Isn't this starting to feel a bit like July 2009?

Thursday, July 15, 2010

Team Macro Man fully expected after a 6 day, 9% rally that equities are due a correction, yet despite the best efforts of Mayfair and Greenwich, seemed supported on dips, only managing to put in a Doji despite the FOMC mentioning the dreaded "D" word. With the Aussie pushing the highs post-China reval level, TMM has been forced to admit that actually, whilst equities & bond yields made new lows (was it really just a week ago...?), neither the metals space (especially Copper) or risky FX markets did. This is despite the fact that at least 90% of TMM's emails and IBs seem to, even now, still be resolutely bearish in their commentary, or attempting to suggest that punters are being sucked into buying at the highs. Now TMM is of the opinion that much of the past week (as mentioned in yesterday's post) has simply been position-reduction (either forced, or voluntary), but can't help be reminded of the last time markets that were fretting about a double-dip and got sucked into a bear-trap which was subsequently followed by a very aggressive multi-month rally. Team Macro Man remembers it well as they were amongst those that were the wrong way around that time...


So what was the set-up in July 2009?


  • A Head and Shoulders pattern had recently completed.

  • The S&P500 had broken below its 200day moving average.

  • Double-dip fears related to the inevitable multi-year de-leveraging of household balance sheets and scepticism about the existence of a recovery and credibility of the stress tests were widespread.

  • There was a large dichotomy between traders and analysts with respect to whether earnings and guidance would be good or not.

Sound familiar? As we now know, traders were wrong and analysts were right, with a blow-out earnings season powering equities higher with little correction, forcing players to chase. Although we have only had a handful of earnings releases, there have been some from important companies (Alcoa, Intel & Novartis) that have both beaten strongly as well as raising guidance, and this has forced many to cover their shorts. As TMM's wise friend RightField commented yesterday, before players will truly embrace such an analogue, they will need to see some of the earnings of the financials given the poor conditions in the housing market and political sensitivity with respect to the FinReg Bill (no point showing great earnings if it will spark more populism in the yet-to-be-passed Bill). But if earnings and guidance continue to print well then deflation/double-dip concerns are likely to dissipate.

Of course, TMM is not suggesting that the situation is exactly the same. ISM, for example, was rising and the inventory build was just beginning to get underway - this time, it is falling and inventories have already been built. But as at least some offset to that, equities are cheaper relative to earnings expectations now (at 13.5x current year earnings) than they were in July 2009 (16x current year earnings) and a falling ISM is not the same as a double-dips (something that is rarer than a dog that speaks Norwegian). And TMM wonders if rather than weakening, Payrolls have merely been coming into line with other measures of the labour market - the chart below shows private payrolls (orange line) vs. the GDP-weighted Employment components from the ISM and non-manufacturing ISM reports (white line). Private payrolls clearly outperformed the survey measures for a while and have now come back into line with them. And even the most entrenched bears would struggle to argue that that chart does not look like a "V" - it is just that the fall was so sharp and over a larger period of time than in prior recessions, and thus so must be the recovery.


But enough cheerleading. The above analogue is dependent upon financial earnings, so today's numbers from JPM are important in that respect, if they disappoint then TMM expect a Soothsayer turn for the worse on Monday. Indeed, TMM are sympathetic to the view that should core-CPI surprise the downside tomorrow that deflationary fears will reach a new height. As mentioned yesterday, TMM has a long-held theory about market turns around the 16th/18th July, but wonders if we might have already seen it? Isn't it starting to feel a bit like July 2009...?

Posted by cpmppi at 8:54 AM  

11 comments:

It is feels like summer 09 to me. It was GS that did it last summer with monster results.
Bespoke did a survey on Tuesday and over 60% said the downwards correction was not over. Meredith Whitney is very bearish for the 2nd half 2010 predicting a 100% chance of a housing double dip.

Something to amuse you TMM -
Smackdown at the SNB

Nic said...
1:24 PM  

The big difference between last July and now, at least here in the U.S., is that the stimulus spending was still on a fairly steep upward slope, the inventory cycle was just beginning the catch-up phase and homebuilding had apparently bottomed a month or two previous.

This time, stimulus is on a slow decline, the inventory cycle is over and homebuilding is falling again.

Bob_in_MA said...
1:36 PM  

What I find most interesting about this environment is the EUR/USD trading like a free lunch rallying on "risk on" AND rallying on bad news from the US. Now, what was it someone said about free lunches ... also the USD/JPY is at amazing levels; Japan is cooked here!

Now, this is THE principal problem of the global imbalance issue since if the only valve through which dollar weakness can materialize is through the EUR/USD and the USD/JPY it will all end in tears (i.e. this is NOT possible and it almost hurts if we are going to have this rebalancing discussion again with the Euro taking over). Let me repeat myself (well perhaps not here, but then elsewhere); rebalancing will NOT occur along the US - EUR, JPY axis. God, I thought that we have been over this already :) ... but apparently not.

Basically, it is all fine that the USD falls but not against the Euro and the JPY since this will only push the crisis from one perch to the other after which of course the USD will rally once again on massive Euro and JPY weakness. And round and round we go ...

So, I can see that everyone is tired of the USD story and wants to give it a flog but buying the JPY and EURO will send Japan and the Eurozone straight to hell.

Claus

CV said...
4:07 PM  

What I found most interesting about this environment is the EUR/USD trading like a free lunch rallying on "risk on" AND rallying on bad news from the US. Now, what was it someone said about free lunches ... also the USD/JPY is at amazing levels; Japan is cooked here!

Now, this is THE principal problem of the global imbalance issue since if the only valve through which dollar weakness can materialize is through the EUR/USD and the USD/JPY it will all end in tears (i.e. this is NOT possible and it almost hurts if we are going to have this rebalancing discussion again with the Euro taking over). Let me repeat myself (well perhaps not here, but then elsewhere); rebalancing will NOT occur along the US - EUR, JPY axis. God, I thought that we have been over this already :) ... but apparently not.

Basically, it is all fine that the USD falls but not against the Euro and the JPY since this will only push the crisis from one perch to the other after which of course the USD will rally once again on massive Euro and JPY weakness. And round and round we go ...

So, I can see that everyone is tired of the USD story and wants to give it a flog but buying the JPY and EURO will send Japan and the Eurozone straight to hell.

Claus

CV said...
4:07 PM  

US economic indicators are sending a message that the well is running dry. Until the politicians deem it appropriate to turn on the liquidity faucet once again, housing, banks and retail are going to be facing stiff headwinds and unseen hazards.

Like driving into the teeth of a 40 mph gale at #17 at St. Andrews - you might make par, but you'd probably be happy with bogey. If you end up in the Road Hole bunker, you might be down there for a while. That's the outlook for long-only equity funds in 2H '10.

Leftback said...
4:18 PM  

Starting to feel like summer '09 to me too....
Few people in the financial press / broker world seem to be mentioning out that while the US data is weaker than expected, it is still pointing to a reasonably robust recovery. With US data surprises hitting rock bottom levels is the only way up?

MKGI said...
5:25 PM  

I can see some short-term bounces this summer, but as it drags on, it will become more and more obvious that the housing market is at a standstill once again, and that there is no endogenous generator of growth in the US.

Leftback said...
5:31 PM  

LB - it is tough to argue against your point on weak growth. but is that necessary for a meaningful rally in risk assets. What about interest rates being low for an extended, extended period?

The comments here are tempering my optimism...any other bears out there aside from Bob & LB? Sounds like it's time for another poll.

MKGI - Surprises have certainly backed off, but i'm not sure about 'rock bottom.' Have a look at CESIUSD Index.

Tyler said...
10:17 PM  

TMM,

Analogue is the KEY word ,
here is part of my analysis in

1 March 2010,

SPY between Mar 99 to start of
2000 , a failed - head- shoulders pattern , that aggressively broke up, then
after some months backing and filling , the rest is history,
the start of the Bear Market started .

Defintely at the time there
was economic similarities
as we have now, now note,
2009 1 May to 15 July failed H/S...<<<<<<<<<<<<<<<<<<<<<<

While I was preparing myself for a sharp drop another H-S was appearearing, again, that would've made it two,luckily it did'nt evenuate, sucked in more weak longs in readiness for a correction.



Now I'm a betting man,love it,but there is no way in the world I'm betting this is going up to the old highs,least not to there is more QE.

FX said...
12:40 AM  

Tyler - I'll give you that, perhaps you'll allow me a little artistic licence on "rock bottom"? However, the US data surprises are at the 24th percentile (based on the series running back to 2003). Now, from what I've been told about performance, being down there is not a good place to be!

MKGI said...
8:43 AM  

It seems to me that the bull case is that the fall in ISM is not something to worry about, even if it falls to 50-52 or so this means nice slow growth.

But where is the upside here? Yeah P/E says the market is cheapish with modest growth but the explosive phase is over.

Balance that against pretty steep risk if the developed economies bungle the emerging deflation. The EU has deep divisions, the US is headed to a split Legislature vs Presidency, and Japan is tapped out with no imagination.

So, I don't see the risk/reward here.

highlowbrow said...
10:24 PM  

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