Oct 6. Pushing too hard
–“Rarely do we investors get a market that we know is over-valued and that approaches such clearly defined limits as the bond market now”. Ray Dalio in remarks to the Central Banking Seminar. In his comments (posted on LinkedIn) Dalio also says. “If appropriate risk premiums don’t exist, the transmission mechanism of capital won’t work as well and the economy will grind to a halt. For these reasons major central banks are facing a ‘pushing on a string’ situation. The last time this happened was in the late 1930s.” Dalio uses the phrase “pushing on a string” repeatedly in his comments, but (ironically in my opinion) concludes CBs will be driven to buy riskier assets. Which further blurs appropriate risk premiums, right? In any case, the fault lines have been identified; central banks on one side and various famed investors on the other, pushing their respective tectonic plates by millimeters until the shift occurs. Dalio, Gross, Soros, Druckenmiller, Gundlach, etc…all have issued warnings while the central banks float trial balloons to extricate themselves from impotent policies. (When is Google like a central bank? When it pulls its bid for Twitter and sends it crashing).
–Yields rose yesterday as non-mfg ISM was much stronger than expected (and printed the high of this calendar year) at 57.1. The problem is that this data series has been so volatile that it has likely lost its usefulness. Late in the day Crude oil was up another $1 to 50.32, essentially matching the high print in August of 50.59. On a continuous chart oil appears to be making a head and shoulders bottom which would target over 70. I’ve read many analysts who think oil can’t get much above 50 as marginal producers will enter the market in force and cap prices. It’s a battle between fundamentals and technicals.
–New highs made in some of the near spreads yesterday, for example EDZ6/EDZ7 posted a new high of 19.0. Kind of a big deal, because we haven’t had any year spreads above 20 except for late July and just prior to the Sept expiration when EDU6/U7 popped just above 20. This firmness is also occurring in the context of an expected hike in December. Maybe it’s just a ‘micro-aggression’ in the market and can be ignored, maybe not.
–A couple of big trades yesterday: Seller of EDX6 9900p at 1.5, open int +35k, and a buyer of TYF 115p for cab-7 in 25k. If one considers the former trade in conjunction with FFX6 (which settled at 9957.0 on new selling and added 20k to open interest), it makes some sense. On a hike in Nov, FFX goes to 9937 (make 20) and EDZ probably goes to 9888, lose 10.5. On a no-go, lose 4 on funds and make 1.5. Looks ok, except that the odds of a hike in November are exactly zero.
