I think the steady flow of negative news has caused BP’s stock price to overshoot to the downside.  BP’s recent progress with its LMRP cap may turn things around.

From http://www.reuters.com/article/idUSN0714720620100607:

During the weekend, BP announced advances in controlling the undersea leak through a containment cap over the blown-out wellhead, giving estimates of captured oil that suggest a significant portion of the escaping crude is being collected.

There’s a lot not to like about ammunition manufacturer Allied Defense Group (ADG).  It is losing money and it has received a “Going Concern” warning from its auditors.  The company had been a takeover target (potential acquirer: Chemring Group PLC), but a DOJ indictment of a key executive responsible for much of its sales has scuttled the deal.  However, the stock has dropped so much that the market cap is now only $23 mln, only about a third of the cost of this New Jersey mansion: http://wcbstv.com/local/million.dollar.mansion.2.1733780.html.  I suspect that there may be substantial value in the intellectual property of the company and this value won’t be fully recognized until another major war breaks out.

I emphasize that long positions in these stocks should be small; ADG may well go bankrupt and the potential downside for BP is huge.

BP is currently quoted 37.72/37.73 and ADG is currently quoted 2.76/2.79.

2-year yield: 97 bps

10-year yield: 369 bps

2s-10s spread: 272 bps

Why are interest rates in Japan so low?  The proximate cause is that Japan seems to be locked into post-bubble deflation.  And why is that?  Couldn’t Japanese monetary authorities simply do a helicopter drop of cash into the economy to defeat deflation?

In an April 15, 2010 Financial Times article, David Pilling writes:

Economically, and in spite of this week’s formation of a ruling-party faction that favours inflation-targeting, the country’s leaders nourish a fatalistic acceptance of deflation. True, 15 years of more or less continuously falling prices have not triggered the crisis some predicted. But falling nominal output has accelerated Japan’s relative economic decline.

…

Yet many Japanese seem more at ease with the idea of stately decline and genteel isolation. One of Japan’s most popular books in years, The Dignity of a Nation, even suggested Japan should stop teaching its children English and withdraw from the world trade system altogether. Short of such radicalism, many people ask what is wrong with being a backwater of wealth and civility in an out-of-kilter world.

…

For Japanese with jobs and access to savings, even deflation can be a boon. “We are just quietly enjoying our affluence,” says one satisfied customer.

David paints a picture of a sleepy, backwater Japan where people “with jobs and access to savings” are not particularly bothered by deflation.

USD/JPY is currently 92.06.  YCS closed at 20.77 on Friday, April 16.

2-year notes now yield 117 bps.  This is an increase of 36 bps in a little more than a month.  I am closing my short 2-year notes recommendation now.  Note that this was a different trade idea than the flattener trade idea – the flattener is a bet on the slope of the yield curve, while this was a bet on the level of interest rates.  My third flattener recommendation is still open.

The flattener trade involves shorting 2-year notes and also going long 10-year notes, so a trader who implemented both my flattener recommendation and my short 2-year notes recommendation would have overlaid one short position in 2-year notes on top of another.

2-year yield: 109 bps

10-year yield: 386 bps

2s-10s spread: 277 bps

I recommended the first flattener on Feb 9 at 282 bps and closed the recommendation on March 5 at 276 bps.  I recommended the second flattener on Mar 8 at 283 bps and closed the recommendation on Mar 12 at 274 bps.

FX Update:

I recommended buying USD/JPY on Mar 3, 2010 when USD/JPY was 88.72.  Right now, USD/JPY is 92.80.   This trade idea could also be implemented by buying the ETF YCS.  YCS was 19.31 on Mar 3; it is now 21.10.

10-year yield: 370 bps

2s-10s spread: 274 bps

I’m closing the flattener recommendation I initiated on March 8, when the 2s-10s spread was 283 bps.  Previously, I recommended a flattener on Feb 9 at 282 bps and closed it on March 5 at 276 bps.

Barclays Capital strategists say in a written report that they have fine-tuned their rates forecast, highlighting the strength in the front end and their continued expectation of a selloff in the long end, led by a stronger economy and supply-demand imbalance. Recent TIC data also highlight that China has resumed diversification away from USD securities, they write.

In the report, they maintain their curve-steepening view. A stronger-than-consensus payroll report seemed to support the view that the U.S. economy continues to turn around, they write.

I think the curve will flatten while Barclays thinks it will steepen.  It is possible for both of us to be right.  The curve might steepen in the short-term, but then flatten over a longer time horizon.

The curve has flattened since I re-opened my flattener recommendation, but it may well become steeper in the short-term.

2-year yield: 94 bps

10-year yield: 373 bps

2s-10s spread: 267 bps

FX Update:

USD/JPY is now 90.51 (vs. 88.72 when I recommended buying it) and YCS is 20.09 (vs. 19.31 when I recommended buying it).

10-year yield: 370 bps

2s-10s spread: 283

Recommendation: put on 2s-10s flattener again.

YCS closed at 20.07 yesterday.  I recommended it at 19.31 on March 3, 2010.

Today’s nonfarm payrolls report was better than expected:

http://www.marketwatch.com/story/payrolls-fall-36000-jobless-rate-steady-at-97-2010-03-05?dist=beforebell

U.S. nonfarm payrolls declined for the 25th time in the past 26 months, falling by 36,000 in February to 129.5 million, the Labor Department estimated Friday.

Job losses were concentrated in construction, schools, retail and publishing. Manufacturing jobs rose by 1,000, the second increase in a row.

The unemployment rate was steady at 9.7%.

…

The employment report was better than expected, as economists surveyed by MarketWatch were forecasting a drop of 90,000. They expected the unemployment rate to rise to 9.8%.

Payroll data for December and January were revised higher by 35,000.

The 2-year yield is 91 bps and the 10-year yield is 367 bps, so the 2s-10s spread has flattened to 276 bps.  I am closing my 2s-10s flattener recommendation with a profit.  I initiated this recommendation at a spread of 282 bps on Feb 9, 2010.  The curve may well continue to flatten, but I do not have a strong conviction about the 2s-10s spread anymore, so I prefer a neutral stance.

My recommendation to buy USD/JPY continues to perform well.  USD/JPY is now 90.10.  The increase in USD/JPY is a combination of the yen weakening on a report that the Bank of Japan is considering further easing measures and the dollar strengthening on the better than expected nonfarm payrolls report.

http://www.forbes.com/feeds/ap/2010/03/05/business-specialized-consumer-services-as-japan-markets_7409699.html

Japanese stocks jumped Friday, buoyed by a report that the country’s central bank was considering taking further monetary easing steps to shore up a recovery in the world’s second-biggest economy.

…

In December, the bank eased monetary policy by offering 10 trillion yen ($112 billion) in short-term loans to commercial banks to boost liquidity.