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Adam Parry – Good brokin’ that!

Monday 22nd Feb 2021|London

As this interminable lockdown continues unabated, all I can say is thank goodness for Smart TVs, although at this stage we are running out of fresh things to watch.

This week, having drawn a blank on Netflix, Amazon, Disney +, BBC iPlayer, ITV Hub, All 4 and nearly everything else I turned to YouTube.

Having gone through cricket in the 1970’s and 80’s, my eye was drawn to a little known gem from 1989. A film called Dealers.

Dealers is about a bunch of bond traders from the fictional US investment bank Whitney Paine, and is basically total nonsense. The lead, played by Paul McGann, commutes from the countryside in a water plane, landing every day just East of Tower Bridge in what is now known as Butlers Wharf. Rebecca De Mornay plays his boss who is trying to recoup a $100m loss on the US Treasury book. She is fairly risk averse, so McGann decides to go for broke and lifts $200m 10yrs at a big figure of 96. He then sees the possie trade 8 points offside – a USD16m hit to his P/L – before some weak US figures bail him out and he flogs them at 98, thus becoming a major hero and getting the girl.

One thing did, however, seem familiar. The dealing room. So I looked up a TV series from around the same time, Capital City. And lo and behold there were all 23 episodes set in the same dealing room. This time the name of the bank was Shane Longman and the series followed the fortunes and love lives of head trader Declan and co.

Once again there were some ludicrous story lines, such as pony-tailed swaps trader Max Lubin getting involved in the space race. And I do remember that at the time the critics panned it. Us 80’s City boys and Girls loved it. Champagne lifestyles to reflect our own, even if in the back-office we were only on 8 bags a year.

That all took me back to some of the characters that inhabited the nether world of the City thirty odd years ago. A time so far removed from the sterilized working environments of trading rooms now that it might as well be 300 years ago. The fact of the matter is that most of us would have been binned for gross misconduct now for our behaviour then on an almost daily basis.

There was, of course, some dreadful behaviour. Such as the time the irritating OLO trader went one step too far and we bunged him out on a foot wide ledge from a window on the trading floor. Four stories up. There was the time we acted out our fantasy of being dealers and bought elephant dung futures, only narrowly avoiding physical delivery being executed outside our office on Bishopsgate. And those are two of the cleaner stories. Most would not get passed the editor onto a family blog such as this.

But I am going to concentrate on one particular cove. And there will be a prize for any old dinosaurs who recognize this person from some of the following examples of typical behaviour at the time.

He started his career in the dealing room of a well-known securities house in the 1980’s, where he was known by competitors in the old knock-to-knock days as “The Cashpoint”. Trade with him on the other side of the deal and you would never lose. His other moniker at the time was “Captain Chaos” which pretty much summed up not only his trading, but the rest of his lifestyle. His classic trading motto was “Back up the truck”. And it was backing up the truck on the Italy 99 issue in 1989 that effectively ended his tenure as a trader after the bond proved to be one of the biggest dogs of all time.

As was a common occurrence in those days, he shifted from trading into broking. At least he was less risky there one would have thought. It was here that I came across him as he covered me. Whenever we traded, whether it was good or bad, the transaction would always end with the words “Good brokin that, weren’t it, Dogga”.

It was a not a question. The first time I was really exposed to the full art of good broking was at a rainy day at the Lord’s Test in 1997, just before Glenn McGrath destroyed the English batting. In those days, a rain delay meant the market congregated at the Veuve Clicqout tent, with the bookies trying to outdo each other in terms of conspicuous spending. Our man emerged with two magnums, promptly pronouncing that this was “good brokin”. After a few more, the Bund trader from Swiss Bank was grappling in a puddle with his oppo from NatWest. Once again this was “good brokin”.

Then there was the Wednesday morning when this genius stuck a load of his own bids on his screen looking to generate a bit of early business. It did. He had failed to appreciate the longer settlement thanks to the weekend and the decretion effect meant that all his prices were two ticks two high. He was promptly hit in the entire screen by a German behemoth. Who got the call? You guessed it.

“Dogga. I’ve gotta a bit of a problem” was the slightly furtive cry down the line.

Having helped him out of the hook, he then managed to unwind one of the 10 positions flat, leaving me to nurse the other 9. “Good brokin, that, Dogga” followed by the strains of Old Yeller down the box, which always accompanied a perceived successful trade.

And there were many, many other events, most of which are once again not fit for civilised consumption.

What happened to this buffoon, I hear you cry? Well, almost unbelievably as of a couple of years ago he was still plying his own unique style of the art of broking when well into his 60’s. Just goes to show you.

Would this individual be able to give you a salient insight into the markets at the moment given that wealth of experience? What do you think? He couldn’t even do that when things made any sense, let alone now.

But nor can I, and I like to think I was a little more astute. So I am not even going to attempt it this week. Instead, I had a request from an esteemed reader a couple of weeks ago to look at the upcoming Gilt futures roll. So that is what you are going to get, with the Eurex rolls following next week unless something extraordinary happens in between that is worthwhile wasting space for.

To start off, the cheapest to deliver – CTD – into both the March and June contracts is the same bond, UKT4.75% Dec 2030. Using a gross basis of 0.40 into March and an actual repo rate to the end of March 0f 0.3% we get a net basis of a -0.03, which is about right.

If we plug in the same cash price on the CTD into June we get a gross basis into June of 1.585. Using the same repo rate of 0.3% we get fair value on the Gilt roll of 91. With a settlement of 97 on Friday, that means that the roll is looking a tad rich at the moment.

There are, of course, other considerations to look into when analysing the roll. Firstly, we need to look at where the open interest in the contract lies, and Gilts have dropped over 5 points since March became the front month back in December, so it is fair to say that OI could well be skewed to the short side. That means that when people start to roll, they will buy the front to be short in the back, i.e. buy the roll, which could be the reason we are trading a bit rich at the moment.

The other thing to look at is any optionality into the back month, or whether the CTD can switch. And in a parallel yield shift, the June contract would have to drop over 20 points for the CTD to shift into the UKT4.25% June 2032. So we can safely say there is very little optionality.

So what to do? Well if you fancy a punt, sell the roll to take advantage of that slight richness. If you are long gilts, roll early. If you are short, maybe hold off for a couple of weeks.

Onto this week’s recipe and it’s a nice fish dish I made for Mrs P and myself last week. Hake with clams and green sauce.

For four, take four hake fillets of about 200g each and cover liberally with salt to firm up the flesh. Leave for thirty minutes and wash thoroughly to remove the salt. Flour the fish, shaking of the excess and season with a modicum of salt and black pepper.

Heat some olive oil in a casserole dish and add 2 cloves of garlic for a minute and then set aside to cool. Once cooled crush in a mortar with a pestle and add 50g very finely chopped parsley.

Add the fish to the casserole and brown in the garlic flavoured oil. Remove from the pan and set aside. Add 2 very thinly sliced spuds and cook until browned, then add a dash of white wine. Put the fish on top of the spuds and add the parsley and garlic mixture and enough water to cover the potatoes.

Put in a dried chilli, a bayleaf and 200g of palourde clams. Cover with a lid and cook gently until the clams pop open. Should be about 7 minutes. By this time the fish should be nice and moist and the potatoes just breaking up as you lift the fish from the pan. Might need a bit of pepper, but careful on the salt as the clams will be salty.

Good brokin, that.

Have a good week.

On the Agenda:

Central Banks:

  • Tuesday: Powell semi –annual testimony before Congress committee on banking at 3pm.

  • Wednesday: Powell testimony to committee on financial services to the House of Representatives.

    • Brainard speech at Harvard.

    • Clarida speech on economic outlook and monetary policy.

  • Thursday: Quarles speech on stress tests.

ECB

  • Monday: Lagarde speech at European Semester Conference.

MPC:

  • Wednesday: TSC on Feb MPC report at 2.30pm.

Data:

US:

  • Monday: CFNAI; Dallas Fed

  • Tuesday: FHFA House Price Index; Richmond Fed.

  • Wednesday: New Home Sales.

  • Thursday: Q4 GDP; Initial Jobless Claims, Durable Goods.

  • Friday: Wholesale Inventories, Personal Income; Michigan Sentiment; PCE Deflator.

Europe:

  • Monday: German IFO.

  • Tuesday: Italian Industrial Orders; Area Wide CPI.

  • Wednesday: German Q4 GDP; French Business Confidence.

  • Thursday: German GfK Consumer Confidence; Area Wide M3; Area Wide Consumer Confidence.

  • Friday: German Import Price Index; French Inflation.

UK:

  • Wednesday: Unemployment.

 

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