The Credit Crisis Financial Stocks Short Journal

Quote from ralph00:


You could probably hedge the libor/ois blowout risk by shorting the front month eurodollar contract, or buying OTM puts on it.
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As far as puts go, I'm looking at the May 2010 99.50 put, it costs 0.02bps to hit the ask(bid 0.005), large spread but it seems like a good idea to pick up some cheap insurance if I start to get worried. I will keep this one in mind
 
The front end got wacked, unfairly in my view. The payroll report wasnt great, it was bellow consensus by some 40K, put the revisions in and you can call that a slighly good report.
I'm probably going back at full speed on ZQ tomorrow, perhaps AUG 2010. And I will be protected by the Dudley 'at least 6 months' guideline which the market for some reason doesn't give much respect.
 
CS is saying fed will change language
http://pragcap.com/credit-suisse-expect-a-change-in-fed-language-as-labor-market-improves

Both Fisher and Bullard didnt mention anything about changing language soon(they just say they dont like it, thats all). Big hawks who sit at the FOMC meetings. Fisher says its too early to hike rates and bullard says you cant do any type of tightening right now. NFP was within expectations so whats the news that CS is seeing?

There could have been in the last meeting a huge debate about doing it but I view that as unlikely given that avalanche of support in speeches for extended period leading up to the Mar FOMC meeting

I think its highly dubious that they do change at the next meeting. Matter of fact in the minutes today might show some kind of debate on the issue but I doubt its of the type 'most members favored a change in language of the statement'
 
I dont understand some people's aversion for ZQ. According to a bloomberg article the sep 2010 contract is pricing in around a 52% chance of a rate hike, there is simply no way there is a 52% the fed hike rates that early, therefore anyone long is picking up that premia.

Now maybe I'm incorrect and the fed hikes, big deal maybe I lose 17.5bps(contract expires at 99.50, it will actually be more as the EFF is not tracking interest on reverses correctly, this works to my benefit), if I'm correct I make about 14.5bps(assuming the new equilibrium FF is 18bps on average)

Almost 1-1 in a even I view as pretty darn unlikely. Actually the meeting is on Sep 21, so the new rate would be in effect for less than 10 days. The actual settlement of the contract might very well be around the current price 99.675, heck maybe higher!. I could be wrong and breakeven or make money. Plus there is the discrepancy between the EFF and IOR that I mentioned. This looks like a good trade
 
Of course there is the risk that the first hike is 50bps or more. But anyone who thinks a FOMC lead by Ben Bernanke, Dudley and by Sep Janet Yellen is going to start a hike cycle by dropping a neutron bomb in the markets is crazy. Yes down the line they might hike more and faster but the first hike they will be cautious, just like they are being right now by monitoring the effects of the end of QE(another reason they might not remove 'extended period' at the next meeting)
 
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