Throwing out the baby with the bath water

Friday, May 21, 2010

When it's time to delever, discipline suggests cutting the losers and keeping the winners. Except it rarely works out like that - the winners bail-out the losers until the pain gets too ball-crunching and then a wholesale dump of everything in the book is inevitable. A lot of the moves yesterday, overnight and this morning are very suggestive of this capitulation point being reached as even the market's favourite whipping boy, the Euro has rallied 4% from the lows on Wednesday. There aren't any Pink Flamingos left.

Yesterday had the feel of "throwing out the baby with the bath water". A few metrics in particular seem to point to many portfolio managers and traders getting the "tap on the shoulder" from superiors telling them to cut their losses. A 20bp move in TIPS breakevens and $7 collapse in Oil are all symptoms of Inflationistas throwing in the towel and converting to the religion of European deflation. Oh dear.


Endemol must be thinking they missed out on a great reality TV show as players in the cash equity market yelled "I've got a position... get me out of here!" as basis positions were liquidated, with the Advancers/Decliners index on the NYSE (see ADLN chart below) hitting the extremes of the last 20years. A few bright sparks have also pointed out that a mere 7% of stocks are now above their 50-day moving average, a feat not equalled since March 2009.

In the more illiquid space, equity derivative desks and the funds that dabble in them are having something of a very bad week (and this time it's not Jerome Kervial's fault), with Dec 2015 Eurostoxx Variance Swaps hitting a high of 0.41. While not an expert, the idea that volatility can stay that high for 5.5yrs seems somewhat silly, given that it averaged about that for just ONE year, and only if you timed the Lehman Crisis perfectly! The Dividend future market also seems to be undergoing another wholesale haemorrhage, with Dec 2015 Eurostoxx Dividends trading South of EUR 85, around 9% lower than the Dec 2011s. Now that works out to be something like a 1.7% annualised fall in earnings per year in that period (caveat, not an expert) which, if a proxy for the change in Nominal GDP, is pricing in some sort of deflationary event.

Baby and bath water indeed...
If the German vote passes, after the weekend it's not hard to imagine players feeling somewhat "less long" of risk than they want to be, and being forced to chase things...

Posted by cpmppi at 11:13 AM  

9 comments:

Everywhere i look at pink flamingos are happening.. it's becoming really scary...
About Dividend futures it's a real collapse, i hope it's becoming nonsense here.. if you consider that spot (DEDz0) is at 110,6 now and dedz5 is at 84, according to me is pricing much more than a 1,7% annual decline!!!!! Ok for a deflationary scenario that mkt is pricing, but at least for now, 5 year yields are again positive....

it could be a cheap way to be long equities but price action is terrible...

Biofa said...
2:52 PM  

Well, cheers to Leftback and Right Field and others who called for risk off. The large portion of humble pie on my plate is bitter indeed. My one solace is that I am still up significantly since turning bullish in mid-March last year. But as you guys know, in the investment world you are only as good as your most recent performance.

Any advice for a guy who has stayed long risk here would be much appreciated.

Here's your sign to fade...

Tyler said...
2:55 PM  

Thanks for the clarification Biofa - as per the post, am afraid I am not an expert in that field, but I thought it was a stunning example.

cpmppi said...
3:10 PM  

Just a quick comment to say well done to all the guys who have blogged this site since the real Macroman departed. The quality and standard has remained incredibly high..... in both a serious, and not so serious vein. ----- Macroman may be gone, but he lives on....

Gooner70 said...
3:33 PM  

Thanks, Tyler. Of course it feels good to be correct at least one week in 26...

Although none of us cares about the Dow it seemed inevitable that Dow 10k would be defended. Feels like all risk assets are very oversold here, but then crashes occur from oversold conditions, not overbought conditions.

However, with the Euro putting in a bottom we might be done with carry unwind for a while. Obvious trades here might be:

a) short JPY against anything.
b) selling/shorting Treasuries
c) selling volatility

Having said that, LB is happy to watch the gyrations of Mr Market for the rest of the day before putting a toe in.

Leftback said...
3:33 PM  

Platinum group looking cheap here. Gold, not so much. Still think base metal complex is crap risk/reward so long as China keeps the handbrake on.

Nemo Incognito said...
3:51 PM  

Has anyone noticed the flamingo in ge, Eurodollar spreads. Is it just me or is it kind of ridiculous that dec march Eurodollar is went to 3.5 bps. Though I guess 2 year at .70 pct don't help. Major stress in here

abee crombie said...
1:16 AM  

@LB, where the heck are you these days? Everybody over at CV's and Andys Gang misses you desperately.

John said...
7:31 AM  

Thanks for continuing with the blog cpmppi. Would it be possible to post the embedded charts so that they can be clicked on an enlarged as they did in the past?

Thanks.

trader said...
2:07 PM  

Post a Comment