Monthly Archives: September 2011

For What Its Worth

There's something happening here

What it is ain't exactly clear

There's a man with a gun over there

Tellin' me I got to beware ...............For What Its Worth, Buffalo Springfield.

The glacial move up in LIBOR sets for Dollars and Euros continued this morning into the quarter end. 3 month money for dollars set at .374 (48 days, no decline) and 1.554 for Euros. The futures for December are 99.48 (52 implied) for dollars and 98.74 (1.26) for euros.  "What it is ain't exactly clear." Stress. Yes. Another Lehman? Meh. As a mental exercise, if it didn't exist, where would we price LIBOR at invention? I'll take - not here.

The problem is even these glacial movements toward reality are (mis)construed as crisis. We have called this "opting for the Matrix" for years. In other words, reality is too scary so counterparties have elected to embrace the lie. Actual currency sourcing is not accessed through the market with robust (and needed) central bank facility usage so the structure is an elaborate extrapolation of an anachronistic constant. LIBOR = FF + 14.  Unlearn that. Refer back to the song.

We'll know more (or less) next week. The relationship between EDZ and EDH (in 1 month and Euros also) should be monitored in early Q4. Presently trading 5 up from -8 in early August. (Geeks can see Chptr 16 of The Eurodollar Futures and Options handbook -avail online- for my metrics on this) Refer back to the song.

The Rumor Mill

A Mill is actually a unit operation designed to break solid material into smaller pieces. Rumor Factory is the more accurate construct for what markets are dealing with. In a factory laborers manufacture goods and oversee the processing of one product into another. The hazard of high capacity utilization rates at the Capital Market Rumor Factory is a topic for another time. The point here is merely that business is good and "employees" are working double shifts.

After weeks of milling, the German's passed their vote today and Greek and Irish bonds have rallied. The Greek 2 year is down 152bp to a still "un-zirpy" 68.25%. The Italians placed some 3 year paper at 4.68% and BTPs at 5.86%, both higher than previous auctions. The 10 year is 368 over the Bund and the Italians will need to roll 90Bln Eur more in Q4. Gear up the machinery.

The US market bent a nice concession (taxpayer ripoff) into the 5 year auction and has rallied nicely into the 7 year and upcoming Twist this morning. In a shocking development, virtually NO day over day change took place in the complex. The 2 year yield was up 1.1bp and the 10 was up .9. The relationship between the two closed at 173.2. New data and Fed chatter should get the machinery humming today. One configuration we are watching (we are not technicians so excuse the pedestrian nature) is the 5 year Treasury future. The product has not settled below the 10 week moving average since June 27. (that was reversed the next week ) The note would need to be above 122.25+ to correct the present weakness.

Coffee break's over. Back on the line.

Student Body Left

The Ultra Bond contract fell 10 points peak to trough in 3 sessions. No one was, allegedly, caught out. The key take away is the completely binary nature of the market. The overwhelming amount of trading absorbed by HFT micro-distortions and day trading results in little if any value interaction in capital markets. In contrast, significant settlement gaps are common due to the global nature of modern economic problems.Thus, significant pieces of the market are unavailable to a large portion of the volume community.

I believe the equity market is already, violently, establishing the long term range trade that will be with us for years. Fixed income is ahead of the action (as usual) but the low yields of September would need to be tested before "range trading" takes over. A reduction in the binary, "student body left- student body right" nature of capital markets would be a significant positive input to forward economic growth.


EONIA- the European Overnight Index Average has remained elevated despite increased liquidity at ECB tenors. The ability of other more volatile risk markets to maintain an optimistic outlook will depend on this metric coming back down. Wednesday a 3 month tenor will be offered and more clues to liquidity and credit problems will be available. The large use of the facility and the 3 month operation should bring O/N rate down 10bp  toward 20 over the deposit rate. (The ECB continues to allot these MROs at 1.5%)

Spain will hold a snap election on Nov. 20 on more austerity. Germany continues to rebuff, politically, virtually all leaked policy from the ESM. Gold and Silver have rocketed out of Sunday nights lows on renewed global monetary madness.      -this link can help you follow the money in Euro Land.

How 12 became 298

The Commonwealth of Pennsylvania may take control of the capital, Harrisburg, soon. In 2003 A garbage incinerator was marked for retro-fitting at a cost of $12 million. A botched contract job on the original redo then led to a series of escalating "solutions" and bond issues. $298 million dollars later, the State may take over the city. No one involved seems to have done the math on the capacity. At maximum operation the incinerator can only burn 800 tons of garbage a run. The price times the burn rate will no longer even cover the interest payment of $18 million a year. The annual interest is now 50% greater than the original outlay.

Change the millions to billions and add the insolvency of the larger entity and you have Europe.

Friday Mind Blower

This morning researchers from Cern on the Opera experiment (Oscillation Project with Emulsion-tRacking Apparatus) will tell us about neutrinos traveling at faster than the speed of light. The details are something like 299,792,458 meters per second vs 299,798,454 mtr/sec. I'll let the Cern boys handle the facts.

For me, the experiment underpins a pet peeve of ours with market analysis. We call it "effecting a cause." As Subir Sarkar of Oxford said today when news leaked out:

"The constancy of the speed of light underpins our understanding of space and time and causality, which is the fact that cause comes before effect. Cause cannot come after effect and that is absolutely fundamental to our construction of the physical universe, If we do not have causality, WE ARE BUGGERED. (emphasis mine)"

Man's human nature to order the world through meaning compels this analysis. We have to learn to let it go. There's less than meets the eye. If the nerds at Cern have tossed Einstein aside while attempting to look at the beginning of  time, so be it. The universe has a way of self correcting. Many will opine today that the end is surely upon us. Don't listen. Even the most worshiped belief systems turn out to be mistaken. Besides, even if they're right, the researchers at Cern already know how it turns out.

(Also: Tim Berners-Lee , inventor of the internet---not Al Gore -- was a Cern alum)