Daily Clueless Musings 5/31

It is the last trading of the spectacular May rally in Eurodallors. What else can we expect but another rally. Europe brought the market Greek bailout 2.0 just in time before US market opened after a long weekend. The details are not announced yet. The basic plan is that in exchange for the 32 billion new money, Greek will fund the gap through expected privatization receipts, rollover of debt mostly by Greek banks and issuance of bills. What a “brilliant” plan! Stocks rallied all over the world and Eurodollar futures traded lower overnight. Insolvency can be solved through selling productive assets or internally transfer liability (Greek banks extend credit to the government), maybe we should rewrite the bankruptcy law. The can could be kicked down the road once again, the question who and when are going to recognize the loss remain to be answered. Greece's problem is lack of a money printing press to force creditor to take loss. US tells us merely a money printing press will not guarantee economy recovery. Today's data again confirmed slowing economic activity since Q1. The headline Chicago PMI data tanked in May, showing the slowest rate of monthly growth since November 2009. Growth in backlog orders almost entirely evaporated while inventories surged, which will put more pressure on the future manufacturing activity. The only thing that did not slow is the input price for raw material, which printed 78.6. Soon, stagflation is going to be the most used word in my summary. The Conference Board’s measure of consumer confidence dropped 5.2 points in May to 60.8. The labor market differential widened from -37.3 to -38.3 in May. This bodes ill for the coming NFP this Friday. Vols came in again. Paper continue to put on bearish trades on the EDU1 together with bullish trades on the back contracts. Paper bought U1 p> and sold Q1 97c as a package. They also bought 0U 92-5 C1x2, which further crashed the mid curve call skew. Although mid curve vol path has been performance in line with the steep skew slope as futures slowly grind higher, market seems to be under pricing jump risk in the future at this point. The market is complacent. As the short risk trade (long Eurodollar futures and shorting volatility) has work well for so long, the risk for marginal profit is absurdly high, and yet no one (at least those who are still riding the trade) seem to concern.