Update

So there you have it. I guess it was sort of a push? I got 3 right, he got 3 right...but to be fair, my S&P call was pretty good too! However, since the X {November Fed Fund} market was technically Mr. Practical Thinker's, I assume that I owe lunch for the office.

~LH

Nostradamus

With Mr. Practical Thinker heading off to the Holy Lands today the Old Baron and myself decided to play Nostradamus and predict where the world would all be at upon his return.

The one with the most losses, buys lunch for the office.

~LH

"Failure is an orphan"

"...but Success has a thousand fathers."

I'd love to take the credit for calling out Wednesday's TY Note auction results and our two plays that netted 87.5% and 69% profits respectively {Highlighted in our last post}. I would love to be that guy, but alas...it was Mr. Practical Thinker.

Mr. Practical Thinker fathered the notion that the market would soundly reject a 4% yield in the TY. He was dead-nuts right. Looking into the Bloomberg article further we found a few points to be encouraging in terms of our pre-auction market analysis.

1. Indirect bidders {read: Foreign Banks} accounted for 8% more of the bids than they did in March. This is encouraging because we see this as a trade that has been initiated out of necessity. There seems to be  real risks in terms of the murky EU situation(s) and US economic recovery and the idea of locking up 50-100mm at close to 4% is a really nice hedge. 
2. The bid-to-cover ratio was 3.72 vs a rolling average of 2.87. Bloomberg cites that this was the most over-subscribed auction since at least 1994. Savvy investors of all backgrounds seemed to be able to identify how lucrative it was to get in on the nearly 4% yields.
3. "The Fed's preferred inflation measure, {Core PCE} an index based on consumer purchases of goods and services excluding food and energy, was up 1.3% in February from a year earlier, below the Fed's Target of 1.5% to 2%."* If treasury buyers are looking for a reason to get long, they have found it in the fact the real inflation is at generational lows. In our opinion, the fact that investors wont get your entire return gobbled up by inflation, coupled with the notion of nearly 4% yield brought additional buyers to the marketplace.

Here's what we're thinking. The $13 billion auction of 30 Year Bonds will be good, but NOT as good as the yesterday's TY. However, yields will drift lower as futures trade higher. We're looking for opportunities to buy TY and US put spreads as well as possibly cherry-picking some cheap volatility trades. Unfortunately, you will probably have to wait until mid-day on Friday {or maybe even Monday} to get the best levels on these trades. In the TY we suggest buying a put between 112 and 114 and financing it a put {or 2} lower than 110.5. For the US contract, we suggest buying a put between 113 and 110 and selling a lower strike.

~LH

*Wall Street Journal, "Fed Fear: Raising Rates Too Soon" by Hilsenrath 04.07.2010

Confucius say ...

"He who pick bottom, get stinky finger" (perhaps my favorite 'market timing' quote--obviously not Confucius)

Friday was a very abbreviated session that gave the credit markets a quick and solid beat down. Not only did every interest rate product move lower, but the spreads started moving as well (as opposed to the unilateral moves we've had recently)

To us, this signals a good sign. The marketplace is finally starting to price in a recovering US economy and all of the impending policy maneuvers that will accompany this revival.

Here's a few points of interest:

• As of the close yesterday, the Fed Fund Futures were pricing in a 43% chance of a 50 bps rate move at the January 2011 meeting. (Also known as an 86% chance of a 25 bps hike)
• Our closely watched NOB (Notes over Bonds) yield spread touched 86 bps on Friday. In the full session yesterday (Monday 4.05.10), it did NOT react as we had expected. Recently, when the short end (ED and 2 Yr Notes) sell off, the NOB goes negative (in relative terms, the 10's are underperforming in relationship to the 30's and the spread between their yields is increasing) Yesterday, even with a aggressive sell in the futures market, the NOB stayed constant at 88-89 bps. This signaled to us that the market wasn't fully convinced that yields were headed higher. Early price action today, confirms that assumption as they are drifting higher in early trade.
• General market consensus is that this week's auctions (all 8 of them ranging from 4 weeks to 30 years) will be met with mixed demand. Most talking heads have been harping on higher interest rates due to investors REQUIRING more bang for their buck. We disagree. Foreign investors were quiet at the last few rounds of auctions as they sifted out the mixture of data coming from the US. We anticipate very robust auctions and a drop in current yields (especially in the TY and US contracts).

We got long the following:

1. In the Ten Year (TY) we bought the 116.5 - 117.5 call spread for 8 ticks. Risk is 8 ticks, potential profit is 56 ticks (64-8). We're looking for a good TY auction on Wednesday and will probably be out around 14-16. {SOLD OUT AT 15 vs. 115.30 TYM10 Netting 87.5% profit}
2. In the 30 Yr Bond (US) we're long the 116-117 call spread for 13. Same parameters, just looking for a pop.{SOLD OUT AT 22 vs. 115.21 in USM10 Netting 69% profit}
3. We're still hedged up for a move to the downside in the Euro Dollar (ED). We still have the E0K 9837.5 - 9812.5 put spread 1x2 on for a half a tick. We're long the 9837.5s to be short 2X the 9812.5s. This trade pays off if the June 2011 ED settles below 9837.5 on May14th.
4. We took off the E0J put spread 1x2 for a 75% profit.

Closing thought:

• A large hedge fund in Greenwich CT. initiated a US 117 - 119 call spread 1x2 this morning. They bought the 117 calls and sold 2X 119 calls. They did 15K (15,000 x 30,000)! In my opinion, they have the same thoughts as us. The only difference is the timing (We put all of ours on yesterday) and size (We didn't do 15K)

This is the week of supply.

~LH

Excution Update

*Click the title.*

~LH

Pre-Unemployment

I've had a couple of interesting and unique bosses and partners in the past. I've always tried to glean the good and leave the rest in an attempt to become a more successful trader. 

I vividly remember watching the futility of my first boss because he wasn't part of the system. I never could understand why this large, former NFL'er, with a booming baritone voice was only given 5 lots when meek, little guys around him were getting fed 50s or 100s. He could physically beat anyone in that pit into a fine sawdust, but was a third (or fourth) tier trader. Why? The system, I later learned, was the act of "paying for information." You throw the broker's a bone or two in terms of a very easily filled trade and they reciprocate by upping your quantities on the juicy trades that they have control over.

Now that I've made the transistion from the pits to the screen, this game becomes ever more important. I need brokers to fill in the color that I was once able to see from the pit. I want them to show me ALL their players, not just the big 3. I require more than just an IM or an email: I require substance. And my weapon of choice to get it? I pass out brokerage checks to a small army of individuals in hopes that each one will add a little bit more to my market picture.

Tonight, as I'm enjoying a late dinner with friends, one of these brokers sent me a press release out of Barclays Capital. I had been game-planning for tomorrow's number while trying to take in some of the very unique circumstances that this number will encompass. The most striking of these is the mere 45 minutes that the market will have to digest it before the S&P 500 futures close down for the holiday weekend. This means that the move could have the potential to be violent! 

• Per Barclays Capital Report Pg 1 & 3, Dated 1 April 2010

Employment report (8:30am): We expect a strong March employment report, with nonfarm payrolls up 250k and the unemployment rate down a tenth, to 9.6% (consensus: payrolls 184k, unemployment 9.7%). We and the consensus also expect the average workweek to edge higher to 33.9 from 33.8. Much of this sharp gain would be transitory, as it reflects the combination of a weather payback and Census 2010 hiring. On the former, we believe that the inclement weather in February subtracted about 75k from payrolls and pulled down the workweek, particularly in the construction and manufacturing sector. We expect this to be reversed in March. On the latter, we expect the Census Bureau to hire about 125k workers in March, which would show up as a boost to federal non-postal payrolls. This implies an "underlying" gain of roughly 50K jobs. Census hiring should continue to ramp up, likely peaking in May at more than 500k additional jobs. However, these jobs are temporary and will be removed from the statistics in the summer and translate to a net job loss.

If the scenario plays out as they suggest and we add 250K jobs, the credit markets will demand higher yields and the equities will blast off. I was roundly mocked in my office for suggesting that the one day , ATM straddle for the S&P should be 17.00-20.00 based on today's close. But, if there isn't a lot of time to finesse your bids throughout a trading day...LOOK OUT.

Barclays suggested one other very interesting tidbit.

Vols richened, probably due to rise in longer rates. 3m swaptions were marked ~4abpv higher. Have vols formed a bottom and now start rising? We think not: there is simply too much supply than what dealers can find a home for. In March, the option market digested roughly $30mn vega from new issuance in zero coupon and agency callable notes. This is more than what it had to deal with in the previous two months. Without realized vol and demand from mortgage hedgers, lower is probably still the path of least resistance for vols.

A massive amount of this Vega was sold via PIMCO and its cohorts for yield enhancement on their bond/mortgage portfolios. And though we've had a very nice pop in Vol over the last 2 weeks (TY June ATM straddles went from 2.03 to 2.23 representing a .5% rise in option vol) they are calling for this to be nothing more than a momentary blip. I can actually see their logic and have begun to change my thought process about getting long Bond Vols, even if I can buy them at sub 8% prices...

All this to say. I'm going to bed and looking forward to a whip-sawed, fast paced day with light volume and only one direction.

~LH