March 20. Front end reflects EU bank funding concerns
–Front part of eurodollar curve under pressure as european bank funding pressures grow due to Cyprus’ rejection of the deposit tax. Large buying of near puts, for example EDJ 9962p traded 0.75 early and buying continued to 2.0, settled 2.5. Front eurodollar options have barely traded in past few months, but EDM3 puts added 52k new positions yesterday. Front end weakness went out two years, with reds -2.75 and greens +1.50. Curve flattened as back end was pulled higher on flight to quality treasury buying. Ten year yield fell nearly 5 bps to 190.8. Implied vol exploded higher.
–FOMC announcement today. Time has changed to 2:00 NY time, with Economic projections also at that time. Press conference begins half hour later. While economic data has improved, global risks have increased.
–While many feel that the impact from Cyprus’ banking troubles should be minor due to small numbers, the risk of contagion and loss of confidence has grown for the entire eurozone. The thought that Germany can “write a check” to stave off EU problems is fading, especially approaching German elections in September. I thought the ECB’s late statement – ECB will provide liquidity to Cyprus WITHIN EXISTING RULES- was tepid at best. In contrast after the 1987 crash, the Fed issued this statement: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” Unconditional. Certainly Cyprus hasn’t yet forced crisis conditions…but it could.
March 19. Bank holiday in Cyprus continues as parliament doesn’t have tax votes
–US interest rate futures are again rallying this morning, though still well below Sunday evening highs, as Cyprus’ parliament apparently doesn’t have the votes to pass the deposit tax. I have seen many articles detailing the composition of depositors, “this is a tax on Russian money launderers” and yet I have seen nothing on who owns senior bonds. Is it too systemically dangerous to force losses on bondholders, causing banking dominoes to fall throughout europe?
–A country that has mostly been out of the news is Iceland, which went a different route, letting banks fail, which…(wikipedia) “meant that the domestic residents would not suffer any losses from the systemic bank failure.” Iceland’s economy is about half the size of Cyprus, and its banking system was 10x GDP ($13b), while it’s reported that in Cyprus the banking system is 8x (GDP $24b). Iceland is struggling with currency depreciation and inflation currently, but the main consideration in europe is “who leaves next?” when Cyprus exits the euro. The fallout should be continued loss of confidence in the euro and in peripheral economies, and much more importantly, in the european banking system.
–Cyprus economy has been compared in size to Shreveport LA in the US, but perhaps Birmingham AL is another comparison, as Jefferson County prepares for bankruptcy. That county’s GDP is about 2x the size of Cyprus, and it’s preparing “a workout plan that calls for reducing the bankrupt local government’s $4.23 billion of debts by more than $1 billion”. Detroit is also heading for bankruptcy, so Meredith Whitney’s call several years ago about municipal bankruptcies wasn’t completely wrong. But she was on CNBC yesterday afternoon saying she was as bullish as she has ever been on US equities. Bell ringer…
–While most news is centered on Cyprus, one interesting side note in the US is the call by sev’l US states for the ouster of FHFA head DeMarco, who has refused to let Fannie and Freddie write down mortgages to provide debt relief. DeMarco appears before a Senate panel today. From what I have read, it appears that he may soon be forced out, and a more lenient FHFA leader may write down mortgage principal for struggling homeowners. A final shot in the arm for housing?
March 18. Cyprus forced to announce tax on bank deposits
–Upon learning of the Cypriot bank account tax grab, Obama immediately asked aides to come up with a similar proposal, saying most large depositors didn’t earn their money without the help of gov’t. Hillary Clinton, having been in the know beforehand, had daughter Chelsea buy a $10.5 million condo (better than having money in a bank). Even the new Pope is a little concerned about keeping deposits in Italian banks and is considering diversification into Argentina. Others with good information sources out of the ECB simply bought US treasury notes. Negative repo in current ten year note isn’t helping the shorts. April treasury options expire Friday.
–Unsurprisingly, Friday’s rally in treasuries continued last night. Amazing that the euro held up as well as it did, having tested 129 last night and now around 129.60. Most of the market adjustment occurred in the first 2 hours after US screens opened. My guess is that Cyprus’ parliament will not approve the new tax and Cyprus will be the first out of the euro.
–There was a buyer Friday of 80k ESM (e-mini SP) 1550c, new position, open interest +84k. On its own it would appear to have been bad timing, (SP -1%) though there was some talk that cash equity positions had been pared back in this portfolio, with long exposure replaced by low vol calls, in which case it’s brilliant.
–FOMC this week. From last statement, “Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook.” Prescient.
March 15. FOMC next week
–Midcurve eurodollar options expire today, as do equity options. Economic news includes CPI expected +0.5 and +0.2. Empire State 10.0, Industrial Production +0.5 with Capacity 79.4.
–Economic news remains mixed. Stocks continue higher, as does high end real estate, supported by low rates. Things are less good for those under top as employment has only gradually improved. The Fed’s stimulus is supposed to spark ‘escape velocity’, but I think it’s more of a ‘trickle down’ economy, stymied by regulatory uncertainty or outright obstacles. For example, from WSJ: “Employers are bracing for a little-noticed fee in the federal health-care law that will charge them $63 for each person they insure next year.” And David Rosenberg notes that restaurant sales were down 0.7 in Feb after -0.6 in Jan. “Note that this the sharpest two-month decline since January-February of 2008, just as the recession was getting rolling.” [Makes sense as payroll taxes increased and energy costs were increasing]
–Quiet in interest rate futures, though there is a bit of selling pressure on the front end of the curve. The long end is resilient as seen by robust ten year auction demand and support in bond futures even after a mediocre auction. There was a new late buyer of June bond 150c, 8-9 for 5k or more, nearly 9 points or around 50 bps away.
–Not much news in the beginning of next week. FOMC on Wednesday includes econ forecasts and press conference.
March 13. Record IL farmland price/ AIG is back…(risk priced too low)
Mar 13. Retail Sales expected +0.5, and ten year note auction today.
–Spirited rally in fixed income yesterday. The curve flattened with red/gold pack spread down over 6 bps to 168.25. 2/10 treasury spread fell 3.5 to 176.7. Short covering in eurodollars as Friday’s employment data fades from view, though retail sales are expected to further reflect firming economic conditions.
–An article on Reuters yesterday cited an Illinois auction of farmland that went for $15,375 per acre! (a record high for a central Illinois county). I mentioned it to my cousin who told me that around 10 years ago he leased out a small tract at $75/acre, now up to $225 acre.
–The yen looks as if it’s trying to put in a bottom, though probably only a pause in the longer term trend. Everything has been correlated with yen moves recently, and US equities also pulled back from the highs.
–Interesting note on ZeroHedge citing a Kyle Bass presentation last week.
“The AIG of the world is back – I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp – $5bn at a time.”…”And it’s happening in huge size – huge – we bought half a trillion dollars worth of these ‘options’… and interestingly enough, one of the biggest banks in the world called me the other day and asked me if I would close my position – that was an interesting day for us – that happened to me in 2007 right before the mortgages cracked.”
March 11. Fed’s own Flow of Funds report argues for removal of accommodation
Mar 11. Friday’s employment data was stronger than expected, sending US interest rate futures lower. Ten year yield was up over 6 bps to 205.5. All deferred calendar spreads in euro$’s made new highs, with red/gold pack spread up nearly 10 bps to a new recent high of 174. 2/10 treasury spread up 6 bps to 180. There was size buying throughout the day in Blue March 98.625p for 0.5 to 0.75 (expires Friday, EDH6 underlying, 9878.0s). Open interest was up 59k in the strike, so these buys are new.
–It was about a year ago in the middle of March that red/gold pack spread hit its high of around 205 bps and 2/10 treasury spread also reached 200 bps. Even though the internal breakdown of the payroll data wasn’t as strong as it could have been, there’s no reason that the curve can’t steepen to last year’s levels (except for the uncertainty in the eurozone). Late in the day Fitch downgraded Italy, but US markets barely responded.
–If the Fed looked at its own flow of funds report released last Thursday for Q4, it would be difficult to justify its super-accommodative stance. http://www.federalreserve.gov/releases/z1/Current/
For example, household net worth rose 9% from the year before to a near record level; it’s about 30% higher than the nadir in 2009. Corporate borrowing rose at 10.7% in Q4 and total non-financial credit growth was 2.4%, the highest since Q1 ’08. In fact if stocks close at current levels at the end of March, then Household net worth will be at a new record in Q1 ’13. Owner’s equity as a % of household real estate has improved from below 40% at the crisis low to nearly 47% now. According to Doug Noland of Prudent Bear, “…As a percentage of GDP, Household Net Worth jumped to 421%, down from the 2006’s real estate Bubble spike to 490% but still significantly above the 385% average for the period 1985-2003.”
http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10770
–In fact, according to my calculations using St Louis Fed’s Fred graphs, household net worth is over 480% of GDP vs high of about 510%. In any case, these levels of household net worth/GDP certainly suggest that trying to further juice “wealth-effect” spending from households may not be worth the risk.
*Note* St Louis Fred Graph in case it doesn’t appear below is Total Net Worth Households (TNWBSHNO) divided by GDP (GDPC1)
Alex Manzara 312 432 4457
March 8. Payroll day
–Payroll day expected 170k with rate of 7.8%. Dollar/yen continues to make new highs (95.66) and EUR/JPY nearly at a new high today (125.50). US curve has tended to steepen as the yen weakens, yesterday was no different as tens rose 5 bps to 1.99%. Red/gold euro$ pack spread was up just over 6 bps to 164, nearly overtaking the recent high of 167.5. Stocks have also been correlated with yen weakness, with DJIA at new high (and Nikkei now over 12k).
–Jobless Claims yesterday were lower than expected and Consumer Credit higher than expected, perhaps foreshadowing a strong employment report today. However, the surge in Cons Credit is nearly all non-revolving (student loans and auto financing). The former went from 1928.4b to 1944.4, up 10% annual rate, while revolving went from 850.8 to 850.9, an increase of 1/10 of a percent. Not the picture of a strong consumer – who is substituting cheaper rate gov’t student loan debt for higher private credit card debt. Won’t end well as the gov’t is the lender on the majority of student debt (the Fed will just add it to the portfolio). According to ZH the only bank that didn’t pass the Fed’s Stress Test (results yesterday) was Ally, renamed from the ashes of GMAC, a result of the gov’t takeover of GM. The US gov’t is not a good lending agent, but one heck of a borrower…
–In terms of today’s job data, I would suspect a strong result as fast food restaurants shifted full time workers to part time status to avoid Obamacare, and the new part timers had to get other part time jobs, which now became available at other businesses for the same reason… (and they took student loans to tide them over. Ta-daa….the dynamic US economy!
–In eurodollars the midcurve March 99.625 straddle traded just 2.5 bps (underlying contract EDH4 which was trading 9961.5). Amazing that with one week until expiration, in front of the biggest economic report of the month, that the straddle on a contract one year forward would trade only 2.5!
March 4. Europe fraying
March 4. Curve flattened a bit more to new lows Friday even as stocks rebounded. 2/10 fell over 3 bps to 161.8, new recent low. Red/gold down 3.25 bps to 152. Ten year yield -3.5 to 185.2. Huge plunge in Personal Income for January, -3.6% as income (bonuses, special dividends) were pulled into the end of last year to avoid increased taxes. Not surprisingly, some of those special dividend payments found their way right back into stocks in the beginning of the year, which argues against the ‘great rotation’ thesis. (thoughts from contrary investor).
–While stocks are currently shrugging off european concerns, the problems appear to be increasing rather than abating. Beppe Grillo warned that Italy may have to leave the euro and needs to renogotiate debt. According to ZH, a former Spanish general brought up the idea of a coup recently. France is trying to undo some of the damage of the 75% top tax rate. In terms of GDP, Italy and Spain combined are about the size of the German economy.
–China says it’s prepared for FX war. Steps taken to cool the property market caused a drop of over 3.5% in Shanghai Comp. The new head of the BoJ (Kuroda) said he will do whatever it takes to end deflation, and prescribed buying huge amounts of gov’t bonds.
–AAPL hit a new low Friday. Gold similarly weak. Former high fliers seem to presage deflationary forces.
March 1. The sequester begins; dollar stronger, US treasuries moving higher
–Late failure in ESH (mini SP) saw new lows on the day as the dollar closed right on its highs. Dollar index (DXY) is at a 62% retrace of last year’s high in June to subsequent low, and moving averages are about to cross indicating further gains. (DXY higher this morning). Foreshadows a deflationary environment. For example, copper has plunged in February and is at a new low for the year, down around 8% from high of year on Feb 1. (Gold down 6% in Feb, Silver down 12%). Not everything is deflationary though, the Chicago Tribune reports that Cook County’s additional $1 tax will make the total tax on a pack of cigarettes in Chicago $6.67!
–Global data this morning is weak. Official China PMI 50.1 vs expected 50.5. Eurozone unemployment up to 11.9% with Italy now 11.7 (way lower than Spain but the highest in Italy since 1992). French car sales weak.
–US rates edged slightly lower though there were some large bearish plays yesterday, for example, a new seller of 40k TUM 110.25c at 4.0. Also on the long end, a buyer of 30k USJ 141/140p spreads late in the day. Midcurve March options expire two weeks from today. The short (red) March 9962.5 straddle settled 3.0 and traded there (ref 9962.0) and the Green March 9937.5 straddle settled 6.0 (ref 38.5). Green March 9925/9950 strangle is around 0.75. Cheap.
–News in US today includes the beginning of the sequester… not exactly “news”. Personal Income expected -2.1 with Spending +0.2. ISM expected 52.8 vs 53.1 last. Bernanke speaks at 10:00 NY time.
Feb 26. Can Bernanke alone undo Italian “risk off” damage?
–Bernanke speaks today in semi annual testimony to Congress. New Home Sales also out, as well as 5 year auction.
–Extraordinary moves and volume yesterday with focus on the Italian election stalemate, one paper’s headline proclaiming “The Winner: Ingovernability.” (Hasn’t seemed to hurt the US so far…) It’s a rejection of austerity for the public and government largesse for the banks… Biz Insider notes that eurozone banks are selling at large discounts today, including Soc Gen and Credit Agricole down about 5%. The prospect of less gov’t support for the banks could send the whole house of cards tumbling, which of course, ignites a bid for free parking in US treasuries.
–I would say that the reversal in USD/JPY is just as important as eurozone issues. The news of Kuroda (expansionist monetary policy) taking the reins at the BoJ was met with new highs around 94.50, but then a huge outside day reversal ensued with a move below 91. EVERYTHING has been correlated to yen weakness, and now it’s “going the wrong way.” In any case, many “risk-off” signals were triggered yesterday, and it seems unlikely that Bernanke can single-handedly undo the damage today. I would guess there will be at least some focus by the politicians on the Fed piggy bank portfolio remittances to the gov’t that help fund the deficit, and the prospect that those amounts taper off.
–All eurodollar calendar spreads plunged to new recent lows, though ranges had been fairly tight in the past month. 2/10 fell about 6 bps to 165, though only 11 bps off the high of the move which is 176. Last 20 trading days high 176, low 167. There were late block trades of 40k in euro$’s, which appear from this morning’s open interest sheets to be exits. For example Short red June 9937/9912ps (1’s) vs Gold June 9762/9737ps (3’s) and bought back 40k Green March 9950c for 0.5.
