Brown Dwarf or Euro Supernova

Wednesday, September 29, 2010

With the USD as the bookie's second favourite, behind Zimbabwe, in the Great Currency Devaluation Race and the Euro as the 1000/1 three-legged outsider, the world has gone into pre-QE DGDF overdrive. But the dirty tricks games of double bluff are alive and well.

China have just thrown in one of their "CHINA C.BANK SAYS WILL INCREASE YUAN'S FLEXIBILITY" headlines which, to be honest, are as worthless as "the cheque's in the post " statements. But it's pretty symptomatic of the phoney war we are seeing appear all over the place, where stated policy is so obviously at odds with self-interest. In Europe, austerity packages are launched and lorded for the benefit of the shareholders, the creditors, bond holders and the ratings agencies with the country involved never really wanting to enforce them. The UK is the same with cuts of 25% in public spending stated which, if ever delivered in one hit, would kill growth if there is no growth elsewhere to compensate. It’s a matter of hoping the cavalry arrive before implementation has to occur. Zapatero has even gone to the extreme of shouting at the enemy that the cavalry HAS arrived (funding crisis is over) in a hope to scare them off and he seriously jumped the gun in August suggesting reinstating infrastructure spends.

Today sees Spain's general strike kick off and we have had the normal stream of negative Irish newsflow with Anglo Irish, but the market is still in denial of anything EUR/USD negative, with that US QE argument driving everything. US print money, USD goes down (EUR/USD up), the rest of the world buy USD vs their own currencies and then rebalance those USDs into Euros and so there is more EUR/USD up. And of course Gold. We all know that’s been the mechanism for China, but with so many others now joining the fray it's making us reconsider our "Euro woes means Euro blows" policy and PERHAPS we could see the first example of a currency ending in a supernova.

Normally when somewhere starts to die its value gets sold off and it dies in a whimper, the brown dwarf outcome. But the Supernova outcome would involve this process of the Euro being the final resting place for everyone else's QE going critical, which leads to Europe blowing apart through an explosion of currency STRENGTH despite some blindingly obvious internal problems. Ireland, for example, currently have the double whammy of seeing their cost of borrowing soar AND their currency soar. If the Euro really takes off, instead of the argument being over how long Germany will tolerate the Periphery being part of the same group, you would see the Periphery clamouring to get out of their own accord. "You want to leave? Well, if you insist..."

But elsewhere there is a spark of good news re a unified Europe - Germany's involvement in the First World War officially ends this Sunday.

One last comment. Could someone please inform the BBC that the recent Labour Party leadership contest does NOT warrant Royal Wedding style coverage and that whatever Red Ed decides on spending cut policy is really rather immaterial AS THEY ARE IN OPPOSITION NOT GOVERNMENT!

Posted by Polemic at 2:10 PM 5 comments Links to this post  

Parity Army

Tuesday, September 28, 2010

Everyone we speak to seems to be singing the same tune, which is slightly worrying. And it goes something like this...



Don't start me talking
'Cos I will rant all night
My mind's extrapolating
While I talk the Aus up, right

See mining information
Have you got yourself an Aus call option?

Parity army is here to stay
Parity army, we're on the way
And I would rather be anywhere else
But short Aus today

There was a China Charlie
He didn't crack a smile
Looked at our mineral wealth
Just stepped in and bought the pile.
Only takes one itchy trigger
Hit the barrier and we're at the figure

Parity army is here to stay
Parity army, we're on the way
And I would rather be anywhere else
But short Aus today

Hong Kong specs buy it
London's hedge funds will buy it
We could be a CTA
Run a model like the RBA
With the boys from the Darwin and the Swan and Murray
But there's no danger
It's a professional career
Though it could be arranged
With just a word in Mr. McCrann's ear.
If you're out of work or out of luck
We really couldn't give a f*ck

Parity army is here to stay
Parity army, we're on the way
And I would rather be anywhere else
But short Aus today
And I would rather be anywhere else
But short Aus today
And I would rather be anywhere else
But short Aus todaaaaaayyyyyy

Posted by Polemic at 11:04 AM 8 comments Links to this post  

What's that, Lassie?

Monday, September 27, 2010

The price action in equities and US$ on Friday together with the following Asian session would make one think that it's all go for piling on the risk. But we can't help but notice this female rough collie tugging at our ankles and barking something? Sorry, we cant quite make that out? Did you say that the runaway train is heading towards the broken bridge? No?

Here is the conversation that then followed between us and the dog.

"The runaway train is heading towards the broken bridge" - No really? Well, it is nearly the last quarter and folks are desperate to get the last train home, so no wonder it's full throttle. Shame about the bridge though, but it will cost about a trillion more dollars to repair it, so don’t look at us.

"There are strangers logging in the next valley?" - But there are 1.5 billion of 'em, what do you expect us to do?

"You've found a hoard of hidden Gold just as the family becomes destitute?" - Yeah yeah, well even Grandpa thinks it's going to 1500, so having a dog long too isn't a surprise.

"Grandpa is stuck down the mine"? - Of course he is (see above).

"There are strangers with funny accents plotting in the woods"? - That was last June, but we wouldn't be surprised if they are back.

"Little Timmy has broken his leg in the forest?" - The Geithner kid? Yes, we know. We did warn him. He'll be OK if the bears don’t find him.

"There's a bear coming"? - Oh dear, how sad, never mind... (Smirk)

Now piss off, Lassie...

We don’t know if you have had any recent chats with anthropomorphic dogs but if you have we would love to hear them in the comments column.

Have fun.
TMM

Posted by Polemic at 11:22 AM 3 comments Links to this post  

Scratching a clearer head

Friday, September 24, 2010

Our company "TMM snake-oil products" has a new product for sale. It's called "Homeopathic Hangover-No-More" and is absolutely great stuff. It may appear to just be water but, when combined with 10 hours of good sleep, it's awesome. Only $9.99. Of course we will also be selling a version in a plain white box with "Made in California" on it together with an emblem of a fruit for $499.99. Having just overtaken Blockbuster yesterday, we're now looking to be bigger than Petrochina. But we digress, so on to other matters...

If you have a beard and Central banking is your business, you need to know when to take the punchbowl away from the party. To extend the same analogy, if you are in the speculating business it is very important to know when the block party is about to be shut down by the cops or your local knife-wielding teenage thugs. TMM is of the view that, with respect to some very heavily owned trades that have been winners this year, that time is now. The trades in question range from the fairly obscure, Philippine equities below:

To Chinese companies that are utterly dependent upon being able to export to the US for their income (Li and Fung):

And the eerie silence from a number of Southeast Asian and Latin American countries that are sick of taking the FX strain of China’s recalcitrance on FX is not hard to see – Brazil, Thailand and Indo all appear to be drawing a line in the sand.

Add to that China’s move to take India’s water, re-trade an oil and gas agreement with Japan, and its stated intention to continue f*cking around in FX markets and it all looks like a setup for risk to come back.

The cracks in the walls are not hard to see at this point, Euro periphery spreads are making new highs (see below for 10y Ireland-Germany yield spread) and are not under control at all (paging Mssrs Trichet, Weber, et al). Yet an only OK’ish IFO has triggered a Eurofest that would normally imply that they have struck iron ore, gold and uranium in the PIISers . We find it hard to get excited about good German news being good European news. The greater the divergence of economic performance between core Europe and the Periphery, the worse the internal stresses become. So either everyone has decided that the current Euro = the NeuMark and has no PIIS component, which we think is a mad view, or else it's another sign of the “follow your leader, don’t miss the train" theme. Either way, European equities certainly don't seem to be taking the same view as the currency and our mibometer has been diverging for some time.

The VIX has been ticking up lately, as has the CVIX, so all signs point to a number of very big-picture powder kegs with fuses ready to be lit. With all that in mind TMM is of the view that we now have the setup for a finale to the year that is more Tarantino than anything else:

Posted by Polemic at 12:02 PM 5 comments Links to this post  

Red red wine -- Uurgh

Thursday, September 23, 2010



Team Macro Man had too much red wine last night. So though there is plenty to pass comment on, we currently have the attention span of a Goldfish and similarly just find ourselves remarking "Nice Castle" to each other every 15 seconds...

So, some hazy thoughts.

Is DGDF really back?

Eurowoes wont go away no matter how hard the PR machine tries to bury them.
Slovaks showing Euro unity in NOT backing the EFSF.
Irish eyes are shining? Shiners, more like.

Best piece on Europe we have seen for ages is HERE. But we would like him to sell merchandise other than just mouse mats. How about in national flag size?

NZ GDP - How the hell can you miss a GDP forecast by so much? That’s meant to be the easy one to predict. But with a population of only 4 million we guess you only need a couple of people to have a lie-in one morning and you can really skew the figures. Oh look, the Irish GDP figs have just suffered the same fate.

So to all those GDP modelers out there we'd just like to say: 1001010101010101111100010010101010100101010101001010100000101011110
100100111100101010100001010100000FEQUE.
Because you are all a bunch of quants.

May not hurry those DVDs back tonight. Blockbuster has gone bust. Again. This company feels like it died years ago but has been hidden in the attic like a 111 yr old Japanese grandpa. If you read that story, old we know, you have to sympathise with the grandkids:
"when family members tried to check on his room on March 25, they saw a skull. 'Grandpa was a very scary man. So, we couldn’t open the door,’ the grandchild was quoted as telling the police. ‘He shut himself up in the room without food or water.'" Scary indeed.

Vince Cable walked straight into that one, as the conservatives said "Of course you can say what you like in your speech, Vince " .. and mumbled quietly to themselves "because then the world will work out for themselves what a complete clueless nutter you are",

Actually thats enough... Head hurts...

Posted by Polemic at 12:18 PM 3 comments Links to this post  

The Drugs Don't Work

Wednesday, September 22, 2010

TMM had The Verve on in the background at home last night as they waited for the Fed decision and though their minds were distracted they were sure they heard the following...

All this talk of buying bonds
Is breaking the printing press
Like The Beard at the Fed, hoping for growth
This time I'm comin' down

And I hope you're thinking of Gold
As you take your money shot
Now Q E don't work
It just makes things worse
But I know I'll see some growth again

Now Q E don't work
It just makes things worse
But I know I'll see some growth again

But I know I'm on a losing streak

'Cause I stopped out of my stocks
And if you want some growth, then just cut our tax
And we'll buy stocks and homes again

Now Q E don't workIt just makes things worse
But I know I'll see some growth again

'Cause Benny, ooh, if Geithner cuts, I'm buying too
Just like you said, you buy those bonds, I'm buying Gold

All this talk of slowing growth
It's getting me all beared up
Like the Fed in a box, praying for growth
They've got no bullets left

Now Q E don't work
It just makes things worse
But I know I'll see some growth again

'Cause Benny, ooh, if Geithner cuts, I'm buying too
Just like you said, you buy those bonds, I'm buying Gold

But if you buy those bonds, just let me know
And I'll buy Gold 'till you stop again

Now Q E don't workIt just makes things worse
But I know I'll see some growth again

Yeah, I know I'll see some growth again
Yeah, I know I'll see some growth again
Yeah, I know I'll see some growth again
Yeah, I know I'll see some growth again

Gold's never going down, It's never going down
no more, no more, no more, no more, no more
Gold's never going down, It's never going down
No more, no more, no more, no more, no more

(Repeat and Fade Out)

Posted by cpmppi at 8:16 AM 4 comments Links to this post  

Fed Day

Tuesday, September 21, 2010

Today is turning out to be a biggie in the rates space. We have kicked off with the European auctions and the results of of the Spanish & Greek Bills followed by the Irish results were as good as the ECB could hope for. Max Clifford is earning his bucks, but we were half wondering if Voldemort was about to jump out in a Leprechaun suit shouting "surplies"!!!

Once again, Fed Day is here and TMM are amazed not just at how quickly it seems to have come around, but also just how much market expectations have changed since then - remember, it wasn't clear cut that they would reinvest their coupon proceeds, and this time around there is a reasonably large (though not necessarily "overly-large") chance of the full-blown QE2 sailing down the Potomac. Since that meeting, the data has largely stabilised, Spooz are a good deal higher and Treasuries trade like folks are a bit longer than they probably would like to be. By contrast, the USD feels pretty offered (helped by Voldemort) and Gold has made new highs and looks somewhat overvalued relative to the rates space. Perhaps for good reason - TMM cannot conceive the Beard suddenly announcing: "I've been having a long think about things, especially after my holiday in Chiang Mai hanging out with Marc Faber, expanding my consciousness and think this QE thing should give way to a hard currency policy". As far as Gold goes, TMM hold a lot of stock in the view that Gold is a Sovereign CDS view: when you can trust policymakers to run a bona fide inflation-targeting policy, it's a giant "yours", and this is why we have so much affection for our real rate chart (see below).

But in terms of expectations, TMM can't help thinking that the market has got itself into a similar position to last meeting, when hopes of a reflationary policy response were delivered, but an overnight reversal led many to throw the toys out of the pram and go on holiday (including most of the Team, itself!). The option markets seem to be expecting fireworks: 1-day Forward Option Agreements on the 10yr Note are pricing in a 14.5bp move, which would make today the biggest "event" day since 2008. In terms of Treasuries at least, that means QEII, an event where the 10yr yield falls say 25bps. TMM believe that an "as expected", largely neutral statement and a slightly more dovish statement would produce +/-5bp moves respectively, while something more hawkish (e.g. - no real change in the outlook language) would probably result in a +10bp move. Just looking at the events which would cause yields to fall (i.e. the circumstances under which the market expectation is for a -14.5bp move), we can come up with an estimate (usual caveats apply) for the market-based probability of QE: -14.5bps = -25*p[QEII]-5*p[dovish] = 25*p[QEII]-5*(1-P[QEII]), which throws out something like a 1 in 3 chance. The FX options market is also pricing in significant event risk, with Overnight EUR/USD Vol north of 21 (see second chart below), a level not seen since the May/June EMU crisis. Given that there doesn't appear to be an urgent need, at least from a data & financial conditions standpoint, for such a "shock and awe" measure, TMM is sceptical that the market is going to "enjoy" tonight, and for that reason will watch from the sidelines...

In another area, TMM's old favourite AUD/NZD looks to be at interesting levels. While the relentless positive chat from the central bank of "God's Country" has been driving Aussie rate expectations, and the drift down in the VIX have led quite a bit of support to the cross, macro players often forget that it is also a function of the Copper/Milk ratio. And with soft commodities looking like they're going to roof it, TMM reckons playing for a re-linking to this ratio might be worth a punt (see chart below, White - AUD/NZD, Orange - VIX, Green - Copper/Milk ratio, Pink - AU/NZ 2yr Rate Spread). There are also a veritable cauldron of soothsayer signals in AUS in general to suggest a turn, the strongest being in AUD/NZD.

All in all, it's going to be an interesting evening given that equities are eager to justify the technical breaks of yesterday. Whatever they do, they would be pretty damn dumb to do something to derail the optimism train just as it's looking like pulling out of the station. A demain...

Posted by cpmppi at 11:30 AM 4 comments Links to this post  

A Sunny Place for Shady People

Monday, September 20, 2010

This was how Somerset Maugham described Monte Carlo in the 1920s and following on from our conference notes from Asia, we thought it worth a post on one member of TMM's trip to the Principality last week, for if it’s September it must be Monaco - well, it is if you are in reinsurance. We aren't, but it is nice to be invited!

Every year the hard working denizens of Lime Street, London and their lucky compatriots from "'hardly any tax, old boy' Bermuda”, plus poor souls from other far less prepossessing places (Columbus Ohio, anyone?) swoop on Monaco in an orgy of pointlessness. The Annual Reinsurance “Rendez-Vous” attracts many hundreds of movers and shakers. Well, maybe 10 or so really big-swinging dicks, and about 2000 hangers on, schmoozers and bag carriers – plus an endless parade of “independent consultants” - i.e. those who have lost their jobs in the real firms.

Why are they there? No one seems to have the slightest idea, other than it’s all about“relationship management”. But hey, it’s all on expenses! And what expenses. It’s all a dizzying round of dull champagne receptions where rotund insurance types discuss run offs and capacity whilst ogling the occasional Brazilian “secretary”, who always seems to be on the arm of some mystery underwriting guy. Apparently he’s very important but nobody quite knows who he is.

So what can we report on from this Mount Olympus of financial summits? Errr... Well, it would seem that if there is one industry that is looking to profit from the BP disaster its the the insurance mob who have suddenly been handed a new event risk to strap all sorts of new fangled insurance derivatives around. We know that the probability of a rare event reoccurring is always over estimated immediately after its occurrence, so you can sympathise with their sales logic. But should we be worried over the parallels between the blow up in the banking derivatives that caused the financial crisis and the current desperate scramble for "innovation" in insurance products? In Markets, "innovative" normally means a novel way of strapping the basics together in order to hide greater costs and spreads to the client. When we hear that the French insurer Scor announced at this year's event that it plans to offer insurance on yaks in Mongolia, we wonder if this is some form of Insurance sub-prime indicator.

And Monaco itself? Well, in a delicious juxtaposition, Barclay's continue to occupy the top end of Casino Square looking right down on the “venerable” institution itself (Vince Cable would be left confused as to which way to turn). Last year they were still Barclays Bank, but now the sign proclaims Barclays Wealth, so that’s reassuring. Of course Monaco has nothing to do with wealth. A rather brutal critic once pointedly observed that Stephen Fry is a stupid person’s idea of a genius – so it is, with Monaco and money. Only a financial dullard would believe that the Monaco Bling, Bentleys & Birds formula equates to real money. In truth the place is a sort of Eastbourne with sunshine. Ancient types drive fast cars in first gear, sometimes for up to two miles, before retreating to hugely expensive rabbit hutches of one bedroom and half a bathroom, whatever that is.

So there is money there then? Well only if you believe that owning a Bentley made by the same firm that knock out Skodas is a sign of wealth (a cursory glance of motor trade periodicals in the UK will show £40k secondhand Bentleys littering the forecourts of such outrĂ© places as Maidenhead and Stoke Poges). So who are these elderly drivers? Mainly the lucky small winners in life – those who sold the pasta factory in Milan for EUR 10million and, having fled the dreadful wife, are brushing up on interviewing Brazilian secretaries... Oh and of course the crooks. But no need to mention them much – they’re just so unimportant.

So Monaco drifts along believing in its own importance and shallow hype about it’s “mega wealth”. In truth, the wealth there is a fraction of the investment banks' bonus pools, and anyone who understands finance knows it and so is not remotely interested in the Grimaldi’s little seaside town. But what about the high rollers? Well, your correspondent visited the Casino (no, not Barclay's Wealth) and found the 5 Euro roulette table crowded with just four players and no other tables open at midnight... Hmm... One wonders if Eastbourne might not be the better bet for the Rendez-Vous boys next year? Does Sussex have any Brazilian secretarial services?

Posted by Polemic at 11:25 AM 5 comments Links to this post  

Meanwhile in Asia

Friday, September 17, 2010

One big industry event that has been on recently is the CLSA Conference which some of TMM have had the chance to attend. The sheer number of meetings and events is somewhat mind-boggling, so we are going to have to stick to the highlights at this point in time:

  • Simon Schama gave a pretty compelling speech on the political risks to the global economy now. As some of the more ursine variety have noted, Act 1 of recovery: stimulus, capital injections to banks etc has been pretty successful. Its Act 2: don’t get hung drawn and quartered by the masses or have them take out their fury on others that is tricky.
  • Everyone seems incredibly bulled up about anything that isn’t China, India, Australia (i.e. - the obvious carry and commodities stuff). Mongolia is about to start producing insane amounts of copper and coal and in the event it taps the market for sovereign debt looks like pretty compelling yield pickup. The Central Asian Sovereign market has previously had some horror stories (Kazakhstan) but TMM is of the view that a bird in the hand is worth two in the bush and Mongolia seems to be executing on its mining projects than Kazakhstan is at getting all that oil out of the Caspian. But TMM is sure that, eventually, those EM punters falling over themselves to buy those bonds will get Genghis Khan-ed (sorry, we couldn't resist). Robert “Toxic Bob” Friedland of Ivanhoe Mines gave a typically colorful presentation and is of the opinion that “it’s a good time to buy a house – if you build it out of copper bricks”. What does he mine again? Ah yes, copper. Nonetheless, his description if Chiquicamata and other mature Chilean mines as “a little old lady in bed, waiting to die” is geologically pretty accurate if in his characteristic bad taste.
  • Dragon Capital’s Dominic Scriven gave a good talk on all things Vietnam, though why one should invest with them is less clear. After explaining how half the banking sector was being forced to consolidate and raise capital and faced more equity dilution one member of the audience asked why their holdings of banks was so high. Indeed, why?
  • One standout presentation was from the head of the Central Bank of Sri Lanka, Ajith Nivard Cabraal. With a civil war behind them and a fairly credible inflation-targeting regime in place as well as sensible infrastructure spending Sri Lanka might not be a bad place to invest – had everyone else not found it already. The performance of the Colombo index screams one thing: early EM market with great fundamentals but way too much in the way of portfolio flows and not enough FDI. Beware the lessons of Vietnam and others: get some more private companies to be publicly listed or start thinking capital controls and real FDI incentives. Nonetheless, one country to watch.
  • Michael Komesaroff of Urandaline Investment expounded on many of his favorite topics (Western China infrastructure spend – buy copper! Buy metallurgical coal!), but one thing that did catch TMM’s ear was his description of zinc and lead as “both dogs of a metal”. Coming from a natural commodities bull that is worth pondering. Some of TMM have been doing some work on Lead and the picture isn’t great – as soon as your average Chinese punter moves from lead acid batteries for his e-bike to lithium it's absolutely game over. The key hurdle here is that despite higher upfront costs lead acid is worse at a 10% IRR. If lithium drops 50% over the next 5 years as Gerbrand Ceder at MIT said in his presentation, that number moves to 30% odd. At that level TMM would happily leave the speculating business and move into making small auto loans.
  • Marc Faber – the one and only – well, not much has changed here. Buy EM, buy gold, forget Japan and the US. Marc figures there is war on the horizon though between the US and China at some point and with the noise coming from the political peanut gallery that is US Congress it isn’t hard to imagine.
Meanwhile, judging by the recent price action in the USD & Equities, punters are desperately trying to identify "the trend" for Q4 that will rescue their years. TMM is interested to hear what their readers think "the trend" will be...

Posted by cpmppi at 10:12 AM 8 comments Links to this post  

Kamikaze Kan

Thursday, September 16, 2010

Let’s get the obvious out of the way and point out the fact that after 3 committee hearings, a parliamentary no confidence motion and every exporter having threatened to walk out of Japan it has finally happened: Nato “Yen We” Kan has decided to run USD/JPY up in a good number of people’s faces – thankfully none of them members of TMM. The intraday moves below in USD/JPY have been remarkable for those who stayed the course:

As for TMM, we’ve been hiding out in crosses that are lighter on crucifixion like SGDJPY and have had a reasonable time of it.

However, it does look as though we are heading towards our previously expressed concerns of a new arms race in the war of competitive devaluations we posted in “Extreme sport fx-devaluations” . This is not the only thing worth noting in FX though – USD/CNY has been moving again and at a steady clip over the last few days, coincidentally as the IMF and everyone else with a few brain cells to rub together notes the strong undercurrent of protectionist sentiment contra China.

How long this lasts is anyone’s guess – TMM has tried to use many models to evaluate CNY movements but none is quite so effective as how punchy the Commerce Department is getting on steel tube and the like and when Chuck Schumer is next to open his mouth in a public forum. If China flakes out on this deal as it did 3-4 months ago the world is not going to be any more patient as to China’s willingness to play its part in global rebalancing.

But back to generalities. It’s a right old mess out there at the moment. There are so many broad macro themes all colliding at the moment it looks like a slow motion replay of a motorway pile up. Deflation meets printing presses, meets commodities, meets politics, meets intervention, meets civil unrest, meets desperation, meets Voldemort. Picking the bones for direction with that lot all going on is becoming tough to say the least. Unless you are a gold-bug of course, in which case your only concern must be if EVERYONE knows it’s going to 1500 then 3000, then why the hell hasn’t it?

We were far too early in thinking about selling Euros as the mad dash correction back from uber-pessimism seems to have picked up a pace. Chinese interest in the well received Spanish Auctions today, the Greek snake oil roadshow, IMF report on Greece (how the hell can you believe any figures coming out of Greece?), perceived printing presses in the US, the belief Europe would be the last willing player to print or intervene, CHF/periphery Europe unwinding and suddenly you see EUR taking the place of the BoJ controlled JPY or the CHF as a default buy/unwind.

But whilst the Eurocrats appear to have hired Max Clifford to do their PR, we still know that the Euro bull story ultimately belongs in the pages of tabloids and it will all end in Eurotears.

Posted by Polemic at 12:01 PM 2 comments Links to this post  

Open Fire

Tuesday, September 14, 2010

Today is one of those days when you really don’t know what to do, but you have a twitchy trigger finger and things are getting nervous. So far the run up in equities has occurred nicely, we have had a turn in USTs and the Euro has indeed been a false start sell off, correcting back up leaving us room to reconsider the opportunity to sell it. But today just feels a bit more "iffy". Whether that is biased by sitting in London, listening to the radio and wondering if you are back in the 1970's with the TUC threatening coordinated protests and action against the cuts. Or if it’s the Telegraph article about the doom coming, we don’t know, but the press is sounding more like the Kaiser Chiefs everyday.

Or if it's hearing about the ongoing grief in Greece that the world apppears to have forgotten. Our interest in Greece has of course been provoked having witnessed first hand the extraordinary pricing of nearly everything out there this summer. October's Vanity Fair is carrying a great article on how the crisis evolved and the mind set that prevails and is well worth a read. Some of the figures quoted are staggering. The BBC also ran a piece last night on how the populace is trying to fight back. The most facinating way of protesting they have developed is militant shopping. You go as a crowd into a supermarket, fill your baskets, all arrive at the check out and then all demand a discount causing chaos. TMM so wants to try that in some UK establishments, but unfortunately most of the complete rip offs are occuring in the monopolistic service industries you can't avoid and they know it. UK RPI printing today at 4.7%? PLEASE show us the deflation this summer's markets were so discounting...

It may just be a sanguine post holiday gloom. But whatever is affecting TMM's pschye is making them wonder if its time to open fire on the bulls. But it’s not clear. Ideally we would see a break of the recent SPX highs in the 1130 region to see a renewed wave of buying come in for one last hurrah, as it still generally feels that there aren't many people on board this equity run and denial is rife. But there are some technicals mounting that need to be overcome. There are a raft of soothsayer indicators suggesting turns in FTSE, HSI, DAX and Copper and there is one coming up in SPX tomorrow. Add to that a mood shift following a good rally, the onward approach of our end of Sep "it all falls over again" date, the softness in Germany's data and, despite the ideal of seeing one more big up-splurge, we are going to make a call that those are definitely white socks and let loose the first volley into the oncoming equity bulls and also restart the euro selling.

"Let em have it lads... Sell!"

Posted by Polemic at 11:36 AM 6 comments Links to this post  

Can't Pick Out The Tune From the Noise

Friday, September 10, 2010

We would like to think that the tune is


But trying to pick it out with so many instruments all playing out of tune is getting tough. In today's orchestra we have :-

Slightly better US figs - causing a squeeze on bond bubbles and associated rates trades -

Banks reserve requirements and the DB issue ( Postbank just an excuse? ) - rolls onto good bank vs bad bank spreads opening and may be a catalyst for Euro woes but not yet.

Chase the trend - cash coming into the system and going to equities to start but how much "follow the leader" to come. Bond-> equity switches being now cited.

Commodities - appear bullet proof BUT? Interesting soothsayer turns signals in Gold and an Ags ETF we follow. Gold is having its UST support rug pulled from underneath it .. Watch out belooooowwww....!!

Silver - "Silver foil" beanies are recommended for some of the stories circulating in this market. The media, having got bored of telling everyone Gold is going to 1500, has decided to ramp this instead. Apparently its going to moon. Hohum

Japan - becoming an issue of its own without the usual jpy strength worries. There is a Europe link via a load of shiiite in yen structures owned by Euro peripheral CBs, which though THEY don’t mark to market, the counterparties that sold it to them have to hedge increasing counterpart credit risk against them as they go further underwater.

Political -- US mid terms, US losing control of the world and their own odd pastor (If they can tell Europe to STFU how hard is it to "persuade" one of their own to do the same). Australian ones a mess but no one cares. UK eyes on coalition rifts (As they did so well during the summer recess we suggest extending it to 360 days a year). The China-US trade politic is the Mammoth in the closet.

China - China: Steel mills and aluminium rationalizing at a steady clip thanks to hopeless overcapacity and generally hopelessness of state capitalism. But don't worry folks, it looks like Huiyuan juice is having the rug pulled out from under it by creditors (state owned banks) so it can be bailed out / acquired by a state owned fund (whisper is CICC). Let this be a lesson folks: if China can't create national champions it will nationalize them. NB: if this happens short Coca-Cola. Every industry globally that has gone up against its Chinese credit subsidized counterpart has got flattened or at least taken a few hits. Just ask Alcoa, US Steel, Q-Cells in Germany etc If history is any guide we can expect the cost of OJ to collapse


Gods Country - Ain't Australia great !!!! Yeah yeah shut up….. Or buy us a beer.

Canada - Quietly smug.

Greece - Budget deficit officially shrinks but comments by Papaconskrauts'n'eu re Greek bonds being "a great investment opportunity" = "great runner, one careful lady owner".


CHF - Doing a Mr Creosote at last… A HF may have taken the initial blame for lift off but bond moves once again the real cause.
(Chart Eur/chf USTs)

EM Asia - still overloaded and due its own Mr Creosote.


Our mood -

Grumpy undertones with a light motif overplayed in the cadences. We are still sitting here happily watching the uplift in mood, squeeze recent trends and start to suck more folks in. But still sitting ready to short once everyone has jumped or forced back in. The real test will be the last week of September but beginning of October when it can all go horribly wrong again.

But waiting for something to happen these past few days is a bit like staying home and waiting for the satellite repair man. Or more accurately - like tantric sex.

You stay in all day and nobody comes ..

Posted by Nemo Incognito at 12:59 PM 4 comments Links to this post  

Was that really the starting gun?

Wednesday, September 08, 2010

Nothing that has come out over the last couple of days on Europe is exactly new; it has been festering all summer. However, the speed and ferocity of the renewed EUR splurge, without a really good catalyst has caught us by surprise. The WSJ article, as mentioned yesterday, is irrelevant, but the market has been fiercely rummaging through their June notes to recycle the obvious.

In Euros' defence the Eurocrats have wheeled out the Clown-in-Chief at the ECB - “ECB's Quaden sees no double dip in Europe". Sounds great but this is from the guy that didn’t even see the SINGLE dip coming.

Just after Northern Rock collapsed and in the midst of the unfolding blow up in the Credit markets, he said "The latest news from Europe is not bad. 2006 was an excellent year and prospects for this year and next year remain positive" (full speech here). To be followed in Oct 2007 with “As regards the short – and medium - term outlook, I would make a distinction between the main scenario, which is the most likely outcome, and the risk assessment. The most likely scenario remains favourable with growth still close to our potential but it is now surrounded by much more uncertainty than usual. And that applies to other regions of the world.”

'Nuff said.

But the worrying thing is that Mangler has spoken. And we know the correlation between Mangler speak and Euro fortunes and they are not positive. The market has grabbed hold of this story "Germany won't back Euro rescue fund for ever: Merkel" and is using it as new ammo. "Forever" of course is a very long time, but in the short run Germany doesn't really have much choice unless they want to speed up the introduction of the NeuMark. But the main concern TMM has is that she has broken ranks from the STFU policy and spoken out.

So where does this leave us? It still all seems too fast and too soon for Euro collapse Part Deux, and the 40 point round trip in German 10yr yields over the past week perhaps indicates that the market isn’t quite sure of itself either. And though we are fully onside with the macro concerns re Europe we feel the timing is wrong. As for Switzerland, unless they manage to rent more space to park all the money flowing their way, they are in danger of doing a Mr Creosote. "One more wafer thiiiin swieees franc, sir"?



Was that really the starting gun to the race we have been in training for all summer? We are hoping we haven't been left behind and it's a false start, the runners having to return for a restart in a couple of weeks' time.

Posted by Polemic at 1:45 PM 2 comments Links to this post  

Was that a flash of White sock?

Tuesday, September 07, 2010

Having ranted on all summer about how we were expecting the STFU and sticking plaster PR policy in Europe to start to unravel in September, it is no surprise to see Europe come screamingly back into focus. But the catalyst being the WSJ article quoting the bleedin' obvious re the bank stress tests that we all knew when they were first announced, is just laughable. The story in itself is not enough news to turn things, it's just the key to the Pandora's Box that Mangler Merkel and the professional Euroteers have managed to lock that "bleedin' obvious" in all summer. As we mentioned a couple of days ago, there is nothing like a good strike and its associated inconveniences sprinkled with Irish banks to focus the mind. We just don't know whether this is a little early and would have preferred to have had this turn around in about a week's time after a bit more western "risk on" is sucked in.

But "risk on" is a strange animal these days and is not generalized. If you look at western equities you'll see a summer range. If you look at western bonds you'll see it as a "risk off" environment trend, but if you look at Asian emerging markets you'll see a climb that is a trend following model's dream and screams "risk on".

While the likes of Zerohedge and Business Insider have now bludgeoned the general public into utter stupefaction and boredom with the various treasuries/gold bubble or not arguments, TMM are of the opinion that the most overstretched trades lie elsewhere. Take, for example, all things Southeast Asia. As you can see below their equities have had quite a run to say the least, but not without some choppiness over the summer. Foreign fund flows have been strong - look at the cash going into the IDX and EWM ETFs.


Earnings multiples appear to be vaguely under control though, so as much as the chart looks like a sell the fundamentals make it hard to rip into without an obvious catalyst (falling palm oil, coal and rubber prices?)

Onshore local currency bonds are another matter entirely. When some of TMM piled into this trade a little over a year ago it was a little like going into a train station in the wee hours of the morning: very empty, vaguely terrifying and the one harmless-looking guy on the platform is oddly out of place and just might be a serial killer.

Those days are gone and the positioning in Indonesian government bonds shown below

looks more like this...


TMM is increasingly of the view that the summer drift is coming to an end as the Troll under the Euro bridge is stirring again. We also think the decoupling stretch in the East is going to start to snap back, as it is not clear how much more appetite Asian CBs have for letting their FX rip higher without China contributing or how much more risk western PMs are willing to throw that way if things at home start to blow again.

Decoupling may be THE theme of the next, ooh, 5-10 years but given the dynamics of risk budgets and the extremes of positioning we are seeing it feels less like the trade of the next month or two.

White socks? We will hold the line and not sell 'til we can make out the label.

Posted by Polemic at 11:52 AM 15 comments Links to this post  

Labour day, no labour day

Monday, September 06, 2010

Nothing to add today after a set of NFPs that we had hoped would have twanged the elastic on the likes usd/jpy a little harder. But if the BoJ were serious about stopping yen appreciation they might start at home with a few quiet words. IF they are going to come in, it is going to be embarrassing if their usd/jpy bids are just filled in by the guys in the next-door Lifer building. Of course if they were to step up, we would ask them to kill a whole flock of birds (pink flamingos even) and buy Rmb/Jpy. That would be a laugh.

It should be a quiet holiday trading day ahead as the US celebrate Labour Day. London, however will be celebrating a "no Labour" day tomorrow courtesy of the tube workers. England are kicking off the long awaited World Cup Strikers competition.

But for now we leave you with the summary page we received of a 3 year EU study on how the financial world sees itself.

Posted by Polemic at 11:38 AM 2 comments Links to this post  

Don’t sell 'til you see the whites of their socks

Thursday, September 02, 2010

Labour day is unofficially the end of the summer in the US financial markets, so, although the UK and Europe are returning to work (the rest of the world never stops working we know), in this vacuous state of current market theme it may be a case of "No, you go first.. No please .. After you". Because it certainly feels as though no one REALLY wants to do anything and true commitment to trades is very light and can be swung on a dime. The problem is that fund managers are paid to make money, not to do nothing. Unless of course nothing involves riding a profitable trend (see treasuries). The end of the year is now visible and after such a shoddy return, the levels of desperation to perform are going to be rising and we would suspect that any developing minor trend will be pounced on, piled into and finally, later, be puked out of. A rally in something will occur, not so much through greed, but because of a fund manager's more terrifying fear that he has underperformed his peer group and must not miss out.

With current opinion of the world only certain of the uncertainty, it is easier to follow the shoal than be the lone anchovy soon to be shark food. When it comes to end of year arse covering, it's easier to explain away your underperformance if you were in good company, than as a stand out maverick. For one thing, if everyone made no money then who are they going to hire to replace you? If you are the stand out worst performer then the answer is "anyone". It's similar to the asymmetry in response to the financial crisis. The imprudent majority protected at the cost of the prudent minority. And that taught us all something - go with the majority, however stupid, as the majority ends up carrying the vote (and pitchforks).

So that is why, with real money managers returning in an environment already discounting doom, they are probably going to look around and place their roulette chips on equities. And when they do and the markets start moving, there will be a "follow the leader" response, however stupid the move may look. Like usual the market will find some good reason of post justification.

We remember the old army saying "don’t fire until you see the whites of their eyes", designed to conserve ammo and make sure every shot is a kill. We also remember in the late 80s early 90s, the fashion for spivvy London boys (and hence many in the London markets) to wear white socks. So we will sit here like Lieutenant Bromhead at Rorkes Drift, in the face of what may be a Zulu dawn of traders buying equities and shout -

Don’t Sell 'til you see the whites of their socks!

Posted by Polemic at 12:33 PM 6 comments Links to this post  

Here endeth the Summer rest stop. All aboard!

Wednesday, September 01, 2010

Here endeth the Summer. We hope you have enjoyed your break in the market's road side service station, because it's time to climb back on board before heading back out onto the highway. Remember, tiredness kills. Unfortunately too many Macro punters, instead of sitting back and sipping overpriced "beverage-like products" surrounded by screaming kids have been out playing with the traffic and come off worst. Or have done a Druckenmiller and sneaked off through the emergency exit never to reappear. I bet the SNB LLC, looking at eur/chf sub 1.30 wish they could make such a clean exit. Imagine the headline - "SNB hand back 280Bio Euro to investors, who say 'hang on, we gave you CHF...'"

Anyway, back the middle of July we asked where you thought various prices would be at the end of August to see if our "high short term volatility but within a summer range" theory fitted with your own. And here are the results:

You said
Eur/usd -
> 1.3350 16.9%
1.2950 - 1.3350 20.6%
1.2550 - 1.2950 31.8% Plurality WIN
less than 1.2550 30.8%

Where will Gold be end of August
> 1350 4% (13 votes)
1250 - 1350 12% (41 votes)
1150 - 1250 42% (139 votes) Plurality WIN (just)
1050 - 1150 27%
less than 1050 15%

Where will SP500 be at the end of August
> 1170 4.7%
1120 - 1170 13.5%
1020 - 1120 42.9% Plurality WIN
970 - 1020 25.9%
less than 970 12.9%

How flat will the 2s/10s US spread be
> 2.60 4.9%
2.40 - 2.60 16.6%
2.20 - 2.40 31.3%
2.00 - 2.20 27.5% Nailbiter around 2.00, but the only one the plurality lost on
less than 2.00 19.6%

You are a clever lot.

But now we face September. The Kevs and Trevs are returning to their trading desks and looking for something to play with. TMM are looking forward to a resumption of the old themes, particularly Europe. The US may be in a mess, but the news flow on Europe should start to pick up again re civil strife and strikes as the summer ends and workers return to errr.. strike. Whilst it would appear that there have been some tacit agreements in some countries not to stuff tourism through strikes, let's be honest, there isn't much point in striking, while you are on holiday yourself and there aren't many more psychologically grim times than finding yourself in September with the grey grind to winter ahead of you. Perfect set up for a bout of "Sod this, let's smash a few windows". And of course the Universities go back soon too. History shows that if a European student stands a chance of getting a First in anything, its going to be in rioting.

But the dirty great fly in the ointment is the current sentiment indicators, which are mostly looking as though the world is pricing in a deflationary disaster and the spring has so much bad news hanging on it, it is going to take a very heavy new weight to get it to stretch much further. Apart from UK fund managers who look as though they are going back into equities. So far today European PMIs are trying to be that weight and even the bullet proof Norwegian safe haven has seen a knock. But not much selloff.

So the plan is to get back on board the bus and pile on short term risk - equities, short USTs (oooerrr) and for an esoteric, long nok/chf. BUT, with a finger hovering over the big red bail out button on the first sniff of trouble and reverse the lot. In fact, the tightest spring is probably wound up in eur/jpy especially if the BoJ jump in chasing it up rather than trying to catch it as it falls (a la SNB). The risk reversals look interesting too. As for our AUD negativity the other day, that remains in the medium term despite shorter term bounces.

Good luck and all aboard, only 115 shopping days left to Christmas

Posted by Polemic at 10:08 AM 6 comments Links to this post