Nov 8. Election aftermath
In a ringing endorsement of Obama’s re-election, stocks tanked, with SPX -2.4% and Nasdaq -2.5%. Copper and Crude made new lows for the move, as did the euro, with crude oil down over $4/bbl to 84.40. The curve flattened to new lows, with red/gold -7.75 to just over 118, (only 10 off the lowest level of the year). 2/10 to 137, down 8. All deferred euro$ spreads made new lows. Wholesale exits of puts that had been bought in the hope of a Romney victory, and aggressive buying of calls on blue/gold euro$’s and on bonds. Implied vol was eviscerated with TYZ down to 4.1 (but had traded 3.9 early). Perhaps it’s not Obama, but simply the focus on fiscal cliff ramifications. But regional votes also tell the tale. In CA, Prop 30, a temporary (7 YEARS!) state income tax increase from 10 to 13.3 on the wealthy passed. The only article I read said that these funds would help education, and the measure was passed due to support of the youth vote. The headline on the Chicago Trib: “Mayor hopes Obama’s 2nd term proves fruitful for funding”.
–Rates (and the curve) at these levels say nothing positive about economic growth going forward, and indeed exacerbate the problems of unfunded pension liabilities. The only hope for investment funds was a strong stock market, underpinned not by growth prospects, but by forced investment in search of yield. So the Chicago Teacher Pension fund, for example, which is woefully underfunded, will suffer right along with the rich guys. That’s why Chicago’s mayor hopes for help and why Illinois’ Governor is hoping the Fed’l Gov’t will guarantee the states pension obligations. Otherwise it means more taxes.
–Hopefully resolution of the fiscal cliff will occur soon, though stocks are still at least partially subject to global forces, i.e. european problems and changing of the guard in China, etc.
–If there is resolution, then buying puts/put spreads on greens/blues/golds has never been cheaper…
Nov 7.
So I guess the Republican strategy of wooing women voters with enlightened ideas on rape and abortion didn’t work out. Congratulations to Obama and his supporters, but at least can we get rid of Geithner?
–The latter part of yesterday’s session saw rates jump with tens up nearly 6 bps to 174. Blue Dec (EDZ15 underlying) puts were bought heavily; open interest jumped over 100k in blue dec puts alone. The 9900 straddle traded 22.5 late, currently 20/21 and most likely heading lower, although futures have jumped from that strike to 9908. TYZ 133 straddle traded 1’10 early yesterday, but settled 1’17 as futures sold off. Now 0’63/1’01.
–This morning, back month eurodollars and treasuries are rallying, and have fully erased yesterday’s sell off. Is it because Bernanke can now keep easing? Because we face a more daunting prospect of the fiscal cliff due to political gridlock? Because we can limp along with anemic job growth at stagnant pay levels? Probably a combination. In any event, the lack of yield in fixed income remains supportive of equities as money searches for returns.
–Ten year auction today followed by bonds tomorrow.
Nov 6, 2012. Judgment day
–Activity in front of today’s election was quiet. If there was a theme to be discerned in US interest rates it was straddle selling and put buying; atm vol edged lower.
–New recent low in red/gold pack spread as curve flattened, down 4.5 bps to 124.25. 2/10 treasury spread fell 4 to 140.8. (this year range 118 to 200).
–Intrade has Obama at 69.8 vs Romney 31.1. Nate Silver (a famous pollster that I had never heard of) has Obama at 92%. If Romney were to win, it will shake markets. What happens if coyote catches the roadrunner? http://www.youtube.com/watch?v=KJJW7EF5aVk
–I looked back at election day 2008 to compare a few spreads. Front euro$ contracts were around 2% or 98.00. First red was 97.50. Reds/greens around 118 vs current 23.6. Reds/golds 210 vs 124 now. Surprisingly, ten year note to inflation indexed tip was 90 bps (and ended 2008 at 15 bps!) while today it’s 247. Obviously not much of a forecasting record there. But certainly current and forward rates indicate economic malaise ahead, hopefully another mis-forecast.
–An interesting note on China on ZeroHedge (citing Goldman) that China’s Corporate debt as % of GDP has exploded to 151%, double the US at 75%. I often refer to this line from John Mauldin regarding debt: “That day comes when the debt is growing faster than the economy. The final Bang! moment happens when the total interest on the debt overwhelms the nominal growth of the economy.” I wouldn’t suggest that China is facing a crisis on debt, but it seems clear that overcapacity is an issue, and some assets can’t cover debt service. http://www.zerohedge.com/news/2012-11-05/chinese-credit-bubble-full-frontal
–Business Insider has a chart showing that analysts’ earnings estimates for Australia have been plunging, reflective of the same thing…a slowdown in China.
http://www.businessinsider.com/australia-earnings-chart-2012-11
–I may be a bit late today as I vote first thing in the morning. Polling place opens at 6 am, but in my community, the regular staff of a few older women is always just a little tardy, making sure the coffee orders are right (did Mildred want sugar in hers?), trying to find their reading glasses (on top of head) in order to shuffle through the sheaf of voter registrations…so I will likely miss the usual train.
Nov 5. Better than expected payrolls but interest rate futures unch’d
–Better than expected employment report (NFP expected 125k, actual 171k) initially sent interest rate futures hurtling lower, but prices recovered all losses by the end of the day, with most euro$ contracts unchanged. Tens and bonds ended marginally lower. Supporting fixed income is a whiff of deflation from ‘risk’ markets, as crude, gold and silver all made new recent lows. Euro has been in a range of just above 128 to just above 131 for the past month and a half, appears to be resolving to the downside. Now below 128 after a big sell off Friday.
–News today includes ISM Services expected 54.9.
–US election voting tomorrow. It will probably take a couple of weeks to learn the official result of a Romney victory; the delay will hopefully will forestall inevitable rioting. Observing the aftermath of the storm on the east coast makes it starkly clear that stability associated with plentiful supplies of food, water and energy can evaporate quickly.
–I continue to believe that dollar/yen strengthening may be the trade of the upcoming year (as I wrongly thought last year too). Here is an interesting quote from David Zervos (as cited by Business Insider): Accompanying the depressing standard BoJ statement on 30-Oct was this very curious additional release – http://www.boj.or.jp/en/announcements/release_2012/k121030b.pdf. Here we have the BoJ governor, the Minister of Finance and the Minister of State for Economic and Fiscal Policy jointly issuing a press release on the BoJ website entitled – “Measures Aimed at Overcoming Deflation”. A press release of this kind is completely unprecedented. And it was published in the “Monetary Policy Releases” section of the BoJ website.
http://www.businessinsider.com/zervos-on-boj-decision-losing-independence-2012-11#ixzz2BLUv6QLr
–This article talks about Japan simply cancelling bonds held by other governmental agencies, thereby improving debt/GDP ratio with the stroke of a pen. In any case, Japan overtly wants to weaken its currency (overcome deflation) and appears more serious about it…I think they will accomplish that goal, with the help of MoF eroding central bank independence.
–Interesting NY Times article has this quote: ‘The atrophying of the country’s ability to “make real things” has been much lamented, but the truth is that U.S. manufacturing has never been stronger. While there are no universally accepted numbers, the United Nations Statistics Division calculates that the dollar value of goods made in America is at an all-time high of $1.9 trillion, just about even with China.’ (Just that it takes fewer workers). This article (notwithstanding previous quote) is about the decay seen along the amtrak train route between NYC and Washington DC. WELL WORTH READING and it’s short.
Oct 19. 25 year anniversary of 1987 Black Monday Crash
–Twenty-five year anniversary of the 1987 Black Monday crash and there was an echo of sorts in GOOG, which dropped 10% during the day on a mistimed earnings release. In fact several tech stocks have shown notable weakness, IBM was 211 three days ago and closed 195 yesterday, a fall of 7.5% (on earnings report) and AAPL is around 10% off highs set last month. (Just those three represent a loss of about $100B in market cap).
–No “algos” of high frequency trading, just “dynamic portfolio insurance” and mouths left gaping as stocks plunged. I was on the CBOT floor on that day, too stupid to know what was going on, but some people made a killing buying treasuries. I remember hearing about the guy that ran Carol Mac in NY walking down the trading aisle telling everyone on the desk to buy every bond they could at any price…
–Interest rate futures were mixed yesterday after the mid week sell off. Tens and bonds were both up a couple of bps, with bonds right at 3% as the pit closed. I marked a new high in 2/10 at 152.6 (+1.4).
–The short end of the curve has finally had some movement, but no real changes in terms of Fed policy expectations. However, positions have been built with confidence regarding the Fed’s vow to keep rates low, and fraying of that confidence could easily cause an outsized reaction. For example, 2 yr notes have jumped from 23 bps to around 29.5 in the last week, and there is still a large short position (40k) in TUZ 110 puts. In euro$’s as well, there had been plenty of put selling to finance long call spreads…should a true unwind begin it will get ugly.
–Today’s calendar is light. Existing home sales expected 4.75m rate from 4.82 last. In general, home sales have been slowing improving over the past two years as prices adjusted and mortgage rates fell.
–Next week is also fairly quiet in terms of news, though the FOMC meeting is Wednesday and the treasury auctions 2. 5 and 7 years starting Tuesday.
Oct 5. Payroll report…
–Employment report today with Payrolls expected 115k and rate of 8.2%. Treasuries edged lower yesterday, led by longer maturities, with tens up a bit over 4 bps to 1.664 and 30’s up 6 to 2.88.
–Oil, arguably the most important commodity in the world, fell $4 on Wednesday and regained that loss yesterday. Sort of a slow-flash crash. Or maybe 4.5% moves don’t quite qualify. Gold continues to press toward $1800.
–The Fed minutes were released yesterday with members again expressing the hope that expanding policies that may ultimately lead to hyperinflation “could lift consumer and business confidence.” In related ‘news’ CNBC aired a long advertisement, oops, I mean hard hitting interviews, late yesterday with several top Blackrock executives, where they pounded home the new slogan of getting out of cash and moving into riskier assets, as short term bonds and cash provide no return…”it’s time to be an investor again.” I guess this is part of the Fed’s goal as well…push people into stocks, and hope for some sort of wealth effect that trickles into consumption. And of course money pumping certainly has that effect; I’ve seen several recent stories of companies using cheap funding to buy back their own shares and reduce float, thus supporting stocks. However, there are also respected analysts who feel that each new dollop of QE is having less of a positive effect on equity valuations. Is this where you go “all in” Larry Fink?
Oct 4. Curve flattens yet again
–ECB meeting today followed by Draghi press conference as Spain edges closer to requesting aid. In the US Jobless Claims expected 370k and Factory Orders expected -6.0 (growth has been trending lower since early 2010).
–Even the Huffington Post (one of the most anti-Romney sites around) ran a headline that said “Romney Wins the Night”. ZeroHedge points to InTrade website that had Obama immediately sliding, falling from above 70 to 67.5.
–The curve edged flatter again yesterday, with red/gold euro$ pack spread down 2.25 to 121. Red/green fell to 19, near its lowest level of the year (~16).
–Crude oil was crushed yesterday, with CLX down $4 late to 87.90. Mideast tensions are growing with Turkey shelling Syria. Iran is struggling with hyperinflation. And a story on Business Insider notes that the 12 month forward Saudi Rial rate (vs USD) has edged above 0, underscoring unease in the region.
–There was a news piece on CNBC yesterday about finances in Chicago where guest Lawrence Msall, head of the Civic Federation, noted that Chicago’s unfunded pension liability is about $20 billion, and said that closing the gap would take a tripling of property taxes. (Obviously related to the whole austerity circle in Europe). In unrelated news, Rahm Emanuel, Mayor of Chicago, fired the Ethics Board…that’s a good start….”During the quarter-century it has existed, the ethics board has been criticized as lax on enforcement. The panel hasn’t found a single case of wrongdoing by aldermen, even though more than 20 were convicted of felonies in that period.”
Oct 2. ISM higher, but interest rate market doesn’t believe it
–Flatter curve. Lower vol. A surprise jump in ISM to 51.5 sent interest rate futures lower early in the day, but there was no follow through, and a rally ensued that took some back month eurodollars to contract highs (e.g. EDZ15). Gold tested 1800 early (multi year high) but faded. Still above 1780 this morning.
–Reuters reported late yesterday that Spain is ready to request a bailout but that Germany suggests holding off.
–Australia cut rates this morning, another sign of global economic malaise.
–Copper is telling a different story, having surged in the month of September after languishing between 330 and 350 the previous three months. Now at 374 and attempting to push higher.
–While data and commodities suggest a mixed picture, slower global growth is the dominant theme. I feel that the longer end of the US curve already has it priced, and is thus vulnerable to the downside.
Oct 1. Structural unemployment/TED presentation
–Curve was steeper Friday, most notably in eurodollars. 2/10 treasury spread edged up 1.5 to just above 140, but red/gold pack spread in dollars jumped 6.25 to 128 as a relief rally in near contracts continued in the wake of the Wheatley (LIBOR) report. (Reds were +3.25 while golds were -3). The market had feared libor settings would be skewed higher due to the report, unfounded as it turned out. Low for the year in red/gold has been just above 106. Wed low was 117 and Friday bounced to 128; year’s hi is 203.
–News today includes ISM, expected 49.7 from 49.6. More important will be Bernanke’s comments on the economy before the Economic Club of Indiana (at 11:30 Chgo time). Presidential election debate Wednesday.
–Bank stress tests in Spain were better than expected (though underlying growth assumptions are likely more positive than will actually be the case), and global PMI readings were slightly better as well, though France plunged to 42.7. As a comparison Greece is 42.2.
–Somewhat interesting note by Bruce Krasting about Social Security, noting that the fund will disburse $65 billion in October, a large and growing number just about equal to the latest QE monthly buying. SS payroll taxes are $49b with other revenue adding $8b…shortfall of $8b and again, growing.
http://www.businessinsider.com/krasting-social-security-and-the-beach-2012-9
–This is a link to a TED presentation given by Andrew McAfee about ‘droids” taking over human labor. http://www.ted.com/talks/andrew_mcafee_are_droids_taking_our_jobs.html
FASCINATING 14 minutes. In it he talks about how the steam engine supplanted human muscle power, and how, in the current situation, computers have augmented brain power by multiples. A post by Mish Shedlock where I first saw this video (thanks JK) questions how the Fed can hope to stem the structural decline in employment with monetary policy…
Sept 24. Illinois/Greece
–Slight drop in yields Friday. Eurodollar calendar spreads are threatening new lows, though in compressed ranges. For example, EDH14/EDH15 settled 19.5, down 0.5 bp, but has only been in a range of 18.5 to 25 for the past month.
–Chicago Fed Natl activity Index today. Has been negative for the past 5 months, last 2 readings -0.13 and -0.34. Dallas Fed expected to improve to +0.5 from -1.6.
–The epic battle between fiscal austerity and monetary stimulus continues around the world. In the US it is shaping up as the “Fiscal Cliff” vs “QE MBS”. In the local example, it is the City of Chicago, State of Illinois. Chicago teachers just rec’d a raise of 16-17% over 4 years. The mayor of Chicago doesn’t know how to fund the pay raise. A couple of years ago the State raised the income tax from 3% to 5%. The state continues to run awash in red ink with unpaid bills of $8 billion. But here’s an interesting strategy the State may pursue (zerohedge quoting Wall St Journal): “Governor Pat Quinn’s 2012 budget proposal already floated the idea of a federal guarantee of its pension debt. …Illinois now has some $8 billion in current debts outstanding and taxpayers are on the hook for more than $200 billion in unfunded retirement costs for government workers.” Is the national government going to guarantee the pensions of a “rogue state”? Will new taxes and fees simply drive more people to neighboring states? Additionally, The Illinois Teachers Pension Fund has cut its investment target to 8% from 8.5% (necessitating more taxes). There is simply no way this fund can make 8% in a world of 1.75% ten yr yield, though I have read several accounts that they have moved far out onto the risk spectrum to boost yields. It’s not just Europe…
In: Eurodollar Options
