Rhody Trader

Vincent Fernando at The Business Insider did a post comparing the current economic situation to that of the early 1980s. The upshot of the post is that when one looks at inflation, unemployment, and interest rates as they are now and as they were then things don’t look quite so bad right now.

Actually, from my perspective things now remind me more of the early 90s. That was the time of the RTC after all those thrifts were shut down across the country. In Rhode Island the governor shut down all the credit unions on New Years day 1990, which really did a number on the state economy for a couple of years. I was only a kid in the early 1980s, but I do remember it wasn’t a great time. The cities were in rough shape. I think anyone who was in NYC at the time would agree.

Seperate, former colleague Jamie Coleman at ForexLive posted  a fun look at the yen situation. The Japanese have always stood ready and willing to intervene in the currency markets, either directly or verbally. That, at times, creates some very interesting press and market action – as it did last night.

There’s been talk in the markets about the increasing use of the dollar in carry trade strategies (even the pound is being thrown into that discussion as well). It’s interesting that we’re not just talking about banks and money managers and that sort involved here. Germany and Austria have taken advantage of the lower US rates by issuing dollar-denominated debt. As this Bloomberg article indicates, the swap rates are such that issuing in dollars is about 25bps cheaper than doing so in euros.

If you’re wondering what the big carry trade is right now, look no further than AUD/USD.

Here’s one for all those who think Goldman Sachs rules the world.

Yesterday there was a BIG drop in the dollar out of thin air in the afternoon. You can see it on this Dollar Index 30 minute chart.

At the time no one knew what happened to cause that fall, which fed into higher commodity prices and a rise in the stock market to new day highs. EUR/USD shot up from 1.4280 to 1.4400 in that period.

According to one of my colleagues in London, the talk in the market has the move caused by a $3b sale of USD/CHF, with that sale being done by Goldman Sachs, potentially on behalf of Warren Buffett, who of course is a big owner of GS. The rumor is that Buffett is buying a big stake in Swiss banking giant UBS.

What’s interesting is that today the Swiss released some much better than expected economic data. The KoF Leading Indicator surged to -0.04 in August. The forecast was for -0.60. This comes along with an upwardly revised -0.85 previous reading (from -0.99) . It was the strongest rise on record.

Can’t help but wondering where USD/CHF (which fell to 1.0560 from 1.0660)  would have been after the data had we not had the big sale yesterday. If it was indeed Buffett buying CHF yesterday he might have saved himself a couple percent doing so ahead of this morning’s data.

Over the weekend (I think), someone uploaded a copy of the Trader video, the documentary from circa 1987 featuring the now legendary money manager and original Market Wizard Paul Tudor Jones, to YouTube. No, it wasn’t me, and I don’t know who did. Although I do own the video, I would never post it on YouTube or any of those sharing sites (so don’t bother asking). Obviously, others have no problem doing so.

Boy, did that create a storm!

I don’t frequent a lot of the apparently really popular market-related sites (as I’m finding out), so I probably don’t even know the full extent of how far things spread. I do know, however, that several very prominent sites, including at least one well known traders’ forum, had articles or posts which embedded the YouTube video. It made rapid progress from site to site – at least until the video got yanked from YouTube for copyright infringement at some point on Tuesday.

Still, the video was out long enough for a lot of people to give it a look, and the comments I’ve seen so far have been very positive, though there are of course the to-be-expected jokes about 80′s technology and fashions. I have always thought the video offered quite a bit of educational value for developing traders, and once upon a time used it in my college classroom teaching, but PTJ clearly has a problem with it being available.

The blast of interest in the video splashed on this website and my trading education one as well. Both sites had BIG jumps in traffic. Part of it was search based, which brought a lot of people to this post I wrote about 15 months ago, which shows up very high in Google’s search results. I got even more traffic to this post on my Essentials site. Part of that was search too, but that one was also directly linked to by several prominent websites because it includes the text from the back cover of the original video tape case. As far as I can tell, that turned Tuesday into the single biggest traffic day either site has had so far. That was certainly totally unexpected.

With the video no longer up on YouTube, the attention will no doubt back down to its normal underground levels, though I’m sure those who missed out seeing it will be eager to try to find a copy somewhere.

There’s been quite a bit of talk in the markets of late about a big drop off in trading volume in the forex market (Bloomberg, Kathy Lien). What’s interesting is that while global volume is down, trading volume in the retail forex arena seems to be on the rise.

Now, I’m not surprised that the broad measures of volume as reported by the central banks, etc. are showing a decrease. Currency market flows are predicated mainly on international trade and capital flows. With trade slowing, naturally the volumes are expected to come down as well. I had questions about whether the capital flow part was dropping too, though, so I looked to the only real volume proxy there is for the forex market – futures.

The chart below shows the weekly front month continuous Yen contract.

You’ll notice two things above. Firstly, volume in 2009 is definitely running well below where it was in 2008. Last year was probably close to 2007, though with much less variance from week to week. This year too is showing fairly consistent volume week to week, but the baseline level seems to be 30% or better below where it was last year.

The even more dramatic and telling thing is the clear downward slope in the Open Interest line. It’s been dropping for basically two years running now, giving us a pretty good indication of what’s been happening in the Yen carry trade. Right now we’re looking at OI running about a third of what it was this time in 2007. That’s a clear sign of less market participation.

I received an email overnight asking about some action in the options market.

Another blogger’s post today says that through 12:45 this morning the volume traded on SPY December $95 puts was 122,018 contracts, i.e. a $1.1 billion worth of underlying.

It has been commented before that a large number of institutional players would enter long positions in stocks once the S&P 500 closed above 950.

Could these large purchases of “portfolio insurance” be signalling such a move?

To answer the question, the sale of the options could certainly have been a type of portfolio insurance play. It was commented on CNBC this morning that this kind of sized put buying is something generally done by fund managers who want to protect against a sizeable move down. They wouldn’t buy puts to hedge against a smallish contrary move because of the cost involved. Those calls closed Thursday out at about $5.70, so they aren’t cheap. Futures may be a preferred way to go there in that circumstance, though there are different implications going with that alternative.

It’s worth noting that there’s a lot of open interest at a number of points in the September puts. Specifically, there’s more than 100k at each 5 multiple strike point from 75 to 90, with 135k at the 85 strike. Only the 100 stirke calls have 100k+ in open interest as of yesterday’s close.

A member of the forex analyst team I’m part of was injured in rather serious fashion last week. It’s bad enough that my employer – the IFR Markets group of Thomson Reuters – is looking to fill his position on at least a temporary basis. The proposal has been put forth to hire someone on a three month contract basis, though there is a chance that it could become something permanent, depending on how things fall out.

Basically, we need someone who can step right in without much ramp up time. The following are some of the credentials involved:

• Good writing skills
• Several years market experience
• Understanding of how short-term events impact price action
• Market contacts to pick up flow information
• Ability to work on a real-time basis
• Located in either the NYC or Boston area

While we don’t expect to be able to find a person with decades of experience as we’re losing, we definitely want someone with experience who understands the forex market well and can communicate what’s happening and what the future may bring to our primarily institutional readership.

If you or someone you know might fit the bill, please contact me at john.forman at thomsonreuters.com.

A note has been sent around in the office. There’s an account manager position open in our municiples group. Here’s what the note had to say:

We currently have one open position for an Account Manager working in the Muni group, if you or anybody that you know may be interested in the position please let me know by the end of day Friday. This position is located in Boston.

** Work with Sales to help generate leads and to retain existing business, grow existing accounts. Account Specialist are responsible to reaching out to all new clients in their territory to offer training and support. Travel to accounts that need visits, quarterly visits to named accounts, reach out to all cancel to try to retain revenue and assist in all sales campaigns.

** support the customer service line, entitlements with territory, product check, travel to clients, outgoing and incoming calls to clients, support billing issues, submit orders and work closely with sales and entire sales account specialist team.

** 3-5 years experience in client service

** College Degree, industry knowledge a plus.

Please send me resumes, interviews will be conducted and hopefully a decision will be made soon.

If you have any interest or know someone who might, let me know.

Poor John Meriwether. His life as a fund manager hasn’t gone quite as he expected, I’m sure. He was a larger than life character in Michael Lewis’s classic book, Liar’s Poker. Lewis clearly had enormous respect for him, and he was widely seen on Wall Street as being brilliant. When he started Long-Term Capital Management there weren’t many (if any) who thought we wouldn’t be successful.

Alas, things didn’t quite go as planned at LTCM. They did certainly make a lot of money – for a while. Then the wheels came off and they nearly took the markets down in 1998. Basically, LTCM got overleveraged in positions that were supposedly uncorrelated that suddently became correlated. This is all outlined in the book, When Genius Failed, which is well worth reading. Actually, if more folks paid a bit more attention to the LTCM collapse we might not have gotten into the mess we’re in now.

Now comes news that Meriwether is shutting the doors on his latest fund after it lost more than 40% in about 18 months.

An interesting headline came across the wire this morning. The CME group has announced that it will be raising the minimum trading increment for Treasury Bond futures to 1/32. This caught me a little by surprise because I thought 32nds were the standard increments, but then I remembered from back in my fixed income analyst days that fractional ticks had come in to play.

Here’s the text of the Reuters release.

    July 1 (Reuters) – CME Group Inc <CME.O>: * Announces increase in minimum tick size for 30-year U.S. Treasury bond  futures * Says plans to increase minimum trading increment for U.S. Treasury bond  futures to 1/32nd effective August 30 * Says change will be applied to all expiration months * Says minimum trading increments for futures intermonth and intercommodity spreads as well as options will be unchanged

It’s interesting that in a time when spreads and increments have actually been generally on a downward path to see something like this in such a high profile futures contract. I told our head bond market guy about that. His theory was that since liquidity in the long end has dried up a bit that the dealers probably requested the change to better serve their market-making purposes.