The Credit Crisis Financial Stocks Short Journal

There is a paper now explaining why fed futures tend to price in ridiculous fed policy probabilities
http://dss.ucsd.edu/~jhamilto/ff_ms.pdf

Apparently it has to do with the tendency of markets of pricing in higher long-term rates then it would be normally expected. This explains the currently absurd levels of fed futures pricing. However it does not explain the huge sell-off following the unemployment report two month ago. I believe I have an edge forecasting fed policy compared to the marginal fed futures trader, therefore I'm really going to for the home run here. I'm betting the farm. Maybe as much as 20-25% of my networth, trying to make 30%-35%ish(this on top of the 10%ish fff gains YTD), maybe more as I can add along the way

I'm just waiting for this short-term trend to reverse and the dip to turn up to buy more/swtich out further in the curve
 
I cut back in some shorts this should make room for fluctuations in fed futures contracts

There are tons of reasons to expect no policy change from the fed for 1 year, heck probably for 2

-The last two easing cycles(with similar inflation levels) the fed only started to raise about 1 year after unemployment peaked. We are not even there yet
-The 90-91 recession suggests this will be a jobless recovery
-Fed futures are usually wrong in easing cycles(long-run profit for longs)
-1937 paranoia in policymarkers. Romer had a Economist article about fears of taking situmulus too soon. Friedman blamed that 37-38 downturn on the fed. Virtually everyone at the fed has read and likely agrees with friedman
-Pimco doesnt see hikes till 2011. They can beat the market, and mcculey is a decent fed watcher


I could go on and on. The are risks of course, the risk is if worries about deficit monetization gets out of hand and inflation expectations soar, or that banks will lend a lot getting M1 and M2 to growth a lot, or that commodities enbark in another mini bubble. However even under those scenarios its hard to see the fed raising as the UR rises. We need to remember that $147 oil CPI at 4-5% and inflation expectations rising lead the fed to...pause
Bernanke and co are neo keynesians who pay a lot of attention to slack and output gaps
 
Not even the brazilian/australian central bank is talking or signaling hikes. When the countries with higher relative economic strenght start doing it then I will be worried about that. The BOE is now increasing their purchase program, I dont think that will happen in the US(at least not right now) mainly because of what Jan Hatzius from GS said, this FOMC is a bit on the hawkish side, even though they have a few Zimbabweans spots(Bernanke, Yellen and Dudley to some extent) they got plenty of hawkish lunatics which might mean they will pull the 'lets wait and see' card(Lacker, Lockhart in particular, also Bullard and Hoenig are coming I believe)
 
Quote from Daal:


-Pimco doesnt see hikes till 2011. They can beat the market, and mcculey is a decent fed watcher
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I can't believe anybody still listens to McCulley after his classic essay "Why Greenspan will never raise rates another time in his career" written a few months before Greenspan began taking the FF rate from 1% to 5%.

You're probably right about no action from the Fed, but holding Feb FF futures contracts to try and make 15 basis points is a silly trade. Sure, you're going to be right 90% of the time and make a couple of ticks, but the other 10% of the time you're going to get black swanned into oblivion. Its no different than Bill Miller buying every single dip in financials for 25 years. It worked great until it didn't and then he lost his investors everything they had made over more than a decade.
 
Quote from ralph00:

I can't believe anybody still listens to McCulley after his classic essay "Why Greenspan will never raise rates another time in his career" written a few months before Greenspan began taking the FF rate from 1% to 5%.

You're probably right about no action from the Fed, but holding Feb FF futures contracts to try and make 15 basis points is a silly trade. Sure, you're going to be right 90% of the time and make a couple of ticks, but the other 10% of the time you're going to get black swanned into oblivion. Its no different than Bill Miller buying every single dip in financials for 25 years. It worked great until it didn't and then he lost his investors everything they had made over more than a decade.
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Thats the point of that study, there is a risk premium in holding those contracts. Much like holding equities produces long-run profits on avg. And Mcculey was assuming greenspan would not be chairmain after 2004. His bet would have been right if the chairman had changed in 2004
 
Quote from ralph00:

I can't believe anybody still listens to McCulley after his classic essay "Why Greenspan will never raise rates another time in his career" written a few months before Greenspan began taking the FF rate from 1% to 5%.

You're probably right about no action from the Fed, but holding Feb FF futures contracts to try and make 15 basis points is a silly trade. Sure, you're going to be right 90% of the time and make a couple of ticks, but the other 10% of the time you're going to get black swanned into oblivion. Its no different than Bill Miller buying every single dip in financials for 25 years. It worked great until it didn't and then he lost his investors everything they had made over more than a decade.
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You are correct that in contracts like Feb you make a little but might lose a lot. But that situation resembles being an insurance company charging a high premium for an unlikely event. Buffett made a lot of money overcharging for insurance. I'd say the currently 30bps priced in Feb is a riduculous premium to charge, specially given that the fed likely doesnt have the legal authority to raise rates and still claim the financial system is in 'unusual and exigent circunstances'
 
I'm yet to figure out how the household data+estabilishment data can both show employment losses yet the UR falls with the U6 rate falling at the same time, wtf?
This is puzzling maybe rosenberg knows what the hell is going on
 
The 'labor force' dropped by 422K to 154,504. This is likely to be the denominator in both UR and U6, so perhaps this is why. Even though there were job losses, people considered to be in the labor forced went down by even more
 
Fed Futures initially tumbled and now are stabilizing, its has not been a good morning as an effort to hedge by going long ES predictably result in a quick loss. It was never my intention with a journal to give the idea that my speculations couldn't go wrong instead it was to post the blood, sweat and tears of trying to shoot for 20-50% returns a year. While I reached that goal last year(And I attribute that to having the discipline to write down my thinking in a journal) this year has been tough, and I find myself down 10% YTD of my networth in my macro account(Total 20% drawdown swing from Mar)

Its a humbling experience yet I dont want to draw excessive lessons from this because I had a somewhat bearish stance in the biggest counter-rally I will see in my lifetime, I just saw a study that this market has the highest breadth readings in 20+ years. There are plenty of hedge fund mavericks with stops who had worse drawdowns
 
Rosenberg lastest updated is very good. He reaches a similar conclusion that I shared in the journal
-The stock market is pricing in 4.25% GDP growth next year, that is pretty darn unlikely to happen

We look to be in the middle to a mini stock bubble, I'm not concerned about this becoming a full blown bubble because humans are unlikely to engage in a third bubble after being burned twice in a row(Montier study) and when they do its contained.

He also breaks down the employment report
- +100K one-time jobs in this report
-He confirmed my suspicion that the drop in the UR is due people dropping out of the workforce. The Employment to Population ratio(a good measure of how many people get cash at the end of every month) fell 0.1%
-Same thing is happening in Canada

The BoC commited keeping rates low to Q2 2010, and thats a country that already had some payroll growth in some months, is a commodity exporter, didnt had a banking crisis and housing is not getting smashed. Their CB is not hiking, current levels of fed futures pricing are cheap to not say downright ridiculous
 
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