Dec 11. Time to hide

–This morning oil is making new lows, China’s yuan is at a new low 6.4552, Canada dollar at a new low.  Junk bond funds continue to crash, Brazil is sliding into junk territory.  Massive mine layoffs.  Thank goodness we can hide our money in Amazon stock, with its p/e of 959.  (No one will ever notice us hiding here…)
–Today brings Retail Sales expected +0.3 across the board, and PPI, expected 0.0 and +0.1 core.
–Yesterday’s trade featured buying of puts up front, for example EDF 9925 puts bought for 1.0 (appears to be unwind related to 95/93/92 put flies) and there was a new buyer of 30k EDU6 9875 puts for 5.0.  Curve was steeper as red/gold pack spread closed 104.375, up 4.75.
–One thing that I mentioned yesterday deserves more attention today.  I saw a note citing DB saying that corporate debt is at a % of GDP (42-44%) where previous credit default cycles kicked in.  So the Fed’s flow of funds report came out yesterday.  In this report Business debt is broken down into two categories, Corporate and Total.  As of Q3, Corp debt was 8046.7b against GDP of 18064.7, so a bit over 44%.  (This is the warning zone DB mentions).  But TOTAL business debt was 12621.4, or 70.0% (!!) of GDP.  I looked back at other times (approximately) when default cycles kicked in, the end of 1988 and end of 2007.  In 1988 GDP was 5412.7 and Corporate debt was 2263.0, or 42%.  Total business debt was 3405 or 63% (so total was less than now).  In 2007 GDP was 14685 and Corp was 6336 or 43%.  Total was 10112.4 or 69%.  One might argue that it’s no big deal now because rates are so much lower, but spillover from junk along with the rate hike and…there will be blood.
–The other thing to notice about the flow of funds is this.  First, American’s net worth declined by $1.2T on the quarter, the first drop in 4 yrs. The press always trumpets the fact that net worth is going up, but with the declines in US equities going into the end of Q3 it didn’t happen this time.  What I tend to focus on a bit more than net worth is growth rates of various sectors in the economy.  In fact, the past quarter showed a deceleration in several borrowing categories.  Total business went from 7.2% growth in Q1 to 8.4 in Q2 to just 4.7 in Q3.  State and local govt’s went from 3.0 in Q1 to 1.0 to 1.7% now.  Fed govt was -1.1 +2.4 and +0.2.  The strongest debt growth was in Consumer credit, 5.6% Q1 , 8.5 in Q2,  and now 7.2%, and we know that’s due to student loans and autos.  I’m going to slap the Make America Great Again sticker right on the back of this new F-150 (which I’ve financed for the next 7 years).

Posted on December 11, 2015 at 5:08 am by alexmanzara · Permalink
In: Eurodollar Options

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