Recap 2014-10-24


Despite the recent move in equities, the options market suggests that the ‘wall of worry’ remains high. The Put Call ratio, for example, remains very high, at levels last seen in mid 2012, late 2011, and mid 2010. The tone has clearly also shifted – equities were higher today despite the Ebola headlines as well as lower oil prices. The S&P is actually less than half a percent away from being UP for the month.

Oil prices are quite interesting here. Despite the price action last week, there was a rise in open interest which is unusual. There is limited timely, public data on this market, so for a financial markets person like me, it is hard to get a clear read on the underlying fundamentals. What seems somewhat safe to say is that 1) oil prices are not far from marginal costs, 2) oil prices are near long term support resistance levels, 3) global oil inventories appears to have been building for most of the year, but oil prices have not fallen due to the geo political headlines. It appears that headline fatigue has set in, and prices are reacting to the inventory build. This all suggests that we may need to see spot prices near here for a while to work off the excess. The futures strip is pricing this in – front contracts have fallen further, and the curve is fairly flat.

The move in the US rates market has also been quite interesting. In particular the curve has steepened on the week, with the 2y point actually roughly unchanged. This is actually all driven by the inflation expectations component. US 2y real yields, for example are actually only 5bps from their highs, and 5y real yields just 18bps from their highs. In other words, the market is pricing in delayed Fed hikes as a result of a fall in inflation:

Time will tell whether this winds up being correct or not – the Fed has historically looked through commodities driven price effects, but given that we’re at the zero bound, there is certainly a good chance that the Fed is more sensitive about that.


  • A second person in NYC has been isolated due to Ebola symptoms
  • US New Home Sales rose 0.2% MoM, but the prior month was revised lower
  • UK 3Q GDP rose 0.7% QoQ as exp
  • German GfK Consumer Confidence 8.5 vs 8.0 exp
  • 25 EU banks reported failed the stress test. Negotiations continue with about 10 banks shown to have net shortfall after 2014 capital measures. Full results are released on Sunday – Bloomberg
  • EU Commission demands more details on French budget. President Hollande confirmed yesterday that France received an official letter from the EU Commission asking for additional information on the French budget.


  • Mon: German IFOUS Markit Service PMI
  • Tue: US Durable Goods Orders, Consumer Confidence, New Zealand Business Confidence
  • Wed: Oil Inventories, FOMC, RBNZ, AU New Home Sales
  • Thu: UK House Prices, German Unemployment, CPI, US Jobless Claims, 3Q GDP, NZ Building Permits, Japan Employment, CPI, UK Cons Confidence

Recap 2014-10-23


The most interesting news out of Europe in a long time, via Reuters:

…tension is most obvious in the relationship between Draghi and Bundesbank President Jens Weidmann, which according to numerous officials who spoke to Reuters on the understanding they would not be identified, has almost broken down. But it goes further than that. According to German officials, Merkel felt betrayed by Draghi’s speech at a central banking conference in Jackson Hole, Wyoming in August in which he pressed Berlin for looser fiscal policy to stimulate the economy.

"Until now the ECB was confident, despite all the criticism in the German media, that it could count on Schaeuble and Merkel," said Marcel Fratzscher, the former head of international policy analysis at the ECB and now president of the DIW economic institute in Berlin. "But the recent criticism has been a real wake up call. There are questions about whether they have the full support of Berlin. The German criticism is a big concern for the ECB."

Weidmann has also not shied away from criticising the ECB chief’s decisions since then. But in the past months, mutual suspicions have grown, according to officials who know both men. A week after Coeure’s visit to Berlin, Draghi and Weidmann’s communications chief gave separate briefings on the same day to small groups of German reporters at an International Monetary Fund (IMF) meeting in Washington. Draghi listed all the ECB measures Weidmann had opposed since taking the helm of the Bundesbank. The Weidmann aide complained that the ECB president was keeping national central banks in the dark and not taking time to build consensus in the 24-member Governing Council, according to people who attended the briefings. Days later, at a Governing Council meeting in Frankfurt, the long-simmering row boiled over, with the two central bankers accusing each other of active sabotage through the media, according to one official familiar with the exchange. That evening, at the ECB’s annual cultural evening, held at the grand Alte Oper concert house in Frankfurt, the tension around them was palpable. "The relationship is totally rotten, it’s beyond repair," said a second official who knows them both. "It has become personal," a third official from the ECB said. "Whenever Draghi and Weidmann are somewhere at the same event, there are bets about whether their paths are going to cross. Weidmann avoids Draghi like the plague."

But even senior Bundesbank officials have begun to express concerns about the deteriorating relations between the two institutions. ECB Council members admit to being worried about hardening attitudes towards the bank in Germany, where supportive voices like Fratzscher have been drowned out by sceptics such as influential economist Hans-Werner Sinn and Holger Steltzner, the hard-line commentator for the Frankfurter Allgemeine newspaper, who dismiss the ECB as a "bad bank". "We will have to fight" to keep the Germans on board, said one member of the council.

One problem, officials says, is that since the departures of board member Joerg Asmussen and Draghi’s top adviser Christian Thimann last year, the ECB president has not had a German ally in Frankfurt who can spread his message in Berlin. Asmussen was replaced by Sabine Lautenschlaeger, an expert in financial regulation with no political experience, and Thimann’s post was taken by Frank Smets, a Belgian. This is why it fell to Coeure, who took over responsibility for government relations when Asmussen left, to make the trip to the Chancellery earlier this month. Frustrations have been exacerbated by Draghi’s leadership style, officials say. The Italian prefers to operate with a small group of confidants, led by Coeure and Peter Praet, the bank’s Belgian chief economist, rather than sounding out a broad range of views on the ECB Council, as Trichet often did.

Before his speech in Jackson Hole, Draghi sought advice from U.S. Federal Reserve Vice Chairman Stanley Fischer, his professor at the Massachusetts Institute of Technology in the 1970s, while leaving some ECB Council members out of the loop. According to one ECB source, Draghi has also clamped down on circulating policy papers to national central banks because they were often leaked. This close-to-the-chest approach has irritated others besides the Germans.

When the vast majority of countries in a union wants – nay, NEEDS something, and a single one of them says NEIN, the fairest thing to do for the greater good is to ignore it. It is unlikely that Draghi decided to go down this path without a plan. The lines are getting drawn – and the Germans will appreciate in fuller measure the ‘independent’ aspect of the ECB’s mandate. At this point, arguably the EU’s situation is so dire that most of the possible outcomes are favorable for EU ex-Germany over the long run. Either the Germans eventually decides to leave the EMU, and/or they don’t and the ECB eases further.


  • PMIs:
  1. EU Mfg PMI improved to 50.7 vs 49.9 exp and 50.3 prev. German strength offset French weakness
  2. EU Services PMI was stable at 52.4 vs 52.0 exp and 52.4 prev
  3. US Markit Mfg PMI
  4. Japan PMI improved to 52.8 vs 51.7 exp and prev
  5. China PMI was stable at 50.4 vs 50.2 exp and prev

EU Consumer Confidence

UK Retail Sales ex Autos declined -0.3% MoM vs 0.0% exp and 0.2% prev

US Jobless Claims rose to 283k vs 281k exp and 264k prev

FHFA House Price Index rose 0.5% MoM vs 0.3% exp and 0.1% prev

New Zealand CPI declined to 1.0% vs 1.2% exp and 1.6% prev

Saudi Arabia said to cut oil supply to market in Sept by 328k b/d – Reuters

Japan sold 3 month TBills at a negative yield for the first time.


  • Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales
  • Mon: German IFOUS Markit Service PMI
  • Tue: US Durable Goods Orders, Consumer Confidence, New Zealand Business Confidence
  • Wed: Oil Inventories, FOMC, RBNZ, AU New Home Sales
  • Thu: UK House Prices, German Unemployment, CPI, US Jobless Claims, 3Q GDP, NZ Building Permits, Japan Employment, CPI, UK Cons Confidence

Recap 2014-10-22: A Perspective on Yields & Vol


I think long term US yields are close to fair value here. 3.0% has been my bogey for 30y yields since 1Q. That view is now seems to be supported by positioning data, which has reverted from very short readings and is now showing readings about 1 standard deviation above neutral, according to JPM:

It is interesting that people were focused on the CPI print today, especially since the market talk last week was ‘growth fears.’ (growth leads inflation – so if there is uncertainty about near term growth, why should it matter what last month’s inflation was?) That hasn’t happened in a very long time. The focus may be related to the fact that despite the move in equity markets, long term US inflation break evens remain at levels not seen since 2011. We can spend a very, very long time discussing why that may be, but for simplicity I will just note that a decline in inflation uncertainty – i.e. coming as a result of higher structural oil supply – will itself decrease inflation expectations, given where they are relative to zero. I’ll reiterate that 1) I don’t think the move is a fluke and 2) declines in inflation expectations are quite bullish for the present value of financial assets.

Like yields, rates volatility is very low relative to history. Harley Bassman, now at Pimco, published a great piece on it recently, and in particular noted the divergence between the steepness of the curve and rates vol. The consensus view is that with the end of QE and the Fed in play, Vol should be higher across all asset classes. And quite certainly, rates vol will rise over the cycle. But that is quite different from the contention that it should be higher now, or in the near future. That is a point that Bassman likely knows well, since he made the same point a year ago. The advent of forward guidance & increased transparency means that the Fed is less likely to pull Volcker like surprises. And given the lower level of terminal rates, arguably the long term average will be lower than that of the past as well. (i.e. if the Fed will stop hiking at 4% rather than 8%, long term rates volatility should fall to reflect the narrowing of the probability distribution) A fundamental model of the MOVE index (rates volatility) suggests that current levels are quite rich, even though they are depressed relative to history. Model outputs for equity volatility are similar.

My point is simply that despite consensus views to the contrary, it is not obvious to me that both yields and volatility should be higher in the near term. IMO, the decline in both are driven by fundamental underpinnings, and we are unlikely see the same averages as the past. This suggests some interesting option plays in rates space, as Bassman noted.

That segues to the dollar. The dollar move has closed tracked rate differentials over the past few months. However, rate differentials have since turned, but EURUSD has not.

In addition, many macro tourists are touting long USD trade ideas now. After a 15 big figure move in 5 months. And Paul Tudor Jones says the move may be over! I espoused the USD structural bull market view a couple months ago, so I sympathize with the tourists. But now does not seem like the best time to be pushing that bet – despite the retracement, it seems like no one is bearish the USD anymore.


  • BoE Minutes: The unemployment rate had fallen by a little more than expected in the most recent data. Despite this, the labour force participation rate had also fallen and it was now estimated to be a little further below its potential level than previously thought. Analysis by Bank staff suggested that the output gap, while continuing to fall, was estimated to be slightly larger in the second half of the year than had been previously expected.
  • BoC kept policy unchanged as exp, but Poloz hinted that they may be lowering their estimate of potential GDP
  1. most of the sectors expected to lead the non-energy export recovery still have some excess capacity. Our Business Outlook Survey (BOS) interviews indicate that while companies plan to invest in new machinery and equipment, few are planning to expand their capacity, at least so far.
  2. Each October, we do a full analysis of the determinants of potential output, and its future trend. We have done so in this MPR, but in future we will do this in every MPR.
  3. The reason this is important is that in such longer business cycles, the restructuring or closure of firms reduces potential output while creating permanent job losses. This means that the output gap can appear smaller than the labour market gap, which is our current situation. This difference persists until the rebuilding phase of the recovery I discussed earlier, after which the excess capacity measures eventually converge.
  4. The neutral rate, too, is uncertain. We estimate that it now lies between 3 and 4 per cent
  5. After weighing these considerations, it is our judgment at this time that the risks around achieving our inflation objective over a reasonable time frame are roughly balanced. Accordingly, we believe that the current level of monetary stimulus remains appropriate.
  6. Some interesting charts from the MPR:

Canada Retail Sales declined -0.3% vs 0.0% exp. The ex auto measure also fell -0.3% vs +0.2% exp

US CPI was stable at 1.7% vs 1.6% exp. The Core measure was stable at 1.7% as exp

DoE Oil Inventory Report showed a large rise of 7111k vs 3000k exp and 8923k prev. Gasoline and especially Distillate Inventory builds were also higher than expected

Australia CPI declined to 2.3% YoY in 3Q as exp vs 3.0% prev. The Trimmed Mean measure declined to 2.5% vs 2.7% exp and 2.9% prev, but the weighted Median measure was broadly stable at 2.6% as exp.

according to Spanish news agency Efe at least 11 banks from 6 European countries are set to fail the stress test (note that 130 banks are being subject to the tests). Reuters

ECB governing council member Luc Coen said there are no concrete plans to buy corporate bonds but he acknowledged that this could be an option. "If we limit ourselves to buying covered bonds and asset backed securities there is a risk that we would pay too high a price. We can prevent that by also buying corporate bonds” – Reuters

the drive to standardize tax policies across Europe has already ensnarled Ireland and now Luxembourg is on the firing line. The WSJ discusses how some Luxembourg tax structures are coming under attack from Eurozone officials. “Regulators say no European country has been as aggressive as Luxembourg over the years in using tax breaks and confidentiality to lure international businesses”. WSJ


  • Wed: New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence
  • Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales
  • Mon: German IFOUS Markit Service PMI
  • Tue: US Durable Goods Orders, Consumer Confidence, New Zealand Business Confidence

Recap 2014-10-21


I wrote last Thursday that that we were likely to see a strong rally off the lows. The price action is reflective of aggregate positioning: cash overweights in most portfolios remain quite high. The recoveries following the previous corrections this year have had similar characteristics to this one – a strong move with minimal retracements until the prior highs are reached. IMO, this isn’t a fluke – it is representative of many underinvested market participants who do not appreciate why the macro backdrop can only result in higher equity valuations.

I found the ECB leak on corporate bond purchases to be very funny. The ECB is in effect saying that, to ease policy, they are willing to take the credit risk of small, barely investment grade companies but not that of Spain or Italy. It’s like they’re using their left foot to scratch their right ear, because their left arm is holding their right arm down. As such actions go, they are likely to kick themselves in the head in the process, and their ear will still be itchy. Comically sad, or sadly comical?

Separately, here’s an interesting chart from Barclays: the percentage of multi-family starts of the total are now at the highest level since the mid 80’s. Demographically, we are seeing some of the effects of the Baby Boomer ‘echo;’ note the similar rise in the early 60’s, as the first Baby Boomers began leaving high school. If history is any guide, we should see continued strong growth in rental properties, and eventually (somewhat) higher inflation as demographics driven aggregate demand rises.

Looks like private equity agreements will be renegotiated after this:

In August, Carlyle settled a lawsuit contending that it and other large buyout firms had colluded to suppress the share prices of companies they were acquiring. The lawsuit ensnared some big names in private equity — Bain Capital, Kohlberg Kravis Roberts and TPG, as well as Carlyle — but one by one the firms settled, without admitting wrongdoing. Carlyle agreed to pay $115 million in the settlement. But the firm didn’t shoulder those costs. Nor did Carlyle executives or shareholders. Instead, investors in Carlyle Partners IV, a $7.8 billion buyout fund started in 2004, will bear the settlement costs that are not covered by insurance. Those investors include retired state and city employees in California, Illinois, Louisiana, Ohio, Texas and 10 other states.

Finally – this is pretty cool:


  • FT: The European Central Bank has not yet put the issue of buying corporate bonds on the agenda for its December policy meeting, according to two people familiar with the matter. While corporate bond purchases are an option that policy makers have discussed in recent months, one of the people familiar with the matter said preparations for buying the debt have not intensified in recent weeks. However, the person said corporate bond purchases are being considered, along with other ideas, as a possible means to extend the ECB’s program of private sector asset purchases – which at the moment are confined to asset-backed securities and covered bonds – should inflation and growth in the eurozone continue to disappoint. Earlier Reuters reported that the ECB might buy corporate bonds as soon as this year.
  • US Existing home Sales rose 2.5% vs 1.0% exp and -1.8% prev
  • RBA Minutes:
  1. Faced with volatility in the labour force survey results, members based their assessment of the labour market on a range of indicators. These suggested that conditions in the labour market remained subdued but had stabilised somewhat this year. While forward-looking indicators pointed to modest employment growth in the months ahead, there was a degree of spare capacity in the labour market and it would probably be some time before the unemployment rate declined consistently.
  2. Despite the easing in financial conditions associated with the depreciation of the Australian dollar, the exchange rate remained high by historical standards – particularly given recent declines in key commodity prices – and was offering less assistance than would normally be expected in achieving balanced growth in the economy.
  3. Members considered that the most prudent course was likely to be a period of stability in interest rates.

China data:

  1. Q3 GDP 7.3% vs 7.2% exp (still a 5 1/2 year low).
  2. IP +8.0% vs 7.5% exp. (this suggests the collapse in IP growth in August to 6.9% was temporary)
  3. Retail sales 11.6% y/y vs 11.7% exp (ex NY, lowest since 2004)
  4. Fixed Asset investment 16.1% y/y vs 16.3% exp, lowest since 2001
  5. the state-backed China Association of Automobile Manufacturers (CAAM) sees total passenger/commercial vehicle sales coming in at 23M for ’14, up 4.6% Y/Y (the prior target was 23.83M, or +8.3%). Bloomberg

The market is talking about the corporate buyback blackout 5 weeks prior to reporting earnings. “Most companies cannot buy stock in open market purchases in the five weeks prior to reporting earnings, and the start of that period coincided with the S&P 500 peak on Sept. 18.” Goldman sees corporate’s responsible for ~3% of the daily volume recently.

Paul Tudor Jones says US stocks will outperform the rest of the world into year-end. Jones thinks the USD rally may have ended and warned about a bubble in credit markets.


  • Tue: Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence
  • Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales
  • Mon: German IFOUS Markit Service PMI
  • Tue: US Durable Goods Orders, Consumer Confidence, New Zealand Business Confidence

Recap 2014-10-20


Oil prices have fallen by an amount similar to levels typically seen during recessions. As such, the stimulatory factors are comparable. The chart below shows the log S&P 12m price return (blue, LHS) vs the 24m log change of WTI prices, leading by 1 year. (red, RHS, and extrapolated past Oct 2015) As the chart shows, if oil prices hold here, the historical precedents are quite bullish for equities – the last time we saw an oil price fall of this magnitude without a recession was the mid 90’s, and before that, the mid 80’s. Obviously, all are not equal, and far more goes into equity returns than oil prices, but I thought the relationship was interesting.

Separately, lots of folks have claimed that the recent market volatility has been due to the decline in dealer balance sheets and risk appetite. I.e., there is a smaller ‘shock absorber.’ Which is probably true. But there are two sides here, and the other side may be that there is too much short term hedge fund money in the market. Certainly, aggregate returns over the past few years support that hypothesis. As a result, the size of the short term flows may well have increased as well. If true, this suggests that we should expect these types of positioning driven moves to recur in the future, barring a decline in hedge fund AUM.

Finally, more signs of loosening regulatory standards for mortgages, via WSJ:

Federal Housing Finance Agency Director Mel Watt said the agency, along with mortgage-finance giants Fannie Mae and Freddie Mac, reached a deal on what kinds of mistakes could trigger penalties for lenders years after a loan is issued… After the financial crisis, Fannie and Freddie required lenders to buy back billions of dollars in loans that the companies said didn’t meet the standards. As a result, lenders have said they have been wary to grant mortgages to riskier borrowers. The FHFA has tried a few times to mollify lenders’ concerns. The latest agreement clarifies what kinds of mistakes could trigger a repurchase demand many years after the loan is granted. Mr. Watt also said the new framework would include a “significance test” for mortgage buyback demands that would require Fannie and Freddie to determine that a loan would have been ineligible for purchase originally had the loan’s information been accurately reported. In his speech, Mr. Watt also said Fannie and Freddie were close to beginning new programs to guarantee loans with down payments of as little as 3%, something the companies largely have stopped doing. He said the loans would be available for loans with “compensating factors” and that details on the program would be released in coming weeks. “We have started to move mortgage finance back to a responsible state of normalcy—one that encourages responsible lending to creditworthy borrowers while maintaining safety and soundness” of Fannie and Freddie, Mr. Watt said.


  • German PPI declined to -1.0% YoY as exp vs -0.8% prev
  • Abe hinted he may delay the next consumption tax hike, telling the FT such a move would be meaningless if it inflicted too much damage on the economy – FT
  • The Nikkei reported that the GPIF will raise its allocation in domestic stocks to around 25%. Currently the investment in equities myst be in a range of 12% (+/- 6%). The weighting at the end of June stood at 17%, near the upper limit. Equities finished +4% in Japan on the news.
  • ~45% of companies responding to a Reuters poll think the BOJ should prevent the yen from weakening below 110 – Reuters
  • GS: We are just past the half-way point of regional bank earnings (10 of 18 reported) and results have disappointed – only 3 banks have beat (BBT, HBAN, FRC) as loan growth has lagged (+64bps QoQ vs. consensus of +1.2%), the credit/expense leverage stories are in the late innings, margins are down 8bps and concerns around the timing of rate rises have pushed rates lower, weighing on margin outlooks. That said, shares are down 3% since earnings (-0.6% for S&P) vs. just 1% 2015 estimate revisions. While near-term trends won’t see much pick-up, shares (11.3x 2015) appear to be pricing in an overly negative outcome.
  • US crude production still going very strong. Experts think Brent would have to hit ~$60 before production starts to get dialed back (and even then the output cuts probably won’t be very large). “Slowing American production is like slowing a freight train moving at high speed.” NYT
  • Most of the dozens of people who had direct or indirect contact in Dallas with Thomas Eric Duncan have been declared no longer at risk of contracting the virus. The Carnival Cruise passenger tested negative. "Nigeria is now free of Ebola," WHO representative Rui Gama Vaz told a news conference in the capital Abuja. "This is a spectacular success story."
  • Germany and France are in “secret” negotiations over a deal that would see Berlin sign off Paris’s new budget even though it violated EU fiscal rules. In exchange for a detailed deficit reduction and structural reform roadmap, Germany is apparently willing to accept the new French budget. Reuters/Der Spiegel
  • Banks begin charging customers for their euro-denominated deposits; in response to the ECB’s neg. deposit rate, some of the world’s biggest banks are charging customers for euro-denominated deposits – WSJ
  • ECB bank stress tests; investors are worried that the shipping loan portfolios of some of Germany’s biggest banks (inc. HSH Nordbank, NordLB, and Commerzbank) could see large write-downs under the ECB’s stress test, prompting some to incur capital problems. HSH Nordbank, the world’s largest shipping lenders, is seen by bankers in Germany as one of the most likely firms to “fail” the ECB tests – FT


  • Mon: RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence
  • Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales

Recap 2014-10-17


Anecdotal Items Bullish Risk:

· Greenlight Capital, the hedge-fund firm run by billionaire David Einhorn, plans to raise money for the first time in two years to take advantage of recent market turmoil

· Via @lebullmarche and Trace: Yesterday clients bot $932mm of paper, multi-yr record -> dealer inventory is now just >$5bn- lowest in over 12months

· BBG: Firms from Pacific Investment Management Co. to Blackstone Group LP say they are poised to scoop up speculative-grade corporate bonds after yields rose to the highest levels in more than a year. They’re looking for bargains after building up the highest levels of cash in almost three years. “Credit is a buy here, specifically high yield” bonds and loans, Mark Kiesel, one of three managers who oversee Pimco’s $202 billion Total Return Fund, said yesterday in a Bloomberg Television interview. At Blackstone, Chief Executive Officer Stephen Schwarzman told investors yesterday that the firm’s $70.2 billion credit unit is ready to “feast” on lower-rated, long-term debt, particularly in Europe, after “waiting patiently for something bad to happen.”

· GS: The recent sell-off in oil has been mostly driven by positioning based upon expected fundamental shifts as opposed to currently observable shifts. While looking into 2015 we have sympathy for these medium- to longer- term bearish views that have driven prices lower, we believe it is too much too early. Prices have also likely overshot to the downside particularly as the lower we go the tighter the near-term balances become. This leaves us near-term constructive despite being bearish as we look further out… We estimate that net specs have priced in a 300 million barrel build between now and the end of March, which is a 2.0 million b/d surplus. While potentially possible, it would require solid delivery from Libya, Iraq/Kurdistan and Brazil. The net spec selling ultimately moved prices into a region where many producers’ puts had been struck, increasing the selling of oil futures by non-commercial traders as they manage the risk incurred from producer hedging programs in a falling price environment.

This came out yesterday, and could be quite simulative – allowing non GSE companies to potentially securitize mortgages again.

WSJ: U.S. Regulators Poised to Finalize Relaxed Mortgage Rules

· regulators are expected to finalize a far looser set of standards for mortgages packaged into securities and sold to investors than initially proposed in April 2011.

· The rules, which stem from the 2010 Dodd-Frank law, will no longer require that borrowers make a 20% down payment to get a so-called “qualified residential mortgage.” Instead, loans will have to comply with a separate set of mortgage standards, including limits on how much overall debt a borrower can have in relation to monthly income.

Interesting items re: BoJ. Does it sound like they want to do more QE?

· Iwata said that the Bank is internally making simulations on exit strategy.(!)

· Although the impact on FX market was limited, it is worth noting that the BoJ failed to collect the target amount in today’s T-bill purchase operation for the first time since the initiation of QQE

There are some very interesting weekly charts today:

10y: Massive hammer candlestick on 10y yields… but the close remains lower week on week in the context of a year long downtrend:

The 5y chart is even more interesting… the massive bear trap in Sept resolved into a reversal below the bottom of the rising triangle. 5y yields are now in no man’s land, technically speaking, without a clear trend.

2y yields, however, closed at the bottom of the rising channel that started with the Taper Tantrum. The technical setup for a bet for higher yields looks pretty good:

The S&P chart looks decent. Massive hammer candle stick with intra-week levels below but a weekly close above multiple long term supports. (50wk ma, the 1880 level, the 12/31/13 close) Obviously we’ll need to see more constructive price action in the coming weeks to confirm, but for now, it’s looking good.

Likewise, CDX HY spreads widened above but closed below long term resistance:

The VIX chart showed how unexpected this move was. The entire body of the weekly candlestick was above the weekly Bollinger Band. The last time that happened was the week of August 12th, 2011. While that week did not mark the ultimate low for stocks, it did mark the high for the VIX and the beginning of the consolidation phase.


  • U Michigan Confidence improved to 86.4 vs 84 exp and 84.6 prev
  • US Housing Starts was a better than expected, but Building Permits were a bit weaker. However, both were positive and revisions for both were higher.
  • Canada Core CPI was stable at 2.1% as exp
  • BOE’s chief economist Haldane said he has grown gloomier on the outlook for UK growth and he now believes rates can stay “lower, for longer.”
  • Gulf nations to oppose any cut to the OPEC production ceiling according to the WSJ. A source said “if we are going to end up with lower market share and prices will fall anyway, let’s stick to market share.”


  • Mon: German PPI, RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence
  • Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales

Recap 2014-10-16: A Short list of Silliness


An abbreviated list of silliness includes:

· Brent Donnelly @ Citi ran a survey where 1 in 6 respondents expected the next Fed move to be QE4.

· 5y Inflation Breakevens are at levels not seen since people feared that the EU wasn’t going to exist

· WTI term structure in contango.

· 2y Treasury yields below 30bps.

· VIX at 30 with the Fed not hiking for at least 6 months and no systemic risk.

· Articles like “Wall Street Might Know Something the Rest of Us Don’t.”

As I said last Friday, I think we will get a low in risk assets this week. With options expiry tomorrow, anything can happen, so I don’t want to preclude anything. And confidence in really any sort of market call in the near term is low. But one source of comfort is that pretty much all product specialists I’ve spoken to over the past few days agree there is value in pro-risk positions in their space. This means that value buyers are probably out deploying capital already. Given where put/call ratios and option skews are, (flattest since July 2009!) I think most real money players are done w/ their risk hedging programs here as well. Whether there has been sufficient stop outs / margin calls relative to the amount of value buying, however, is obviously anyone’s guess.

I believe that the market is a mechanism that essentially seeks ‘pain trades’ within the context of a longer term ‘fair value.’ This is akin to Jesse Livermore’s saying that stock prices go along the past of ‘least resistance.’ Now without a doubt, this market move has been fast and furious and bewildering to a lot of folks, including yours truly. As a result, it is common to see people say that while they expect a recovery in prices, but it will take time because confidence has been damaged. Which may well be true. But once the downside stops have all been hit and positions are cleared out – the pain trade will be to the upside. And the offside group is the fast money crowd. The CEO of the world’s largest asset manager said "This is all more of the fast money moving out", calling the downturn "a meltdown with a lot of hedge funds and fast money.” So we shouldn’t be surprised if the market ramps up the way it fell down. The fact is that this risk off move was likely strongly accelerated by low levels of liquidity resulting from the shrinking of broker-dealer balance sheets. And the thing about low liquidity is that it exacerbates price action in both directions.

Oh, and also this:

It’s not going to prevent transmissions that have already occurred, but the wake up call this week and the tightening of both training and standards should go a long way toward limiting future transmissions.


  • US Philly Fed declined to 20.7 vs 19.8 exp and 22.5 prev
  • NAHB Survey declined to 54 vs 59 exp and prev
  • US Jobless Claims declined to 264k vs 290k exp and 287k prev. Lowest print since April 2000!
  • New Zealand PMI improved to 58.1 vs 56.5 prev
  • China M2 improved to 12.9% YoY vs 13.0% exp and 12.8% prev. M1 growth, however, was quite weak, falling to 4.8% vs 5.9% exp and 5.7% prev


  • Fri: Triple Witching, Yellen Speaks, Canada CPI, US Housing Starts, U Michigan Confidence
  • Mon: German PPI, RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence