The Credit Crisis Financial Stocks Short Journal
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I talked w/ML about the Einhorn trade last winter. Its a small investment world out there, and I'm guessing that Einhorn got the idea for it from the same place I got the idea for it - from a November 2008 article in Grant's.
Its a 10 year 'swaption' on the US 10 year note struck at 6%. It boils down to betting that at some point over the next 10 years, the US 10 year note will yield more than 6%. I can't remember the price of the option, but it was something like $100K for $10 million in face value. The payoff for a correct bet would have been and would still be huge. Remember, if rates do get up in the area of 6% in the next few years, its likely that volatility will have increased as well, thus adding further juice to the price of the option.
My guess is Einhorn has initiated a similar trade w/JGBs as well.
FWIW, Merril indicated that they would do the trade w/me, even though I'm not an institutional client. I never pulled the trigger on it though.
Its a 10 year 'swaption' on the US 10 year note struck at 6%. It boils down to betting that at some point over the next 10 years, the US 10 year note will yield more than 6%. I can't remember the price of the option, but it was something like $100K for $10 million in face value. The payoff for a correct bet would have been and would still be huge. Remember, if rates do get up in the area of 6% in the next few years, its likely that volatility will have increased as well, thus adding further juice to the price of the option.
My guess is Einhorn has initiated a similar trade w/JGBs as well.
FWIW, Merril indicated that they would do the trade w/me, even though I'm not an institutional client. I never pulled the trigger on it though.
http://www.pimco.com/LeftNav/PIMCO+Spotlight/2009/New+Normal+QA+Gross+El-Erian+Oct+2009.htm
Pimco on the new normal. This is the stuff that is not currently priced in financial markets right now even though its public information and whoever bets big on this is likely to make a lot, that is because the market is wrong, like it was about the new economy, goldilocks/global liquidity, decoupling. Eugene Fama can go nuts all day but the market makes dumb mistakes frequently, since crowd behavior can create self-fufilling prophecies that explains partialy why markets look so predictive in retrospect
Pimco on the new normal. This is the stuff that is not currently priced in financial markets right now even though its public information and whoever bets big on this is likely to make a lot, that is because the market is wrong, like it was about the new economy, goldilocks/global liquidity, decoupling. Eugene Fama can go nuts all day but the market makes dumb mistakes frequently, since crowd behavior can create self-fufilling prophecies that explains partialy why markets look so predictive in retrospect
WSJ on hiring
http://online.wsj.com/article/SB125599093581195087.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsForth
"Another reason not to hire new workers: Many companies already have excess labor on hand. After reducing hours and cutting overtime during the recession, they can easily increase production by simply adding hours for existing workers."
"Productivity, or output per hour of work, grew at a 6.6% annual rate in the second quarter, as employers shed workers faster than they cut output. It was the largest increase in any quarter since 2003. Productivity grew at a 2.5% pace from 2000 through 2008."
"Businesses have been so aggressive in cutting labor input that productivity rose noticeably in the first half of the year," Federal Reserve staff economists told officials at their September meeting, according to minutes released last week.
This seems to be a consequence of the earnings 'bubble' the US had up to 2007, things were going so well that a lot of corporate 'fat' built up(efficiencies that were not put in place) as companies didnt had to work hard to earn a lot, now that things turned companies are burning that fat so the corporate profits as a % of GDP mean reversion was/is far more gradual even with a very weak economy. Thus the burden is being laid off to the labor markets(some of the fat was an oversized head count) and as consquence to savers as the Fed keeps money easier than they would otherwise do
http://online.wsj.com/article/SB125599093581195087.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsForth
"Another reason not to hire new workers: Many companies already have excess labor on hand. After reducing hours and cutting overtime during the recession, they can easily increase production by simply adding hours for existing workers."
"Productivity, or output per hour of work, grew at a 6.6% annual rate in the second quarter, as employers shed workers faster than they cut output. It was the largest increase in any quarter since 2003. Productivity grew at a 2.5% pace from 2000 through 2008."
"Businesses have been so aggressive in cutting labor input that productivity rose noticeably in the first half of the year," Federal Reserve staff economists told officials at their September meeting, according to minutes released last week.
This seems to be a consequence of the earnings 'bubble' the US had up to 2007, things were going so well that a lot of corporate 'fat' built up(efficiencies that were not put in place) as companies didnt had to work hard to earn a lot, now that things turned companies are burning that fat so the corporate profits as a % of GDP mean reversion was/is far more gradual even with a very weak economy. Thus the burden is being laid off to the labor markets(some of the fat was an oversized head count) and as consquence to savers as the Fed keeps money easier than they would otherwise do
I thought I'd throw in some anecdotal evidence from suburban phila ... economy can only be described as strong.
RE - lots of inventory, but stuff is moving. The realtors I know are all as busy as they've ever been, closing lots of deals, minting money.
Comm'l re - lots of vacancies, even in the well located, prime shopping areas. However, I fail to see how this assesment hasn't been priced into the market for months.
Retail - malls are packed. Tough to find parking anywhere near the door at various Home Depots. Home Depot is a classic case - they cut employees and inventory to the bone in the last 2 years and now find themselves short of everything. Restaurants are filled to the brim w/new ones opeing everywhere.
Industrial - I own several apartment buildings and we're replacing about 30 windows in one of them. I get my windows from a local manufacturer. Talked to the delivery man last Friday and he told me they are so busy that their fleet of delivery trucks isn't sufficient and they've had to rent vans to make all their deliveries.
As for apartment rentals, they are quite strong. I'm not seeing any sort of boom in inventory that would lead to lower rents. I rent mostly to young professionals and none has complained about job problems or economy problems.
Summed up - the economy is strong, bordering on booming.
You need to be careful focusing on econ stats (which are always behind the curve at turning points) and news stories where your typical journalist finds it a better story to write about distress over good stuff ('if it bleeds, it leads' syndrome).
Just my 2 cents.
RE - lots of inventory, but stuff is moving. The realtors I know are all as busy as they've ever been, closing lots of deals, minting money.
Comm'l re - lots of vacancies, even in the well located, prime shopping areas. However, I fail to see how this assesment hasn't been priced into the market for months.
Retail - malls are packed. Tough to find parking anywhere near the door at various Home Depots. Home Depot is a classic case - they cut employees and inventory to the bone in the last 2 years and now find themselves short of everything. Restaurants are filled to the brim w/new ones opeing everywhere.
Industrial - I own several apartment buildings and we're replacing about 30 windows in one of them. I get my windows from a local manufacturer. Talked to the delivery man last Friday and he told me they are so busy that their fleet of delivery trucks isn't sufficient and they've had to rent vans to make all their deliveries.
As for apartment rentals, they are quite strong. I'm not seeing any sort of boom in inventory that would lead to lower rents. I rent mostly to young professionals and none has complained about job problems or economy problems.
Summed up - the economy is strong, bordering on booming.
You need to be careful focusing on econ stats (which are always behind the curve at turning points) and news stories where your typical journalist finds it a better story to write about distress over good stuff ('if it bleeds, it leads' syndrome).
Just my 2 cents.
Quote from ralph00:
I thought I'd throw in some anecdotal evidence from suburban phila ... economy can only be described as strong.
RE - lots of inventory, but stuff is moving. The realtors I know are all as busy as they've ever been, closing lots of deals, minting money.
Comm'l re - lots of vacancies, even in the well located, prime shopping areas. However, I fail to see how this assesment hasn't been priced into the market for months.
Retail - malls are packed. Tough to find parking anywhere near the door at various Home Depots. Home Depot is a classic case - they cut employees and inventory to the bone in the last 2 years and now find themselves short of everything. Restaurants are filled to the brim w/new ones opeing everywhere.
Industrial - I own several apartment buildings and we're replacing about 30 windows in one of them. I get my windows from a local manufacturer. Talked to the delivery man last Friday and he told me they are so busy that their fleet of delivery trucks isn't sufficient and they've had to rent vans to make all their deliveries.
As for apartment rentals, they are quite strong. I'm not seeing any sort of boom in inventory that would lead to lower rents. I rent mostly to young professionals and none has complained about job problems or economy problems.
Summed up - the economy is strong, bordering on booming.
You need to be careful focusing on econ stats (which are always behind the curve at turning points) and news stories where your typical journalist finds it a better story to write about distress over good stuff ('if it bleeds, it leads' syndrome).
Just my 2 cents.
Tks for data. I'm not the No1 fan of anecdotal evidence however I do pay attention to stuff like the Beige Book, they reported stuff like
"Reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilize in July and August. Relative to the last report, Dallas indicated that economic activity had firmed, while Boston, Cleveland, Philadelphia, Richmond, and San Francisco mentioned signs of improvement. Atlanta, Chicago, Kansas City, Minneapolis, and New York generally described economic activity as stable or showing signs of stabilization; St. Louis remarked that the pace of decline appeared to be moderating"
Notice no one is saying the economy is strong so I disagree with the idea that the economy is booming. Maybe if you are long lots of ES, it feels like booming. But at this point if the current situation stays the way it is or improves gradually(which is my current forecast) that is quite consistent with a U shaped recovery where corporate profits will dissapoint
Don't forget that the folks who bring you the Beige Book are from the same organization that brings you the Open Market Committee - and neither is going to say anything that makes the other looki bad. The Fed is a bureacracy and has a vested interest in using words like 'moderate', 'somewhat' ,...
I guess the point of my post is that you may not want to listen to those who would tell you the stock market and the real economy are diverging. From where I sit, there is outstanding strength in a broad variety of REAL economic activity. If you want to make the argument that this strength is only from the steroids pumped in by the Fed and gov't spending, you may have a valid case. However, to continually bang the table (a la Rosie, BLSI) that the economy is terribly weak and the stock market is out of touch w/reality is just plain wrong.
I've been legging out of my Dec 10 E$ options over the past 6 trading sessions. I've made a couple of dollars on them, but I've really lost confidence in the trade. I think the eurodollar futures market has a 100-200 point dip coming sometime in the next couple of months. Perhaps I'll use that occasion to get back in.
Things booming in the formerly depressed, old industrial areas of Southwestern PA as well ...
http://www.technologyreview.com/energy/23694/page1/
http://www.technologyreview.com/energy/23694/page1/
I hear you on that. However check back in beige books from the 03-07 period, they usually said stuff like
"Reports from the twelve Federal Reserve districts indicated that economic activity continued to expand"
So far they havent said that, maybe they will say it tomorrow's book, but so far they havent
Nov 2003 beige book, when Greenspan had 1% rates for a 'considerable period' wording still out there
http://www.federalreserve.gov/FOMC/Beigebook/2003/20031126/default.htm
'Reports received from the District Banks suggest that the economy continued to expand in October and early November'
http://www.federalreserve.gov/FOMC/Beigebook/2003/20031126/default.htm
'Reports received from the District Banks suggest that the economy continued to expand in October and early November'