MBS CLOSE: To Everything There Is A Season

by Matthew Graham

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5 PM "Going Out" Marks

Today no doubt has most of us wishing this particular season would "turn turn turn" as fast as possible.  But today's closing post title is carefully chosen...  You know and I know that we can't simply have week after week of stability and gains in MBS without some other side of the equation creating balance.  It seems obvious, but some needed to hear it more than others today: there are going to be good times and bad for MBS.  The funny thing is that today is not even that bad if you've been with us through the more volatile times of the meltdown.  Our charge, yours and mine, in times like this, is to keep the possibility and warning signs of such an occurrence on the front burner when the time is appropriate.  For AQ and I, that means talking about things like the long term trend violation, "buckling up," and the signs of weakness finally outnumbering the signs of strength.  For you it means excercising logical systems with respect to your pipeline--more or less--GUT-FLOP.

To whatever extent you were prepared or not for this, I urge PERSPECTIVE. Read this out loud: "The 4.5% MBS coupon fell just over .375 today leaving the price right at 101-00."  The recent stability and price positivity may have created thinner skin among some of us than is warranted.  Seasons will always change, and so far have done a good job of changing back.  So too will it be with this late cold spell intruding on what felt like a perfect start to our MBS summer.

When all was said and done today, here's where what we looked like intraday:

And now on to the more important to today's discussion: DAY OVER DAY basis:

You'd be correct in noticing that we're nowhere near this year's lows, and landed right in the "bulk" of February and early March's trading range.  You might also notice some sort of "funny little numbery dashy line thingies."  These are retracement levels plotted with this year's lows at 0% and highs at 100%.  You might notice the line where we once had the long term horizontal trend is actually a 50% retracement level (we discussed this a few times).  We can't devote the space in this post to thorough explanations of technical indicators, but suffice it to say, these retracement levels have both "magnetism," in that they can repel an approaching price curve, and "gravity," in that price curves are nonetheless drawn to them (at least moreso than other random spots on the chart).  This gravity/magnetism idea should be seen on the 50% line in April quite easily as prices closely approached again and again, only to be "repelled" back upward.  Once we did indeed break through 50 and get close enough to 38, the "gravity" from 38 pulled us right down there as well.  But as we discussed the lack of "confirmation" on that break-out, we were able to bounce right back up to the previous range.  Whew....  All a bit much?  Yes?  No?  Remember, this is not hard science, more like "slightly-better-than-average historically positive correlations."  So the prices will never "snap" to these lines like clockwork, just exhibit whatever degree of "gravity" and "magnetism" that your imagination will allow.

All this is discussed today for a few reasons.  First of all, I suppose it's just kind of "neat" to see how often the pseudo-science has panned out in this, an environment we're constantly purporting to be more technically-driven than normal.  However much you want to buy into technical analysis--I myself am just the messenger, not necessarily a devotee--it would be hard not to notice that the last time we broke through the 38% level, we had 2 bounces almost exactly on the 23% line.  There were two more bounces in mid February and depending on your technical analysis number-fudging leeway, some might call these bounces too.  With that in mind, it would be even harder not to notice that the same thing has happened as of close today.  All that to say, it's not such a travesty that prices are where they are...  We're not at the annual lows...  We are not violating any rules of the retracement levels.  We are predictably weak after "crossing over" the 50% retracement line that we've been harping on again and again as a signal of potential momentum shift.  Not only is there nothing so "out of whack" about current price levels, but depending on your read of the data, one might even say: "A time to rend, a time to sew."  Some might say this is right where we should be.

Enough of that... Take a look at this:  Our current downtrend matches the slope of this year's other downtrend.  One of two things are suggested here.  Either the similarities in overall price level will persist and we will keep pushing down towards 98-00 on the 4.0, or the combination of the 23% retracement and the downward sloping trendline will provide a bounce higher.  Sadly, the latter is heavily data-dependent.  This chart is nothing more than sort of a "nifty" curiosity, and if nothing else is one more chip in the pile of "things aren't so outside the norm."

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So what did all this?  How'd we come to be talking about the lower half of the annual range as opposed to the half we want to be talking about?  In a word: inflation.  Yes my friends, the 2 "I'd" monster is back.  Mind you, I don't think he's back, and neither should you, but it ain't just us who have beds made out of the fixed income market.  Many of them are leaving extra lights on for fear the Inflation Boogie Man will jump out from under the bed and sap the value of their debt investments.  Why again?  Well, several Fed governors and now the rest of the free world expressing concern at the growing size of the Fed's balance sheet doesn't help.  That happened in the Fed minutes last week, but the problem is not quite so romantic as a singular sweeping explanation might allow.  To an equal extent, this is simply a problem of a weak-backed camel, who upon being encumbered with another $100 bln + in treasury supply is starting to ask about Doan's and ThermaCare.  Further compounding the problem is the small detail of "NO HISTORICAL PRECEDNT!"  So who REALLY knows if what we're doing today causes inflation or not?!  Who really knows if the inflation we may cause is the lesser of two evils?  Lots of folks with nice suits and emphatic voices REALLY seem like they want me to know what they know, but I caution you!  Don't trust anyone unless you've seen proof of their viable time machine!  No one knows folks...  Not even Batman.

But even so, some take this opportunity to PREPARE either for what they think they know or for the worst case scenario of what others think they should know.  And so treasuries sell.  And sell and sell and sell...  AND get compounded by a stock rally.  Is it real?  Is it a dead cat bounce?  Ask the guys with the time machines...  Today's consumer confidence data points didn't help either, and more than offset the all-time worst Case-Shiller home price index.  Further artificially strong data will do a bit of the same, and weak data will have to be a bit weaker than normal to shake the bullish lemmings from their trance.  As far as more fuel for more fires, tomorrow brings a much more important treasury auction with nearly as hefty ($35bln) a price tag.  The 5yr auction tomorrow makes existing home sales and FHFA price indexes at 10AM look like potatoes so small, they are returned at the dust-mite McDonalds for something of more appropriate size.  Like today, that happens at 1pm and expect volatility.  Even if the numbers are bang-on with expectations, some of these guys don't even know what they think about trading the data until someone tells em what to think, and that might change five times in the first five minutes.  So protect yourself where you need to, and if we're having a strong or even stable day up until then, be patient where you can afford to, in order to give the markets some time for the convulsions to die down before you take your first assessment of the real directionality.

If you didn't lock on the Thursday before last, or even this most recent Friday, or even earlier today (!), you likely find yourself unwillingly in the float boat.  Granted, I didn't want to see many of you here, but this ain't no dinghy!  We've been through trickier waters before and will be again ere the battle is won.  For the "stressed-out" among you, take a deep breath...  Pay attention to the updates on the blog...  Ask well-thought-out questions in the comments if you're unclear...  We're now in the middle of the lower half of the year's trading range.  That makes it easier to stay afloat at these levels, and easier to cash in as any gains worthy of lock recommendations would generally be bigger.  Barring heroic tsy auctions this week, "bigger" is not a high probability adjective for MBS, but without that time machine, we won't know until the results are published.  As long as you're ready to act, we, as always will be here to give you the info you need to act quicker than your lenders. 

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