The Hard Part

May 12, 2024 – Weekly Comment

“See, you know how to TAKE the reservation.  You just don’t know how to HOLD the reservation.  And that’s really the most important part of the reservation: the HOLDING.”

“The easy part of private credit is lending money.  The harder part is getting it back.”

The first quote is from a Seinfeld episode where the car rental desk does NOT have the midsize which Jerry reserved.  The second is from James Morrow of Callodine Capital, cited in an April 18 BBG article and again by Danielle DiMartino Booth in a Blockworks podcast this week. DDB also said this: “Traditional banks are now expediting price discovery [writing down asset values] when it’s incumbent on private equity and private credit to slow the process of price discovery.”  She implies that there are a lot of dodgy assets on private equity books that are tucked in dark corners (with fingers crossed for rate cuts).  I happen to have first-hand experience with this dynamic.  I worked at Refco when it went public.  I bought shares in the IPO; as much as I thought was prudent. The CFO assured me I was thinking too small, that Refco was on a path to go head-to-head with the CME.  I knew guys that took out second mortgages for this deal.  Then, as the stock was climbing, a non-performing, or actually, a non-existent asset was discovered (un-discovered?) on the books. I think it was an uncollectable debt related to the previous blow-up of a famous trader. Fraud.  And that, as they say, was all she wrote.  Stock went to zero. CEO went to jail.  That was in 2005. 

They don’t let that happen any more.

If it’s private, you can value it wherever you like. Tough for the end investors to really know.  There was a May 7 article by Business Insider for example, saying that Blackstone’s BREIT is not generating the cash flow out of operations with which to pay investors.  It’s a pretty harsh accusation:  From the article:  “Craig McCann, a financial analyst who served as an economist at the Securities Exchange Commission, wrote last year. ‘Investors should not accept anything Blackstone and BREIT state as truthful.’ ”  But BX isn’t anywhere near zero.  It’s only about 6% away from the year’s high.

I’m not saying these things are true or untrue.  But we’ve all seen situations unravel in a hurry. Everyone knows that, but now thinks the Fed will always be there.  Bullshit.   

Last week I cited the SBUX earnings call as a dead canary regarding the consumer.  This week ‘Goldman warns consumers are cracking’ (ZH).  McDonalds is vowing to bring back value.  Whole Foods is “…expanding its generic brands to offer more affordable options and minimize the impact of inflation.”

In April, Consumer Confidence sank to the year’s low of 97.0 from 103.1 in March.  On Friday, U of Mich Consumer Sentiment plunged to 67.4 from 77.2.  On Tuesday we get NFIB Small Business Optimism, which was 88.5 last, below the COVID low. Last time it was here was 2012.  Also on Tuesday is the Q1 NY Fed Report on Household Debt and Credit.  This report is released at 11:00 am, but there’s a press call at 9:30, so someone will have the details before the 11:00 am release. (if not already)

NFIB is tracking the path going into the GFC (in a downtrend from 2005 to the beginning of 2009).  Note that the last Fed hiking cycle of similar magnitude ended in June 2006.   FFs remained at 5.25% for 15 months, until Sept 2007.  In the current cycle, the last hike was in July 2023.  Fifteen months puts us just before the election.  This weekend Bowman said she doesn’t see the need for cuts this year.  Logan said it’s too early to think about cutting and even Kashkari says the FF rate should stay high for an extended period.  (I would note that in the Greenspan years, Fed Funds stayed between 5% and 6% from the start of 1995 to the end of 1998, nearly 4 years).  Last week’s SLOOS indicated generally tighter credit conditions.  While many analysts are complaining that financial conditions are becoming too loose and will re-ignite inflation, I think those fears are overblown.  Long-end yields are still being pressured higher by the fiscal situation.  Deterioration in consumer finances will keep the Fed on track to ease short rates.  The curve should become less inverted. 

Along with NFIB, and the NY Fed report, PPI is released on Tuesday.  Then on Wednesday, CPI and Retail Sales.  CPI expected 0.4 with Core 0.3.  Yoy expected 3.4 from 3.5 with Core 3.6 from 3.8.   


Overall it was a quiet week.  Curve became slightly more inverted.  The two year rose 6.5 bps to 4.866%.  Tens rose 1.5 bps to 4.644%.  On the SOFR strip SFRU5 was weakest, settling -10 at 9569, while three years forward, SFRU8 was only down half a bp at 9604.5. 

Somewhat interesting were large (new) out-of-the-money put buys in treasuries Friday, right around the time of futures settlements:
TYN4 105.5p 6 paid for 35k, settled 7
TYN4 104.5p 3 paid for 35k, settled 4 
(TYU4 settled 108-305 ref 10y year 4.644%.  One point in TY futures is 15-16 bps, so 3.5 points, the 105.5 strike, is around 50 bps away.

FVN4 104.0p 6.5 paid for 35k, settled 6.5
FVN4 103.25p 3 paid for 45k, settled 3.0
FVU4 settled 105-3025 ref 5y at 4.516%.  One point in FV futures is 23-24 bps, so 2 points to the 104 strike is also around 50 bps away.

There are some short end trades going on like buys of SFRM4 9475/9500c 1×2 for 0.5 (settled 0.25, 2.25/1.0) and SFRU4 9500/9550c 1×2 (also settled 0.25, 9.25/4.5).  Much better to pay up rather than have the open-ended risk to the upside.

UST 2Y480.1486.66.5
UST 5Y447.8451.63.8
UST 10Y448.7450.21.5
UST 30Y465.7464.4-1.3
GERM 2Y292.4296.74.3
GERM 10Y249.5251.72.2
JPN 20Y168.3169.20.9
CHINA 10Y231.5232.00.5
SOFR M4/M5-90.5-82.58.0
SOFR M5/M6-39.5-43.0-3.5
SOFR M6/M7-9.0-12.5-3.5
CRUDE (CLN4)77.7677.840.08

Posted on May 12, 2024 at 11:38 am by alexmanzara · Permalink
In: Eurodollar Options

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