Spring has sprung

Suddenly, the long cold winter appears to be but a distant memory.   Spring is in the air- and not just because of the warm sunny weather we're getting in the northeastern United States. 

The Tories' shock election win in the UK will allow us to finally determine whether David Cameron is a "true" Conservative or merely a wet blanket with or without a strange-bedfellow coalition partner.  Certainly the FTSE and sterling (as measured by EUR/GBP) are rejoicing.  It's important to remember, though, that spring also brings hay fever to unlucky allergy sufferers.   We now face the prospect of one, or perhaps two vital referenda in the next few years- in the UK on EU membership, and potentially in Scotland (again) on independence.   Still, it's too early to begin pricing that stuff into UK assets, so British readers are invited to knock back a glass or two of Pimm's and lemonade as they brace for their first Tory government in 18 years.

Spring, too, has arrived in the US payroll data, which rebounded smartly to an in-line 223k.   To be sure, the revisions for March were poor (down to 85k), but Macro Man isn't sure that matters too much- a poor Q1 has now been solidly baked in the cake, as it were.  The significant thing is that the first hard data of Q2 has brought about the long-awaited rebound....the key now, of course, is for other data to follow suit.

As for markets, there are at least some signs that we will revert back to "as you were."   Yesterday's price action in Bunds, which has been the nexus of CTA pain, carried more than a faint whiff of capitulation, as depicted by the "hammer" formation on the candle chart:



Your author is still treading fairly gingerly, while considering a career switch to a UK political pollster.  Any job where you can be that wrong and remain employed amounts to little more than a sinecure...
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Anonymous
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May 8, 2015 at 3:36 PM ×

Dumb question:

What is a "CTA" ?

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Error404
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May 8, 2015 at 4:27 PM ×

Political pollster....or Fed forecaster?

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Leftback
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May 8, 2015 at 4:42 PM ×

For once, we agree with MM. It's back to the prior FX regime of stronger USD in anticipation of another ride on that tired old horse of US recovery.

So it's profit taking time here at Falling Knife Capital while the sun shines on a quiet Friday. Time for LB to depart the following trades:

1) Long VGK. EURUSD set to turn lower for a while.
2) Long VWO. DX set to rise for a few weeks.
3) Long GDX. See above.
4) Long XLE. Crude oil about to turn lower.

Spoos may drift higher or be flat, we don't care. US rates will continue to calculate the FOMC matrix. We are going to watch the auctions next week and generally be Sidelines Capital for a while. No need to be clever.

Income plays still in effect, might be bargains there if rates spike again.

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Anonymous
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May 8, 2015 at 5:07 PM ×

@leftback

Why exit Long VGK? Shouldn't lower EURUSD be good for VGK along with Draghi's QE?

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Leftback
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May 8, 2015 at 5:28 PM ×

Agreed. We plan to return to the EZ theme in time. But the near term will depend on the steepness of the DX move... and we are not anxious to repeat our error of January having done a lot of hard yards to get back, not to mention the smack talking from MM. :-)

EZ equities seem priced for perfection here, perhaps time for another performance of the Greek panto? STOXX seems ripe for a pull-back, really just didn't want to be worried about hedging EUR here.

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hipper
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May 8, 2015 at 9:35 PM ×

Tough call LB but I'd rather like it than not.

Yellen remarks on equities (which might have some real significance or hint even though they were passed with a shrug), good in-line NFP starting for Q2 and unemployment notching down would IMHO be logical to be perceived as even a bit hawkish by Mr. Bond and Mrs. Equity. Maybe treasury yields would've actually been rising today were it not for the Bund bounce, which basically means foreign sympathy buying outweighing domestic selling.

It actually isn't that inconceivable that EZ data would have some more positive surprises for us. But if it manifests itself as the deflation trade unwinding itself further it will be shock and horror for equities as we witnessed so far. Looking forward to that juicier fixed income opportunity.

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Anonymous
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May 8, 2015 at 10:35 PM ×

This last week has been quite frustrating for me. Poor GDP (about what I expected, actually) and bonds tank. Payroll number as expected and bonds soar.

I have been long EDZ5 from 99.16. Today, I closed out the long position, and joined MM on the dark side (just a nominal ten lot, though) at 99.42. I just don't see the FFTR above fifty basis points at the end of the year, which would make the expiration value (ignoring the effect of potential 2016 Q1 rate hikes) about 99.35.

I don't know which is more likely - slower or faster rate hikes than the market expects (they will certainly be slower that the FED forecasts, though), but it just feels like there are more external events that could push back liftoff, especially if we return to the rising dollar / falling energy prices) meme, than there are events that accelerate rate hikes. (I have always been skeptical about the "need" to raise interest rates when oil prices go up, in any case - in an energy importing economy, higher energy prices will slow economic activity all by themselves).

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Anonymous
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May 8, 2015 at 11:13 PM ×

Great comments. It's amazing how fast the whole German bund yield point of view changed. I'm still cautious about what the long term effect is but I am long stoxx. Will need some follow through for confirmation. Let's see. One has to be flexible here, especially with Greece.

There are some great videos from the recent milken conference online. Take a peak. El erian is a super smart dude and also an interesting piece on real estate with Zell and Barrick, 2 of the industry's brightest. 3 cap rates. That is also a big unwind waiting to happen sometime...

Abee

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Anonymous
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May 8, 2015 at 11:30 PM ×

It's a June hike. What does 3/4 months matter? Rip the band aid off. The FED equity comments were ignored by Spoo but the move after cash open was more an ECB QE like trade that we saw in Q1Dax led the way.

I love a bit of contrarian guess work.

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Polemic
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May 9, 2015 at 10:29 AM ×

A couple of thing have come together here.

Fully agree with MM as I too looked at that bund chart and thought 'typical spike exhaustion sell off'. The rebound amidst a mood of 'get me the hell out of here is a perfect CTA market bottom.

We agree that CTA weighting has been a large component of this turnaround so if they were the nly players in town then the next move should be higher. Especially when we have the oil tanker of the ECB bid still around. You could argue the ECB is grateful having profit transfered from CTA bin to ECB bin via the better transfer price.

But there are a couple of other background issues. FI`rst is that we all seem to agree that bunds 'should' be pricing 75-100bp yields and the second is how 'out' did real money get on that move. I am not sure as on one hand volumes were huge but on the other their belief is that bunds are a good hold for all the reasons they were buying them since Jan. Apart from price have they had any BIG reason to change their minds (dismissing all the reasons that I have for selling them as they didn't agree then so why should they now?).

But maybe the biggest fly in the bounce ointment is that psychology has dramatically changed over the last 2 trading days. The bounce appears to be very much cast in the 'that is it panic over, lets start buying everything again' mode. THis has been helped by the Euphoria from us UK based traders that the UK election results are 5 bells in a row for business and private growth. So we end the week on a high which no doubt will be builet upon by the media.

But lets just go back to where we really on on that Bund. Yes a bounce, but look at that chart on Bund again and see where we are relative to 2 weeks ago. We have only countered 1 1/2 days worth of drop.

We are basically not out of the woods yet everyone thinks we are. Which in the psychological game is dangerous and translates in the Elliot wave picture creates wave Bs.

The case for bounce is indeed good but the assymetry of payoff has me thinking it may well be worth hanging in a bit longer to the short bonds/bunds trade as euphoria wanes and a lower chance of a major dump again out weighs the higher chance of a smaller rally.

As for US markets, I still see them as a side show to Europe which appears to be leading. Not a surprise as now that ECB is in QE mode it is trying to wrestle with controlling the whole of the yield curve serpent, whereas the US is now holding it by the tail ( short end) having released its actions on the rest of the curve (stopped QE). letting go of the long end does leave it free to whip around but not as much as the shocks you can have when releasing a pinned snake as we just saw in Bunds.

Equities have had a good move at the end of the week in response to the lifting of panic and oil has turned too. Another observation of how oil stock are leading oil. They weren't going up in the last days of the oil rally this week. So oil price also showing a move back from the reflation trade.

Full house turn, but I am trying to pick correlation from causality.

Have agood w/e

Pol



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Anonymous
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May 9, 2015 at 11:44 AM ×

Canadians are on a debt binge...( well, so is everyone else )

Infographic: Canada's households now owe a record $1.8-trillion

http://tinyurl.com/nxc5z6e

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Polemic
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May 9, 2015 at 11:50 AM ×

Always wish they'd publish net debt rather than face debt. As with government debt /gdp ratios. eg. I borrowed a load at 2% and stuck it in my pension fund where I instantly get a 100% return due to tax benefits. Measuring my debt doesn't reflect my total assets. Germany are quite capable of doing the same but are hampered by their self imposed debt/gdp ratios.

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Anonymous
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May 10, 2015 at 8:30 PM ×

Working age Americans who have no job and are not looking for a job...

April 2015-- 93.2 million

June 2009---81 million

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Anonymous
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May 10, 2015 at 11:46 PM ×

@anon 8:30

So who is feeding them?

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Anonymous
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May 10, 2015 at 11:47 PM ×

"What that means is that the vast majority this debt isn’t due to out-of-control credit cards or the working poor digging a hole just to pay for groceries. The Canadian debt nation is mostly made up of middle and upper earners".

http://business.financialpost.com/news/economy/the-debt-crisis-in-canada-if-your-paycheque-is-100000-plus-that-means-you

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Anonymous
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May 11, 2015 at 12:40 AM ×

@anon 11:46 PM

You and I.

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Anonymous
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May 11, 2015 at 1:24 AM ×

http://www.marctomarket.com/2015/05/five-questions-that-may-be-answered-in.html

"Last week [China's] Politburo intimated it was considering stronger stimulus. On May 9, it reported April consumer prices rose less than expected, though the 1.5% increase was slightly faster than the 1.4% reported for March. Still, food prices are masking the deflationary forces. Non-food prices have risen 0.9% from a year ago. This compares with the 1.6% pace in April 2014. Food prices have risen 2.7%, the same as it has averaged over the past 12-months.

The PBOC responded today with a 25 bp cut in the key one-year lending rate to 5.1% and the deposit rate to 2.25%. It is the third rate cut in six months. It is unlikely to be the last in the cycle. In addition, and consistent with the gradual liberalization, the PBOC announced that banks could pay as much as 150% of the deposit rate to attract savings compared with 130% previously. Another cut in required reserves would appear to be the next step.

The PBOC's rate cut may renew demand for Chinese stocks. By extension, it may end the pullback in emerging market stocks more broadly. The MSCI Emerging Market equity index pulled back 4.3% from the seven-month high seen in late April before stabilizing ahead the weekend. The pullback of European and US bond yields and the strong rally in US equities last Friday will also likely lift emerging market assets at the start of the week."

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abee crombie
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May 11, 2015 at 1:31 PM ×

Continuing on China, the retail party in local stocks still seems strong. There was an article last week about Beijing Baofeng ( 300431 CH)

http://ftalphaville.ft.com/2015/05/01/2128368/srsly-this-is-nuts-whens-the-crash/

its gone limit up every day since its IPO in late march, and still going!

http://imgur.com/o3c9h12

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Anonymous
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May 11, 2015 at 5:45 PM ×

OK, I'm ready for a MM guessing contest on when the Chinese markets finally crash: will it be hours, days, weeks, months, or years from today? 5 easy time intervals to predict when the match is at long last set on the ultimate "Chinese Banger".

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Anonymous
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May 11, 2015 at 5:52 PM ×

I say tonight as after an euphoric initial reaction to the rate cut, reality will set in that no QE is on the horizon...Meanwhile, as per railroad activity and trade statistics, things are slowing down at an alarming rate....

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abee crombie
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May 11, 2015 at 8:44 PM ×

Just as housing is starting to pickup, the 30 year decides to get unfriendly.

While still pretty low, I wonder how the markets will deal with this. REITs, MLPs and Utilities, lets see.

Consensus seems to be behind financials though they are still down for the year.

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Anonymous
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May 11, 2015 at 8:52 PM ×

Bloomberg: Oh my..."almost $100 million worth of options pegged to volatility in U.S. equities changed hands in a split second today in Chicago"

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Anonymous
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May 11, 2015 at 8:53 PM ×

ToS was showing a 260,574 contract July $VIX call spread at the 16 and 23 strikes at 12:16.

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Anonymous
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May 11, 2015 at 9:19 PM ×

Looks like the bond traders listened to Yellen

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Polemic
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May 11, 2015 at 9:27 PM ×

Bonds first. Equities next. I m rather short Nasdaq now so I hope so.

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washedup
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May 11, 2015 at 11:00 PM ×

Pol - yes the fact that the relevant discount rate for US equities has climbed 50 bps in the last 2 weeks does not seem to have sunk in yet for equity punters - no matter what voodoo model one adheres to I don't see how that's not worth at least 1 multiple contraction in equities - but I guess this mkt just thinks higher rates just means more sales and earnings growth because this must mean global growth will start re-accelerating - rt?

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Anonymous
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May 12, 2015 at 11:19 AM ×

A quote from the latest SCIENCE FICTION article...

FDIC Chief Martin Gruenberg:

"If major financial firm runs into trouble, it will be allowed to fail"

Gruenberg thinks we are all just potted plants.

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Anonymous
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May 12, 2015 at 1:06 PM ×

Nice quote: "CB's unleashing easy money to fight imaginary villain, consumer price deflation, risk of feeding real monster asset price inflation" - Sharma

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River
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May 12, 2015 at 2:19 PM ×

http://stockcharts.com/h-sc/ui?s=$tnx&p=D&b=5&g=0&id=p41298869661

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charles
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May 12, 2015 at 2:51 PM ×

@Polemic 9:50
" borrowed a load at 2% and stuck it in my pension fund where I instantly get a 100% return due to tax benefits. Measuring my debt doesn't reflect my total assets."
Reading your pension "value" doesn't reflect your total assets either. Did you indeed consider :
- the yearly fee taken by the pension manager until you draw ?
- the tax that you will have to pay when you get your money out, discounted with very low rates ?
- the refinancing risk if your finding is shorter term than the drawing date of your funds ?

Also I am puzzled : you are a hedge fund manager, you should trust your ability to earn a better return than a pension trustee. What about the opportunity cost of not managing your money yourself ?

Last, but not least, How are you sure that your assets are always going to match your debt ? Measuring your debt doesn't reflect your total assets indeed, but if, as Germany, such debt has been used to buy Greek bonds, that is not going to help you.

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hipper
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May 12, 2015 at 3:09 PM × This comment has been removed by the author.
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hipper
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May 12, 2015 at 3:10 PM ×

More accounting tricks for Greece as we expected. On Friday a €1.4bln treasury bill maturing and after that it's clear sailing until the beginning of June. But depending on Friday's result (almost 2x of todays repayment, very meaningful and telling lump sum) the fundamental bottom line will become stronger and more obvious: no EU official wants a contagious break up and there will always be bidders for ECB backed high-yield govvies.

The media circus will just go on and on and on.

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Polemic
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May 12, 2015 at 3:19 PM ×

CHARLES -

- the yearly fee taken by the pension manager until you draw ? YES.
- the tax that you will have to pay when you get your money out, discounted with very low rates ? YES CONSIDERING THAT WE CAN TAKE 25% TAX FREE AT 55 THOSE CALCS AREN’T AS LONG DATED AS YOU MAY THINK.
- the refinancing risk if your finding is shorter term than the drawing date of your funds ? TRUE, BUT I CAN HEDGE THAT IN THE FUND BY HOLDING SUITABLE LEVERAGED SHORT RATES PRODUCTS.

Also I am puzzled : you are a hedge fund manager, you should trust your ability to earn a better return than a pension trustee. What about the opportunity cost of not managing your money yourself ? I AM, WE HAVE PRETTY LOW COST 'SIPPS' HERE THAT ACT AS PENSION WRAP UMBRELLAS OVER YOUR OWN STOCK/BOND/ETF/WHATEVER SELECTIONS WHICH YOU CAN PUNT AS MADLY AS YOU WANT. AND.. I AM NOT A HEDGE FUND MANAGER.

Last, but not least, How are you sure that your assets are always going to match your debt ? Measuring your debt doesn't reflect your total assets indeed, but if, as Germany, such debt has been used to buy Greek bonds, that is not going to help you. VERY TRUE. AND I GUESS THAT THE GREEKS MUST BE FEELING THAT WITH ANY GERMAN DEBT THEY MIGHT HAVE BOUGHT IN APRIL! BUT CONSIDERING THE WHOLE OF FUND MANAGEMENT IS BASED ON CORRELATED RISK CALCS OF ASSETS VS LIABILITIES SOME NETTING OUT MUST BE ALLOWED. I CAN borrow cash, get tax relief and place in cash if I wanted. minimal risk.

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Leftback
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May 12, 2015 at 6:11 PM ×

MM, how is your Spidey sense these days?

LB is just beginning to get an eerie feeling that the Fed might in fact move in June after all (see comments by Williams, who is hardly a hawk). Not really sure what they hope to achieve by a 25bps rate hike (and I am sure it would be one and done for quite a while), but suddenly I find I can't rule it out, and that if it does occur, positioning in some markets seems to be very unbalanced. Perhaps the recent moves in the Treasury markets are in part reflecting a repricing of this risk as well as unwind of the "long USD, long Treasury" trade?

I do expect a resumption of the latter before long (this time I think it will be as more of a "risk off" trade than just piling into anything in $), but the current retracement in yields may not yet have run its course.

Great time to be in cash. This is one of those quiet toppy markets where someone is going to get pantsed in spectacular fashion, and then it will all seem really obvious in retrospect. Can't pick the trigger but Shanghai and Athens are at least two potential sources of butterflies, and there is an unending supply of Pink Flamingoes out there.

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CV
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May 12, 2015 at 6:23 PM ×

Amen LB.

I have lost my mojo, temporarily!, in the last month, my longs aren't really doing anything/as expected, and I don't want put cash to work. I am also slammed on the breaks a bit and hedged a bit via a short FTSE 100. In short; zero conviction! With the USD weakening, USTs are beginning to look interesting for foreign money, but not yet I guess.

Risk/reward favours picking up on of those novels on the shelf that you have never finished (I have a lot!) ... not punting.

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Mr. T
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May 12, 2015 at 6:37 PM ×

Not really sure what they hope to achieve by a 25bps rate hike

A 25bp hike should not have a material impact on the real economy, but is enough get the market ready for a more sustained period of increases. I think the fed is more worried about impact and destabilization in financial markets than the effects on the real economy.

So if you were a) concerned about market positioning and b) worried about financial asset prices and potential destabilizations, a small hike fits the bill.

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washedup
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May 12, 2015 at 6:49 PM ×

Two observations:

1. The Fed very pointedly removed the phrase regarding NOT hiking in June in the last statement - remember the old bayesian probability monty hall puzzle about the 3 doors? Read and reflect..
http://en.wikipedia.org/wiki/Monty_Hall_problem

2. The Fed follows the bond market, perhaps not directly but lets not quibble about correlation vs causation - not vice versa - so if the market starts pricing in an earlier hike that's what its likely to get.

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washedup
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May 12, 2015 at 7:01 PM ×

and left - as for who is about to get pantsed - look no further than the punters who are long crude - I do believe they are about to be acquainted with fluid mechanics sans parachute. Pretty thoughtless to get long an inflation hedge without much actual inflation, if u ask me.

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Anonymous
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May 12, 2015 at 8:32 PM ×

By doing it in June they get to maintain their supposed control. Also, they're acedemics. Need to test the old thesis out!

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Anonymous
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May 12, 2015 at 8:35 PM ×

Also; who's gonna hold long end and HY into mid June and run the chance..

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Mr. T
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May 12, 2015 at 9:37 PM ×

Also; who's gonna hold long end and HY into mid June and run the chance..

I don't think 25bp is going to break anything. The long end has rallied 80bp in 3 months and has not (yet at least) caused any distress. The HY market is not showing any signs of distress. So to answer your question - the same people who currently hold it? The biggest impact would be felt in fx-land, but with DXY off a solid 5% from its month-ago levels I'm not sure a couple percent bump would really matter much.

I wouldn't get overly aggressive on the short end but I've been burned enough there to know to stay light.

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Leftback
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May 12, 2015 at 10:05 PM ×

Very interested to read those thoughts. It's really interesting how a lot of diverse people arrive more or less at the same place from different perspectives and via a variety of circuitous routes.

I do think there will be some distress at some point this summer, the question is where, and I suspect the answer will be as usual, "where the maximal leverage is", which can sometimes be in a place where people think they are in a "safe haven" yet also "reaching for yield". Mr T is right, 25bp is no big deal but someone will screw up somewhere.

At the moment LB agrees with CV - that this is a good time to lie back in the hammock, enjoy the weather and read a good book while hanging out the sign at the front door that says "Dun Puntin'"..... once the accidents start happening we might tune in again with interest.

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