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Decoupling Is Back After Plunging 10 Year Yields Reflect 10 Point ES Disconnect
Yesterday may go down in the history books for being the only day in months in which the daily decoupling, either between risk and FX, or risk and Bonds did not occur. Alas, today the binary market hijacking mutants are back to their signal chasing momentum ploys, as a result despite the 10 year about to plunge below 2.90, stocks are flat. As either stocks are rich (no question there) or bonds are (yields are low), the intraday recoupling surefire trade is back, and promises to pay a few nickels to those willing to short stocks and short the 10 year (and pray there is no steamroller in the vicinity).
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Normally if you wanted to buy the stock market then 1 contract on the stock market would be 1 x $50 x 1067 = $53,350
What people do in the carry trade is borrow $53,350 in yen, convert it to dollars and buy the stocks.
They would borrow 53,350 x 87yen = 4,641,450 yen. The correlations in the markets are closely linked to AUDJPY and EURJPY.
So, If I wanted to hedge by selling the stock market and buying the FX pair would I then convert the 4,641,450 yen into
AUD to work out how much to buy? 4,641,450 / 76.5 = AUD60,672 Since 1 lot = 100,000 units, this would be 1 contract on the
ES to 0.6 FX lots. Is this calculation correct?
Similar principle for bonds above - if one bond is 123.76 - is the ratio 9 bonds to 1 contract on the ES?
Now to complicate things, how do I do the same calculation when wanting to do this on a spread betting platform?
back-of-the-envelope: 10Y duration is 8.2ish. regression of 10Y vs S&P shows around 150x since April - i.e. 1bps drop in 10Y implies a 1.5pt drop in the S&P. $10mm 10Y therefore makes ~$8,200 for 1bps yield compression which 'matches' a 1.5pt drop in S&P...8200/1.5 = $5466 - adjust size of S&P exposure to have a 1pt delta of $5466 which in ESU0 (i think $50 tick size right?) means 110 contracts...so Sell 110 ESU0 contracts @ 1098 vs Sell $10mm 10Y bond (10Y at $105ish)
I scribbled this so forgive me if I screwed up...
This is the issue, in UK we can also trade by pip or by pt. So we would trade at £x per pip.
So, on average the 10 year note moves 0.66 per day (14 day ATR).
The SNP moves about 20pts per day (200 by 0.1pts) (14 day ATR).
This gives a ratio of 3:1, ie 3 units of the 10 year vs 1 unit of the SNP (200 / 66).
Heck if I know. But there are many easier ways to short stocks. I'll leave the carry trade to the big guys.
"convert it to dollars" <-- Is this bullish for the dollar?
Bonds, gold and stocks are rich.
Buyer beware...
What ???
Bonds are in a 30 year bull while hitting all time lows in yield yet you think that gold in is overly rich because it is in a 10 year bull but not anywhere near its 2300 inflation adjusted price ?
Gold is dirt cheap. The unmolested bottom in gold was probably $400 or $500. It was only Gordon Brown that dumped gold on the market which gave it a unrealistic manipulated price of 250.
Yeah, hold on while i blow off my broker.
Maybe stocks are not that "rich" if you use the declining rates to discount future earnings? Just a thought, but I realize the consensus here is that these low rates and declining TIPS spreads are harbringers of deflation.
Agree re deflation..but has there ever been deflation and a sustained growth in the economy? (Not rhetorical)
Maybe stagnation is more like it.
I have been in the stagflation camp, but with the false support of the markets I have been singing around the campfire of the deflationists.
Japan saw an average 1% GDP gain during its 1999-2005 deflationary period, so yes,an economy can experience tepid growth during prolonged periods of deflation. Of course it took about a quadrillion yen in govt. spending to achieve that whopping 1% avg. growth rate.
deflation and sustained growth: look over the U.S. railroad expansion period and the U.K canal expansion period. Significant improvement in net efficiency through technology.
Moore's law (2x improvement every 18 months at constant price) did that for electronics, but overall effects masked by banksta's.
- Ned
Only if you drive thru yer rear view mirror.
Up ahead the bridge is out.
Get short or die...
Risk off, bitchez!!
10yr below 2.90 = how the HELL can anyone think there is a recovery going on is beyond me. If only the media focused on bond yields even for a few minutes to highlite whats going on, i think many a few would raise an eyebrow and put 1 and 1 together.
Just who do you imagine believes we are in recovery? If you can't immediately come up with a name and quote to substantiate this assertion, then you are hallucinating.
Ill have to look to the (recently unemployed) census workers to come up with the names of around 100MM folks who are in said camp!
Or, better yet, do twitter handles count?
Can't name anyone, can you? That's because there is no one saying we're in recovery. Everyone agrees that the economy is in the doldrums. It's an overwhelming consensus, a herd, if you will. And this website here is herd central: opinions here are entirely conventional and mainstream.
Name one person, anywhere, that says we are in a recovery that doesn't have a personal vested interest in saying so. Just one...
Obama has been screaming "we are in recovery" daily.
Steve Leishman
QED
Leash-man?
Who owns his mortgage?
Can this be done with ETFs? SDS is pretty liquid, but for shorting 20 years I'm looking at TYO, goodness, this thing has only trade 5800 shares today so far.
You want the IEF (assuming its 10yrs you want since 20yr is simply TLT)
Dont touch it with a barge pole, unless you want beaten over the head with it.
I think it's time for a little baseball. where's our friend with the bat and toys in the garage?
Bonds will speak the truth, like ZH. The whole CDS/CDO structure is rooted there.
Is a bond-quake coming?
ORI
http://aadivaahan.wordpress.com
.
Friday afternoon funnies. Jim Rogers calls CNBC a publicity agency for the Street. On CNBC. Giggling host retorts "oh you are so cheeky Jim, you know CNBC just reports the news"
Video here :)
http://www.fundmymutualfund.com/2010/07/video-jim-rogers-call-cnbc-public.html
Wow...
Check out these....
Heavy equipment, airlines, aircraft manufacturers.
Somebody didn't get the memo about the "Great Depression" that is coming.
"extend and pretend" is back
where are the chicks dude??
thats the fed ordering planes & shit - ber-skankee is upgrading to jets do drop pennies from heaven
Well in that case!
<Sarcasm off>
Rest assured, there will be no 'D'epression.
These radicals secretly dream about something real bad (i.e. the market crash, gold price shoot up to the moon, anti-Christ becoming our leader, the world comes to an end...etc. something real stupid and bad). The 2008 Crisis caused a massive monetary destruction, so Bernanke's Quantitative Easing will have zero-sum affect in the economy.
*sigh*
The world is not falling apart; despite what radicals want to portray the world, ha!
Soon, we will turn things around and Americans will roll again.
We recently witnessed a Super Bull market (6600 to 11000), we will be safe, we will be happy and we will be great again.
So, calm down.
Calm... there you go...
Easy, easy~
I ask you to make a pledge this weekend.
1) Turn off the TV
2) Turn off the Internet
3) Spend quality time with your family. Maybe going to the beach, catch some fish, eat some nice fruits, enjoy the scenary and relax in the sun, get massage from your wife/husband, kids running around in the beach...etc.
Have a wonderful weekend.
on Fri, 07/30/2010 - 10:29
#496558
In keeping with Cog Dis's work. Member - 2weeks 17 hours. Posts - 1.
EDIT: seven posts, sorry SP.
Aww... You need to brighten up a little. The world is not filled with villains, you know?
There are many hardworking, peace loving, order following people. I think that you may be spending a little too much time on the internet; maybe you should take 2 weeks vacation sometime near future. Away from the internet and from all the bad ideas circling around your head.
You will feel enlightened.
I assure you, once you lift up your buttocks from the chair you sit on right now, you will be relieved immediately; can you imagine if you were to breath fresh air outside and enjoy juicy tasty full-tasting-mouth-watering-sweety sweet fruit?
You deserve a better.
Step outside, there is a new world waiting just for you.
Also, don't forget to pray to your leaders and thank them for their careful micromanagement of everything in your life.
...unless you live on the gulf coast.
coming? according to our Federal Government "we never came out of the Great Depression"! Amazingly "some Fed governor named Bullard agrees"! Needless to say "the bond market agrees more"!!! And is that the ghost of Jim Belushi chanting "TOGA! TOGA!" i hear? Forget partying like its 2008. I wanna party "like it's 1788."
The precious metals make a run. Friday is a great day for them, as the weekend always brings uncertainty to this manic market. I am surprised that there is still a weekend to not trade. With this insane volatility, I bet you within two years trading goes 24/7....if there is anything left to trade.
Also please note we are sitting at DXY which is one of the most important data points you will ever see. Once this breaks there may be no stopping to it. If you are rooting for the blood letting that has intensified since the Dinosaur Kings informed the world that the markets were broken (were they ever rational?) in the Fall of '08, you better hope that DXY recoils around 83. Once again, as I can not stress this enough, 81.5 is where the weight is, and if support breaks hard to the downside, it could be bye-bye doelarr.
If the Dow was traded 24/7, it would reach 36,000 within one week
Robo -
There has been some question as to what your posts imply - "the market is a laughing stock" is one or maybe you are implying that the market is signaling something "much better going forward." I only ask because I have always interpreted the former. Would you mind clarifying? (sarcasm off)
Who cares what his intent is? The end result is your former interpretation.
"Who cares what his intent is? The end result is your former interpretation."
I don't like misinformation, disinformation, wrong information, deception, denigration, duplicity, ignorance, insolence, arrogance, oft handness, or rudeness. That's why I come to Zero Hedge.
Now let the man answer. btw, do monkeys get the mange - the hair on your face seems to be thinning. ;-)!!!
edit: SARCASM ON
There's buying in bonds due to month-end index duration extension, and Bullard's comments also helped. However today's Chicago PMI presages a much stronger ISM than expected and with a bout of corporate issuance early next week expect a steep sell-off in 10- and 30-year Treasuries on Monday. Additionally the long-end is overbought and all technicians recommend selling into strength in the 123'24 area for the 10-year futures. Load up on 121-strike September ZN puts.
@London Dude Trader: I appreciate your insight, but currencies are indicating further JPY strength, i.e. USD weakness...
I think the bond market is the one that is out of step here. I think they are pricing in deflation and for a while, there going to be wrong. If, as most here say, that the stock market is manipulated by the fed and .gov, what is it that they are telling us? It appears they are saying to look for QE2. They are the ones who will pull the trigger so who do you believe? The bond market would be correct in a "real" market, but this one is anything but real at this point.
The stock market is like a petulant child of the bond market. After throwing its tantrums will eventually follow the bond market. Its like this, the players in the bond market are more mature than the ones in the stock market. The bond market is at least 10 times bigger than the stock market.
i like you
When will the fed/govt announce they own 10% of S&P 500, or were thyey the sellers sitting on 200MA this week so they could buy another dip on awful data today (which they of course new about). In a perfect market we should have seen 2-40 points down in SP today. It's getting tricky to trade when the dealer has marked the cards and holds a limitless wallet.
More important, seems like the sovereign bear trade is coming into focus again, Spain down and Germany up. So short Eurostoxx and buy Dax as this has converged largely on the stress test bulls**t, today it went fast the other way and I see that as a beginning of Latino bank dumping and also works well with riot scenarios in Greece. Things will get worse and flight to quality (Germany) will prevail. The shit about 12 banks talking about possible sovereign default might also impact.
If/when the Euro fails everybody want to hold German assets as the D-Mark will appreciate massivley vs the junk piiFags (dont forget France and Austria, same crap) local currencies (or the totally deflated Euro without Germany).
If PPT can hold the US high/higher, Dax will move higher but not necessarily Eurostoxx, if PPT gets squashed this spread will go to the moon in your favor. 1Dax Long/5Eurostoxx Short I recommend.
Not really talking in my own book as the liquidity is there for any amount.
I agree and get slightly depressed about the situation in the world but to you all goldbugs, why not make some serious useless Fiat cash before turning it into gold. Or are you using your physical gold as collateral to leverage the market (in that case I agree with you, but I doubt thats the situation).
Also to all you American citizens, why are you staying there waiting for the holocaust, understand not all can move but more than a few of you seem to have the goldfunds in order so not necessary to hang around for what will happen, your gold will be as good all over.
Thats all folks, if you wonder about the avatar its the only dollar asset I hold, first run will be the 19th at Freehold (NJ).
Anyone here just trade 9650 Aug SPY 106 puts?
Looks like a big bearish bet to me.
Someone actually questioning the bond market? Good word my son.
American Funds, Fidelity, Vanguard, Franklin Templeton, that's 4 trillion bet long...their current redemption rate is 10 - 12%, that means each month they HAVE to sell about $40 BILLION in shares...
Right now things aren't 'that' bad and they are still cornered into forced selling to keep up with the demands of their shareholder redemptions...the population is aging after all, and at 70.5 you have to take your money out of retirement plans....now wait for the first manic panic...let's see how well the market holds up...as these big fish are forced to sell their very large cumbersome positions in SP 500 and DOW components...
Reality can only be postponed not altered in form. When reality is realized, this will get fun, fast.
All I know is that this bond rally is too good to last. This is a simulated panic, if this were a real panic the 10y would be at 2% and I would be selling my bonds with both fists.
So every hedge fund that has been shorting short term paper is about to rack up some major gains... I thought this trade was too popular to get traction... I thought wrong.
Ali: "they told me you was washed up Frazier."
Frazier while pounding the crap out of "the tan man"--"they told you wrong."
Ramp jobs! Do it, Brian sack. It's eom.
ok ...got the message ...its MANIPULATED....but can anyone tell me why they are keeping this shit up now...its gonna fall anyway someday....arent they just wasting their time...just what exactly is the FUCK they are trying to do???
Trying their tails off to get past the first Tuesday after the first Monday of November this year without significant downturn.
Exactly that.
- Ned
ok ...got the message ...its MANIPULATED....but can anyone tell me why they are keeping this shit up now...its gonna fall anyway someday....arent they just wasting their time...just what exactly is the FUCK they are trying to do???
Step 1) Steal underpants.
Step 2) ???
Step 3) Profit!
"just what exactly is the FUCK they are trying to do???"
Burn up their store credit at Staples.
see #497142
- Ned
Anybody who bet on this decoupling had a hell of a time from January 2006 thru December of 2007. Of course, then they made mad cash in 2008, so it's hard to feel too sorry for them. Still, a short-term bet on this could lose a lot more than you'd think.
SPX must close above 1100 to confirm bullish spin for the week. Positive earnings offset troubling economic indicators in July. With most of the earnings reported, August likely to be flat or down as the economic indicators are worrisome.
I find it very interesting that "strategic players are complaining of a lack of divergence which results in a lack of trading opportunities." Of course "none of them will admit to doing exactly the same thing" since "that will show they aren't earning their 20%." Hence the mistake of "risk on/risk off" which is simply a mask for "inflation on/inflation off." Of course one must have a legitmitate trade in order to understand pricing--and simply charging 20% is not a legitimate business. at least that's what some guy named Mr. Market told me. sometimes a man must "look beyond the convergence" and maybe in so doing "become a man."
i just hope the fucking Indian arkets keep on falling like they did today
Updated DOW charts:
http://stockmarket618.wordpress.com