June 14. ‘Enhanced Leverage’ and the FOMC. Is there a connection?

–Dow, SP 500 and Russell all made new highs yesterday.  At the same time, Bill Gross is warning risks are highest since the 2008 crisis, while JPM’s Marko Kolanovic warns that losses on short vol strategies could be catastrophic, and Jeff Gundlach echoes the same themes. (But euro$ straddles were in another 0.5 bp and TYQ atm trades just 4.0%)

–From Wikipedia: “On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to “bail out” one of its [mortgage] funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. Bear Stearns had originally put up just $25 million…”.  Just the NAME of that last one makes you wonder how any capital was ever committed by investors.  It SOUNDS fake.  “Enhanced Leveraged”?  Does that sound like it goes with “High-Grade”?  Anyway, I remember reading that story in the WSJ 10 years ago while riding the train into work.  And I thought to myself, this is a BIG problem; the two funds had essentially lost everything.  I thought stocks would crater.  However, after a brief lull, stocks made new highs in October 2007.   We all know what happened next.

–There have been plenty of bearish catalysts, but the sign of a bull market is that it shakes off bearish news.  However, crude oil doesn’t appear to be shaking off the latest inventory build with CLN at $46.00, -0.46.

–Yesterday the US treasury curve again edged to a slight new low, with 2/10 just under 85, 5/30 just under 109.  Red/gold euro$ pack spread eased by 0.25 to 58.375 (not a new low).  Inflation signals continue to grind down, with ten year treasury to tip spread at a new low of 177.5.  It is, of course, FOMC day.  Jan 2018 FF settled unchanged at 9872, which indicates market odds of about 50/50 for another hike by year end; I’ll take the ‘under’.  As an aside, China’s curve inversion is getting more play in news sources; in previous years China was known for ‘exporting deflation’ now it might be ‘exporting declining growth’

–Other news includes CPI expected 0.0 with Core +0.2 (yesterday Core PPI was +0.3).  Retail Sales are also expected 0.0; ex-auto and gas expected +0.3.

–June midcurve options expire Friday, with 2EM 9812.5^ settling 7.0 exactly at strike.  By comparison, 3wk (Friday) FV 118.25^ settled 21/64’s vs 118-07, about 6.5 bps.

Posted on June 14, 2017 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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