Nov 6. Underdog

You got no time for the messenger/ Got no regard for the thing that you don’t understand/You got no fear of the underdog/ That’s why you will not survive.  -Spoon

“Ireland’s class of 2016 stamped their names into the history books as Joe Schmidt’s side dispatched New Zealand 40-29 in Chicago for their first victory over the All Blacks in 111 years of trying. Three days after the Chicago Cubs ended a 108-year drought to land baseball’s World Series, Ireland lit up the city’s Soldier Field stadium with their maiden win over the All Blacks at the 29th attempt.”

Utah, a friend of mine, reveling in Ireland’s defeat of the All Blacks in rugby said, “It’s the year of the upset!  It’s the year of the longshot!!!”  Certainly it’s been an historic week in Chicago with the Cubs Series win and the outcome of the match noted above.  In a city usually cited for record murders, millions of people descended on the World Series parade route from Wrigley Field to Grant Park in Cubs blue, without incident.  Train stations were mobbed, people were caught in gargantuan crowds climbing statues and lightposts, but the city came shining through.

On the political front, we (finally!) face the US election.  Perhaps it’s not exactly the year of the underdog, but rather the year of the big middle finger, as shown by Brexit, and smaller examples like the Belgian region of Wallonia breaking the Canada-EU trade deal.  Early next month the Italian referendum looms.

Where does it leave the markets?  For one thing it means that trading survival depends on respecting the longshot and listening to the messenger (however muddled the clues might be).  There hasn’t been follow through in markets this year, and central banks are intent on attempting to blunt the effects of any and all outliers.  However, institutional powers are eroding.

I saw a bit of market commentary that said the markets gave us an indication this week of what a Trump win might do, as stocks eased lower and yields fell.  According to my unscientific polling, most observers expect stocks to initially fall on a Trump victory.  A Clinton win is viewed as ‘more of the same’.  Of course, by many measures stocks are more than fully valued and are vulnerable no matter who ends up in the White House.   However, this past week’s price action may have less to do with the election and a lot more to do with other factors.   One of the big movers on the week was crude oil, which plunged nearly 10%, and is down nearly 15% from the high in mid-October.  It was the hike last December and the plunge in oil prices which caused panic in high-yield and led to a drop in stocks (of over 10%) and rally in treasuries in the beginning of the year.  From Barrons this week citing Martin Fridson, “Junk bonds have suffered a sudden and alarming selloff in the past two weeks. The 1.8% drop in the BofA Merrill Lynch U.S. High Yield Index since Oct. 24 works out to a minus 46% annualized total return, one of the most dramatic price swings of the past 20 years.”

The other often cited risk is China.  Again from Barrons:

According to [DB chief internat’l economist] Slok, in 2015 it took more than $450 billion in bank credit to produce one percentage point of GDP growth in China. In the U.S., it took $350 billion to produce one percentage point of GDP growth at peak inefficiency in 2007. As recently as 2008, the amount of credit needed in China was less than half the 2015 number, before China amped up credit growth to levels never scaled by any major economy.

One of my themes has been that inflation data will start to accelerate due to yoy oil comps.  The sell off in crude over the past few weeks diminishes this factor.  I would note that in the odd market environment we find ourselves, two economically important commodities, oil and copper, are trading inversely; signals are crossed.  However, yield curve measures continue to steepen.  For example, 2/10 and 5/30 in treasuries, and reds/golds in euro$’s all closed near recent highs (99.3, 133 and 60.75).  On the Eurodollar curve, butterflies generally declined, that is, near calendar spreads compressed relative to deferred as the market accepts the Fed’s idea of  g r a d u a l  hikes with a rise in inflation toward target.  For example, Dec’16/Dec’17 ED one-year calendar fell 4.5 bps this week to only 15.0, while Dec’16/Dec’17 fell only 1 to 17.5, so that fly went from +1.0 to -2.5 this week.   The front Dec/March spread, EDZ6/EDH7 closed at just 2 bps, a new recent low.

The employment report on Friday was supportive of a hike in December, as Fed Vice Chair Fischer summarized that the economy is close to full employment and that the labor participation pick-up is partially driven by wage gains.  There was tremendous volume in EDZ6 on Friday of over 600k.  But again, the signals aren’t particularly clear as open interest in that contract only changed by -4500.  The first four ED contracts saw combined OI fall by 32k on Friday, but EDZ7, the 5^th quarterly, rose by nearly 29k.  The only obvious note is that some players are hedging bets for a December FOMC hike by buying calls and covering shorts in near contracts.

On the longer end, there was a new buyer of 70kTYZ 128 puts for 5 and 6/64’s.  This put has a ten delta, and settled 6 vs 130-08.  It’s about 25 bps out of the money, approx 2.04% on the current cash ten year.  Note that the treasury auctions 3’s, 10’s and 30’s this week.

My personal bias is that yield curves will continue to steepen, and that even if Trump wins, the Fed will hike in December unless stocks fall >10% from here.  I think there are low risk trades that can be entered for minimum premium outlay to express the idea that the Fed may be forced to be more aggressive in tightening next year than the market is currently pricing (call for ideas).

While this week’s focus is clearly the US election, shocks to the global system can come from many different directions, and risks globally appear to be growing.  The VIX surged to above 22 from just over 16 this week, even though the decline in SPX was a rather modest 2%.  Vol pullbacks across asset classes, should they occur, ought to be bought.

Finally, the mascot of the week.  UNDERDOG!

when in this world the headlines read,
of those whose hearts are filled with greed,
who rob and steal from those who need,
to right this wrong with blinding speed,
goes Underdog! Underdog! Underdog! Underdog!

_________________________________________________________________

	10/28/2016	11/4/2016	chg
UST 2Y	85.3	78.5	-6.8
UST 5Y	132.3	123.7	-8.6
UST 10Y	184.5	177.8	-6.7
UST 30Y	261.6	256.7	-4.9
GERM 2Y	-61.7	-63.7	-2.0
GERM 10Y	16.7	13.5	-3.2
EURO$ Z6/Z7	19.5	15.0	-4.5
EURO$ Z7/Z8	18.5	17.5	-1.0
EUR	109.87	111.41	1.54
CRUDE (1st cont)	48.70	44.07	-4.63
SPX	2126.41	2085.18	-41.23
VIX	16.19	22.51	6.32

_________________________________________________________________

Nov 4, 2016. Unemployment and the Cubs parade….related?

–Payrolls today expected 173k.

–A few notes about yesterday.  The curve edged to new recent highs.  For example, the euro$ red/gold pack spread rose 1.25 bps to close at a new high 61.75.  2/10 treasury spread rose 2 bps to just over 100 bps.  However, the real signal came from 5/30, which jumped 4.7 bps to a new high of 134.  The Fed has pounded home the idea of gradual rate hikes, therefore any new information that undermines the bid in the long end steepens the curve.  Interestingly, crude oil had another bad day yesterday.  Since late October CL has slid 7 dollars from over 52 to under 45….even this move is not supporting bonds.  (However, I would note that copper has gone in the exact opposite direction having jumped about 8% in the past nine sessions).  Additionally, Italian banking shares and DB are easing back lower, another factor which could add to the idea of financial stress and provide support to treasuries.  And of course, ESZ has closed lower for 8 days in a row.  All of which draws me to the conclusion that the steepening trend is occurring for other reasons, one of which is decreasing confidence in central banks, and another is a possible Trump victory that could lead to increased bond issuance for infrastructure projects.  Note that there is supply next week, 3, 10 and 30’s issued.

–One final somewhat interesting note.  Bitcoin seems to bear some relationship to China in that it has been rallying as the yuan has depreciated.  Yesterday bitcoin made a new high early and had a key reversal: higher high, lower low and lower close with a large range.  Perhaps China is going to stem further fx depreciation in the short term.

–Cubs parade today. Expect 60 degree weather under clear sunny skies.  And beer.

Nov 2. Beeks

–“Where in the hell is Beeks?”  Orange juice futures soared to a new high to start November, jumping nearly 5%.  However, a somewhat more important global commodity, crude oil, has gone in the other direction and is sub $46/bbl this morning, having been above $52 in mid October.

–Rate markets are taking their cue from equities, which in turn seem to be reflecting concerns over a Trump win.  The ten year note eased 1 bp to 182,  The green euro$ pack (3rd year) was the strongest part of the curve, closing +3.0.  Both 2/10 treasury spread and red/gold ED pack spread edged to new highs, 99.5 bps and 61.125 respectively.  While equity markets (and the Mexican peso) saw selling pressure related to the US election, it might be worth keeping this in mind: one of the stubbornly weak facets of the US economy has been the lack of investment in productive capacity, with financial stimulus finding its way more into financial asset prices than plant and equipment expenditures.  Would Trump or Clinton better address this shortcoming?

–FOMC meets today.  No press conference.  It would be pretty easy for the Fed to tweak the statement to solidify rate hike expectations for December.  For example, instead of “Market-based measures of inflation compensation remain low…” the statement could say these measures have turned higher.  There will still be three dissents at this meeting. In terms of market pricing, Jan’17 Fed funds traded as low as 9941 yesterday, but came back to settle at 9943, roughly 70% odds of a hike.  Some trades lean against the idea of a hike, for example there was good size buying yesterday of EDZ6 9900/9912/9925 c fy 1x3x2 for 0.5.   Vol remains firm, there was a late buyer of 45 delta TYZ 130c for 45/64’s late in the day, in size of 10k (new).

–ADP expected 165-170k.

–By the way…Trading Places wasn’t supposed to feature Orange Juice futures;  the Chicago Exchanges refused to be a part of the film that might portray trading in a negative light.

Nov1. Implied vol firms as data looms

–China’s mfg PMI was a bit better than expected at 51.2, but the BoJ downgraded growth and inflation projections.  US yields are edging a bit higher and precious metals are continuing to rebound with gold up $10 this morning.  However, crude oil remains near yesterday’s low, having sold off nearly $2/bbl Monday.  Late yesterday CLZ6 was 46.78, down 1.92.  However, even with the move in oil, US equities were stable.

–Little movement in US rates with the US ten year falling 1.4 bps to 183.  The interesting feature was an increase in implied vol, as ten year atm straddles firmed up by a few 64’ths; I marked both Dec and Jan straddles at 4.7.  There was a new buyer yesterday of 20k TYZ 129.25/128.25 put spds for 18 (settled 17 ref 129-20).  With Dec Five Yrs nearly unchanged, FVZ6 120.75 straddle rose 2/64’s to 45, up to 2.8.  Once again, buyers of put protection in front of FOMC and employment have extended out the curve rather than focusing on the first red euro$ contract.  Perhaps another indication that the market is more concerned about a steeper curve rather than aggressive tightening by the Fed.

–In terms of tomorrow’s FOMC announcement, November Fed Funds settled 9958.75 up 0.25.  October expired yesterday and final settle should be 9960.3.  The Fed effective rate is now pegging 41 bps, so FFX6 clearly indicates that tomorrow’s meeting is dead.  However, Jan’17 Fed Funds were 9942.5 bid early in the day and came back to settle 9942, even though the morning was dominated by call buying on EDZ6, which settled +0.5 at 9905.5.  In other words, odds for a December hike remain high.  Surprisingly, new circus acts relating to the US election aren’t shaking Fed perceptions; the Italian referendum in early December might oddly have a larger impact.

Oct 30. Seven years of college [or CB policy], down the drain

Flounder:  Will that work?

Otter:  Hey, it’s gotta work better than the truth.

Pretty much sums up the election cycle. (youtube link at bottom- Animal House)

********************************************************************************

Yields jumped last week and the curve steepened to new recent highs.  First, a couple of curve notes.  The red/gold euro$ pack spread which I highlighted a couple of weeks ago has surged 20 bps since the end of September, from 41 to 61, now the highest since late June.  Although the magnitude of the move wasn’t quite as large, the 2/10 treasury spread over the same time frame rose from 81 to 99, and importantly has exceeded June’s high (associated with Brexit).  Speaking of Brexit, the 10 year Gilt has risen from a post-Brexit low of 52 bps made in August, to 126 now.   So the yield has more than doubled in two months.   The German bund was -14.5 in late September and is now on the right side of the grass at +16.7.  The US ten year has gone from 156 to 185 in the same time frame.  It’s also interesting to note that the high in the Russell 2000 stock index was made in late September at 1263; it has since formed a top and closed at 1188 Friday, a loss of 6% in a bit over a month. (Initial objective 1150-55).

There is a powerful bias for rates to remain low and curves flat, having to do with demographics and huge debt loads.  For example, from Hoisington’s last missive, “As an economy becomes more over-indebted, additional government spending slows growth even more due to ‘non- interest economic costs’ such as misallocation of saving, reduced productive investment, weaker productivity growth and eventually a deterioration in demographics. Slower growth will cause underutilized resources to build, bringing down inflation and subsequently interest rates. Therefore, increasing deficits have, and will continue to result in lower, not higher, interest rates.”   This quote is typical: “Rates are going to remain low for the rest of my career,” Memani, 56, said Friday in an interview on Bloomberg Television. “And I am looking forward to having a long career.”

On Friday there were indications that selling pressure was abating.  For example, the stronger than expected Q3 GDP of 2.9 caused initial selling in rate futures, which was easily absorbed.  The FBI re-opening of the Clinton email saga late in the day further raised uncertainty and lifted fixed income contracts.  For example, EDZ8 made a new low for the move, had an outside day and closed higher.  However, that wasn’t the pattern for all contracts.

The long term question is whether this rise in yields is a change in trend or not.  The more immediate issue is, could this be the start of a ‘taper tantrum’ type move?   Recall that in Q1 of 2013 the US ten year yield was right about where it is now, 1.80 to 2%.  It dipped going into Q2 then ripped higher in June, hitting 3% by the end of Q3.  In terms of where yields ‘should’ be, there’s this from Martin Feldstein:  “The price of the 30-year Treasury bond is so high that it implies a yield of about 2.3% [actually 2.6 by the end of the week]; given current inflation expectations, the yield should be about twice as high.” (from a Project Syndicate blog, link below).  Whether this is a long term change in trend or not, it’s certainly advisable to sidestep what could be a large back-up in yields.  I have previously shown that oil prices are closely related to forward inflation expectations, and while crude had a reasonably sharp drop this week, the pattern since August is one of higher highs and higher lows.  As a side note, copper had a strong rally this week, jumping from 209 to over 219.

I would further mention strong corporate issuance.  “Companies including yogurt-maker Danone SA and Honeywell International Inc. sold about $62 billion of bonds worldwide this week, the most since mid-September, according to data compiled by Bloomberg.”  These are pretty large numbers, (global corporate bond issuance is over $2T this year), and CBO projections of increased US deficits are going to add to supply.  However, the largest factor regarding yields and curves is perceptions of central bank actions.  The withdrawal of QE and the idea that rate repression has run its course could lead to large global rate re-sets.  This dynamic could simultaneously be responsible for declines in other financial asset prices.  The fraying typically begins at the edges, and I would use weakness in the Russell 2000 as a prime example.  Although HYG and JNK junk bond etfs made new ytd highs on Monday, I received this interesting chart showing record outflows from HYG (thanks AOK).

While some would point to potential Fed rate increases as the main culprit for current price action, note that January Fed Funds made a new low this week, printing 9940.5, indicating around 80% of a hike already priced for December.  However, FFF7 settled 9942.5, down only 0.5 on the week.  All near euro$ one-year calendar spreads are within a few bps of 20, so forward rate hikes are certainly expected to be gradual.  This isn’t about the Fed all of a sudden getting rate hike religion, it’s about a lack of confidence, increased uncertainty, and building in an inflation premium.  These factors are difficult to quantify…it’s best to take technical cues from the way the market trades.

Another issue which goes into the ‘difficult to quantify’ basket is China.  I saw a couple of notes this weekend citing a surge in China’s one year swap spread to 52 bps, from around 5 at the end of June, the widest since July of 2015, with the one-year swap at 273 bps. (ZH, link below).  Doug Noland notes that “Chinese 10-year yields traded Monday at a record low 2.60%. There seems to be a safe haven dynamic at work.”  Tightening financial conditions in China could spill over into other markets; again, it’s probably best to take technical cues from the market rather than be swayed by divergent fundamental data sprinkled with political ‘bombshells’.

Having said that, this is a big week for possible catalysts in the US, including ISM mfg and service data on Tuesday and Thursday, the FOMC meeting (no press conference) on Wednesday, and Unemployment on Friday.

Oct 28. Go Cubs go

–Just because it ‘can’t’ happen, doesn’t mean it won’t happen.  Interesting day in global markets yesterday with yields pushing higher in a bear market steepener.  Ten year yield rose 5.3 bps to 184.1.  2/10 treasury spread rose 4.3 bps to a new high of just over 96.  As pointed out yesterday, in euro$’s the red/gold pack spread rose 4.875 bps to 58, also a new high.  In fact, one year euro$ calendars edged to new highs from March17/18 on back, though most remain below 20 bps.  Many think that over-indebtedness will prevent rates from rising because the pain will be too great for both gov’t and corporates.  For example, Hoisington’s latest missive still calls for lower rates, and it has certainly been the case that they’ve been right all along.  But from these low vol and flat curve levels, a rush to the exits can clearly cause months of angst.  By the way, vol jumped as well, most notably in bunds, bobls.

–Today is Advance Q3 GDP expected +2.5%.  Current dollar GDP is around $18.45T.  Yesterday the Atlanta Fed released its GDP Now forecast at 2.1%, and Atl has been rather accurate, so I would assume that any ‘miss’ on today’s data will be on the weak side.

–As noted yesterday, the Russell2000 small cap index is breaking down, and yesterday closed at the low, breaking down from a 3 month sideways topping formation; clearly there is divergence across equity indices.  AMZN’s results yesterday were disappointing, and as colleague JA notes, the move to brick and mortar seems misguided.  The stock p/e is around 200…hard to maintain with delivery vans and physical stores.  I would also mention that its market cap is around $390b or about 2% of GDP.  (Total equity mkt cap to GDP is about 120%). Who is AMZN selling to?  The people that own and work for companies in the Russell index.  Sure, I’m simplifying, but the divergence between big tech and the rest of the market/economy is stark.

–I can’t help but include this snippet.  A Tesla car was defaced in the most “San Fransisco crime ever”.  Someone spray painted the car with Tesla’s after hours stock price.  http://www.sfgate.com/crime/article/Tesla-defaced-in-most-San-Francisco-crime-ever-10417569.php?utm_source=fark&utm_medium=website&utm_content=link&ICID=ref_fark

–Interesting piece from Bloomberg: Charts that scare Wall Street.  Well worth review.

http://www.bloomberg.com/news/articles/2016-10-27/these-are-the-charts-that-scare-wall-street

Oct 27. A few technical notes; FOMC and ED quarterly expiration dates

FOMC ’17	EURO$ QRTERLY	EXPIRES	FOMC
1-Feb			OUTCOME
15-Mar	EDH7= 99.000	13-Mar	unknown
3-May
14-Jun	EDM7= 98.945	19-Jun	known
26-Jul
20-Sep	EDU7= 98.900	18-Sep	unknown
1-Nov
13-Dec	EDZ7= 98.845	18-Dec	known

 

Oct 25. US long end trades soft

–Light volume Monday.  Front end of the curve a bit weaker, with a buyer of 30k EDX 9900p for 0.75 to 1.0 ref 9904.5 in EDZ6 (open interest fell by 37k).  The two year yield rose 1.5 bps in front of today’s auction.  AAPL reports today as Nasdaq trades at the high, and Cubs/Indians start the World Series.  14 days until the US election, 40 days until Italian referendum.

–Nov/Jan FF spread posted a new high at 16.5.  Chicago Fed’s Evans said he could see three hikes by the end of 2017, which would indicate 2 next year, yet the one-year euro$ calendar spreads aren’t moving and are pegged at 16 bps.

–Yuan made a new low and is slightly lower this morning.  It’s likely no coincidence that some industrial commodities are pushing higher as a result, for example iron ore and zinc, and while copper has been quite weak, it is getting a jolt higher this morning.

–Both USZ and WNZ (ultra bond) had technically bearish days; new highs early in the session, negative reaction to higher than expected mfg PMI (53.2 vs exp 51.5), outside ranges with lower closes.  Volume was light, but the long end continues to trade poorly.

–Bank of Canada’s Poloz suggested that fiscal stimulus may make further rate cuts unnecessary.  Sort of an interesting contrast with Carney who immediately cut rates on Brexit.

–Amazon and Alphabet (google) report Thursday.  While Nasdaq is at the high, the other averages, SPX, Russell, DJIA are not experiencing the same exuberance.

Oct 23. Boomerang

Last week I cited news reports that Vice President Joe Biden warned Russia that the US was considering cyber attacks against Russia. And on Friday the US itself was subject to a massive cyber interruption.  Hey Joe, you pushed the wrong button.  I guess we’re lucky he didn’t threaten someone with nuclear annihilation.

Below is an updated chart I trot out every so often, SPX divided by the Bloomberg Commodity Index, which points up the idea of financial asset inflation.

One interesting aspect of this chart is that it seems to have stalled from late 2015 until now, perhaps as a result of the slow turn in perceptions of central bank omnipotence.  Of course, as energy is 31% of the BCOM index, the surge in late 2015 can be partially attributed to oil’s plunge.  What brought this topic to mind was a question posed to Draghi at last week’s ECB press conference about the effect of QE on income inequality.  Draghi pretty much dismissed the question, but did say that while the ECB may generate some wealth inequality in the short run, there’s scant longer term evidence.  Obviously, this chart provides a clue that equity holders have outpaced the pack, but there are other factors at play as well.  For example, information technology has become much more valuable than ‘things’. In addition, there’s a long running theme that new technologies have displaced bulky, commodity-dependent products, for example, a cell phone and earplugs have now replaced a turntable, shelves of vinyl, speakers, a tuner and tape deck; the accoutrements of a previous day (actually the picture below shows the audio equipment at my local coffee shop Alchemy; the vertical turntable IS pretty cool).  Given that phones now hold files and mail and music, it sort of makes me wonder why every idiot on my train is lugging around a wheeled suitcase and huge backpack, but I suppose that’s a question for a later time.

 

In any case, the Fed has necessarily become preoccupied with the prices of financial assets.  In the current environment of declining earnings and record corporate debt loads in the context of an equity market valued near a record pct of GDP (now ~120%) it all feels a bit top heavy.

The diminished importance of ‘things’ is likely disinflationary, as are the well-known factors of demographics and a stronger US dollar (China’s currency fell to a new low last week).  However. as SF Fed president Williams noted, “There’s no question that US wage growth is picking up.”  Government ‘fixes’ in health and education have spurred rapid price increases in medical care, insurance, and tuition.  Also, M2 has accelerated from below 6% growth at the end of 2015 to 7.4% now, the fastest since early 2013.  The prospect of fiscal infrastructure spending and increased budget deficits are additional factors that might make investors shun long duration, which is why I continue to favor long curve trades.

Many investors have been beaten down into central bank price distortion hell, as has been reported extensively, most recently in a Bloomberg article (linked below) with snippets like this, “…the 57-year-old manager says the past few years have been the most perplexing of his career.”  It seems as if smothered volatility has been a frequent feature of this landscape, clearly on display in interest rates this week.  For example, on Thursday TYZ 130.5 straddle was 1’20, it settled 1’12 on Friday.  Two Fridays ago the atm USZ straddle (165 strike) was 4’54, on Friday the same strike (also atm) closed 3’40 (25% decline…about equal to the loss in days, but the relationship isn’t supposed to be linear with this much time left).  There was huge selling of EDH7 9900^ last week, with a settlement of 14.5, down from 16.5 the previous Friday.  Ten year vol is near multi-year lows sub 4% and the bond contract is nearing 9%!  Of course, it’s not just rates.  Crude oil is near a two year low (using the CBOE Oil ETF VIX).   Same with stocks.  A friend mentioned Friday that he had bought one week (week 4, October) 2050 puts for just 0.35. “…easily the lowest pricing of puts with a week left that I have ever seen.”  These puts were 4% out of the money on Friday.  Perplexing.

One last note.  The euro closed below 109, near the low for the year and below the Brexit low, as the trade deal between Canada and the EU fell apart.  Annus horribilis for the euro, with Brexit, ongoing problems with commercial banks, and now this.  From Wikipedia, “the phrase was used in 1891 to describe 1870, the year in which the Roman Catholic church defined the dogma of papal infallibility.”  Perhaps now it will refer to the failures of central banks and other over-reaching institutions.  On the other hand, the Chicago Cubs are in the World Series!

 

_________________________________________________________________

	10/14/2016	10/21/2016	chg
UST 2Y	83.5	82.3	-1.2
UST 5Y	127.8	124.3	-3.5
UST 10Y	178.9	173.8	-5.1
UST 30Y	255.2	249.2	-6.0
GERM 2Y	-65.9	-66.1	-0.2
GERM 10Y	5.8	0.6	-5.2
EURO$ Z6/Z7	19.0	16.5	-2.5
EURO$ Z7/Z8	16.5	15.0	-1.5
EUR	109.72	108.84	-0.88
CRUDE (1st cont)	50.75	50.85	0.10
SPX	2132.98	2141.16	8.18
VIX	16.12	13.34	-2.78

_____________________________________________________

http://www.bloomberg.com/news/articles/2016-10-21/hedge-fund-managers-struggle-to-master-their-miserable-new-world

http://www.zerohedge.com/news/2016-10-21/outcome-undeniable-global-debt-investors-face-reality-world-devoid-options

Oct 20. Conflicting comments

–“Every day that central banks hold out the false hope of a paper solution is a day that chips away at the productive foundations of our economy.” -John Hussman.

–ECB today, with most looking for an extension of QE in December.  The euro made a new low yesterday and is around the Brexit vote low.

–From Reuters, “If the economy stays on its current trajectory I think … we’ll see an interest rate hike later this year,” New York Fed President William Dudley told a modest dinner gathering at the Lotos Club [last night].

–On the other hand, a piece by Ambrose Evans Pritchard in the Telegraph is warning against Fed hikes:

“CrossBorder’s liquidity measure for the US is now at levels comparable to the inflection point a few months before the US recessions of 1990 and 2001, and before the recession starting in November 2007 – and a whole year before Lehman Bank collapsed”
http://www.telegraph.co.uk/business/2016/10/19/fed-risks-repeating-lehman-blunder-as-us-recession-storm-gathers/

–Kyle Bass, on a CNBC interview discussed the negative situation in China, said they must recap banks, but their economy is smaller than the US was in 2008 ($12T vs $17T), while their banking system is three times larger.  Said that the banking recap will slow global growth.  When asked about the US economy, he talked about oil and other commodities firming up, prices and Owner’s Equivalent Rent moving higher, wages going up.  Said 2017 is going to be a stagflationary environment. Concluded with the following:  Do NOT own any long duration bonds.

–The muddled picture extends to commodities.  For example, crude oil rallied and is only a few dollars away from the high of the year set in June, while copper has been selling off and is nearing September’s low (now around 209).

–Interest rates were quiet yesterday, though the curve had a steepening bias (5/30 just above 128, at recent high).

–News today includes:

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.

  The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.