April 14, 2019 – Weekly

Misallocation of credit is the topic of a short note of friend Keith Weiner, founder and CEO of Monetary Metals.  A link to the note is at bottom, from which I have copied a graph, below.

This chart shows that nearly 40% of Russell 2000 companies are not profitable even as earnings estimates increase.  There’s another chart which highlights Keith’s main point: the decreasing marginal utility of debt.  That is, increases in debt levels for Russell 2000 companies are generating lower growth levels in earnings.  A dollar in increased debt buys smaller and smaller amounts of increased earnings/growth.

This phenomenon is evident with China’s data released Friday.  The US equity market cheered China’s stimulus, which was reflected in a huge increase in credit.  China’s Aggregate Financing grew 80% yoy in the month of March.  On a quarterly basis (Jan/Feb/March) the yoy growth was 40%!  This data was much stronger than expected.  There comes a time when more debt simply doesn’t address structural issues.  In any case, the ten year yield in China has responded. From a low of 3.07% at the end of March, it ended the week over 3.35%, a gain of more than ¼%.  Since the start of Q3 last year, US, German and Japanese bond yields have been in downward sloping channels.  While China has broken out to the upside, downward trends are still intact in other bond markets (for now).  One other bit of news out of China concerns imports, which were much weaker than expected at -7.6% yoy, the lowest since 2016, and a sign of sluggish consumer demand. 

Another chart which circles back to the idea of misallocation of capital is displayed below from The Daily Shot, which shows that the 5 year yield in Greece has fallen below that of the US.  No further comment.

Last week I mentioned the staggering amount of new money-losing IPOs, with LYFT as the poster child. LYFT has now fallen to 59.90 from an IPO price of 72, and is down by nearly 1/3rd from the high price of 88.60.   

The question is whether high and increasing debt levels, driven in large part by government, are going to spur sustainable growth.  For now, US bond markets don’t appear to be buying into that thesis.  Sure, rates increased across the US curve by 5 to 7 bps this week and by 12 to 15 over the past two weeks, but that’s in the context of SPX and Nasdaq being with a couple percent of taking out last year’s highs.   

From Hoisington’s Q2 review, “Federal debt accelerations ultimately lead to lower, not higher, interest rates.  Debt-funded traditional fiscal stimulus is extremely fleeting when debt levels are already inordinately high.  Thus, additional and large deficits provide only transitory gains in economic activity, which are quickly followed by weaker business conditions.  With slower economic growth and inflation, long term rates inevitably fall.”

An interesting article from the NY Times was brought to my attention: (thanks BCC)  ‘What the Rest of the World Can Learn from the Australian Economic Miracle’.  28 years without a recession!  The author identifies reasons:  good luck, good policy choices and regulations, the growth of China.  “Yet, instead of giddy enthusiasm, what I found in Sydney was a pervasive sense of caution and wariness – and not just involving real estate, though housing does loom large in discussions about the economy.”   What is stunning is that nowhere in the article does the author mention the huge household debt to GDP data.  It’s a glaring omission.  According to various articles. Aussie household debt to GDP has grown to between 122-129% of GDP currently, from 105-110% in 2006.  By way of comparison, it’s about 77% in the US, having peaked around 100% just before the crisis.  Well sure, there’s a pervasive sense of caution when one is saddled with large amounts of debt.  And now housing prices have begun falling.  From January another article mentions: “Household debt [in Australia] towards the end of 2018 was equivalent to 127% of GDP, or 189% of disposable income.  Both of these ratios are near record highs and very high on any global comparison.”  (links below)

Misallocation of capital has been incentivized by governments and central banks.  It continues until it falls under its own weight.  Vice President Pence was the latest to add another couple of straws in an interview with CNBC’s Joe Kernen on Friday.  Paraphrasing, Kernan asked, “if the economy is so great then why is the administration pressuring the Fed to cut rates back to emergency levels?’  Pence responded, “Because there’s no inflation.” Great.


As TYM9 traded around 123-04 Friday, there was a (new) buyer of about 75k TYK 123c, and seller of nearly 100k 124c.  The call spread was legged for 20 to 21, and settled 19 vs 123-03.  May options expire in two weeks, 26-April.  Though it was a weak close across the curve in interest rate futures, further downside is likely limited. 

Odds of a Fed ease are being squeezed out of the market for 2019.  In late March FFF0 had settled at high as 9791.0, more than 30 bps lower in yield than the current Fed Effective, that is, more than one ease.  On Friday, FFF0 settled 9972, essentially pricing 50/50 for an ease this year.  While near term odds of an ease fell, the near one-year Eurodollar spreads still remain around -25 bps.  EDZ9/EDZ0 is the lowest, settling exactly at -25, having been -27 the previous week. 

Shortened week as US markets are closed for Good Friday.  Beware of illiquidity as the week progresses.  

4/05/2019  04/12/2019  
UST 2Y 234.1 239.3 5.2
UST 5Y 231.2 237.5 6.3
UST 10Y 250.1 255.8 5.7
UST 30Y 290.9 297.2 6.3
GERM 2Y -56.8 -55.9 0.9
GERM 10Y 0.6 5.5 4.9
JPN 30Y 54.5 51.6 -2.9
EURO$ Z9/Z0 -27.0 -25.0 2.0
EURO$ Z0/Z1 -1.0 -2.5 -1.5
EUR 112.18 113.01 0.83
CRUDE (1st cont) 63.08 63.89 0.81
SPX 2892.74 2907.41 14.67
VIX 12.82 12.01 -0.81



Posted on April 14, 2019 at 12:21 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Coherent Arguments (and credit acceleration)

April 12, 2019

–It’s off to the races this morning with a new high in ESM above 2900.  WTI crude has likewise erased a large part of yesterday’s decline, now +87 at 64.45, but not quite at a new high.  Apparently better than expected China export data and strong credit growth is contributing to the euphoria.  According to Bloomberg, China’s broad M2 growth was 8.6% and Aggregate Financing was 2.86T yuan vs expectations of 1.85T.  Global stimulus.

–However, gold has only recouped about 1/3rd of yesterday’s $18 drubbing (GCM9 trading 1296 late).  BCOM (BBG Commodity Index) had spent a couple of days above the 200 dma, but fell well below it yesterday.  Implied vol in rates was pounded as the world embraced a theme that Kudlow vocalized. “Rates may never rise again in my lifetime.”   With 43 days until expiration the atm TYM9 straddle settled 1’04, less than 14 bps.  USM9 148^ settled 2’18, more like 12.5 bps. 

–There was an interesting quote from Brainard from an interview yesterday, “FOMC listens to fact-based, coherent arguments.”  I assume, though I didn’t see the interview, that she was referring to things like MMT and the gold standard.  In any case, here’s a couple of arguments from the latest Q2 2019 Hoisington Review:

“Federal debt accelerations ultimately lead to lower, not higher, interest rates. Debt-funded traditional fiscal stimulus is extremely fleeting when debt levels are already inordinately high. Thus, additional and large deficits provide only transitory gains in economic activity, which are quickly followed by weaker business conditions. With slower economic growth and inflation, long-term rates inevitably fall.”

“The 2018 pattern is consistent with econometric studies that show that large increases in government debt boost the economic growth rate for a few quarters, but the overall effect is negative by the end of three years.”

–Earnings reports today from JPM and PNC Financial pre-open, with Wells announcing at end of day.

Posted on April 12, 2019 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


April 11, 2019

Below is chart of 30y vol… 5 year lows.  0EU 9775 straddle settled 32 yesterday and is 30/30.5 now.  The central banks won.  “War’s over man.  Wormer dropped the big one.”

Posted on April 11, 2019 at 11:39 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


April 11, 2019

–Trading in rate futures remains lackluster, despite several pieces of news yesterday.  Draghi set the tone early, saying there will be no rate increases through the rest of 2019 (at least).  Euribor futures responded with a solid rally, with the green pack settling +5.0.  ERZ9/ERZ0 closed at 8 bps, just above the low settle from March 27 which was 7.5.  In dollars, EDZ9/EDZ0 settled -30.0, down 2.5 on the day.  

–Libor/ois spreads as reflected through ED vs FF also remain compressed and trending lower.  For example, EDM9/FFN9 settled 18.0 and EDU9/FFV9 19.5.  Both of these actually settled +0.5 on the day, but BAML looking for the spread to further narrow to 15 as t-bill supply dwindles in the short term.

–CPI Core yoy was 2.0%, slightly weaker than expected.  Fed minutes provided no drama.  The ten year note fell 1.8 bps on the day to close 2.479%. 

–Today’s news includes PPI expected +0.3 with Core +0.2, and yoy Core 2.4.–LYFT fell over 7% to 60.12, erasing over 10% of its value; down 16% from the IPO price.  UBER next up to bat.   Taking the investing public for a ride.

Posted on April 11, 2019 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Policy making for disaster

April 10, 2019

–Ten year yield slipped back under 2.5%, down 2 bps to 2.497 with an auction today, followed by 30’s tomorrow.  Today’s news includes the ECB meeting, CPI and the Fed minutes.  CPI expected +0.4 with Core +0.2 and yoy Core 2.1%.  Stocks encountered profit taking yesterday.  AAPL finally had a down day after closing higher 9 days straight; it’s now just a shade above the 61.8% retracement from the high in the beginning of October 233.47 to the low in early Jan at 142, which is 198.53.  The rally has taken nearly the same amount of time as the sell off.  Nasdaq has retraced nearly the entire sell off.

–Regarding the Fed minutes. we already know that policy is now ‘patient’ and that the market leans toward easing as the next move.   

–Fed Vice Chair Clarida gave a speech yesterday evening about the Fed’s efforts to review policy tools and communication.  Once again he bemoaned the low neutral rate, which is expected to persist, as a complicating factor making it more likely to revisit the Effective Lower Bound in downturns, which in turn makes the Fed’s job more difficult.  He then posed three questions: 1) Should the Fed employ ‘make-up’ policies for previous inflation shortfalls? 2) Are existing policies adequate or should the toolkit be expanded? 3) How can the Fed’s communication policy be improved?  Ironically, this speech, which is about communication, perpetuates downside risks and the Fed’s seeming inability to combat them.  The old adage is, when you find yourself in a hole, stop digging. Perhaps the key is less hand-wringing communication and more confidence. 

–Yesterday, a large euro$ market maker put out a note about extreme call skew.  As an example, with EDZ9 9751.5, the nearly equidistant 9800 calls settled 3.5s and 9700 puts at 0.5.  The same is true in midcurves.  EDZ9/EDZ0 settled at -27.5 (already indicating an ease).  EDZ0 settled 9779, near the peak price on the ED curve.  On the call side, 9825c settled 9.0 and 9837c at 7.0, while 9725 puts settled just 2.75.  This pricing is a reflection of underlying concerns in Clarida’s speech:  There is no fear of the downside, and moves to counter economic weakness may have to be significant.

Posted on April 10, 2019 at 9:45 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Fed ease odds pared back

April 9, 2019

–Yields edged slightly higher on light volume Monday with tens +1.6 bps to 2.517%.  Reds were weakest on the dollar curve, closing -2.0 on the day.  Chances for a Fed cut this year have fallen, with FFF0 now 9775.5 (-1.5), indicating around 60% odds.  Aug/Oct FF spread, which isolates the September FOMC, had been as low as -9.5 a week and a half ago, but settled -4.0 yesterday.  The first three euro$ one-year calendar spreads are all around -25  (lowest is EDZ9/EDZ0 at -26), so the gradual easing bias is still intact.

–News today includes NFIB small business optimism, JOLTS and the 3-year auction.  Clarida is slated to speak on Monetary Policy and Communication Practices, but not until 6:45pm.  Tomorrow features much more news, including the CPI report, 10y auction and FOMC minutes.

–Crude oil again making new highs due to supply concerns related to Libya.  CLK now around 64.70, having retraced about 2/3rds of the drop of Q4.  Currencies seeing a modest bear market bounce and gold tenuously holding above 1300.  

Posted on April 9, 2019 at 5:09 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

You know how it is

April 7, 2019 – Weekly Comment

Dan Milner: Well, you see how it is: fools get away with the impossible.

Lenore Brent: That’s because they’re the only ones who try it.

That’s a bit of dialogue from the 1951 film noir, His Kind of Woman starring Robert Mitchum and Jane Russell.  The plot is summarized as follows:  “In a desperate attempt to get out of debt, career gambler Dan Milner (Robert Mitchum) agrees to rendezvous with a mysterious contact at a distant Mexican resort in exchange for $50,000.

It sort of touches upon all the current flashpoints.  Desperate authorities trying to address unsustainable debts by doubling down.  Gambling on mysterious theories.  Closing down the Mexican border.   

We often use that little saying around the desk. “You know how it is…”  Like this: “You know how it is, the central banks supply additional liquidity and stocks make new highs.”  (Not so fast, financial shares). 

I was so desperate to come up with something to write about this weekend that I actually was going to lead off with the Live Hog/Live Cattle spread which I learned about from DK on Friday.  And while it’s interesting that Hog prices are converging toward that of Cattle as the African Swine Fever outbreak in China has driven up prices for the former. I couldn’t really do the topic justice except to note the logical reason for the move. But there are some spread divergences that perhaps have a larger macroeconomic theme.  For example, here’s a chart of Nasdaq and the KBW Bank Index over the past two years.  KBWB is comprised of large national US money centers, and regional banks and thrifts.  JPM, BAC and WFC are nearly 25% of the index.  Up until the March 2018 Fed hike, the performance of the two were similar, but the flattening curve weighed on KBWB. 

Nasdaq in black/ KBW Bank Index in gold

A lot of charts indicate the same thing, whether looking at SPX vs financials or SPX vs small caps.  Is this move into the safety of large caps a possible warning sign?  It’s worth mentioning that earnings season will be kicking off with some of the big banks reporting. On Friday, JPM and WFC release results, with the following Monday and Tuesday seeing reports from C, GS and BAC, MS.  But perhaps there’s nothing to be concerned about at all with respect to liquidity.  Consider the following:

“In 2018, a remarkable 83% of IPOs were of companies that did not turn a profit compared to 81% at the height of the dot.com mania in 2000.   This is a stupendous achievement considering that in the 1999-2000 IPO era, the craze for shares of money-losing companies was such an affront to the idea of an efficiently operating market that it quickly entered the history books as a once-in-a-lifetime event.”

I saw the above quote cited as being from The Elliott Wave Financial Forecast.  I didn’t research its accuracy, but with the IPO of Lyft, we’re back to fools doing the impossible:  selling the public a money losing enterprise pinned on the hopes of larger scale and better logistical applications leading to eventual profit.  I’m going to go out on a limb and say that Fed Ex is pretty good at transportation logistics.  And that’s down 29% from its 52 week high.  Or look at Expeditors Intl, also in transportation services.  EXPD has a market cap of about $14 billion and makes money.  Lyft has a market cap of $21 billion.

This is the environment we face as Trump tries to pack the Fed and juice the economy and stocks.  Fools getting away with the impossible?  Here’s a quote from new Fed nominee Herman Cain as he ran for president in 2011.  “A poet once said, ‘Life can be a challenge, life can seem impossible, but it’s never easy when there’s so much on the line.”  That poet was disco queen Donna Summer, the quote having been lifted from the song featured in the Pokeman movie of the year 2000.  Let’s get this Fed party started!  Maybe it’s all going to work out fine and lead to solid wage growth that lessens income inequality.  You know how it is.

On the other hand, I keep having the sense that a pervasive wave of deflation is again going to descend on the global economy as USD strengthens. What if the hyped trade deal with China resolves in China slowly weakening its currency?  In 2014 Japan unleashed yen depreciation as part of its three arrows.  In Q3 2014 $/yen was 102, and by the middle of 2015 it was over 125.   Eventually, China had to respond and devalued in August of 2015.  From mid 2014 to the end of 2015 crude oil went from over 100 to below 30.  The dollar index DXY went from 80 to over 100 by Q1 2015, and then bounced around between 93 and 105 for a year.  In the middle of 2016 most major bond markets made their low yields. In 2015 of course, we had the plunge in oil and emerging markets.  A deflationary wave that was partially spurred by USD strength.

Now DXY is 97.40 and appears likely to re-visit 100 as Europe wallows.  The quesiton is, how do we know when the “authorities” who are somberly trying to hold it all together pull the plug?  In early 2015, it was the Swiss National Bank that abruptly dropped the EURCHF peg.  Then China.  Right now, it’s the Hong Kong dollar that is having a peg tested.  Through the middle two quarters of 2018 and now again, HKD is pinning 7.85.  China has had CNY strengthen against USD since late last year.  Gold has attempted to get through 1350/1370 at least once a year since 2016, most recently in February at 1345, but can’t seem to confirm an inflationary impulse, now having fallen back to 1290. What if the China deal is sealed and HKD breaks through 7.85 shortly thereafter?

The administration is trying to jawbone a Fed ease.  Kudlow is out there uncomfortably pressuring the Fed to cut.  But before long, mark my words, it is going to be Mnuchin’s turn to talk down the dollar. This will occur shortly after the US/China deal is signed.  And he will do it despite the hypocrisy of having admonished China to keep their currency stable, which, by the way, has been done, especially against the price of gold.  Mnuchin will single out Japan and Europe as $/yen exceeds 115 and EUR breaks below 1.10, and will once again hint that a weaker USD is good for global trade.  Trump says the China deal could be completed in four weeks.  Just in time for the “sell in May and go away’ adage.        


EDH21, M21 and U21 are the highest points (lowest yields) on the euro$ curve, having all settled 9780.5, approximately 40 bps lower in yield than the current libor setting.  I suppose if we’re using the curve as a guidepost for when recession will strike, 2021 is the wager.  However, near term eases are being priced in Fed Funds, with FFF20 settling at 9777.0 which is 3/16% lower in yield than the current Fed Effective of 2.41%.  In terms of a timing forecast, the market is pegging either the Sept or Dec FOMC with the highest odds of an ease.  The May/July FF spread is only -2.5, giving a one-in-ten shot for an ease in June.  July/Aug settled -1.5, indicating little chance of an ease at the Aug 1 FOMC.  But Aug/October settled -5.5 and November/January at -6.0. (Oct/Nov also settled -1.5, with a meeting on Oct 30th). 

Tens and bonds both rose about 9 bps on the week with supply coming Tuesday thru Thursday of 3, 10 and 30 year paper totaling $78 billion.  Maturing amounts are very close to that amount, so the auctions should roll very easily. 

3/29/2019  4/5/2019  
UST 2Y 227.0 234.1 7.1
UST 5Y 223.8 231.2 7.4
UST 10Y 241.2 250.1 8.9
UST 30Y 282.0 290.9 8.9
GERM 2Y -60.3 -56.8 3.5
GERM 10Y -7.0 0.6 7.6
JPN 30Y 49.9 54.5 4.6
EURO$ Z9/Z0 -28.5 -27.0 1.5
EURO$ Z0/Z1 1.0 -1.0 -2.0
EUR 112.19 112.18 -0.01
CRUDE (1st cont) 60.14 63.08 2.94
SPX 2834.40 2892.74 58.34
VIX 13.71 12.82 -0.89
Posted on April 7, 2019 at 2:22 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

About fair

April 5, 2019

–Employment day with payroll growth expected 180k, a bounce from last month’s paltry 20k gain.  Little net change in prices yesterday, though Art Main summarizes option activity as follows: “We continue to see participants roll upside out in time and up in strike in front contracts.”  For example, there was a buyer yesterday of 30k EDM0 9800/9825 call spreads for 5.5 vs a sale of 20k EDU9 9750 calls at 7.0.  

–In reviewing levels across the curve, things look fairly priced.  The first three one-year euro$ calendars are -25 to -25.5, so around 1/4% easing priced for any given year.  EDM9/EDU9 settled -6.0, and August/Oct Fed Funds spread (which prices odds of a Sept ease) settled -6.5, both indicating about a 25% chance of a cut in fall.  June midcurve atm straddles are between 20 and 23.5 bps with a bit over 2 months to go, probably about right if not a bit on the high side given the bias towards an ease already priced in the calendars.  The bund yield is gravitating around zero, leaving further adjustments in the hands of the weakening euro.  Strength in the dollar index keeps a deflationary pall over the market, and while USD is one signal of tight financial conditions, declining forward interest rates, tight corporate spreads and levitating equities argue the other way.   The on again/off again trade deal with China is drawing closer to resolution. 

Posted on April 5, 2019 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Europe in reverse

April 4, 2019

–Yields rose yesterday with tens up 3.7 to 2.515% and 30-yr bonds marching back towards 3%, up 4.2 on the day to 2.927%.  However, US data yesterday was on the weak side with ADP at just 129k and Service ISM 56.1 vs an expected 58.  This morning German Factory orders for Feb came out at -4.2%, -8.4% yoy.  Italy is reportedly slashing its 2019 growth forecast from 1% to 0.1%.  The bund has now slipped back to a negative yield.

–New buyer yesterday of 40k EDZ9 9850c for 1.0.  These are 98 bps out of the money.  On the downside EDZ9 9712.5p also settled 1.0. 39.5 out of the money.  If things go bad, there’s a chance they go really, REALLY bad.  But if things go good, the Fed has effectively been handcuffed in terms of tightening.  Thanks President Trump, we’ll do your bidding in stocks on that.

–On March 5, before stocks sold off into the middle of the month, the atm red June midcurve atm straddle ( 0EM 9737^) settled 23.0 bps.  With one month having elapsed, the current 0EM atm straddle is  the 9775 strike, which settled 24.5.  Apparently, some perceptions of risk have increased, even as SPX is up around 75 points from March 5, and VIX was 14.8 in early March, and is now 13.8.  

Posted on April 4, 2019 at 5:49 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

New life for bitcoin as EUR looks dodgy

April 2 2019

–Yields rose yesterday as economic data on balance was stronger than expected, starting with China’s Mfg PMI.  US Retail Sales were weak at 0.2 with Core -0.6.  However, ISM Mfg was better than expected at 55.3.  The narrative of a seasonally weak Q1 followed by a rebound seems to have taken hold (though last year it was helped by the tax package and inventory hoarding in front of tariff fears, and this year it’s difficult to see the same sort of catalyst). In any case, reds through golds on the eurodollar strip more or less had a parallel shift lower of 7 to 8.5 bps.  The ten year note also jumped 8.2 bps to 2.494%, almost a test of the original Jan 3 spike low at 2.52%.

–The first three one-year eurodollar calendars are now clustered at – 1/4%, at -26, -25 and -24.  Fed fund spreads show a bit less enthusiasm for near term eases, but are content to price one ease this year. There was notable buying yesterday of USM puts, with the 144 and 143 strike bought in size of about 20k each (open int fell 10k in both).  Early prices in the 144’s were 10 to 13 above 149-05; late in the day the market was 16/17 with the contract a point lower.  There was also a new buyer of 40k USM 132 put for 2, which was 2 bid late.  

–This morning bitcoin is back in the news having surged over $5000 before falling back.  I guess some people would rather be in bitcoin than euro, which is back near the lows, just above 1.12.  A natural beneficiary should be gold, which is dead in the water at present.  Oil on the other hand, continues to make new highs with CLK above $62/bbl this morning.–Data this morning includes Durables expected -1.8% with Core Capital Goods Orders expected +0.1.   

–With nearly all eurodollar midcurve straddles at the 9775 strike, it’s interesting to note that reds have the highest nominal straddle prices.  Short red to green straddle spreads had been trading with greens over; that has recently flipped.  Perhaps a sign of greater near term volatility in general.  

Posted on April 2, 2019 at 5:20 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options