Discussion in 'Index Futures' started by nitro, Jul 6, 2007.
The right way to measure inflation from a trading perspective isn't CPI, it is the spread between TIPs and bonds. That gives you a realtime estimate.
That number is approxmiately 2.54%. That is .50% higher than the FEDs comfort zone.
I know that rate policy has a momentum factor to it, but I have a theory that we get maybe one more rate cut, the FED lets those cuts take effect on the credit markets to stabilize them and leaves the IR steady at say 4.5%, then slowly starts raising again to combat inflation, bringing IRs back to 5% or a little higher. All bets are off if a recession hits. There are signs that some parts of the economy are enterting recession already, e.g., retail, or the obvious sector, housing.
How long before rates start to come back up again? I estimate late first 1/4 of next year, again, assuming no recession.
I know this is probably radical to most of you, but I would start watching corn, and the CRB index in general:
Ethanol went ballistic when Bush announced plans to have government subsidized alternative energy sources. The price of corn went much higher on that news, and every farmer and his cousin tried to get into the act.
The short term effect was that so much supply hit the markets, that corn finally changed trend and reversed to the mean. However, I believe that price spike is not a one time deal. The higher the price of oil goes, the more viable ethanol becomes.
This will drive up the price of corn and as a side effect, it will raise the prices of food, things like tortillas and livestock. So while that is inflationary on one end of it, it is deflationary on the oil side.
Solar panels and other technologies will become more cost effective as the price of oil goes higher. The pain has to be long enough so as to chance the perception on the consumption of oil. That will determine the trend, or not. So far > $80 oil has not hit the consumer, as gasoline prices are holding steady. But don't hold your breath...
How does this affect SIFs traders? Well, it is the long end of the curve that is most sensitive to inflation. If bond yields go higher, investors shift out of equities into bonds. Capiche?
It is impossible imo to trade directional SIFs at this point without having the 10 year bond , TIPs and the 30 on your screen (and of course YEN and EURO). It is not enough to see a steepening YC and say that is bullish. You have to understand the dynamics, and the levels.
Next week will be very interesting, and potentially very volatile. I would be a buyer of gamma here.
Demand for options seems muted. I expected more...
Still, the EOM is upon us, and things should ramp up later this week.
Option demand muted once again. Hmmmmm...
As an aside, this is the first day of SPX options on Hybrid 3.0.
Option demand is completely muted this week. Opt vols have suffered as a result. I was wrong.
Amazing what the .50 FFs cut and the .50 discount window cut has done. There are markets that are going wild, i.e., commodities, but strangely they are having almost no effect on SIFs.
I don't understand this market of the last week. One thing might be clear though. With everything this market is/has gone through, and inspite of that many markets are at or close to all time highs, how in the world can you justify strategically selling it?
I have come to the conclusion that index options anticipate regimes of volatility and use some sort of markov property to shift between regimes of fear, greed and moderation. Depending on which regime the models are in, it drives demand for options. We seem to be in a moderate regime now, where options vols are getting crushed. A month ago we were in fear regime, and for about a year or so before that we were in greed regime. It is my contention that models were tuned to moderation very soon after the FED cut rates by .50 basis.
But for this to be true, markets as a whole would have to be in sync as som sort of conscious entity. That would be a heck of a trick, and there has to be a mathematical reason that underlies it. Perhaps it is because most hedge funds sell variance as their source of alpha?
I am just thinking out loud...
I thought this was a good article in todays WSJ, so I thought I would post it so that I can find it in the future.
Nymex Crude-Oil Benchmark
Has Some Doubters
By BRIAN BASKIN
October 1, 2007
HOUSTON -- In deciphering the factors supporting near-record oil prices, traders are closely tracking the forces affecting the U.S. crude benchmark. Once again, some are questioning how useful that benchmark is.
At one point last week, the November West Texas Intermediate crude-futures contract traded at more than a $5 premium to international benchmark Brent. Comparable blends of Gulf Coast crude are trading almost even with WTI, down from a $7 premium in July.
It is the swings in those prices relative to WTI that traders are focusing on. WTI became a benchmark because of the stable supply and demand of Texas crude. Other blends would fluctuate against the steady benchmark based on problems in their individual markets.
Today the opposite is more often the case. Light Louisiana Sweet, a leading Gulf Coast blend, has been produced and consumed at steady rates for most of 2007, yet its value has fluctuated between $7 over and $1.75 under WTI. Despite what some see as erratic fluctuations, there is no sign of an alternative benchmark to WTI.
For consumers, the near-records in headline oil prices haven't translated into record prices at the gas pump partly because most types of oil used to make gasoline cost less than WTI and the gap has been widening.
One reason is that the price of WTI is being affected more than other grades of oil by a major refinery outage that has lasted longer than expected.
BP PLC's Whiting, Ind., refinery, the fifth-largest in the country, was partially shut down after a fire in March. It now processes about 330,000 barrels of crude a day, months after the company expected to be back at full capacity of 410,000 barrels a day.
BP has also taken down a unit used to remove impurities from low-quality oil. Until those repairs are completed early next year, the refinery is only accepting high-quality, or sweet, oil.
That increased appetite for light, sweet crude in Whiting is likely one reason that stockpiles in Cushing, Okla., the delivery hub for the WTI futures, are dwindling, said Stephen Fekete, a consultant with Purvin & Gertz in Calgary.
A person familiar with the Whiting refinery's operations said the facility is taking 95,000 barrels a day more sweet crude than normal and has been since June.
Some also question the role Cushing stocks play in influencing oil futures. Many more barrels of WTI are traded on the New York Mercantile Exchange than are actually delivered to Cushing, with financial investors preferring to roll over the contract into the next month rather than take physical delivery of oil.
Stephen Fiorini, with Fimat Canada in Calgary, called the Whiting refinery's increased appetite for sweet crude a "microfactor" in determining futures prices. "WTI is very much affected by global issues, so BP would just be a small part of it," he said.
On Friday, the front-month WTI futures contract, traded on the Nymex, approached the all-time record of $83.90 before falling back to settle at $81.66. Prices rose 10% in September.
--Ken Clark and Jessica Resnick-Ault contributed to this article.
Vols are showing signs of waking up again. Still pretty subdued imo.
The psychology as I see it is: No one wants to sell a market that seems incapable of being taken down for any length of time. On the other hand, few want to buy a market at all time highs with real reasons for concerns over a looming recession and likely reduced corporate earnings.
Vols for the rest of the year may have days where vol spikes on few days, followed by days where it is dead. Volatility clustering may not to be the norm. The high vols days are all news driven it seems now.
Seems like summer and fall trading regimes have switched places over the last couple of years...
The minutes today will be on both the .50 rate cut, and the emergency meeting to lower the discount by .50. Fasten your seatbelts - there may be something in those minutes that we don't know.
AA earnings after the close which will reflect a weak dollar. This earnings season and the next should be more interesting than any other earnings in the last five years imo.
I am going to go out on a limb again and say we get higher vol from here on to the end of year, inspite of a vol implosion since the FED cut. No, I have not learned my lesson from my last vol prediction.
PS I wonder if historically, a weaker dollar signals lower volatility?
Separate names with a comma.