March 23. Hammered
–When all you have is a hammer, every problem looks like a nail. Analyst explanations of the stock market sell off range from tariffs and trade wars, to domestic political issues, to tech problems etc. Maybe it’s all just part of the big karmic circle. Trump triumphantly took credit (repeatedly) for the amazing amount of wealth that he engineered, which, as we learn in this particular business, comes back to bite your ass. Whatever the case, they hammered stocks. One contributing factor is Fed policy. Not only does a higher discount rate diminish the present value of future cash flows, it also increases servicing costs on the debt that firms were encouraged to gorge on by the previous Fed. Grant’s has a new daily e-mail, and in yesterday’s missive cited this snippet from Morgan Stanley from last July: “If the companies in our universe were rated based only on their leverage, we estimate that over a quarter of the investment grade market would have a high yield rating, using Moody’s leverage buckets across sectors.” July was 100 bps ago. Creditors may not be quite as welcoming when it comes to rolling that debt over. And there’s a lot of it.
–What Trump DID capture with his embrace of equities is the idea that the economy and the stock market are as one. The Fed’s Powell is seeking to separate the two, saying that the stock market is NOT the economy. But with market cap at a near record % of GDP, I think Trump is closer to the truth. Time will tell. But the back end of the euro$ market is forecasting deceleration. Once again, reds to golds closed on the low, at only 16 bps. Yesterday was the first time that I’ve seen a euro$ calendar spread trade negative, EDZ0/EDH1 which printed -0.5. There was a new buyer of 60k EDZ9 9900c for 1.5. Open interest in EDZ9 plunged by 55k on short covering. In EDZ8 flows were 2 ways, a buyer of 100k EDZ8 9737/9725ps vs 9775c (bought the put spread flat premium) and a seller of EDZ8 9750/9725/9712p fly at 8 to 7.5. EDZ8/EDZ9 settled 34 having traded 38.5 post FOMC, and EDZ9/EDZ0 settled 7.5, having traded 10 post FOMC.
–Yields took a tumble, with tens down 7 bps to 283. EDM8 traded 9770, within a couple of bps of the 3 month libor setting, and only a couple of bps away from the 2y treasury yield which ended at 2.285%.
–Durables today. Possible comments from Bostic, Kashkari (I TOLD YOU we shouldn’t have hiked) and Kaplan.
