March 7. Ten year yield falls back below 3.5%

–Interest rate futures rallied after the employment data, which came in around published expectations at 192k and 8.9%.  However, the market was leaning towards even stronger data, and there were disappointments in hourly earnings, workweek, and the labor participation rate.  The ten year note fell back below 3.5% at 3.49.
–The upcoming week is light on US economic news, and trade will likely be driven by events in the Middle East, which seem to be worsening.  According to S&P website, energy is now around 13% of total market cap.  I seem to recall seeing that it was over 20% in the late 70’s and 80’s.  In any event, I am seeing more about peak oil, and about speculation concerning Saudi reserves.  Interestingly, while Geithner mentioned that the US could tap its strategic oil reserve, there was a piece last week in the Financial Times saying that the Philippines is ordering oil companies there to maintain increased reserves.  “…developing countries across Asia are taking evasive action, shoring up their strategic petroleum reserves against the risk of a prolonged supply shock.”  China is building strategic reserves currently.  Seems like a “no-brainer” for China to offload hot-potato dollars to the Mideast for oil, and let those countries in turn recycle their dollars for good old US manufactured weapons.
–Treasury auctions, (and Fed will buy) 3’s, 10’s and bonds this week.

–Just a few other thoughts.  I have a friend who assured me when stocks were near their lows and the economy looked awful, that ‘the Fed’s rate cuts and increased liquidity will work, just like it always does.’  Every time I think of that I slap my forehead with my palm, because of course, he was right and I thought….well, I was just wrong.  Well it seems to me that we are now running into the reverse situation…a lessening of liquidity.  Not only is the Fed supposedly going to end QE in June, but the oil price increase also drains liquidity.  And governments at all levels are moving towards fiscal austerity.  Back in the beginning of Clinton’s presidency, Greenspan supposedly made a deal to lower rates if the administration reined in the budget.  That was around the time the Clinton (quaintly) said something like “do you mean my economic program is dependent on a bunch of f’ing bond traders?”  I say “quaintly” because the US bond market has the Fed as its bond daddy now.  But Portugal is fighting a ten year rate of 7 3/8% while Spain is right around 5 3/8%, which is the rate at which Ireland is struggling with in the ECB deal.  In any case, Bernanke has no such carrot to dangle in front of the current administration…everyone knows the path is unsustainable.  We’ll almost surely have more QE beginning in Q3.

–The eurodollar option pit is rumored to have lost something like $200 million over the past month.  There really only seems to be about 4 big customers, and there is a lot of “disguised” market maker to market maker trading going on.  This might be a stretch…(well it is a stretch but I’m going to go with it anyway), but it makes me think about all the “social networking” and concepts like Groupon and Open Table.  The connection that I make is that these sites are a lot like local trades in the pit in that the “pie” isn’t getting bigger, the DISCOUNTS are.  Sort of like one advertiser picking the pocket of another.  While it feels like growth, just as Nasdaq in the late 1990’s did, only a few winners are likely to shake out…barriers to entry just don’t seem particularly high.  Is this another area that is simple driven by liquidity?

BELOW from Prudent Bear, citing Financial Times:

March 2 – Financial Times (Leslie Hook):  “As oil prices spiral higher amid turmoil in Libya, developing countries across Asia are taking evasive action, shoring up their strategic petroleum reserves against the risk of a prolonged supply shock. Their actions could propel crude even higher. The Philippines… announced… that it would require oil companies in the country to maintain 15 days of reserves, and refineries to keep enough oil to last for 30 days.  Manila’s move is the most visible sign yet of how Asian countries are seeking to improve their oil security… Analysts believe the political upheaval in the Middle East and north Africa is likely to encourage both China and India to accelerate their purchases of crude for strategic reserves… Unlike industrialised countries… China only recently began its strategic reserve programme, starting to fill reserves in 2006 and completing a 102m barrel build-out in ‘Phase One’ two years later.  The second phase of the programme will build a further 168m barrels… by the beginning of next year. When China finishes filling its reserve, which it is expected to do by 2020, it will hold about 500m barrels, equal to roughly three months of imports… China’s strategic stockpiling ‘is likely to be a feature of the global oil market not only this year but this decade’,

Posted on March 6, 2011 at 10:32 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply