Oct 26. Skepticism and risk returning

–Amazon was down 4% yesterday, but fell another 10% after hours on a disappointing earnings report.  This market has blithely accommodated higher prices, but skepticism comes back with a vengeance on negative news.  One drop of wax and highfliers have crashed to earth like Icarus. NFLX -75% in 3 months.  GMCR -44% in a month.  As agreement for a european solution looks increasingly elusive, jarring volatility may ensue on a larger scale. (A small example was yesterday’s reaction to news that today’s finance meeting had been cancelled; stocks sank and bonds soared). Yesterday’s plunge in consumer confidence to 39.8 (nearing crisis levels) is indicative of fragility.  Germany doesn’t want the ECB used as an open ended backstop.  Plans for a Special Investment Vehicle (SIV) appear shaky, with Brazil already saying it’s not interested. (Reuters) The SPIV would be open to private capital, sovereign wealth funds and the IMF to add their funds, according to the proposal seen by Reuters….. A third official said the IMF was ready to set up an administrative account for the EFSF with the Washington-based international institution. IMF shareholders and possibly sovereign wealth funds could put money into the account to help the euro zone.

–More tangible evidence of weakness: Iron ore with 62-percent iron content fell 7.2 percent to $128.50 a tonne on Tuesday, according to Platts.  (Had been between 165 and 180 this calendar year).  Slowing demand from China is to blame.  I guess the move in US Steel (X) from 64 in Feb to 22.50 now is also telling. 
–(Reuters) Obama plans to accelerate a plan to cap student loan payments at 10 percent of income, bringing it forward to start in 2012 instead of 2014. I don’t know if that’s going to lock up the student vote, but it did bring down Sallie Mae stock (SLM) 13% yesterday.

–In eurodollars, calendar spreads compressed, for example EDU12/EDU13 fell to a new recent low of 14 bps, down 5.5 on the day.  Red/gold pack spread had been on a fairly steady climb for the last month from 180 to Monday’s level of 209.6; it fell nearly 10 yesterday to 200.  2/10 fell from 195 to 188. 
–Tens had appeared to be in a long bear flag, which was shattered to the upside yesterday.  Yield fell from 223 to 213.  There are likely some significant shorts caught here…
–Today’s US news includes Durables, expected -1.0% and New Home Sales.  (By the way, for three years, the US has tried to stop the downward trajectory of the housing market, and it is just now perhaps stabilizing.  How can europe fix its financial problems in a few months?)  Five year auction this afternoon.

Posted on October 26, 2011 at 7:06 am by alexmanzara · Permalink
In: Eurodollar Options

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