Today is options expiration day.  Will it be of significance?  Have positions already been unwound?   According to Susquehanna International Group as of late yesterday afternoon, the total number of outstanding contracts on equity, index and ETF options expiring today stands at 95.5 million, slightly lower than the record 95.6 million that were outstanding in July.

Against the above backdrop, positions have not been unwound.  Will volatility rise?

The CBO released its estimates of the “Build Back Better” legislation late yesterday afternoon.  The Administration has adamantly stated it will cost nothing.  The CBO indicated that it will add of $367 billion to the deficit not counting IRS enforcement.

The CBO indicates that additional IRS enforcement will add about $127 billion in additional revenues thus increasing the deficit by a “nominal” $240 billion while the White House is forecasting a $400 billion increase in revenue thus is net a positive.

Yesterday, according to Bloomberg the S & P 500 was hit with a “series of large sell programs” following a CNN report that Senator Manchin’s vote on the bill “may not be a lock.”

Are the equity markets in a precarious position…large number of options outstanding leading into a major news release?  Maybe.

Changing topics, a WSJ headline read How the Fed Rigs the Bond Market.  In my view the biggest issue facing the markets is inflation that threatens financial stability.  Inflation has not been this high relative to Treasury bond yields since the 1970s.

The Journal writes “then as now, real bond yields—the gap between the 10-year Treasury and inflation—signals distress for policy makers and market participants.”  The article writes today’s real yields of negative 4.7% are the second lowest since 1970, eclipsed only by 1974 with a negative yield of 4.9% which was a catalyst for the S & P 500 to tumble 37%.

Why are yields so low?  Will yields spike?  Again, quoting the Journal

First the US Treasury bond market has been rigged and manipulated since the Federal Reserve’s second quantitative easing program began in 2010.  Since then, Fed purchases of Treasury debt have funded as much as 60% to 80% of the entire government borrowing requirement.   In other words, Fed actions have crowded out private escort private sector price discovery for more than 10-years, pushing yields to lows and stock prices to record highs.

Several times I have referenced Bill Gross, the former manager of the world’s largest bond fund, stating that 60% of net Treasury purchases over the last five years was by the Federal Reserve, further opining asking who is going to buy this debt as the Fed tapers, amplified by trillion-dollar deficits for the for see able future.  Gross also commented about the possibility of currency devaluation but essentially said this might be a zero-sum game.

All markets are greatly skewed by monetary policy.  We have never been in this position thus the only obvious conclusion to make there are no precedents to follow.  The ultimate outcome will probably be the one that had never been discussed.

Commenting on yesterday’s market action, technologies led the S & P 500 and the NASDAQ higher.  The Dow posted a nominal advance.  Treasuries were essentially unchanged.

What will happen today?

Last night the foreign markets were mixed.   London was down 0.65%, Paris down 0.63% and Frankfurt down 0.33%.  China was up 1.12%, Japan up 0.50% and Hang Seng down 1.07%.

The Dow should open flat. The 10-year is up 15/32 to yield 1.54% and oil is down about 3% on the possibility of increased European COVID lockdowns.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.