Turning points -weekly comment

On Friday, I attended the funeral for my uncle Constantine (Gus), a veteran of WWII, who served in the South Pacific as a naval officer.  I have always respected the tribute of Veteran’s Day, but I must say that this was an especially poignant and fitting occasion, as it was a full military funeral held at Jefferson Barracks National Cemetery, just to the south of St Louis on the west bank of the Mississippi River.   This is a massive plot of land, and it’s stunning to actually see and drive along the unending rows of uniform white marble grave markers over gently rolling terrain.  There were three fully uniformed military personnel who stood at attention throughout the service, followed by a three-volley rifle salute and playing of Taps.  Finally two of the three Honor Guard members slowly marched to the casket and at either end lifted the flag draped over it, and went through the slow and somber precision ritual of folding it in a triangle and presenting it to the family with the grateful thanks of a nation.  It’s one thing to see in a movie, and quite another to actually observe, and I was honored to have been present.

The drive to St Louis down I-55 takes one past the industrial factory corridor of southwest Chicago, followed by the Exxon Mobil refinery in Joliet, which we passed pre-dawn, a huge complex of steel lattice towers and cylinders, whose staggered lights dotting the structures are shrouded in steam and smoke like a science fiction movie.  Along one side of the highway was a miles long freight train.  Further south there are giant windmills looming over now barren cornfields, and a few hours later we reached the historic backbone of the US transportation system, the Mississippi.

It’s a pretty sharp contrast to the flashing lights of our trading screens which represent the values at any given moment of this aggregation of labor and transport and physical product.  Comments about markets will be fairly short this week though there were some interesting reversals, perhaps signaling some longer term changes.

Most of the commentary in the US about market movements last week was related to dimming prospects for a sweeping tax reform program.  US stock indices eased modestly, as did the US dollar index.

There were a few high profile reversals.  Most notable was bitcoin, which soared to 7879 before posting a low of 5507 and ending at 6160.  A range of about 30% on an asset with $100 billion market value is astonishing.  The Nikkei also made a new high on Thursday, having rallied 20% since the start of September, but had a big outside day and closed lower on both Thursday and Friday.  The US index which seems most closely tied with US tax reform is the Russell (small caps).  It has been in a slow decline since the beginning of October and this week gave up about 1.4%.  Both the DAX and CAC40 made new highs on Tuesday but then slid for the remainder of the week (-2.9% and -2.5%).  There seems to be an undertow of concern related to even a modest deceleration in Central Bank and fiscal stimulus with the latter being currently defined by tax policy.

However, fixed income markets were not a beneficiary of these worries.  Yields ended higher, with US twos and fives at new highs of 1.654% and 2.051%, while tens rose 5.7 bps to 2.397%.  The VIX closed at 11.29, up from 9.14 on the previous Friday.  Treasury vol firmed modestly on Friday’s price decline.

Most people are aware of Time and other magazine covers as contrary market indicators.  When the mainstream press glaringly informs the public of a given trend, it generally means that trend is ripe for reversal.  The most famous is probably Business Week’s ‘Death of Equities’ from 1979 which explained ‘How inflation is destroying the stock market”.  There was an additional feature: ‘Indexing bonds to oil and gold.’  Another one of my all-time favorites in the ‘bad-timing’ category was when Merrill briefly changed its famous bull logo into a swirling neon outline representing fiber optics of the tech boom right before the Nasdaq crash of 2000.  It’s much different than today’s environment, with sage commentators knowingly assuring us that inflation can’t go up due to technology, demographics, etc.

While magazine covers no longer hold the same cachet as they once did, it makes me wonder whether Powell’s recent announcement as Fed Chair will mark the low of the Central-Bank-inspired decline in volatility.  I would also note that the ICE exchange launched FANG futures this week.  Could it possibly signal the top of the mega-cap tech darlings that have single handedly powered passive portfolios to new highs?

One other note.  High yield junk bond ETFs HYG and JNK had their lowest closes since March.  While spreads are pushing a bit higher, I would hesitate to focus too strongly on these products.  Janus posted a rather interesting piece last week authored by Jenna Barnard, about the decline in supply of high yield bonds, noting a couple of factors.  For example: “While the number of credit rating downgrades has exceeded the number of upgrades in the high-yield universe, the volume of debt being upgraded to investment grade has far outweighed that being downgraded to the high yield index.”  She also notes the resurgence of leveraged loans, where “…over 75% of loans outstanding are classified as ‘cov-lite’.”  Further: “Since the end of 2014, the U.S. high yield market has shrunk by 3.7% while the loan market has grown by 12.7%.”

https://blog.janushenderson.com/most-unusual-cycle-shrinking-high-yield-market/

While there have been consistent warnings in some outlets about Chinese debts in the shadow banking system, it’s not always clear when marginal debts coalesce into something more ominous.  In this regard, I would mention in passing the 17% stock drop that LC (Lending Club, a peer-to-peer lender) encountered as it announced plans to tighten lending standards.  It closed at 4.30, less than 1/5th of its IPO price in the beginning of 2015.

 

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11/3/2017 11/10/2017 chg
UST 2Y 162.1 165.4 3.3
UST 5Y 200.2 205.1 4.9
UST 10Y 234.0 239.7 5.7
UST 30Y 281.8 287.8 6.0
GERM 2Y -75.3 -74.6 0.7
GERM 10Y 36.4 41.0 4.6
JPN 30Y 84.4 80.3 -4.1
EURO$ H8/H9 32.0 32.5 0.5
EURO$ H9/H0 17.0 17.5 0.5
EUR 116.10 116.65 0.55
CRUDE (1st cont) 55.64 56.74 1.10
SPX 2587.84 2582.30 -5.54
VIX 9.14 11.29 2.15

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Posted on November 12, 2017 at 1:00 pm by alexmanzara · Permalink
In: Eurodollar Options

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