Super Bowl

I had intended on getting this out on Saturday or even Sunday, but as usual, life got in the way. By life, I'm referring to a 2 hour trip to Costco, church, little people who want to wrestle, and 36 miles of running over a 36 hour span. Oh, then there was that part about the Super Bowl consuming ~4.5 hours of my life. By the time I actually got around to writing, my brain was fried and it was moved to today's agenda.

Friday was a fairly busy day. I don't really want to write about the legitimacy of the NFP data and whether you believe it or not. Rather, I'd prefer to focus on what happened in the products we watch and where we think the next few weeks will take us.

Let's talk Fed Funds. There was a noticeable volume spike heading in to the week's end. Where we are normally seeing 18-22K contracts a day, we suddenly saw a bounce up north of 50K. Obviously, customers wanted to move some of their inventory prior to the release on the Unemployment figures on Friday. On Thursday, prior to the data, a new customer came to buy 3000 of the July '12 -- Jan '13 future's spread. He started accumulating at a price 2 ticks and paid up to 2.5. We count spreads on an adjacent month basis. That is to say, that selling 100 N/F spreads actually resulted in selling 600 spreads {100 of each adjacent month NQ, QU, UV etc...}. At the time, 2s looked to be a decent sale. However, by the time the customer started lifting our 2.5s the trade no longer looked attractive as all the hedges has disappeared.

As the number hit the tape on Friday, the Funds sold off 1-2.5 ticks {which, if you're familiar with this product, is a substantial move}. Right on cue the customer was back to buy 1000 more spreads and though he was only 2.5 bid, we were sure that he'd need to step up and pay at least 3.5 in order to get filled. Hindsight trading says we should have unhitched the wagon and dumped every spread we had in our inventory at that moment. However, we didn't and within an hour or so, the Funds had rallied, the spreads had collapsed, that bid was long forgotten as the 1.5s began to trade in N/F. The turn had been subtle, but the force behind it showed that market participants still agreed that we're not going to see a Fed Funds rate change until 2014. We did well when viewing the traded for 50K feet, however, had we taken a more aggressive stance prior to Friday {which market participants did post-NFP} we would have locked in a great trade.

~LH