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Know Your Enemy

By | June 11th, 2017|Economy|

“Know Your Enemy” - Sun Tzu & Green Day On Friday, we got a 2bp flattening in EDH8-H0.  As mentioned in a previous CA, there is a tendency for the curve to flatten a few days going into the Fed meeting.  Note that I didn’t mention EDZ8-Z0, which was unchanged on Friday.  The price action felt differently on the Zs last week, and may last going into this Fed meeting.  Unlike prior weeks, the Z algo seems to be offering the Z contracts more often than not.  Whether this is just a lightening-up before the FOMC (before further buying) remains to [...]

Conditional Curve Shape

By | June 4th, 2017|Basics|

I think of value on the curve in two ways: (1) bottom-up, and (2) top-down.  Bottom-up would be looking at a small piece of the curve and thinking about the value there, whether it’s a particular Fed meeting, or slope or curvature on a segment of the curve.  This is probably the most common way to come up with a trade idea.  Top-down would be looking at the overall level of rates and asking what implications makes sense for the shape of the curve. On Friday, ten year yields made new “post-election” lows (starting a few days after the election [...]

ETF WTF

By | May 28th, 2017|Economy|

As I was watching equities make yet new highs last week despite lower stimulus prospects, increased Presidential turmoil, and weaker data (albeit still constructive), I thought about the ETF phenomenon.  I had mentioned ETFs casually in previous CAs as a source of equity support.  Consider all the 401(k)s, retirement funds, and personal investments that are tied up in passively managed funds.  A lot of that money is just automatically invested at regular intervals.  Workers generally only make allocation changes a “few” times a year.  Since the flow of funds into the ETFs are very regular, there are probably funds that [...]

Fed vs the Markets

By | May 21st, 2017|Economy|

Tens are back near the recent low yields, and Z8-Z0 spread is back near the recent lows.  This is a little surprising, but I suppose the bulls got an assist from Trumpidity.  All other things being equal (ex-Trump), I would have thought we sold off going into the Fed minutes, that may discuss tapering of the balance sheet.  Instead, with the announcement this weekend that Comey would testify after Memorial Day, the markets are going to be more focused on the headlines and less on the Fed. Let’s for a moment ignore Trump/Comey/Russia, take a step back and look at [...]

A Caveman’s View of Frexit

By | April 23rd, 2017|Economy|

I am not going to pretend to be any type of French political expert.  But sometimes, not being so immersed can give you a different perspective.  I put on my CArock, the Unfrozen Caveman Curve Advisor, hat on to give you some non-standard takes: The market reaction should be interesting on Sunday.  I discuss a few trade thoughts in the next section.According to the betting markets, the following are the odds of the various Final Two pairings.[1] Yes – I realize the bookies have had a terrible 12 months with political odds.  But, just because something is 10 to 1 [...]

Potpourri II

By | April 16th, 2017|Economy|

I’ve been a bit punch-drunk for most of this year by all the headline bombs we have been a little behind the markets on.  There are a lot of things we have no competitive advantage trying to guess (since others in the markets have some insider information or just better leading information sources).  I wasn’t sure why the Fed was in such a rush to hike in March, when they are gradual and data-dependent and there was no pressing data.  I wasn’t sure why the Fed is in a rush to normalize the balance sheet by “later this year”, when [...]

Potpourri I

By | April 9th, 2017|Economy|

[Not one of my more inspired posts, but this goes to show you why directional trading is not always the best approach.] I have a lot of mixed thoughts about rates right now.  The best course of action was to jot them all down, take a step back and evaluate them. BULLISH THOUGHTS Later Non-Quarterly meetings. “Later this year” does not just mean Dec.  It could mean Nov (and Sept is a remote possibility).  This means that the Nov non-quarterly meeting year is not looking great for a hike, if you are in Dudley’s camp that the Fed takes a [...]

Widen Your Trading Horizons

By | March 13th, 2017|Basics, Featured|

One of my pet peeves about trading is how the general trading population can only think in terms of “up or down.”  As a result, people tend to under-appreciate market commentary that is not related to correctly predicting/forecasting/guessing “up or down.”  I wanted to discuss the various forms of analysis that you can make use of: Correct directional analysis. This is unquestionably useful when correct, but very few people are right significantly more than about 55-60% of the time.  Very few.  If you take a longer time horizon, that number could be higher.  But it would be unrealistic to think [...]

Six Pillars Update

By | March 12th, 2017|Economy|

That article I wrote was finally published.[1]  The hard copy should be out some time next week.  I’m supposed to be getting a distributable pdf copy at some point that I will forward to you.  The important takeaway from the article is to understand when the regime is about to change.  “Understand the current regime we are in relative to the historical data and understand what regimes we are likely to progress towards.”  We are a few steps from getting to a regime change now… Remember the “Six Pillars of Long Rates” [2] article from last quarter?  We are starting [...]

Calendar Thoughts

By | February 26th, 2017|Economy|

I saw an interesting interview last week with Chris Cole (Artemis Capital).  He gave an example of the Cold War, where we had peace (low volatility) however any number of things could have happened that could have triggered a nuclear disaster.  Since he is a vol trader, he was referring to the current environment of high risk but low volatility. I suppose I had been thinking something similar, in that I have been saying the tail risks to both sides have been quite large.  It’s somewhat unusual to think that we can get a huge move and not have a [...]