Author Archives: Kevin

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.


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:   

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… 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.


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.

4.86 for 100 Years

from Bloomberg News:

Century Club

This would be Ohio State’s second century offer. In 2011, it became the first public school to issue 100-year taxable debt when it sold $500 million. In earlier issues, Walt Disney Co. (DIS) sold centuries in 1993 and the Port Authority of New York and New Jersey followed a year later. Yale University and the Massachusetts Institute of Technology have sold centuries into the corporate market. So has railroad Norfolk Southern Corp.

Ohio State is determining whether to issue taxable bonds due in 2114 or tax-free securities due in 30 years, Papadakis said. The Cleveland Clinic borrowed Sept. 11 via the corporate market at an interest rate of 4.86 percent for a century, data compiled by Bloomberg show.

While historically low yields are luring issuers, some investors are balking at longer debt.

BlackRock Inc., the world’s largest asset manager, is shifting to 10- to 15-year bonds from longer maturities, Peter Hayes, the company’s head of municipal debt, said in a Sept. 10 report. Fidelity Investments is also focusing on intermediate debt, said Kevin Ramundo, a money manager who helps oversee its $28.6 billion of state and local securities.

And TeeVee’s telling you about the Fed changing some words.