The puts I have are part of a long strangle I threw up for BoA. I figured I could play the volatility of financials that way no matter which way the market moved. Of course BoA is at almost the exact same price right now as they were when I bought the options so I’ve lost out on almost 2 months worth of time value. Oh well, I’ve got 4 months left on the options for BoA to make a big move.
All I can do is shake my head in response to folks who tell me the notional value of CDS and interest rate swaps is irrelevant because they are hedged and offsetting. Tell that to the Harvard Endowment. How Harvard Nearly Went Bankrupt After a Rogue Interest Rate Swap Went Sour
My take on all hedged CDS and IRS positions: The spread risks going to $0 or notional value depending on the ability of the counter party to pay up.
CASH RATIOS FOR EQUITY PMs DOWN TO 4%
When we are talking about cash on the sidelines, it begs the question as to how
much liquidity is sitting in equity mutual funds. As Chart 3 illustrates, we have
gone from around a 6% liquidity ratio when the market was testing its cycle lows
earlier in the year, to 4.0% currently. So, running down cash levels meant nearly
$100 billion of buying power just from PMs putting cash to work during this huge
rally. At 6.0%, institutional equity PMs were at their highest liquidity ratio since
the 2001 recession/bear market; now at 4%, they are back to where they were
in October 2007 (the month the bull market ended).
Historically, institutional equity investors carry less than 4% cash in their
balances less than 1/25 thof the time. Therefore, unless we either start to see
share buybacks, capitulation by the private client or some insider buying, it
remains to be seen where the buying power for the next leg of the bull market is
going to come from now that the shorts have been covered.
COULD IT BE THAT HOUSING IS SPUTTERING AGAIN?
No sooner did we see the October National Association of Home Builders’
housing market index disappoint but the September U.S. housing start data also
came in light, at 590k units at an annual rate (were 587k in August) and have
been flat now since June. No growth at all.
To be sure, all the weakness was in multiple-housing units (sliding 15% MoM
and down now in three of the past four months); apartment construction still
goes into GDP. Single-family housing starts did bounce 3.9% MoM but this did
not fully recoup the 4.7% slide the month before. What really caught our eye
was the 3.0% MoM decline in single-family building permits — the first setback
since the first of the “green shoots” emerged in March.
DEFLATION PRESSURES PREVAIL
U.S. producer prices did the unthinkable in September and declined 0.6% MoM
— the consensus was looking for no change. Even the core PPI (which excludes
food and energy) was down 0.1% MoM, which is a rare event indeed. This
occurred despite the slump in the U.S. dollar and the surge in commodity prices,
so it would seem as though margins are being squeezed as opposed to hitting
cycle highs. Core consumer goods PPI (which excludes energy) fell 0.1% MoM,
now down for the second time in the past three months. This is very positive for
the U.S. treasury market.
EMPLOYMENT STILL TANKING
The state by state U.S. employment data were just released and showed that the
aggregate job loss in September was 451,600 (recall that the initial nonfarm
payroll release revealed a 263,000 decline). New record highs for the
unemployment rate were reached in three states — Florida, Nevada and Rhode
Island. There are now 14 states that have double-digits unemployment rates.
Moreover, the decline was so widespread that 43 of the states posted
reductions in their employment base last month.
IS THIS A GREEN SHOOT?
The U.S. architectural billing index managed to rise, to 43.1, in September from
41.7 in August — recouping the decline that month. But here’s the rub —
anything below 50 means contraction and that’s exactly what is happening in
the commercial real estate sector.
RESIDENTIAL REAL ESTATE STILL IN THE DUMPS
It looks like the U.S. housing market is rolling over — so look for the government
to quickly come to the rescue again and extend or even expand that homebuyer
tax credit. Mortgage applications sank 13.7% in the October 16 th
week and this followed a 1.8% falloff the week before. Bad news for the homebuilder stocks to
be sure.
Sorry to hear that BondTrader. Your information is always knowledgeable and very insightful. Was this out of the blue or just an across the boards cut that you kinda saw coming?
Best of luck to you BT. Your information is very good and one of the reasons I look forward to IHB each day.
I hope your unfortunate circumstance got nothing to do with your IHB postings.
Is now BT = Iceman?
Ha, yeah. My parents are in town with some friends, so my job for the moment is a tour guide. And looks like me leaving Pacific Life finally brought out the bears.
Best of luck to you BT. Your information is very good and one of the reasons I look forward to IHB each day.
I hope your unfortunate circumstance got nothing to do with your IHB postings.
Is now BT = Iceman?
Ha, yeah. My parents are in town with some friends, so my job for the moment is a tour guide. And looks like me leaving Pacific Life finally brought out the bears.
BK. I totally agree. Iceman is the real deal when it comes to the markets. This guy really knows his stuff.
1) The market now has overhead resistance around 1075. “They” couldn’t
trigger a short squeeze because likely the shorts were timid and there
was nothing to squeeze to help power things upward.
2) The focus is on the GDP report this Thursday might start another mad
run toward 1100+ on S&P if the number is better than 3%.
3) DOW is sitting on its log scale trendline. The NASDAQ played
catch-up to the downside today. It cannot be said that the NASDAQ
remains “strong” as it dropped 1.20% versus a green DOW. Very unusual
and it seems to have to do with the DOW holding its trendline. Weird.
The market thinks that chart is important. More evidence of a
fractured market. (or manipulated…)
The bottom line, my best guesses will be more downside pressure, at
least tomorrow morning to get S&P closer to the 1045 support line, but
what is going to happen afterwards is anyone’s guess. My feeling is
S&P will try to top 1100 one more time before the big correction.
