwtape Letters,” wrote: “The greatest evil is not done now…in those sordid ‘dens of crime’ that Dickens loved to paint. It is…not even done in concentration camps and labor camps. In those we see its final result, but it is conceived and ordered; moved, seconded, carried and minuted in clear, carpeted, warmed, and well-lighted offices, by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voice. Well, because these “quiet men” do not “raise their voices,” because they sometimes speak in soothing tones of brotherhood and peace, because, like other dictators before them, they’re always making “their final territorial demand,” some would have us accept them at their word and accommodate ourselves to their aggressive impulses. But if history teaches anything, it teaches that simpleminded appeasement or wishful thinking about our adversaries is folly. It means the betrayal of our past, the squandering of our freedom. So, I urge you to speak out against those who would place the United States in a position of military and moral inferiority... I urge you to beware the temptation of pride–the temptation of blithely declaring yourselves above it all and label both sides equally at fault, to ignore the facts of history and the aggressive impulses of an evil empire , to simply call the arms race a giant misunderstanding and thereby remove yourself from the struggle between right and wrong and good and evil. ... I believe that communism is another sad, bizarre chapter in human history whose last–last pages even now are being written. I believe this because the source of our strength in the quest for human freedom is not material, but spiritual. And because it knows no limitation, it must terrify and ultimately triumph over those who would enslave their fellow man. Yes, change your world. One of our founding fathers, Thomas Paine, said, “We have it within our power to begin the world over again.” We can do it, doing together what no one church could do by itself. Isn't it ironic that 30 years later, those who refuse to " remove themselves from the struggle between right and wrong, between good and evil " and those " who speak out against those who would place the United States in a position of military and moral inferiority " are forced to seek asylum in... the Evil Empire ? Average: 4.421055 Your rating: None Average: 4.4 ( 19 votes) Tweet !-- - advertisements - -- - advertisemen Login or register to post comments 9725 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Snowden Requests Russian Political Asylum Snowden Withdraws Russia Asylum Request; Nine Countries Deny Application Ronald Reagan's 1981 Christmas Address Paul Farrell Explains Why America Needs An "Evil Plan" In Advance Of The Next Revolution Presenting The "Evil Empire's" Projected Debt
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