Oct 13. US ten yr treasury yield up 1/2% since post FOMC low…time to buy.

Oct 13.  One year eurodollar calendar spreads made new recent highs yesterday.  EDM12/13 gained 1 bp to 20.5, with larger moves seen further out the curve. The day after the FOMC, on 22 Sept, this spread was only 1 bp.  In fact, most curve lows occurred right after Fed’s twist announcement, 2/10 was 152, made a new high yesterday of 194, just 14 trading days later. Red/gold was 164.5, yesterday +8.875 bp to 202.5.  I’m not sure whether to interpret the moves as disdain for the Fed, or that the US economy is in better shape than thought as some data suggests, or that europe is addressing banking problems.  Probably a combination of these factors, which have also contributed to a sparkling 13% gain in the SPX from Oct 4 low. In terms of the Fed, the goal of keeping long dated rates low doesn’t seem to be working as 10 yr yield hit 1.76 Oct 3, and has risen nearly 1/2% since then to 2.22.  Signs of the Fed’s impotence are not just reflected in the market, Philly’s Plosser was on CNBC saying the Fed has done a lot and further action isn’t likely to help the economy (though minutes yesterday revealed that QE3 should still be an open option).  One other rate that has been relentlessly rising bears mention: 3 mo LIBOR yesterday surpassed 40 bps, up from 25 in July.
–Yesterday’s trade indicated that some players were taking advantage of the rise in yields to enter long positions.  For example a seller of 25k TYX 127.5p was new.  Also a buyer of 25k FVX 122c covered 121-21.  And a seller of 20k EOH 9900/9925 put spreads at 6.5.  These trades happened before the sloppy 10 yr auction which triggered immediate sell orders, followed by a rebound.  30 yr bond auction today.
–Today’s news includes Job Claims, 405k and US Trade Balance, -46b estimate.  Regarding global trade, this was on BBG: “China’s exports rose the least in seven months and the customs bureau warned of “severe” challenges as the global economic outlook dims…” And from another Bloomberg article over the weekend: “Containers are stacked at the Yangshan Deep Water Port in Shanghai, China. Growth in shipments to Europe, China’s biggest export market, slumped to 9.8 percent, from 22 percent, amid the sovereign-debt crisis in euro-region nations.”

Oct 6. ECB leaves rates unch’d, adds other liquidity measures

Rebound in risk assets.  Ten year rose 11 bps to 1.90.  Red/gold pack spread leapt 15 to 179.5.
–ZH reports the French govt has contingency plans to nationalize 2 or 3 banks.  Could bank nationalizations be the catalyst that stabilizes things?  Facing the problem and dealing with it might inject confidence back into markets. (Although it doesn’t solve the issue of a hard landing in China).
–In the US focus will be on tomorrow’s jobs report.  Claims today expected 410 from 391.  Every calendar spread in eurodollars is now positive.  The lowest one-year calendar is now EDH12/EDH13 at 3.5 bps, which captures the year just before the Fed’s commitment (in June 2013) to keep fed fund rate low.  From there the spreads gradually increase…EDH13/EDH14 is 49.  Still really low but maybe on  a more normal path.
–There’s a video clip I received of a Judge Judy episode, where a guy is being sued by his girlfriend for not paying rent.  He receives a county subsidy of $450 month specifically for housing, and admits he paid nothing toward rent.  Judge Judy says he’s stealing the county’s money; it’s a disgusting example of what’s wrong with our country’s system of subsidies. 
Then a see this clip in the Wall St Journal: WSJ-More than half of $4 billion in federal funds disbursed this year to spur small-business lending by community banks was used to repay bailout funds that the banks received under the government’s Troubled Asset Relief Program.
–I don’t really know how the above can be documented, but since it’s a nice day maybe I’ll hang out with the protestors for a while on LaSalle street today.

Oct 5.

While US stocks finally rebounded into yesterday’s close with SP500 up over 2%, metals continue to trade under pressure.  Copper, silver and gold are all threatening new lows, and crude made a new low yesterday.  Additionally, the Hang Seng index continues to plummet, down over 1/3rd from April and -3.4% this morning. US stocks were apparently underpinned by Bernanke saying the Fed could do more, and by a late plan to support Dexia, leading to thoughts that europe’s banking system as a whole could be righted. 
–Moody’s cut Italy’s rating…didn’t seem to have much of an impact.
–Red/gold pack spread fell another 5 bps to 164.5, revisiting the low made on the FOMC statement day.  The intervening high was nearly 195.  2/10 treasury spread edged up a bp to 155.  The Fed’s first sales of treasuries related to twist ops occur tomorrow, but only $8-9 billion of paper with less than one year to maturity. 
–Today’s news includes ADP and non-mfg ISM expected 52.9 from 53.3. 
–Chicago’s mayor Rahm Emanuel telling city employees to pay $3 million in unpaid traffic violations or lose their jobs.  I’m sure that amount is being carried on the books at par, as if that $3 million is going to be paid…more likely it’s worth about $1 million.  The new austerity budget is coming to Chicago….

Oct 4. Stocks still under pressure….

–Bernanke speaks at 9 to Joint Economic Committee. ISM stronger than expected yesterday, which cheered the market for all of two minutes.  Stocks fell with many big industrials making new lows…CAT, DD, GE, MMM.  Financials were again crushed. Citi -9.8%, BAC -9.6%, MS -7.7%.   Bonds fell 16 bps to 2.76%, making a new post-FOMC low.  Red/gold pack spread plunged 14.5 bps to 170, with reds down slightly and golds up nearly 14. Ten year at 1.78%.
–(Reuters) – China warned Washington it is “adamantly opposed” to a proposed U.S. bill aimed at forcing Beijing to let its currency rise, saying its passage could lead to a trade war between the world’s top two economies.  Hang Seng index down another 3.4% as of Tuesday morning.
–Dexia, which made the news during the (first) crisis as a top beneficiary of the Fed’s liquidity measures, continues to plunge with Belgium and France discussing a good bank/bad bank solution with state guarantees.
–EDZ1/EDH2 edged to a new high of 6.5. With 3 month Libor setting creeping higher every day, the pressure is mostly on the second quarterly contract (EDH).  3M libor just over 37 bps or 9963, vs EDZ at 9944, representing 19 bps of convergence in less than 3 months makes it hard to short Dec, though there was some Nov put spread buying yest.

Oct 3. Implosion continues

–Slow motion deterioration continues.  Greece misses deficit target, now will cut thousands of public workers. CA pulls out of settlement talks related to mortgage robo-signing, which is sure to lead to a protracted mess lingering over banks and mortgage firms like Pigpen’s dust cloud.  And in this environment, BofA and Citi announce plans to charge fees on debit card use. Utterly tone deaf.  Goldman is way ahead of the curve on this one…you don’t hear Blankfein touting “God’s work” any more.  He’s had the sense to clam up (and hire personal counsel).  The banks are completely misplaying their (already bad) hands.  I guess they think that policy makers are sure to realize that the financial structure is critical, and that they can fire a shot across the bow with highly publicized fee increases. But the politicians see their “solutions” aren’t working anyway, and in the midst of policy disputes at every level, they can all agree on at least one thing: banks provide a perfect target for indignation…now more than ever.  Heck I’m even jumping on the “Occupy Wall Street” bandwagon…but not actually by physically protesting (I don’t care for mace), just by buying BofA puts. 
–With a weak president going into election season, and protests growing in many cities, it might seem as if the US is vulnerable.  News of Putin returning to the Russian presidency could be cited as an example of exploiting that weakness.  However, the US dollar is ironically the beneficiary of US (and global) quicksand.  
–ISM today expected 50.5 from 50.6
–Just take a look at these two charts/links from the St Louis Fed…Velocity of Money and Money Multiplier.  Neither one is having a meaningful upturn.
http://research.stlouisfed.org/fred2/series/M2V
https://research.stlouisfed.org/fred2/series/MULT

Sept 29. Germany passes EFSF vote

–Copper seems to have been foretelling the direction of stocks.  Yesterday it plunged fully 25 cents late in the day to 318.  Spike low early Monday morning was 307.15.  Stocks had a late sell off as well, and the Shanghai Composite continues to make new lows. SP500 fell 2%.
–Interest rates were fairly quiet.  Vol slipped… seller of about 12k TYX 129p.  Also FVZ1 122.5/123 strangle was sold in size of about 13k from 62 to 61. (New, adding to position, settled 61).  Curve flattened after large steepener Tuesday.  Red/gold pack spread was 185.5 Monday, rose to 195 Tuesday, and fell to end just above 190 yesterday. 
–Today’s domestic news includes GDP revision expected 1.2%.  Jobless Claims 420k.  7 year auction. Awaiting German vote at time of writing.
–From the AP, Federal Reserve Chairman Ben Bernanke: Long-Term Unemployment A ‘National Crisis’.  ZH reports that Bernanke said the Fed might have to do more if inflation expectations decline, in response to a question after the speech. 
–An example of Greece in the US is Illinois: The state will end FY2012 with a deficit of $8.3 billion according to a Sept. 26, 2011, study by The Civic Foundation. Its study noted that although the state reduced spending, any benefits were negated by higher pension costs and increased borrowing costs.(sunshinereview.org).  Though income taxes were raised from 3 to 5%, medicaid and pension costs keep rising.  Chicago is in similar budget bind, facing $650 million budget hole.  Fees and taxes are raised, businesses leave or adjust, and expenses keep rising for the gov’t.  With long term rates at new lows, unfunded pension liabilities continue to grow.

Sept 28.

–5 yr auction today. Bernanke speaks at 5 EST about emerging economies. 
–Ten year and bond yield both up 11 bps yesterday, with tens back above 2% to 2.01.  Before the Fed meeting 30 yr was around 3.21%, plunged to 2.74 and now back to 3.11.  So perhaps the majority of “twist” pricing in the curve has already occurred.  A gov’t sponsored mass real estate refinance plan is probably going to be a lot more effective than simply trying to hold bond rates low (if that’s even possible). 
–Euro$ calendar spreads also moving out toward highs.  For example, EDM12/EDM13 fell to 1 on FOMC day, now back out to 11.5, near the high of the past month. Red/gold pack spread has jumped 30bps since last Tuesday, to 195 yesterday, up nearly 10.
–Article in WSJ notes that Man Group assets fell $6 billion (nearly 10%) due to redemptions and some negative returns.  There was another piece, (I think in FT) about financial transaction tax.  Related to drops in interest rate futures open interest?  (yesterday euro$ OI was up modestly).   
–There’s a quote from Warren Buffet, and I paraphrase, that when a company with a good reputation takes over a company with a bad one, it’s usually the latter reputation that remains intact for the combined entity.  Germany faces dilution of its credit to ‘save’ Greece.

Sept 27. Wild swings in metals

Dec Gold had a range of $131 yesterday.  Silver, $4.82.  Crude $4.12, Copper, 28.5 cents.  And this morning silver up $3. Wild swings.
–Markets responded to news that EFSF would be expanded and possibly levered.  According to CNBC, the EFSF would provide seed money to the Euro Investment Bank, which would then buy sovereign bonds.  On margin.  Gives me the same feeling of security as the NYPD Police Chief saying that the dept can take down a plane if it has to.  Still a German vote coming up Thursday on EFSF ratification.
–Buffet is buying back shares of Berkshire as they’re undervalued.  You’ll notice that HE isn’t buying Greek bonds.  AAPL (over 3% of SP500 weight) closed down slightly due to lower component shipments for the i-pad.  At the same time, AMZN released its new tablet features.  Foretells lower consumption or simply competition and substitution?
–Liquidation seems to be the theme in eurodollar options.  Seller of 30k E2Z 9887c from 32 to 31. Open interest (OI) declined 25k.  Also a seller of 40k EDM13 9900/9750p 1×2…exit.  Euro$ futures OI down another 46k.  In fact, through the beginning of 2011 ED OI had gained from 7.15m in Jan to 10.77m in mid-June.  Since then it has steadily dropped, now 8.37m.  Same sort of pattern in treasury interest rate futures. Any implication for stocks of financial exchanges?     
–Today’s news includes Consumer Confidence and 2 year note auction.

Sept 23. Carnage

Extraordinary moves yesterday with stocks plunging, gold down around 4%, oil down 6.8%. The dollar soared.  Bond yield sank in the wake of the Fed’s twist announcement, with 30 year down 25 bps yesterday, and 42 bps in just two days.  Crisis low 30yr was around 2.5%, now 2.79%. Copper has fallen 25% in less than two months; high was on August 1.    
–Eurodollar curve displayed the same reaction…reds -1.6 bps on the day, while golds were +24.5, perhaps the largest one day flattener I’ve seen, at least at these low yield levels. 
–The market is craving help from policy makers.  Yesterday it grasped onto news of european bank recaps- stocks rallied as did the euro- but then quickly faded back as the banks in question are mid tier.  (BBG) G-20 officials said after talks in Washington they were “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.” While the markets plead for a strong gov’t response in the form of bank recaps and financial firewall, ordinary citizens are having gov’t benefits pared due to austerity…all part of the same increasingly volatile mix. It’s hard to envision an ironclad announcement of support that will provide true stabilization, though a Governing Council member of the ECB said growth risks may be addressed as soon as next month.  My own bias is that lack of political cooperation in europe and the US will forestall a strong response to the crisis, and markets will sense the weakness.
–October treasury options expire today.

Sept 22. New Fed “twist” program could backfire as dollar strengthens, stocks fall

Sept 22.  30 year bond yield fell below 3% as the Fed announced $400 bln in longer dated treasury purchases by June 2012 in a “twist” program.  The Fed cited significant downside risks in the economy and lower inflation expectations as previous price increases dissipate. (But you still can’t refi if your house is underwater). 2/10 treasury spread made new low of 167 (-13 bps).  Three dissenters, who favor no more stimulus.
–Prior to the Fed meeting there were rumors that capital infusions would be forthcoming to French banks either through France or Qatar.  BofA, Citi and Wells debt ratings were all cut by Moody’s, as perception of gov’t as a backstop is now questionable.  In keeping with the same theme, the House yesterday rejected a short term spending bill, threatening another govt shutdown fight, and highlighting the idea the gov’t spending will likely be a drag on GDP rather than a boost.
–After the Fed announcement, TYZ 130.5 straddle was sold heavily down to 2-57 (traded 3-08 in the morning).  Stocks accelerated a sell off late in the day, as did EUR, which quickly plunged from about 137.50 to 136. (now below 135, and EURJPY making new lows, as is copper). Immediately after Fed, two people mentioned the same thing to me: attention will now shift back to europe.  And the implications aren’t good.  China Mfg PMI fell to 49.4, signaling weakness.  China shares erased much of Wed’s bounce, now ready to re-test new lows.
–A breakout in the dollar, which appears to be in its beginning stages, has negative ramifications for stocks (as exports by multinationals have been a bright spot based on a WEAK dollar).  It would also be deflationary, and if combined with a slowdown in China, poses risks to world growth.  The Fed’s plan to support housing assets may backfire…the transmission effect of lower rates isn’t working well in a world of negative equity, and if stocks (and gold) tumble then “wealth effect” consumption goes into reverse.  Gov’t sponsored debt write-offs are part of the solution, but politically unlikely.
–News today includes Jobless Claims 420k and Leading Indicators, expected 0.

• 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.