Oct 14. Black swans and fluttering red flags

–SPX down to 1400 by the end of the year?  That would be a ‘black swan’ event.  That’s so unlikely it would be like the Cubs going to the World Series.  That would be like Playboy no longer showing naked women.  Inconceivable!
–If there is one thing becoming clear to me it’s that US equity markets are extremely vulnerable barring extraordinary liquidity measures.  Yesterday, the WSJ ran a piece noting “Cracks Emerge in the Bond Mkt” noting that rating agencies are ‘downgrading more US companies than at any other time since the financial crisis, and measures of debt to cash play are rising.’  This dynamic has been building for some time, as is obvious from the Fed’s flow of funds report.  Corp debt is at a record (near $8T).  The growth rate of corp debt was 6.9% in 2014, and in the first two quarters of 2015 was 8.4 and 8.7%.  Sure, it makes sense to borrow when rates are low, but GDP has a much smaller relative growth rate…obviously the ratios are deteriorating.  And JPM just reported a revenue drop of 6.4% and warned about the next quarter.   Remember when Bear Stearns first announced problems with its mortgage backed funds?  It was a huge engraved invitation to be out of stocks.  However, after a bit of turbulence, stocks actually continued to ascend…for a while. Après… le deluge.  Now UBS is closing its High Yield Plus fund, on the heels of Fortress shuttering its macro fund.  FRAYING starts at the edges.
–If there were global signs of inflation picking up, or of a growth spurt, things might not be so worrying.  However, China consumer prices just came out at 1.6% vs expected 1.8% (in an economy of 6-7% growth), and India wholesale prices were down 4.5%, the 11th straight month of decline.  Inflation is muted everywhere.
–VIX settled yesterday at 17.67 and the Nov VIX future at 18.67.  I am inclined to buy relatively near VIX futures and sell deferred.  (thinking of Nov/Feb -1.10, but need to do a bit more work on this).
–In interest rates yesterday net changes were fairly small.  However, near one-year spreads continue to shrink, with EDH16/EDH17 at just 54 bps, -2.5 on the day.  There was a late buyer of 60k EDZ5 up to 9962 (open int -9k, appears exit).  There was also a buyer of 50k FFX up to 9985.5 and this contract, surprisingly, showed an increase in open interest of 44k.  New buyer at this level?  Must have been Lael.
–Today’s US news includes Retails Sales expected +0.2, ex-auto and gas +0.3.  PPI -0.2 with Core +0.1.  Business Inventories +0.1. And in the afternoon the Fed releases the Beige Book in preparation for the October FOMC.

Posted on October 14, 2015 at 5:13 am by alexmanzara · Permalink
In: Eurodollar Options

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