Friday, December 04, 2009

Don't get technical with me! 12/4/2009

Well! -11,000? I didn't see that coming. And I think its a game changer. There is no way the Fed can keep rates at zero while unemployment is falling. I just can't see it. I'm also willing to go out on a limb and say that one jobs start turning positive, they will stay positive. This doesn't leave me expecting blow-out GDP or anything like that. Its still a tepid recovery. But I think 4% 10s are on our target screens now.

For what its worth, here's where Fed Funds futures are. Pricing about 50% chance of hike in June. I've got to admit that you have to apply some odds to a hike in April. Suddenly my Taylor Rule post doesn't seem so crazy!


Alright on to the technical picture. Last week we bounced pretty hard off the 3.20% area which now looks like a triple bottom.

I also threw 3.48% on the chart (red line). Can't really say its a top since we broke it several times recently, but notice there's been a lot of work done right around that area. So I really wouldn't be surprised if we need to consolidate around this 3.48% area before we can push much higher in yields. Notice below that we're closing in on an over-sold area as well. (Note I'm using price of the old 10-year for this chart).



Once that happens I think its 3.71% then the recent high of 3.95%.

Meanwhile, back at Echo Base, check out the curve slope. This should be the real story when thinking about potential rate hikes. Strangely we're only 1bps flatter today. The 2-year should getting hit much harder than it is. Anyway here is a quick slope chart. Some people poo poo using resistance points with spreads but think about what the slope is. Its how much extra someone gets paid to go out the curve. Here it looks like when the spread hits about 265, investors start pushing out the curve...


Long-term I think the target might be +50 or zero, so this could be a huge play. How to play a flattener? You usually do something like short 10's and go long 2's and 30's in a certain proportion. Its a trade that often requires significant leverage and/or access to options on rate futures to really pull off. Our regular Joe readers ought to consider shorting mortgage REITs like Annaly Mortgage. They live for a steep curve.

14 comments:

Anonymous said...

AI,

Your move toward technical analysis is deeply disturbing. I took you for better....you have published some absolute gold over the last 18 months. The depth of your research has been first rate, and your commentary has more than once informed some of my own pf mgt decisions in preference to the published research of various shops.

How you have suddenly arrived at TA as an analytical tool is unfathomable. You're bright enough to have done your homework on this stuff; there are literally dozens and dozens of articles that ably demonstrate the non-predictive nature of TA.

The funds that publish results are guilty of the worst and most pernicious form of survivorship bias. And, what's more, do you really think that in today's market - with the likes of DEShaw, Citadel, RenTec etc etc with all their hundreds of CoLo servers scanning heuristics and trading the markets in milliseconds - that drawing a line on the screen is going to provide consistent, statistically significant, non-random payoffs? Have you ever found trading to be just that easy?

This sort of stuff does serious damage to your credibility. Ditch it and bring back the old AI....i would pay good money for that stuff. In the meantime, I would suggest a thorough read and re-read of Education of a Speculator and Practical Speculation by Vic Niederhoffer....yes, yes, yes, I'm aware of his blowups. I refer you to it for his thorough, scientific and methodical debunking of this numerology-like practice.

Best wishes - and thank you for your excellent coverage of all matters debt related. I'd hate to see you stray outside your realm of expertise.

N.

TexasRadio said...

I've already taken the other side of your trade by going long the 10yr futures on today's break. I work with a lot of smaller companies; I know what their order books look like going into 2010. Deflation is a lock and Goldman's forecast of 1Q2010 rate of 3.1% on the 10yr is optimistic, in my view.

Anonymous said...

N,

There's nothing wrong w/T.A. by itself. On a stand alone basis, it has a mixed record. But if you combine that approach w/extrinsics like fundamentals then you have a higher chance of making successful trades.

Quants dominate short term trading but T/A is validated on medium-long term trend lines.

getyourselfconnected said...

Hard to square "banks have recovered" and "economy is growing" with higher rates and their effect on housing. Nothing better than all the suckers taking the mortgage buyer credit only to see any equity they may have had vaporized by higher mortgage rates. Anything can happen though.

hear today guanno tommorrow said...

sell 5y, buy bonds. dunno why u mention the fly ... as get closer to hikes materilizing, sell 2y, but 10y note. simples

Flow5 said...

Fundamentals preceed technicals. Monetary flows (MVt), or our means-of-payment money actually exchanging hands:

"The proxy for real-growth topped at .50 in Jul and bottoms at .01 in Nov. -- Nov. should be the time to enter shorts. Accrued Interest comment -10/27/09 10:04 AM"

Given timely, accurate, and conforming data, economic forecasts are mathematically infallable. Unfortunately, the FED discontinued publishing the necessary data (G.6 release).

Using a corroborative figure, (legal reserves), the proxy is even more bearish than I would have guessed this year for bonds.

The fallacious "Real Bills Doctrine", or the FED's equivalent, an "elastic currency", or the FED's seasonal accommodation of the money market is inflationary:

i.e., just as the X-mas shopping season started, Office Max marked up a Hewlett Packard Printer by $200.

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