Jan 21. The IBM financial model for Central Banks….

Note: changes referenced are Friday to Tuesday close.  Curve flattened as the ten year yield edged down 1 bp to 180, and 30 yr bond fell 4.4 bps to 239.3.  2/10 treasury spread made a new low just below 132 bps.  5/30 fell 5 bps to 110.5 (down to 109 after floor close) but is still holding above the recent low of 103.  Shorter maturities were under pressure, as the Fed continues to stubbornly insist (through Hilsenrath) that rate hikes will still occur this year, even as the dollar soars to new highs and essentially does the heavy lifting of tighter policy.  The only one who’s going to look foolish is Hilsenrath, but I guess that’s the price of central bank “access”.  The same access is afforded to news anchors who lunched with the President prior to the SOTU.  And if you weren’t already convinced that the state of modern journalism is deplorable, the SUN ended PAGE 3! It’s no wonder the world’s going to hell in a bucket.
–As futures floated around during Tuesday’s session, there was consistent premium selling.  Late Friday straddles were strongly bid.  For example, FVH 120.75 straddle settled 1’17 Friday, was sold early at 1’14 (open interest increased, so appears to be new positions) and settled at 1’12.  TYH 130^ went from 2’11 Friday to 2’01 yesterday.  In contrast I would say that green and blue March midcurves held up very well, with Blue March 9800^ only losing 0.5 bp to close 37.0 yesterday.  Lower option prices are somewhat surprising given increased tensions in Ukraine and elsewhere, along with uncertainty in front of the ECB meeting tomorrow.  Additionally, liquidity across markets appears to have lessened, providing scalping opportunities.
–One quick note on Crude Oil.  The one year spread between CLH’15 and CLH’16 appears to have bottomed, having gotten to -869 early in the month and now around -773.  The discount appears to have been fairly extreme given an underlying price around $47.  I don’t know what the storage costs for oil are, but a discount of 15-17% for front month oil in a world of negative yields seems pretty compelling and perhaps the stabilization of the spreads suggests that downside is limited in near contracts.
–One last thought.  About a year ago Stanley Druckenmiller cited IBM as the poster child of financial engineering due to share buybacks and increased debt to make earnings look good.  IBM reported results yesterday and Q4 revenues were down 12% yoy. however, EPS only fell 4% yoy.  it appears as if the lack of organic growth combined with increased debt (even though buybacks have diminished), have caught up with the company, as the stock has fallen from 195 in October to 155 now (-20%).  I suppose that it’s simply company specific, but I can’t help but think of the comparison with Central Banks, who encourage debt and increased balance sheets with QE, trying to hold up the appearance of a vibrant underlying economy.  The BoJ appears to have overshot the runway, yet the ECB is desperately trying to grab the baton…

Posted on January 21, 2015 at 5:29 am by alexmanzara · Permalink
In: Eurodollar Options

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