Four Kings

The book by George Kimball (2008) covers the last great era in boxing -- when Leonard, Hagler, Hearns and Duran challenged each other over 9 fights.  A great read for anyone who has a passion for the sweet science, which I do.  Gave me greater appreciation for Hearns and Duran, who are often given less attention than the other two.

Not Shocking

An article from Bloomberg quoting Thomas Simons, an economist from Jefferies:

“The fiscal picture has a very long way to go before it is on a sustainable path...the effect of the S&P ratings outlook revision takes some of the heat off Congress in the near term to address the deficit.”

That attitude tells you a lot. No one is actually serious about reform. If they can avoid it, they will. And they won’t do something about it until the crisis is already here.

What if...

I’ve seen it mentioned in a couple of places recently (here’s one) – the notion of negative convexity selling in the bond market.

The story goes something like this. When interest rates are low, people who have mortgages are apt to re-finance, with the opposite true when rates are higher.  And for an investor who owns any of these MBS bundled products comprised of mortgages, a mixture of increasing rates and increased duration (from fewer re-fis) is very bad for asset value. The hedge is to short treasuries (i.e., “convexity selling”). And the rumor is that somewhere around 2.2% on the 10-year is where owners of these MBS bonds are going to be forced to do it in greater volume.

In the context of what’s going on lately, with respect to the talk of tapering by the Fed, if they actually did buy fewer bonds (which would cause rates to rise), at the same time that convexity selling is starting to increase, you can only imagine how much higher rates would actually go – killing any semblance of a recovery and absolutely decimating the idea that the budget deficit is shrinking.

So, it seems likely that there is no taper coming. By the way, the 10-year is right at 2.20% these days. Interesting times, indeed.

Ugly Chart

I have a daily chart for GLD below over the past 3 months.  Does not look good.  A perfect cup and handle has formed.  A break below ~$130 signals the next downdraft, and measures out to somewhere around $117 (which means about $1,200 in the metal itself).  Basically, we are at the level where we find out what comes next.

Modern New York

The subtitle is The Life and Economics of a City and the author is Greg David (2012). An interesting read about the City, since the mid ‘60s, when John Lindsay became mayor. The takeaway is that the City is at its best when Wall Street is thriving. Therein, though, the author (who was the editor of Crane’s New York Business for over 20 years) tries to note distinctions in the administrations that encouraged growing incomes, versus those who emphasized the role of government to lift everybody up. Again, where the mayor (Koch, Giuliani, Bloomberg) seemed to be supportive of the financial industry, the economy grew. In every case, though, each of the mayors seemed to revert eventually to growing government in order to pay back constituents (whether from the beginning, like Dinkins, or later on, like Giuliani).

The book also touches on rent control. It has become a political third rail and the chances that it is ever eliminated are slim – even though it still operates as a disincentive to development and forces up the rents of market-rate apartments, making the City prohibitively expensive for many. In fact, the chances of the system becoming even stronger are high with the election of a new mayor in 2013.

The other interesting discussion is about the sectors that drive New York’s economy now. Obviously, the list includes finance (which in 2007 represented 28% of all income in the City). But, of great import is also tourism. And, more recently, higher education, the television and film industry, and technology have all become key engines with regards to income and workers. As one anecdote, the 110 institutions in New York have about 600,000 students – roughly the population of Boston, which is itself known as the college town. All of which is to say that manufacturing is not nearly as important as it once was – so, the argument from community groups when a new development is proposed in their backyard, that includes reference to the loss of manufacturing jobs when industrial space is converted, is not really valid given the data.

As a born and bred New Yorker, it got me nostalgic at times, reminded of my childhood when certain pivotal moments in the City’s recent history were mentioned. I enjoyed the book.

Some Observations

A bunch of different things, briefly:

-Gold looks like it is getting ready to make a sharp move. The only question is in which direction. A few “tells” perhaps – it is slowly stair-stepping higher over the past couple of weeks, forming an ascending triangle, and is now above the 10-day moving average. It looks like $1,420 is the level that needs to be broken through.

-Treasuries are still within the trading channel that dates back a year, on the high end of the range – but for several sessions they have also remained above 2.08% on the 10-year, and 3.28% on the 30-year, which were important resistance levels within the past 24 months. Of course, there are probably plenty of people who might argue that higher rates are the natural consequence of a “healthier” economy. I don’t think that’s what is going on.  But I'm not doing anything about it either yet.

-As a corollary, the high yield market has fallen off a cliff lately (using HYG as the proxy). That may signal that rates will continue to rise, but not for good reason.

-I genuinely believe that the S&P 500 topped out on May 22nd. While there might be another rally that gets everyone excited, the key thing to watch is whether 1,687.18 gets taken out.

-The Nikkei continues to be a shit-show. Kyle Bass was right – Abe and Kuroda are going to need to go even bigger with their QE program.

-The Yen went as high as 103.75 against the U.S. Dollar (on May 22nd), and has now worked its way back to 100. It could very well fall back to about 97.20 or 94.50, given the huge move since last year, but regardless I still think it will continue to get weaker over time.

My first NBA post in a while

Disregard later maybe.  But, I remember reading an article early this season where Skip Bayless pointed out that Lebron had a long history of choking in the big moments -- then Game 6 in Boston last year, Miami rolls to a title, and suddenly all is forgiven and forgotten.  Did he really change that much, from someone who was not dependable in the clutch to a closer?  I don't know if Bayless was on to something, but tonight sure does offer us a great chance to find out the answer.