Nov 27. China down 5.5%, black Friday mark-downs

–Dull session on Wednesday, volume was light.  Slight new low in 2/10 at 130 bps, with twos unch and tens -1.
–This morning China stocks are -5.5%, contributing to a pullback in US index futures, and supporting a grudging bid in treasuries.  Crude under pressure, with CLF near $42/bbl.

–Skimmed a few articles yesterday.  One was about the ex-CEO of Barclays saying that headcount in the big banks may need to be slashed by 50%.
http://www.businessinsider.com/ex-barclays-boss-anthony-jenkins-on-fintech-and-bankings-uber-moment-2015-11
Not surprisingly this prediction is based on new financial technology: payment systems, new start-ups for lending, technology systems for ‘wealth management’, and on regulatory burden.  Additionally mentioned is the fact that new start-ups require much less initial funding than previously (a thought that has also been articulated by Marc Andreessen).  Also noted is that financial professionals that have already been axed have valuable experience in the field and abet the rise of new competitors.  There’s nothing particularly earth-shattering about these projections, except that [cost] barriers to entry have declined across the globe.  (I would note that financials comprise 16.2% of the S&P 500, with only Info Tech higher at 20.8%).
–The other was an article on Bloomberg about the debts coming due for Puerto Rico, and the various underlying bonds.
http://www.bloomberg.com/news/articles/2015-11-25/puerto-rico-s-dec-1-deadline-a-guide-as-possible-defaults-loom
It looks like a lot of payments are coming due in the next three months.  Obviously PR is close to default.  What I thought was interesting is that the actual upcoming payments indicate an interest rate of about 5%, while actual market rates as quoted in the article are 9.2% to 10%, and in some cases much higher.  Clearly unsustainable.
–Which brings out to the tie-up.  Central banks have engaged in QE, encouraging risk taking, forcing yields down to justify unsustainable projects both public and private.  When yields float back up, cracks appear.  At the same time, the most nimble of the private sector needs less capital because of technology and therefore invites even more disruptive competition, driving down prices.  Companies like old-line banks become much less relevant, and regulatory burden is relatively high.  At the same time, their emphasis on ‘wealth management’ pretty much goes out the window in a new world of 2-3% yields (on the high end).  Now too much capital is chasing too little opportunity.

–QE creates its own trap.

Posted on November 27, 2015 at 5:12 am by alexmanzara · Permalink
In: Eurodollar Options

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