Diligence
November 2, 2025 – Weekly Comment
*****************************************
The theme that kept striking me this week is due diligence. The Tricolor and First Brands bankruptcies seem like they could have been sidestepped if someone had just checked under the hood, so to speak. (See, that’s funny, because those businesses were related to autos, which used to have engines under the hood, but now just have delinquent debts and drained batteries). Below are a couple of notes that restore faith in diligence, but perhaps only at the fringe.
A BBG piece highlights Dominic Ball, a 26-yr-old analyst at Rothschild & Co Redburn, as the ‘Lone Bear on Fiserv’ (only analyst with a sell signal; stock dropped 44% last week, “wiping out some $30 billion in market capitalization.”) I watched an interview with this guy and he was low-key and thoughtful, and said the company he works with is great because they encourage analysts to do deep dives. “There was a big dichotomy between what was happening on the ground, when we speak to merchants and retailers, versus what the investor base thought was happening.” [said Ball]
Another example from X, noted by @HeroDividend:
There is a Wells Fargo analyst who ordered the same burrito bowl 75 times at eight different Chipotles in NYC to prove the portion size inconsistency $CMG [I’d like to think he did that on foot]
My favorite old report was the guy who would inspect corn fields in person, laying a half-shucked ear down on the ground next to a pack of Marlboros to display quality and size, documented with a photo, taken no doubt with a Kodak Instamatic.
Counter to these anecdotes is a new item on ZeroHedge: “The private-credit arm of BlackRock Inc. and other lenders are racing to recover hundreds of millions of dollars after falling victim to what they’ve described as a ‘breathtaking’ fraud – the latest sign of weakness in an opaque corner of the U.S. debt markets.” This story says Blackrock’s HPS Investment Partners wrote off $150 million after allegedly finding falsified collateral. Small potatoes, but the outlines are becoming a recurring theme…sniffing around on the ground versus reviewing the numbers from 30,000 feet. The problem – and we’re in it now at the highest levels – is that the guys in the jets ignore those that are seeing and hearing it with their own eyes and ears. It’s only ‘breathtaking’ when the unwind hits. Sort of mirrors ‘anecdotal vs hard’ data analysis.
On a Monetary Matters podcast (Jack Farley), Joseph Wang @FedGuy12 outlines issues related to the Fed’s balance sheet (summarized in his link below). He also mentions that commercial banks are increasingly cutting back direct C&I (Commercial and Industrial loans) and instead lending to shadow banks/private credit operations, who in turn directly lend to companies. I was surprised that he deemed this trend as less risky for the banking system, because unexpected losses would be a layer away from banks. I think that’s a questionable assumption, but only time will tell how it plays out as more private credit losses pile up due to ‘fraud’. One might think that AI could help quickly discover collateral that has been pledged to more than one lender. Then again, AI could also easily re-create false docs.
https://fedguy.com/balance-sheet-dominance/
In any case, the other theme of the week was the Fed meeting and implications for the balance sheet and markets. Joseph Wang’s piece suggests that massive deficits necessarily lead to the Fed not only ending QT (which it did) but again increasing its balance sheet. “A steady expansion of the Fed’s balance sheet is the most likely way to meet the growing financing demands of the Treasury.” This is likely to occur both through enlarged usage of its standing Repo facility and by buying t-bills. I’ve seen several commentators opine that t-bill purchases by the Fed aren’t really QE and are more of a cash management function.
The famous part of the Fed meeting last Wednesday is when Powell said a rate cute in December is “not a foregone conclusion”. (Curve immediately flattened as front-end easing bets were exited). But the other interesting note is that Powell said the Fed’s balance sheet should begin to resemble the Federal Government’s maturity profile, which means less Fed holdings at the long end and more in t-bills, bringing the Fed’s average weighted maturity closer to the outstanding stock of treasuries.
On the Market Huddle podcast, guest Marvin Barth said the Fed is moving towards a corridor system for reserve management, with the bounds essentially defined by the floor of the Reverse Repo facility rate, 3.75% as of Thursday, and the cap at the Standing Overnight Repo rate of 4.00%. Interest paid on reserve balances is now 3.90%. The Fed’s Discount Rate is 4%. As of Friday, the spread between SERX5 (Nov one-month SOFR) and FFX5 ended at the low of the move, -11.5 bps, from -4.5 bps in the beginning of September. Settles were 9600.5 and 9612.0. That is, the one-month SOFR contract is essentially at the upper bound, which indicates perception of tight reserves. There is no FOMC in November, and at 9612.0, the FF contract is 3.88% vs Fed Effective setting of 3.87% on Thursday. The actual SOFRRATE Thursday was 4.04%, a spread of 17 to EFFR.
Barth’s interview was quite enlightening, but one tidbit that I’ve tucked away is that he says the US 10/30 treasury spread is a good proxy for term premium (which he thinks should be going up). From February through August this spread was in an upward trend, 20 to 70 bps. Since Sept 2 it has generally fallen, now at 57 (4.10/4.67). I don’t have a particular bias on this trade, though I think spreads like 2/10 and 2/30 should be steepening, even though Powell is warning the easing cycle may be nearing its end. I look at a couple of market signals below, but I just want to return for a second to the upcoming ‘QE or NOT QE’ question.
My initial thought regarding a resumption of QE was that when it was originally implemented, the market reaction, (paradoxically) was that bond rates tended to go UP, not down, but STOCKS went up. So, if QE is around the corner, it might not be particularly beneficial in terms of lowering bond and mortgage rates. However, if it’s just t-bill purchases, (QE that’s NOT QE), perhaps bond weakness will be exacerbated, and perhaps stocks will see zero benefit. Clearly the market isn’t expecting much of a reaction at all: the MOVE (implied volatility index for treasuries) made a new low for the year this past week at 65.75 and ended Friday at 66.61. High in April was 140. VIX firmed slightly on the week from 16.37 to 17.44 even as SPX rose marginally.
In terms of a terminal rate for Fed Funds, I have noted several times that the Red SOFR pack (second year forward, average price) seems to have a hard time getting through 9700 or 3% (blue line) throughout the tightening and easing cycles. I’ve also observed that the 10y yield has seemed to gravitate to the Fed Effective rate over the past several months. My conclusion was that reds would see a shift up towards 9750 as perceptions of a rate cut cycle remained intact, and that the 10y would move to 3.85-3.88%. I am still holding onto that thesis, though market signals since Wednesday’s FOMC are less encouraging. Below is a chart of the red pack YIELD and the FF midpt.
Could we be getting closer to the terminal rate, which appears from the red pack to be around 3%? The current FF midpoint is 3.875% and the red pack settled 96.87625 or around 3.125%.
Though there were a lot of exit trades Thursday and Friday as Powell poured cold water on future cuts (with Logan saying she would have preferred, like Schmid, no cut), there was a new buyer of about 80k 0QZ5 9700/9725 call spreads for 4.0 to 5.0 bps. 0QZ options have SFRZ6 as underlying, 9688s, and expire into the contract on 12-December 2025, six weeks from now. Call spread settled 4.75 (7.0/2.25). While renewed expectations of an ease in December would be a tailwind for the trade, the main driver should be perceptions of forward easing, which could be encouraged by weaker employment data and/or more credit problems.
| 10/24/2025 | 10/31/2025 | chg | ||
| UST 2Y | 347.5 | 360.6 | 13.1 | |
| UST 5Y | 360.7 | 371.5 | 10.8 | |
| UST 10Y | 400.1 | 409.9 | 9.8 | |
| UST 30Y | 458.8 | 466.9 | 8.1 | |
| GERM 2Y | 196.6 | 196.5 | -0.1 | |
| GERM 10Y | 262.5 | 263.2 | 0.7 | |
| JPN 20Y | 259.4 | 259.2 | -0.2 | |
| CHINA 10Y | 184.5 | 179.3 | -5.2 | |
| SOFR Z5/Z6 | -64.5 | -65.5 | -1.0 | |
| SOFR Z6/Z7 | 11.0 | 7.5 | -3.5 | |
| SOFR Z7/Z8 | 20.0 | 19.0 | -1.0 | |
| EUR | 116.27 | 115.37 | -0.90 | |
| CRUDE (CLZ5) | 61.50 | 60.98 | -0.52 | |
| SPX | 6791.69 | 6840.20 | 48.51 | 0.7% |
| VIX | 16.37 | 17.44 | 1.07 | |
| MOVE | 68.94 | 66.61 | -2.33 | |
https://www.federalreserve.gov/newsevents/pressreleases/monetary20251029a1.htm
