Author Archives: Kevin

420 Bob

The rates space has foiled the promulgated narrative of the media crowd. Monday, and for a few hectic hours Tuesday morning, the ridiculous idea that falling 10 year rates “were telling us something (that was leading to stock selling)” was the meme du jour. As we pointed out, this gross misunderstanding of, flows, low rates and macro economics is a convenient retro-fit for unexpected or knee knocking equity drops.

The fairly stable and attenuated range in the term structure is providing support to the economy. Corporations are utilizing the extended exit concept to lock in financing into 2020. Consumer balance sheets continue to heal and the Siren Song of borrowing is faintly tickling their ears from far away shores. As the annual smoke-in known as 420 Day approaches, the markets have inhaled a big toke of reality …and chilled.

Nasdaq Red Moon

The Nasdaq future (100) moved up enough to trigger a buy signal at 3463 and raced through the first objective. Quickly, the market reversed back through the Sell point at 3447 and is melting into the downside objective of 3394.

The price action is ringing in calls for a major market and economic contraction. The present reality is the market has returned to Feb. levels in a hard seasonal round trip. Traders continue to embrace the notion that the Naz Leadership is a harbinger of bad things to come. We are unconvinced.

A major theme of our understanding of QE is the higher elasticity of capital market prices to economic activity. A world focused on high speed trading has increased the link between markets and activity. Economic lags continue to be well behind the 400 millisecond capital investment. The other “analysis” we hear is the rising 10 year note price must mean something bad is coming. This myth was heavily hyped in the sub-2 % spike. Contrary to the “This must be bad” thinking, the economy bottomed and improved from that point.

As we mentioned in a note last month: Equity market gyrations are over analyzed both up and down. Behind the apoplexy, a 2+ economic advance struggles for traction and something faster. Certainly, tanks and shirtless egomaniacs complicate confidence but deep down Americans focused on missing planes and celebrity club hopping have little room for the Ukraine. We continue to believe markets have been “loose” from the underlying reality for some time. There’s less going on regardless of direction.

On Drugs

This is a primer on medical treatment, drugs and by connection the health insurance roll out. Gilead bought the maker of the experimental Hepatitis C drug now called Sovaldi for $11 Billion. According to the SF Chronicle, over 3 million people in the US have Hep-C and 140 million worldwide.

The drug will CURE over 90% of cases with a 3 month pill regimen of 2 pills per day. The cost in the US is $84,000. Compared to long term kidney problems or a $500,000 transplant the number is not insane. In fact, other drugs, with lower efficacy, can cost twice the amount. The key here is the potential volume. Under full coverage in the US the take for Gilead is $252,000,000,000 not a bad return on 11B. Express Scripts and the big carriers are fighting back on the cost of the pill.

The same treatment in the UK would cost roughly $60,000 and in Egypt a paltry $900. Clearly, the dysfunction in the US is leading to exploitation. Biotech, R&D and the confusing weave of health care in the US just got much more complicated.

On the Sidelines

Some technical difficulties put us on the sidelines and WOW is it crowded over here. We continue to believe the tossing around in equity markets has more to do with the modern reality of monetized capital than economic activity. Groping to retro-fit a couple day’s rise or air pocket down to the globe’s growth path is a popular fool’s game.

I still see signs of improved traction and confidence away from the circus that is the Naz and SP indices. Outside of Wonderland, markets fluctuate without immediately morphing to crisis. I expect the noise to continue at least until roughly half the earnings are out. Interestingly, we noted the “Black Diamond Day” on Hooper last week (and a weekly upside objective) that warns the next pattern will be a choppy mess. A broken router can also keep you from slicing yourself to pieces.

The stream is red hot with crash hype and Day of Reckoning vitriol. I’m not a fan of Greek or Spanish debt up here but this doesn’t look like the crisis everyone’s hoping for.


The Note market had an outside range after Employment. As we’ve said before, we look for inside nesting days if the Employment direction is still valid. The Equity market has adjusted to the significant corporate down guidance as the reporting season kicks off. The Naz is popping this morning. I could see a scenario where tech outperforms the SP through the first half of earnings, and the pundits have to completely change their narrative.

We will be watching the rates space to turn back on the model.


The after data market snapshot is a pop in the belly and further re-orientation toward steepening. European debt markets are moving up in the headlines. The strips, after seeing shorts cover earlier in the week and move to short dated options, are 7-8 better. The prices held “fair value” with a meh number.

We are watching for a weekly up (lower than last week low and higher on week) and prices are testing that level now. I could see the rally fade by Tuesday and we could see a common pattern of weekly up followed by a weekly down. You get the picture..More of the same.


The electronic trading world and its shady links with certain entities and for profit exchanges continues to dominate the airwaves. Behind that discussion, a little followed rule from Dodd-Frank is coming to shape. Here’s some background, uncovered digging around with Matt Boesler of Business Insider:

Basics- The fed pays IOER to entities that have accounts with it. This operation started as crisis response so the political environment was too toxic to ask that the GSEs be given accounts at the Fed. Fast tracking MS and GS into “covered banks” had to get done. Since GSEs (and other shadow banking entities) would find themselves sloshing cash around, the FF rate would/could fall below the target area of the Fed.

Hanging at ZIRP, few cared but the hope to someday return to normal meant a “floor” needed to be supported. Term Deposit Facility and the Death Star came into being. Heavy new regulation was also, and continues to be, loaded on the system. Systemically Important Financial Institutions (SIFI) crystallized TBTF in the new landscape. Exchanges and Clearing Corps, having moved to for-profit public Cos, added a new layer of coverage to the system. Enter the Financial Market Utility (FMU). Now, under Dodd-Frank, since Feb 18, The FMUs have accounts at the Fed (and fairly large cash balances sloshing around as much OBS OTC activity is now on). The Fed is “deciding” what rate these FMUs will receive on these balances. Everyone else, into the Death Star beam.

I find it odd that while outrage and regulatory fighting on HFT, maker-taker and “rebates” takes the center stage…The government has allowed the Fed to “electronically mark up the balances” of the same institutions. Right hand….meet Left.

Developing, Scratching Head, Meh


Headline Risk..

..or How I quit day trading and learned to love the Tape Bomb.

“What are you buying right now then, Kevin?” The tilt of this question, a common follow up after I explain my disdain for the belly, speaks volumes to the operational bias of market analysis. After 4 sessions of liquidating retreat, the bond market is allegedly, “Leaving the station” for higher rates. Maybe, maybe not, either way the track will be twisty. I heard a lot about it leaving the station in Dec too, only to see the Great Rotation morph into one of the top performing sectors of the quarter.

The reality is violent repricing on certain data release dates has shifted participant risk to adjusting to the effect. Players looking for higher rates were enticed into curve flatteners to offset the carry consequences of their ideas. As we noted last week, it is not uncommon to be wrong on direction and bailed out by the curve. The Employment report is driving a reduction in this position and the long end is feeling the heat because that’s what’s “owned”. I would not say the “market” is anymore liked, or disliked than prior.

If you look at data releases in terms of volatility, or range, then a interesting consequence of Fed openness has developed. Fed days and Employment days (and we believe soon Retail Sales days) become the “equivalent” of 4 to 5 “regular days”. This means position reduction (usually considered the prudent action) into these events can alter capture by as much as 1/4 of the month. It also means that position size away from these points needs to ramp up to accommodate for missed opportunity if your “risk management” is to be out when they print. It also means that short dated option products that encase these releases provide interesting “bets” to get a piece of the drama. Guess what? That is exactly what we are seeing in the futures markets.

Don’t read to much into movements prior to these releases that are driven by liquidation of large holdings unfit for headline risk. If you want to play on data ( its an addiction after all), adjust your size to 1/4 or 1/5 of “normal” and think of it in terms of “days.” Above all, stick to your discipline and plan. The disciplines may vary but the plan is to still be trading on Monday.



The Liquidity Birthers

Michael Lewis writes good books. His most recent is creating a stir from a well crafted marketing campaign and a touchy subject. Unlike The Big Short, which no one in the real world wanted to admit they were on the wrong side of (spoiler alert: we all were); Flash Boys has an antagonist that everyone can openly hate. This post isn’t about that.

The hype over a fact, well known to any professional, is unimportant. The real story lies with the Liquidity Birthers that defend their actions with this heavily promulgated myth. Here’s the thing, there is no liquidity in the securities that matter when the eventual problem comes around. Equity, low man on the totem pole of capital structure doesn’t require liquidity by definition. Debt, on the other hand, does.

A large chunk of what is perceived to be some of the deepest, widest and most resilient of that debt now resides in a Yucca Mountain of carry at the Fed. Futures and options products linked to those obligations now transact massive pre-arranged trades away from the mirage that is the prevailing presented price. (If the market was liquid, why would they need to “block” away?) HFT will always have the Eric Stratton defense on their side (we broke a few rules and took some liberties with the female party guests…but don’t knock the whole system or the good ole USA). We need to come to terms with monetized capital markets. Stocks that are actually flows. Only then can we get into the minutia of speed. The business of Wall St, and to a degree America, is the creation and churning of financial products.

There’s a host of scummy things going on in the electronic trading world and “for profit” exchanges complicate that. But, there was no shortage of scum-baggery going on in the ole’ pit days either. (Eric Stratton again..”we did, wink wink.”) Lets just drop the liquidity myth as the reason this is supposed to be ok.