Phil Grossfield's Blog

A LITTLE EXTRA…

Monthly Archives: June 2015

Inside Out — Bonds Rally – Greece In Big Trouble

insideoutInside Out.  I was surprised…it was a really good movie…a smart movie.  The entire time I was watching it all I could think about was how smart it was to put a person’s emotional well-being into an animated world that actually makes sense.  I thought about people I know that seem trapped into thinking one way or another.  Why does their joy seem to be trapped somewhere deep and dark? Have they forgotten how to be happy?  But more importantly, this movie reminds you that all of your emotions have a place…fear can be useful…sadness can be useful.  And without those emotions, we’d be out of balance.  Like most things, there is a delicate balance between our emotions, and if they get out of balance, then our emotional well-being can get trapped.  My wife actually cried during the movie because it made her think about one of her loved ones whose emotional well-being is currently trapped.

I encourage you to see this movie with your kids…ours loved it.  It’s not often I go to a movie with my kids that I come out with a deep sense of satisfaction, like my kids learned something valuable, and so did I.

My Market Watch – June 29, 2015

For an explanation on how traders look for technical signals to decide whether to worsen or improve rates, read My Great Bond Elevator Analogy.

greece5Bonds Rally As Greece Is In Big Trouble.  The 30-year Fannie Mae bond is up +56bps since Friday’s close. Generally a lender’s pricing improves when the bond is being bought, like this morning.

The market appears to be reacting to the Greek dramatic saga. It looks like Greece is not going to get the bailout they so desperately want. Moreover, the banks will be closed in Greece all week and if you have any money in there you can only withdraw 60 euros a day. Can you imagine? Check this out: Greece Shuts Banks In Bid To Prevent Collapse.

This kind of news gives traders a horrendous feeling about global markets and the global economy. Therefore, stocks don’t seem very attractive right now so traders would rather invest in safer bonds instead and when that happens a lender’s rates/pricing improve. Let me know if you have any questions…

My Disclaimer

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Yes, Dog Booties by Ruffwear Grip Trex

Yes, Dog Booties

In the cactus infested and hot weather of Scottsdale, Arizona, cactus needles and the blistering 150 degree pavement led to havoc on my dog Pongo.  So, because I enjoy hiking and running with my dog, a pair of Dog Booties seemed to be the answer.  However, getting Pongo to accept his booties was a little challenging, but nothing a bag of leftover bacon couldn’t handle.  Here he is just getting used to his new booties…click the graphic to see a 9 second video:

pongo dog booties

The Great Bond Elevator Analogy

The Great Bond Elevator Analogy.  Phil, what the heck are you talking about?  I get many questions about why rates go up and down when there are no economic reports or political news to affect trading behavior.  So, I came up with an analogy to help explain the same.  Keep in mind this is a very rudimentary illustration and explanation.

First it’s important to understand that when traders perceive the economy as weak, for example when an economic report shows higher unemployment, then stocks aren’t very appealing and traders would rather invest in safer bonds.  Simply put, when traders invest in bonds, a lender’s rates improve.  On the other hand, when traders perceive the economy as strong, for example when an economic report shows lower unemployment, then stocks look like a great investment.  When that happens traders usually sell off less attractive bonds to buy stocks instead and when bonds are sold off a lender will worsen their rates.  At the end of the day, the trader hopes to buy low and sell high.

But how do traders decide when to buy or sell bonds when there are no economic reports or political news to persuade them?  Well, I’ll tell you…they look for past trends in the buying and selling of bonds to provide insight so they can make an informed guess on which way the market will move.  These trends are called moving averages and on a chart  are referred to as “Ceilings of Resistance” and “Floors Of Support.”  Put another way, the Floors and Ceilings represent past trading behavior, and therefore they provide guidance for traders on whether to buy or sell.

glass elevatorA good way to think about how traders analyze Floors and Ceilings is to visualize a glass elevator in a hotel.  Bonds are the glass elevator…when traders buy bonds the glass elevator goes up and when they sell off bonds the glass elevator goes down.  Got that?  Good.  Now visualize traders are buying lots and lots of bonds…the bond elevator is going up and passes a Ceiling and then it continues to go up and passes another Ceiling.  When it reaches the top traders start selling off bonds and now the bond elevator heads down and passes a Floor and then passes another Floor.  Keep that picture in your head.

Traders are always keeping their eye on the bond elevator…they watch it from afar…like if you were watching it from across the lobby.  From afar, you don’t know whether the bond elevator will go up to the top floor, or just go up one floor before coming back down.  But you do know that each time the bond elevator nears a floor, there’s a chance it might slow down and stop.  And if it does stop, it might head the opposite direction.  Absent economic reports or political news that give insight on whether to buy or sell bonds, a trader looks to see where the Floors and Ceilings are based on past trading trends.  As the bond elevator nears a floor or ceiling they prepare to take action…either to buy or sell.

Traders put the Floors and Ceilings on a graph and compare the current trading activity for guidance on whether to buy or sell.  Remember, because traders always want to buy low and sell high, any insight on how the bond price might change is valuable.  As the bond elevator trades up towards a Ceiling, traders wonder if the Ceiling will slow it down and cause it to reverse direction downward…that’s why it’s called a Ceiling Of Resistance.  Similarly, as the bond elevator trades down towards a Floor, traders wonder if the Floor will slow it down and cause it to reverse directions upward…that’s why it’s called a Floor Of Support.

explanation_floor7explanation_ceiling88Here’s an example of what it looks like when traders are buying bonds and the bond elevator is heading up towards a Ceiling.  Will it slow down, stop, and reverse directions downward?  Absent any economic data or news, a trader may reasonably conclude the bond has reached its high point and sell at the Ceiling to get the highest possible price.  If there is some economic report or news that gives traders a reason to keep buying, then the bond elevator may not even slow down and will break through that Ceiling.  If that happens, then traders will look for the next Ceiling up for guidance on when to sell.

Now imagine traders are selling off bonds and the bond elevator is heading down towards a Floor.  Will it slow down, stop, and reverse directions upward?  Absent any economic data or news, a trader may reasonably conclude the bond has reached its low point and buy at the Floor to get the lowest possible price.  If there is some economic report or news that gives traders a reason to keep selling off bonds, then the bond elevator may keep heading down and break through the Floor.  If that happens, then traders will look for the next Floor down for guidance on when to buy.

A lender’s Capital Markets Department watches Bonds trade up and down when setting rates and pricing.  Simply put, if bonds are being bought and heading up the elevator, then Capital Markets will improve rates/pricing.  But if bonds are being sold off and heading down the elevator, then they will worsen rates/pricing.  If the bond elevator breaks through a Floor or Ceiling, then they know that trading is exceeding a past trading behavior and therefore they should set pricing for the upside or downside towards the next Ceiling or Floor.

Having a working knowledge of how traders analyze the market and consider past trading behavior gives you insight on how a Capital Markets Department sets their rates/pricing.  More importantly, this gives you more talking points with your customers.  A borrowers’ trust level increases when they perceive you as knowledgeable about the markets, particularly when they ask you for your opinion about the direction of rates, and they ALWAYS ask.  The more they trust you the more likely they will do business with you and refer everyone they know to use you as well.

I hope all of that makes sense to you…let me know if you have any questions or comments.

From My Wife, The Travel Mama – Summer Vacation Rental

Summer Vacation Rental – From The Travel Mama

My wife is The Travel Mama…it’s true!  She owns one of the most popular family travel blogs, TravelMamas.com.  The site appeals to anyone who wants to travel with children…and stay sane!  The site’s mission is to help families better connect with each other and the world around them through travel.

Here she wrote a guest post for TripAdvisor about Vacation Rentals so I thought I’d share it.  If you read it, please like and share it, thanks.

tm_vacationrental

Game Of Thrones (spoiler warning)

Game Of Thrones

WARNING – there are spoilers herein – if you haven’t watched all episodes through season 5, then STOP reading now!

I love mystical books, but I never read these books which is good and bad. It’s good because the HBO TV Series is outstanding and I have no idea what’s going to happen episode to episode. The bad is that it doesn’t prepare me for some of the horrific scenes, and, the loss of favorite characters.

In A Nutshell. If you’ve never read or watched, Game Of Thrones takes place Westeros, an area of the world similar to medieval England with Kings, Queens and Castles. “Game of Thrones” is the story of 7 houses all vying for the Iron Throne of Westeros and it’s fascinating to watch the strategy. Yes, it’s brutal at times, but I suspect that’s how it really was. And yes, there are dragons, but hey, there were dinosaurs on Earth at one point…why not dragons?

It’s all about the characters. The attraction to the show are the main characters…and there are so many compelling individuals. In fact, there are so many characters that I had to google a chart to figure them all out. But reason I’m obsessed at the moment is that some of these characters have been killed off. In the first season they spend the first 9 episodes getting you to love one of the main characters, and then they chop off his head. It was shocking. And then we lost some more lovable characters over the seasons. But none more than Jon Snow, who was just killed in the last episode on Sunday. I can’t stop thinking about it. I thought he was going to be the one to save the world. But in a world with dragons and blood magic, maybe he’ll come back in some way…I hope so.

game of thrones

 

Jobs Report Tomorrow – The Dalai Lama – Game 1 NBA Tonight!

Game 1 Tonight!  
Who are you taking?  It’s not the Warriors versus the Cavaliers…it’s the Warriors versus Lebron James.  And despite the talent of the Warriors as a team, their lack of experience against the best player in the league (and maybe the best player ever) might not be enough.  Here are 5 reasons to expect one of the best NBA Championship Series of all time and it starts TONIGHT!

My Market update:

The 30-year Fannie Mae bond is up +25bps since yesterday’s close.  Generally a lender’s pricing improves when the bond is being bought, like this morning.

I’ve been absent all week from following the market with any detail other than watching rates/pricing get worse and worse.  Suffice it to say that overseas concerns I identified last week are mainly responsible.  But tomorrow’s Jobs Report is a big one for bonds and therefore for the short-term future of our rates/pricing.

It is expected that 210,000 new jobs were created in May while unemployment stays stagnant. Simply put, if the Jobs Report indicates more new jobs than expected, and/or decreased unemployment, it tells traders that the economy is stronger and therefore investing in stocks rather than bonds is advisable which results in rates getting worse.  Conversely,less new jobs than expected and/or increased unemployment tells traders that the economy is weak and therefore investing in bonds is safer which results in rates improving.

Economists of high intelligence can easily make an argument that the economy is either weaker or stronger and there is an abundant of market data to support each.  There really is no way of knowing for sure…but if you know, please tell me so I can buy a LILY.

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