It’s too hot

I’m lethargic. My office is at 29C and humid. The markets are lethargic. At some point new homes in the UK will be fitted with A/C. Liquidity is terrible, even for $ES_F, the SP 500 mini future, which should be the most liquid equity instrument on the planet. The 10 year Treasury future ($ZN) is spookily flat. It looks like the JGB future, that barely trades, because the BoJ has bought up all the bonds. Nothing looks promising. The opposing forces of massive monetary stimulus and massive virus-created economic damage seem perfectly in balance, eliminating opportunities for profit.

Tidying

The contango trade, championed by Kuppy, has not aged well. In situations like this, it is very hard to know what to do. The simplest thing is to cut one’s losses, which is what I’d normally do, especially as it has never really made any money. The alternative, though is to write some short-dated calls, to alleviate the short term pain, get some income, and keep the trade idea alive. I A some wag has pointed out, a long-term holding is a short-term idea that went horribly wrong. You can read about Kuppy’s thesis here.

Trading ideas

US retail REITs surely have further to fall. Relative to UK retail space, the US has a giant amount. It’s really expensive to short REITs because of the huge yield they have. The Simon Property Group was recently trading at a 15% yield. That’s an awful lot of carry. Not sure what high-yielding stock could be used in a pair trade to offset this effect.

European Banks are in a terrible state (because Euro long-term rates have been repressed forever, so there is no money any longer in maturity transformation: the main value traditionally added by banks). The problem is that if you try to take advantage of this, you’re up against someone with a very big budget indeed: the ECB, with Madam Lagarde determined that banks won’t fail on her watch. I plan to listen to this podcast. I started listening, and I heard DD-B explain that J Powell wanted to do the right thing when he arrive, but that the system is simply too big for him to fight. Chris Irons is a loose cannon, but occasionally his interviews are worth listening to, IMHO.

Wrap

It’s the end of the week. Equities seem to sag towards the close. This is fairly common: longs taking profits? Gold up a bit. Kudlow on TV claiming that all statistics point to a V-shaped recovery. The EU seems to be talking about requiring visitors from the US to be quarantined, in contrast to most other visitors. Trump behaving oddly: staying in Washington, not appearing at a news conference: Twitter is full of conspiracy theories, but in all probability he just can’t be bothered to shlep over to NY or Florida, given the heat and the virus.

Otherwise: nada!