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