The porn pattern worked as this selloff has been unusual. Maybe I should have shorted when I got stopped out but I got tons of bearish exposure through ZQ and euro$, front end is going Nasdaq to the frustration of the Fed bluffing hawk brigade
VIX back at 27 and ES free falling, will watch the 40 and 50 ES MA to decide when to buy more XLF puts(which are down more than 50% since I bought but they might make a come back if this is going to be a bad October)
And the brigade is going strong "Lacker Says Fed May Need to Tighten Before Unemployment Falls" http://www.bloomberg.com/apps/news?pid=20601087&sid=aec72yFS.BiU âI donât think that is a showstopper if the unemployment rate hasnât starting falling yet,â Lacker said. â We have never done it. There is a first time for everything.â He wants to save the first time ever for when inflation is at this secular lows. He also suggests the first time ever will come at the worst employment plunge since the 30's(4.4% to likely 10.5%+, compared to 5.7% to 10.8% in the 80's, without even mentioning the record U6-UR spread) I say thats a bluff
Nice rise in DEC 2010 GE today, and I'm out because I don't like the credit risk with Eurodollars, versus Govt securities. I'm looking around for other potential ways to play the "lower for longer" theme. Fed Fund futures look great but I'd prefer an instrument with a liquid options market. It doesn't look like 13-week bills have liquid options. 2 year T Bonds might be a good alternative.
What you mean by credit risk?Its exchanged traded and libor is full faith and credit of the US gov these days If it blows out they will manipulate again with more QE, bailouts, TARP, god knows what Btw, Lacker is out of the FOMC next year, probably headed straight to a mental hospital
I agree that the Fed / Treasury will continue to introduce more QE / bailouts etc. if and when the TED spread rises. However the question is, how long would they wait to do this? At a TED spread of 50 bps? 100 bps? 250 bps? Even looking at the relatively benign environment of the first six months of 2007, the TED spread was as high as 50 bps, and in mid 2008 (pre FRE / FNM / LEH / AIG) it was as high as 100 bps. To me that's too much risk and not enough reward. I'd rather look for a way to "play" this investment theme with govt securities, and not have to worry about credit spreads widening.
My thinking is, by Dec 2010 the financial crisis is likely to be over. So the Libor-OIS(the expected 3m Fed Funds Rate, I rather use this as fed funds trades at a premium to govs too) spread will be around 11bps, which was the avg leading up to 2007 4-1 odds on the calls looks good, plus I'm long fat tail of negative rates. After today they almost doubled but if I'm right, this party is just getting started
Lets remember that during Jan and Mar where the world thought every bank was insolvent and C debt was yielding 25% YTM, libor blew up by only 25bps, which reversed as the manipulations(like the stress test) kicked in. So my eurodollar trade already has a buffer of protection against the case the financial crisis is not over by then or that bank fears come back(Which they probably will) and dont leave the system
XLF is down 3%, corporate bonds 1% and Junk almost 2%. Yet libor is at 0.28%, down a bit for the day(Which is a bullish movement). So even though I expect some libor rise a bit, we are not likely to see post Lehman libor action ever against in our lifetimes