Author Archives: Kevin

Now what ?

In November of 2008 Quantitative Easing became a household word and the LSAP (Large Scale asset Purchase ) program was launched. Quickly, the 2 concepts became viewed as one. Like Ebeneezer’s nighttime guests, QE 2 and QE 3 were visited upon us in Nov. 2010 and Sep. 2012. Unlike Scrooge, the nation has not risen with a renewed outlook and joyful re-incarnation. The landscape has changed markedly, however.

The simple truth is markets care about the calibration of monetary policy not the ugly way in which its delivered. Now that LSAP has faded away, we will get another chance to see how far, if any, the spigot has been left open. Taylor, and many others, has argued that the FF rate should be considerably higher. Here’s a thought experiment: When oil prices move, a multitude of global adjustments take place. Yet, when the most fundamental borrowing rate in the financial system is “artificially held too low” for years….nothing happens and more importantly, Mr. Market makes no attempt to alter it. Oil traders are brilliant but bankers are all dumb.  We do not,,,and have never believed it.

The purest example of our belief is what transpired earlier this month. After months of FG prodding that the Ghosts had all visited us, participants herded into the promoted idea of “raising the rate.” 10 sessions ago, just before the POMO swansong, that idea blew up magnificently. QE continues to have the dubious reputation of being completely ineffective AND the cause of everything. We have tried over the past years to draw the distinction between LSAP (and other innovative programs) and the policy regime..QE. We remain in a QE regime so prepare for reports on halting of re-investment and the roll down of the Fed balance sheet. Raising rates is reactionary Fed policy not precautionary. Goodbye POMO, hello ???

The 12 Monkeys Rule

If you really did know the future, everyone would think you were crazy anyway.

 

Yesterday, 2 unrelated “happenings” came to light in FI Markets. First, the silly. After a well intentioned long period of warning, the CME Group altered the delivery basket for the Classic to account for the 5 year window from 2001 to 2006 for which no standard issue existed. Months of meetings and discussions failed to soften the 10 point higher repricing of the illiquid contract for next June. A paltry 1600 contracts traded and the slaughtered will, as usual, fade into obscurity. Unlike the “leaked” stopping of issuance announcement, where well known players bought wildly before the release, this move seems to have little to cheer.

Also:

Harley Bassman (super bright mortgage analyst) emerged from the shadows at PIMCO to pen a typical “Must Read” on the Eurodollar term structure (I know a guy that writes about that a lot, I heard he was awesome) and implied vol for those slopes. I won’t attempt to paraphrase Mr. Bassman’s great writing in my irreverent and pedestrian way, just read it here:

 http://www.pimco.com/EN/Insights/Pages/Financial-Market-Cognitive-Dissonance.aspx   

However, between the lines rests a very direct push back to the huge position that Bill Gross was holding. Essentially, BG was long the strip and short the volatility. As the color coded lines show, BG was betting that a steady state of roll down would increase the price AND converge the green vol to the much lower red. Bassman argues that a long position should also be LONG the red vol.

Discussing this oddity with GRD ( @Groditi on Twitter ), we noted that without a robust MOVE future, yet, Hedgies and Specs caught out in the FI squeeze and stock market air pocket down had no alternative than to buy VIX during the event. The present pricing indicates this insurance was also no bueno. The apparent disconnect between the strip and the implied vol also shows the decimation of FI trading desks has allowed situations that would have been “arb-ed” away much earlier to fester and morph into anomalies, correcting violently sans liquidity…..as indicated in event 1 above.

Take heart, if you did know the future, no one would believe you anyway. 

                                                                               

Can I Get 10,000 Marbles ?

As we indicated last week, the interest rate volatility coincided with a massive drop in OI. This morning’s JPM Client Survey showed a huge jump in NEUTRALS.

The run off destroyed positions aligned to FG and the Fed dots. The survey shows that turning the positions to net long will not be easy. Eurodollar open interest trends toward the prevailing fixed or floating orientation of end users. Convincing finance operators to Pay Fixed does not jive with the general milieu.

It seems the “guide” at the head of Forward Guidance turned out to be Stork from Animal House, and the Band marched right into a dead end.

What Just Happened?

The markets went haywire yesterday and the explain-a-palooza has been in full gear. Here’s the angle we are coming from: Its all about the positions.

We have, ad nauseum, railed against the “openness” policy at the Fed and the tethering and jawboning of expectations expressed in forward market prices. Essentially, The Fed promulgated a universal position then watched it blow up. The market, in fact, was conservative in its evaluation of FG. Now Fed Talking Heads are backtracking.

PIMCO WG (with Gross) and Janus AG (after Gross), are just 2 examples of positioning large to FG. Long the Eurodollar Strip and short the Vol was buying into FG whole hog. When the market repriced rather than slowly roll up over time, things got weird.

We, and many others, have also warned that FI desks have been gutted as regulatory and reality changes have altered the PD/bank landscape. The CME Group may laud the VOLUME but the massive Open Interest drop and price spike show there is no LIQUIDITY.

Remarkably, we are to believe that a sudden 100 BP shift in the color coded Eurodollars over a month and a 450k drop in open interest -IN A DAY ! – resulted in no P/L damage to anyone. We are going out on a limb here..Somebody got hurt…BAD. We’ll find out who and how bad over the next few months.

Dysfunctional markets are driven by liquidation and It’s always about the positions. I’d love to see a damaged speculator sue the Fed for following their guidance. Now lets see who wants to come back and play again.

Dallas Topic

A tweet from a really solid follow – @interestarb – highlighted one of the topics we covered in Dallas with Blake Morrow and Wizetrade. The astute @interestarb noted the insane popularity of peripheral European bonds at paltry yields. In Dallas, I referenced the early 80′s when yields well above the nominal growth rate were shunned. Henry Kaufman – Dr. Doom -of Solomon Bros. (#GIK) coined the phrase “Certificates of Confiscation.”  As the young pit broker for Dean Witter Reynolds cash desk, I was sometimes asked for an opinion- usually when the desk was well under water. “I think they trade well, I’d say,” sheepishly hedging. “I think we should buy some.”

“Someone tell the kid, we don’t buy this stuff.” would be the jab over the Hoot-n-Holler. An entire generation of traders knew only how to short.

Flash forward to today. Bonds of dubious heritage and zero/negative real rates are hoarded. ETF products promulgate the “renter” class for the asset. Several years ago, I coined the term CANs, for Capital Appreciation Notes. This is what happens at cycle peaks and troughs. In fact, it MUST happen. The universe self corrects, And we don’t buy.

Update

Since we have a lot of new people behind the curtain now – thanks for checking in all – here’s an update on The Dog’s view.

The WEEKLY SPZ pattern completed a short from 1990 to 1948.90 Wed/ Thur. At the minimum 2/3 covered at objective and stop moved down to 1976.50 until close and New Pattern tonite.

On the DAILY – the POC was 1950.50 to turn up looking for 1980 and stop is 1948. Good risk.

Hooper Drives the Boat, Chief

All the King’s Horses

“Bond King” Bill Gross abdicated the throne of the empire he built to avoid a revolution. Gross’ behavior has tilted toward the odd since the peak in Fed QE/LSAP activity. The ElErian departure was only Act II.

Rumors are now flying that the Stamp Collecting Cat Lover will take the other side of PIMCO’s massive positions for his new firm. The reality is most traders that find themselves in new employ, or trading their PA, reload the position that got them into trouble – often with great result.  Just ask Jon Corzine.

We predicted early in 2014 that the King’s reign was over and a fall was coming. Obviously, we thought it would be Mr. Market that would lead the revolt. Instead, it was a series of weird communications and office jag-offity. We don’t see the Janus job working out. The next headline is the exiled Bond King takes his massive wealth, his bonds and his new cat to the beach and retires.

Hooper Update

The SP daily pattern hit the upside at 2003.75. The weekly (coming off the last down pattern week) has an upside target of 2008.75

The 5 yr Note had a black diamond (upside and downside pattern in same session) yesterday on the Fed….avoid it.

EDM6 and EDM17 trade poorly reflecting 1.63 and 2.63 respectively. Dots way higher.