Sept 20. And then, depression set in.

chicago-boot–Not much occurred in the markets yesterday.  Interest rate futures were largely unchanged.  However, the Nasdaq future made a new contract high, but then reversed and had an outside day with a lower close: Key Reversal.  However, other stock index futures didn’t fare badly and ranges weren’t particularly large, so it might be a bit of stretch to call a top.  (Though that’s what I’m doing).  Take a look at a stock like GE.  It used to be the largest cap stock in the US, and it’s still fairly large at $266b, but it’s off more than 10% from the high set in July and closed on the low of the day yesterday.  Also, take a look at Deutsche Bank.  It closed down 3% at 12.97 and is nearing it’s all time low.  According to BigCharts the market cap is $16.54b.  According to BBG it’s $17.9b.  The US Justice Dept wants $14b.  

–Now consider a crude analogy.  Imagine that you live in Chicago.  You learn that your friend’s car (we’ll call him Dave Bartman) has gotten the Denver boot.  He needs you to provide funding.  On a good day the car is worth $1500, call it $1515 if there’s case of beer in the back, which there might have been, but it went to the city pound so the value of that asset is dubious, as it may have disappeared.  The tow fee is $150.  Storage is $20 a day for the first five days, another $100.  You don’t get booted if you don’t have outstanding tickets, call that another $500.  Plus, you got another ticket for that particular day ($50).  And the boot fee is $100.  Mastercard?  I don’t think so.  And don’t forget that it’s winter (because that’s when this sh-t generally happens, take it from me).  So now you have to decide, do I fund this project.  Good news, your friend tells you he has interest rate derivatives with a notional value of $10 million.  “Great!  What do you got?”  “I’m long 10 Dec eurodollar 100 calls.  I paid two and a half for them.”   That’s DB.
–Another lurking debt problem was pointed out by the BIS concerning China.  From the Telegraph’s Ambrose Evans-Pritchard: “Outstanding loans have reached $28 T, as much as the commercial banking systems of the US and Japan combined.  The scale is enough to threaten a worldwide shock if China ever loses control.  Corporate debt alone has reached 171pc of GDP…”  As a comparison, Q2 Corporate debt outstanding in the US is $8.376T, a record high, but as a percent of GDP it’s only 45%.


Posted on September 20, 2016 at 5:06 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply