Daily Clueless Musings 6/28..Final count down to the Greek austerity plan vote

Risky assets continue to rally before Greece voting on their austerity plan. Market priced in a high probability that the vote will pass, although the protests shown on CNBC reminds everyone that passing the austerity plan has nothing to do with executing it, as Greece already failed to do so on the austerity plan they passed just a year ago. EU/ECB still does not have a clear plan to solve the Greek insolvency, but they learned to just toss an idea around the market and then stick to it, if market seems to be happy. As market rallied after French banks agreed to roll over their debt. Reuters reported that German banks agree in principle to adopt the same plan, although it still does not prevent private investors holding out of the soft restructure. Market again ignored bad economic data from US. The consumer confidence declined 3.2 points in June to 58.5, reaching its lowest level since last November. The labor market differential reported in the Conference Board data widened from -37.8 to -38.6 in June. The 5 year auction is a horrible 3.5 bps tail off the market. The bid To Cover coming at 2.59 a plunge from May's 3.20, and the lowest since June 2010. Indirect interest evaporated once again, tumbling from 47.1% to just 37.6%. As QE2 is about to end, dealers can no longer flip their treasuries to Fed for a quick buck. The real demand for US treasuries may not be as strong as the previous auctions had shown. The demand is likely to be much weaker, if Europe is not in the middle of credit/currency crisis. Futures traded lower on the second day in a row. The downward movement is pretty violent. There was no more buying the dip trade, as we saw in previous selloffs. Gamma options are relatively weaker than the vega options, as market is sure that the can will be kicked down the road.

Daily Clueless Musings 6/27

Stocks rallied before Greece voting for the austerity plan. Fronts bounced back slightly, but they are still pricing significant liquidity risk. Wednesday's vote is the first step for Greece to obtain the 12 billion EUR money they need to meet their debt payment through Aug. If they fail to pass the vote, a default is going to be imminent. EU sources told Reuters that they have ruled out several options for Greece should the austerity vote fail. Real consumption in the US fell 0.1% in May and the change in spending for April was revised down from +0.1% to -0.1%, while spending in +0.3% yoy, as consumer continues to deleverage. Real consumption growth for 2Q is only tracking about 0.8% gain yoy. Ironically the savings rate is high, when the real interest rate is in the negative territory. The core PCE deflator increased 0.257% in May which was its strongest monthly increase since October 2009; the index has risen 2.2% annualized over past three month and up 1.2% yoy. The first 2 year auction after FOMC was a nearly 1 bp tail. Market needs to wait until the Jackson Hole for the much hoped (or tweeted) interest rate cap. There were not many option flows. Front vols were slightly lower. Paper took off some of their libor crisis trade, they bought back N1 96C vs N1 92-5P>. They also sold U1 92-5 P>.

Update on Hanny Holdings

Hanny just announced the sale of 49% equity interest in the Guangzhou Jixiang, which controls 100% interest in the Yuexiu Project. Hanny paid 1064M for the project. Prosperous global, a local real estate developer, paid 746.7M HKD for the 49% interest. So the deal is a positive for Hanny. It not only confirmed the value of Hanny's real estate holdings but also reduces the future capital investment. Prosperous global has developed several commercial real estate projects in Guangzhou. So the deal will also give Hanny more local connections and expertise to ensure the success of this project.

Daily Clueless Musings 6/22 FOMC

The Fed has lowered (yet again) it's GDP growth and job recovery forecast. However the Committee anticipates the recovery will "pick up in coming quarters." The slowdown was thought to reflect factors that are "in part" temporary, particularly the rise in energy prices and the Japanese supply chain disruptions. When asked during the press conference what does the “in part” imply, Bernanke expressed relatively low conviction, saying “We don't have a precise read on why this slower pace of growth is persisting” . Near term core PCE is revised higher by 0.2%. QE 3 is the hidden theme today. Market has been hoping for some hints on the possibility of QE3. Both Eurodollar futures and risky assets traded higher in the morning. Bill Gross tweeted and talked on CNBC on the idea that QE3 is likely to take the form of short term interest rate cap. Although Bernanke did not shut the door on QE3, he current condition does not warrant new round of asset purchasing, as the Securities purchases were intended, in part, to end risk of deflation ( Ben gave some lengthy explanation on how the current condition is different from last year). At the same time, his remarks hinted that the FOMC has in fact discussed easing options, which include: 1) securities purchases, which could be structured in various ways; 2) a cut in the interest rate on excess reserves; 3) guidance on how long the Fed will wait to sell securities; and 4) or “a fixed date to define extended period”. Market disappointed. Stocks traded lower and futures broke after Bernanke concluded his press conference.

Daily Clueless Musings 6/15--The Greek Show

The Greece situation feels like slow motion of Lehman Brother 2.0. Apparently when EU/ECB/IMF kicked the Greek debt can down, it was not far enough. Everyone thought one year of time would be enough for Greece, European banks and ECB to come up with a solution for the debt issue. They were wrong. Politicians have a tendency of avoiding answering hard questions as long as possible. Just like preparing for exams in college, only the last few days count. Now as the deadline for Greek debt rollover approaches, the situation is as complicated if not more as it was a year ago. ECB, German and Greece are locked in a prisoner's dilemma. The obvious and sensible solution may be derailed by the conflicts of interests between the parties. The consequence of the more unpredictable than the market perceives. Front contracts were under selling pressure again, although libor fixing continues to come in. Stocks market were lower as well and vix was bid, but they are not nearly at a level implying massive risk to the economic recovery. Euro were down more than 250 pips, but it is still significantly above the 1.20 level we saw when the Greek debt crisis first broke out. The economic data in the US was shadowed by the news on Greek debt crisis. The headline and core CPI increased 0.17% and 0.29% respectively in May. Both were larger than expected. Apparel price rose 1.2%, the largest increase in more than two years, which may suggest the labor and raw martial inflation in the emerging economies are finally showing up at consumer level. The annualized core CPI is very close to hit the lower boundary of Fed inflation target range. The Empire State manufacturing survey weakened significantly in June, with the headline falling 19.7 points to -7.8. The details are more worrisome. he ISM-weighted composite for the June Empire State survey dropped from 58.1 to 49.7.The workweek also posted its largest decline on record, plunging 25.7 points in June to -2.0, and employment fell from 24.7 to 10.2. Vols were bid on the rally. As paper were buying downside options in the U1 and Z1. However assuming central banks have learned their lessons from Lehman Brother's debacle, it is unlikely to see the liquidity issues in the market even if Greece defaults. The price Volatility of safe asset may actually decreases, as the increased supply of liquidity and decreased supply of safe assets.

Daily Clueless Musings 6/14

It is the first time Eurodollar futures closed lower in two consecutive trading session. Economic data finally deliver better than expectation, as growth expectations got beaten down enough. May retail sales fall by only 0.2% and rose 0.3% ex-auto sales. The May reading of the Producer Price Index was +0.2% for both the headline and the core. Excluding light vehicles, which does not provide good guidance for CPI, the core PPI rose 0.3% in May, which was the strongest monthly increase in almost a year. Inflation in emerging economies continue to come at higher number than expected. May inflation accelerates to 9.1% yoy in India and 5.5% in China. Emerging economies have been an exporter of dis-inflation in the past decades, as they export cheap labor to developed economies, like US. It seems to be reaching a tipping point. Bruce Rockowitz, president of Li & Fung the largest consumer goods sourcing company, warned "prices of mainland-made goods will increase by five percent annually over the next five years." Consumer prices are depressed in the US due to soft labor market. Just like a compressed spring, inflation is likely to show its teeth as soon as labor market recovers. Tomorrow's core CPI is expected to increase 1.4% year over year, only 0.1% below Fed's target range and 100 basis points higher than 2 year treasury yield. The number only may seem OK to some, but this is achieve with unemployment rate standing at 9.1%. Futures traded lower before the CPI number. paper got more aggressive on buying put options to put bearish position. They about H2 and 0N puts as well as calendar puts spreads betting on curve steepening. Vols are firm, as futures broke, but there was seller of green gamma. They sold 10k green U straddles as vols were bid.

Daily Clueless Musings 6/9

This breathless rally finally paused for a day with the help of rumors about Greek austerity plan and a worse than expected 30 year auction. Initial claims edged up to 427k. After a large swing in the data late in April that was caused in part by some temporary distorting factors, claims have stabilized around 425k, signaling some deterioration in the labor market relative to earlier in the year. Unlike Bernanke's burying your head in the sand strategy to inflation, upside inflation risks prompted "strong vigilance" from the ECB, setting the stage for a July rate increase, which also add pressure on Eurodollar futures. The release of Q1 Fund of flow showed some interesting factors. Debt of the domestic nonfinancial sectors inched forward at only a 2.3% annual pace last quarter, the third slowest quarter in over half a century. Nonfinancial corporations bought back shares at a $332 billion annual rate. As the debt owed by state and local governments contracted at a 2.9% rate, the fastest pace of decline since 1996, there is a lack of balance sheet expansion to absorb fresh savings in the private sector, which can partially explain the negative real rates environment. Vols were firm as futures traded lower. Front whites were under selling pressure. Paper bought green u call spread in the morning.

Daily Clueless Musings 6/8

Eurodollar futures continue to rally, after Bernanke's dovish speech yesterday. Slowing economic activity and weak labor market are not news. Bernanke also "explained" to the market that Fed's zero rate policy is not causing rising commodity and weakening dollar (thus, maybe, he implies that raising rates is not going to be the right response to solve those issues, when they come.). He seems to be concerned about the potential fiscal drag from both state and federal level, as he spent two paragraph discussing how the fiscal drag will slow down the recovery. We should expect more "stimulus" from Fed, if there is larger than expected cut on government spending. Mr. Bernanke also suggested that, rather than buy more assets, the Fed is more likely to respond to the slowdown by holding on to the assets that it has for a longer period. Holing the bloated balance sheet at Fed steady and keeping interest rate at zero (or negative real interest rate) for extended period is likely going to the unofficial QE3. Ironically, although Bernanke again denied more quantitative easing/ asset purchasing program, the number of key word "QE3" hits on Google search made new high after his speech. Eurodollar futures have no way to go but up, although they have already priced in very low probability of rate hiking before mid 2012. Volatility is low, as Fed once again assures the market Fed tightening monetary policy is further than more options will expire. Longs rushed to accumulate more futures before the 10 year auction, which unsurprisingly turned out to be strong. Yield on 2 year closed at 38 basis points, only 4 basis points higher than the all time low. Speculators are blamed for higher oil prices. Do we really think the real money investors are chasing 38bps yield for 2 years, when core CPI prints 102 bps higher? paper continue to acquire long delta exposure by selling vols. They sold green H 80 put to buy 81-2 call spread 8 times.

Daily Clueless Musings 6/02

Eurodollar futures retraced back from yesterday's rally before tomorrow's NFP. The expectation is low. Any number that is close to the expected 170K will likely make futures break. However the economic data today showed no sign of improvement. Initial claims was 422k. The level of claims stubbornly remains above 400k level. Unit Labor Costs were revised down three tenths to +0.7%, which eases the pressure on core CPI inflation but implying continued softness in labor market. Both will put pressure on nominal GDP growth. Factory orders fell 1.2% in April and shipments were down 0.2% during the month. Durables are down 3.6% in April and related shipments down 1.3%. However the data could be disrupted by the Japan earthquake, as transportation products led the declines in both durable goods orders and shipments. Moody's said US government's rating may be cut if no progress on debt limit. No one in the world believes debt ceiling will not be lifted. So stock market reacted by bidding up the stock prices. Eurodollar futures broke on the news. It seems that market believe the more pressure rating agencies put on the congress to raise the ceiling, the more likely for the ceiling to be raised without too much deficit reduction. Slower expansion of US government’s balance sheet is probably the last thing the market wants in the middle of this slow recovery. As US private sector needs to de-lever, there needs to be an expanding balance sheet to absorb the savings. As emerging markets like the BRICs are putting brakes on their economy, Japanese are facing the uncertainty after the natural disaster and Europe is swamped in the debt crisis/ austerity measures, US government becomes the most important source to absorbing savings from private sector. Expansionary fiscal policy is very bearish for fixed income and bullish for the recovery. It seems to be the first time in a while we do not see people rush to buy futures on the dip. The expectation is too low for tomorrow's number, the tail risk tilts toward downside. Vols were firm, as futures break. There were some straddle buying. Paper has not put on big bearish trade.

Daily Clueless Musings 6/01

The ADP employment report estimated that merely 38k private-sector jobs were added in May. This was the softest reading for the ADP report since QE2 started. ADP had a pretty good track record predicting NFP in the recent month. ADP reported that 175k jobs per month were added between October and April, while the BLS reported that 185k over the same time period. Today's number bodes ill for the NFP. However given the recent volatility in labor market to the impact of natural disasters, NFP could be significantly different from the ADP guesstimate, because ADP employment report incorporates data during the week prior to the BLS’s payroll survey week. The average initial jobless claims for the weeks covered by ADP report is 24k higher than those surveyed by BLS. PMI are softer across the world. China reported a reading of 52 in May, down 0.9 from April. The Euro area manufacturing output PMI is estimated to have fallen 4.9-pts to 55.2 in May. US PMI was at 53.5% in May, sharply down from 60.4% in April. The new order, production and back order indexes are all down at a faster pace than the inventory, implying more future softness. Greek debt was once again downgraded to Caa1 from B1. Again, at this point the question is not whether Greece is going to default but when it will default and who will take the loss. Eurodollar futures rallied and vols are smashed. However the front contracts seem to have priced in worse possible scenario and unable to rally on the surprisingly bad number. Paper continue to put on bullish trades on green futures. Small green calls got cheaper even as futures rallied more than 10 ticks, as paper bought call green 1x2s.