Category Archives: Fixed Income Markets

Jobless Reports Fuel Fed Bets, U.S. Stocks Drop After GDP Jobless Reports Fuel Fed Bets

According to Bloomberg,

(Corrects Dollar General stock price in 17th paragraph.)

U.S. stock-index futures fell, signaling equities will extend a four-day slide, after data showing faster-than-forecast economic growth fueled speculation the Federal Reserve will curb stimulus spending.

Aeropostale Inc. lost 3.8 percent as the retailer’s fourth-quarter loss forecast was wider than estimated. Apple Inc. rose 1.4 percent as China Mobile Ltd. moved closer to offering its 759 million subscribers iPhones. General Growth Properties Inc. added 4.5 percent as Standard & Poor’s said it will add the mall owner to its benchmark index this month.

S&P 500 Index (SPX) futures expiring this month fell 0.3 percent to 1,787.20 at 9:12 a.m. in New York. Dow Jones Industrial Average contracts lost 39 points, or 0.3 percent, to 15,847 today.

“The numbers today pave the way for the Fed” to cut stimulus, Matthew Kaufler, a portfolio manager at Federated Investors Inc. in Rochester, New York, said by phone. His firm oversees $363.8 billion. “There’s angst in the short run, but I think it’s only positive in the long run that the Fed begin to taper and extricate itself from being the ultimate market maker.”

The S&P 500 has surged 26 percent this year, challenging 2003 for the biggest annual gain in the last 15 years, as the Fed refrained from reducing its monthly bond purchases and corporate earnings surpassed estimates.

Stimulus Bets

The central bank has said it will start slowing the pace of stimulus if the economy improves in line with its forecasts. Policy makers, who next meet Dec. 17-18, will probably wait until the March 18-19 Federal Open Market Committee session before reducing monthly bond purchases to $70 billion from $85 billion, according to the median estimate in Bloomberg’s latest survey of economists conducted on Nov. 8.

The U.S. economy expanded in the third quarter at a faster pace than initially reported, led by the biggest increase in inventories since early 1998. Consumer spending slowed. Gross domestic product climbed at a 3.6 percent annualized rate, up from an initial estimate of 2.8 percent and the strongest since the first quarter of 2012.

Separate data showed applications for U.S. employment benefits unexpectedly fell last week to the lowest level in more than two months. Jobless claims decreased 23,000 to 298,000 in the week ended Nov. 30, the Labor Department said.

Data tomorrow may show the unemployment rate fell to 7.2 percent, matching the lowest level since 2008.

Fed Bank of Atlanta President Dennis Lockhart, a backer of record stimulus, said today the central bank when considering tapering should announce a total limit on purchases or a timetable for dialing down the program.

‘Transition Process’

“If and when the FOMC arrives at a decision to wind down asset purchases, it’s my view that it will be helpful to the transition process to provide as much certainty as possible about how this will be done,” Lockhart said in a speech in Florida.

The S&P 500 has retreated 0.8 percent in the past four sessions, dropping to a two-week low after closing at a record on Nov. 27. The index fluctuated yesterday before closing lower by 0.1 percent, as optimism that lawmakers in Washington were close to a budget deal offset better-than-forecast jobs data that fueled stimulus-tapering concerns.

The gauge’s rally this year has pushed valuations higher, with the equity benchmark trading for about 16.1 times its constituents’ projected earnings, up 23 percent from the beginning of 2013 when it traded at 13.1 times projected profit.

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Bezos Says Amazon Tests Drones for Same-Day Parcel Delivery

According to Bloomberg,

Amazon.com Inc. is testing drones to deliver goods as the world’s largest e-commerce company works to improve efficiency and speed in getting products to consumers.

Chief Executive Officer Jeff Bezos unveiled the plan on CBS’s “60 Minutes” news program in the U.S., showing interviewer Charlie Rose the flying machines that can serve as delivery vehicles. Bezos said the gadgets, called octocopters, can carry as much as 5 pounds within a 10-mile radius of an Amazon fulfillment center. Amazon may start using the drones, which can make a delivery within 30 minutes, within five years pending Federal Aviation Administration approval, Bezos said.

“It will work, and it will happen, and it’s gonna be a lot of fun,” he said in the “60 Minutes” interview broadcast yesterday.

Amazon's Prime Air

Amazon, based in Seattle, has been introducing ways to get products to consumers faster, seeking to keep shoppers coming back to its Web store instead of going to brick-and-mortar retailers. The company said last month it was teaming up with the U.S. Postal Service to begin Sunday delivery to members of its $79-a-year Prime program.

Delivery drones also are being used by the Australian company Zookal to deliver textbooks, said Oliver Lamb, director of Sydney-based Pacific Aviation Consulting. In China, the SF Express delivery company is experimenting with drones in the southern city of Dongguan, according to a report by the Civil Aviation Resource Net of China.

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Administration Says Obamacare Website Repair Goals Reached

According to Bloomberg,

President Barack Obama raised the stakes on his three-year-old health-care overhaul yesterday, declaring that fixes to his administration’s troubled insurance exchange website make it ready to sign up 800,000 people a day.

The site, healthcare.gov, is sure to be tested immediately today — “Cyber Monday” — when deals from online retailers draw more Americans to their computers and the Internet.

The site’s stated new capacity of 50,000 simultaneous users hasn’t been proven in the real world, and U.S. officials aren’t certain the site will hold up, according to a person familiar with the repairs who asked not to be identified because the information isn’t public. At the same time, the reduced error rate of 0.75 percent per page, down from 6 percent in October, still means many users will encounter a glitch in clicking through multiple pages to enroll in a health plan.

If consumers find continuing problems with the site “it is going to help drive this to a huge advantage for the Republican party, for a broader agenda which will not be just fixing the website; it’ll be scaling back the law,” said Robert Blendon, a professor of health policy and political analysis at the Harvard School of Public, in a telephone interview.

The effect of the repairs may not be known until the middle of January, when the administration reports on enrollment in December. About 100,000 people signed up for coverage through the federal system last month, a roughly four-fold increase from October even as healthcare.gov was undergoing repairs, said a person familiar with program’s progress.

Open Mind

Healthcare.gov

Healthcare.gov

The enrollment jump may be an encouraging trend for the administration, signaling that consumers are keeping an open mind about the U.S.-run exchange even as it suffered software glitches and breakdowns. Americans face a mid-December deadline to sign up for coverage beginning Jan 1.

In a report released yesterday by the Health and Human Services Department, the administration said it has fixed or improved more than 400 software issues and made the site between two and five times faster through a series of hardware upgrades, including new servers. The site’s average response time has fallen from eight seconds in October to less than one second over the past three weeks, the report said.

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Paulson Said to Inform Clients He Won’t Add More to Gold

According to Bloomberg,

Billionaire John Paulson, the best-known gold bull since he started wagering on bullion more than three years ago, is backing away from his bet.

Paulson told clients at his firm’s annual meeting Nov. 20 that he personally wouldn’t invest more money in his gold fund because it’s not clear when inflation will accelerate, according to a person familiar with the matter. The hedge-fund manager, who has been betting that bullion would rally as a hedge against inflation and as recently as last year told clients that gold was his best long-term bet, has lost 63 percent year-to-date in the PFR Gold Fund, said the person, who was briefed on the returns and asked not to be identified because the information is private.

Paulson, 57, started his foray into gold in early 2009, betting that bullion would rise as governments printed money to revive their economies following the 2008 financial crisis. Gold-related securities helped drive losses for the firm in 2012 as mining company stocks fell. Paulson & Co.’s main strategies have gained this year on bets in mergers, defaulted securities, convertible bonds and telecommunications, energy, insurance and asset-management companies.

The fund, which has shrunk to $370 million — with most of that John Paulson’s own money — from $1 billion at the end of 2012, fell 1.2 percent in October, the person said. The hedge-fund firm will maintain the fund’s positions in gold stocks and let options related to bullion expire, Paulson said at the meeting in Paulson & Co.’s New York office, according to the person.

Hedge-fund Manager John Paulson (Bloomberg)

Hedge-fund Manager John Paulson (Bloomberg)

Armel Leslie, a spokesman for $19 billion Paulson & Co. with WalekPeppercomm, declined to comment on the meeting and fund returns.

Bullion’s Slump

Gold is heading for its first annual drop in 13 years as some investors lost faith in the metal as a store of value, fueled by concern that expected reductions in $85 billion of monthly bond buying by the U.S. Federal Reserve will ease the risk of accelerating inflation. Billionaires George Soros and Daniel Loeb sold their entire positions in the SPDR Gold Trust exchange-traded fund in the second quarter, according to regulatory filings. Inflation expectations as measured by the break-even rate for five-year Treasury Inflation Protected Securities fell 12 percent this year.

Bullion has slumped 26 percent this year to $1,246.30 an ounce at 3:21 p.m. in London and reached $1,236.88 yesterday, the lowest since July 9.

Hedge funds and other money managers have cut their net-long positions in gold to 55,456 futures and options as of Nov. 12, according to the latest data from the U.S. Commodity Futures Trading Commission. The holdings are down 48 percent this year.

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FHFA Faces Pushback on Cuts to Fannie Mae Apartment Lending

According to Bloomberg,

The U.S. regulator of Fannie Mae and Freddie Mac is proceeding with plans to scale back their financing of apartment-building loans next year, shrinking what opponents call a critical support for rental housing.

The government-owned companies back about 45 percent of the multifamily market. While the size of the cuts is still undetermined, they will add to a 10 percent reduction in apartment financing the Federal Housing Finance Agency required Fannie Mae and Freddie Mac to make this year as part of a broader effort to boost private investment in housing finance.

Developers, lenders and affordable-housing advocates are pushing back, saying the move could deprive rural areas and smaller cities such as Boise, Idaho, and Topeka, Kansas, of rental housing that private investors may neglect. Dozens responded to a recent FHFA request for suggestions with the same message: Don’t do it at all.

“Without Fannie and Freddie our ability to get deals done in smaller towns would be greatly reduced,” E.J. Burke, chairman of the Mortgage Bankers Association and an executive vice president at Cleveland-based KeyBank, said in an interview. “We haven’t seen that impact yet, but down the line I’m very concerned if the conservator continues to cut their volumes.”

FHFA officials say Fannie Mae (FNMA) and Freddie Mac’s multifamily footprint is still larger than their 30 percent market share before the financial crisis. The market absorbed this year’s cuts “without major disruption,” FHFA Acting Director Edward J. DeMarco said in a speech Oct. 24.

Long-Term Plan

The reductions are part of a long-term FHFA plan to create more room in housing finance for private capital. In the absence of action from lawmakers to set up a new mortgage finance system, “we will continue to take gradual steps to reduce the enterprises’ exposure in this market, while maintaining a market presence,” DeMarco said.

Fannie Mae and Freddie Mac purchase mortgages and package them into securities on which they guarantee payments of principal and interest. They were seized by regulators in 2008 after investments in risky single-family loans pushed them to the brink of insolvency. They are now owned by the U.S. government, and their profits go to the Treasury.

Since the financial crisis, the companies’ multifamily portfolio has provided steady profits. Before taxes this year, Fannie Mae earned $1.4 billion through Sept. 30 on its apartment business and Freddie Mac (FMCC) earned $1.8 billion, according to company filings.

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VIX Trader Betting $13 Million on 88% Jump in Fear Gauge

According to Bloomberg,

An investor bought $13 million in call options on the Chicago Board Options Exchange Volatility Index, betting the gauge will rally at least 88 percent in the next four months.

About 100,000 VIX March calls were purchased with a strike price of 23 for about $1.30 each, according to Trade Alert LLC. The contracts were among the five most-traded on U.S. options exchanges today, based on data compiled by Bloomberg.

Chicago Board Options Exchange

Chicago Board Options Exchange

 

 

 

 

 

 

 

 

In another transaction, a person spent $5.1 million in a bet that the Standard & Poor’s 500 Index will rise more than 10 percent in the next three months. The trade involved buying about 31,000 February calls for about $1.65 per contract with an exercise price of 1,975 on the U.S. equity benchmark, according to Trade Alert.

“The S&P 500 (SPX) trade looks like a melt-up trade and the VIX trade is the melt-down trade,” Justin Golden, a partner at Lake Hill Capital Management LLC, said in an e-mail. The New York-based hedge fund trades options on equity indexes and commodities. “Either way, in order for either of these to pay off you need significant movement in some direction.”

The two trades — one that makes money with higher volatility, the other profiting with equity gains — show seemingly opposing wagers on the direction of the stock market as investors gauge the prospect of continued monetary stimulus after a four-year bull market. The transactions may be used to speculate on the direction of the VIX (VIX) or S&P 500, or to hedge swings in other investments.

‘More Hopeful’

The S&P 500 is up 25 percent this year, putting it on track for the biggest annual gain since 2003, as the Federal Reserve maintained bond purchases to spur economic growth and corporate earnings topped analysts’ estimates. Investors may see political turmoil over the next three months as Congress’s self-imposed deadline to agree on a fiscal 2014 budget comes next month and the law now funding the government expires Jan. 15.

The S&P 500 fell 0.1 percent to 1,789.25 at 3:32 p.m. in New York. The VIX, which moves in opposite direction of the equity gauge about 80 percent of the time, gained 2.1 percent to 13.38. The VIX was about 12.9 when the calls were purchased this morning.

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U.S. Agencies to Say Bitcoins Offer Legitimate Benefits

Nov. 18 (Bloomberg)– The Department of Justice said Bitcoins can be “legal means of exchange” at a U.S. Senate committee hearing, boosting prospects for wider acceptance of the virtual currency.

“We all recognize that virtual currencies, in and of themselves, are not illegal,” Mythili Raman, acting assistant attorney general at the Justice Department’s criminal division, said at the hearing.

The Committee on Homeland Security and Governmental Affairs, which solicited comments in an Aug. 12 letter, scheduled the hearing “to explore potential promises and risks related to virtual currency for the federal government and society at large” after the Silk Road Hidden Website was shut down in October. The closing of the marketplace, where people could obtain drugs, guns and other illicit goods using Bitcoins, is helping fuel a rally in the virtual currency as speculators bet that the digital money will gain more mainstream acceptance.

“The FBI’s approach to virtual currencies is guided by a recognition that online payment systems, both centralized and decentralized, offer legitimate financial services,” Peter Kadzik, principal deputy assistant attorney general, wrote in a letter dated Oct. 23. “Like any financial service, virtual currency systems of either type can be exploited by malicious actors, but centralized and decentralized online payment systems can vary significantly in the types and degrees of illicit financial risk they pose.”

Virtual MoneyBitcoins (Bloomberg)

Introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto, Bitcoin is being used to pay for everything from gourmet coffee to smartphones on the Internet. There are almost 12 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks activity across various exchanges.

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