Friday, February 25, 2011
TMM are reminded of Macro Man’s words regarding Pink Flamingo’s at this point in time:
Recent market price action has started to remind Macro Man of an episode from his distant youth, nearly 30 years ago. People did strange things in the 1970's, and he remembers a "game" played by various households in his neighbourhood in what must have been 1979 or so. One family bought a pink lawn flamingo, such as that pictured to the left, and stuck in the lawn of a neighbour. There followed several months of "pass the parcel", wherein the flamingo would magically appear on the front lawn of a different house every few days or so.
And it seems to have been for macro thematic trades, where the "pink flamingo" of position unwinding has been passed from market to market.
With Libya looking increasingly like it is descending into a tribal civil war TMM have come to the conclusion that recent events in the markets have moved so fast and so unexpectedly that the thematic trade unwind - Qaddafi assassination/SPR rumours and equity bounce notwithstanding - is likely to continue into the weekend and month end, and arguably the next few weeks. Long oil and the EM/DM thing were arguably quite “owned” by the fast money set but the massive blow in front end crude vol and decline in E-minis these last few days are indicative of the “get me a chopper and get me out of risk fast” trade.
In the E-minis TMM note that over the last few days the JBTFD crew has been out in force only to see them fade into the afternoon. Indeed, they find it remarkable that despite Oil trading ten Bucks or so off its highs that equities have not really managed to bounce in any material way. To that end we are expecting a lot of very crowded thematic trades to start unwinding if they have not done so already including – but not limited to the following.
1) Super Growthy Tech Names: For this TMM can give no better example than Baidu. It trades at about 78x trailing earnings and aside from being expensive it has also had two very, very bad things happen to it for those who know much about China: a government sponsored entity has become a competitor to it, and it has started to receive a number of anti-monopoly suits that are being reported in the media. TMM know that this is not Baidu’s first day in court but the play these cases are getting in state media may be indicative of something more sinister. The whole street assumes Baidu keeps its 80% stake in search going forward so there is plenty of room to disappoint and with 7%+ of the company owned by hedge funds thoughts of disorderly exits from burning theaters have crossed TMMs minds. Netflix, with the launch of Amazon Prime video streaming is probably in this bucket too – catalyst + prospect of oil shock recession = not a whole lot is going to trade at >50x PE.
2) Japan Equities are About to Get Slugged by Oil: Japan is incredibly dependent upon oil and it imports most of it from the Middle East. The BP Statistical review has this snappy chart you can see below.
Much of Japan’s recent recovery has been driven by consumption and unusually low savings rates – one can safely assume that if oil stays high more of that income is going to get spent on oil and general economic conditions will deteriorate. It also does the trade balance now good, which makes TMM think that the JPY rally is more panic driven – once the panic subsides and people realize that Japan is a major importer with a lot of other structural issues the buying should abate. The rest of Asia will be affected too but they are likely to respond by revaluing their currencies up. The recent outperformance in the Nikkei is likely over until further notice and the JPY is likely not far behind it. NOKJPY is the usual way this one is played though it was doing well before Gaddafi turned out the lights on Silvio’s court proceedings by shutting off the gas to Italy. The recent rally JPY on the back of this is further proof of TMM’s prediction that trading JPY this year was not going to be easy.
3) MXNZAR: Somewhat obscure cross but basically long a US growth proxy and short a basket case country with a central bank that is dovish. Sadly aforementioned basket case is the world’s largest gold producer, Mexico’s oil reserves are depleting and US growth isn’t looking so great here. Unwind well underway.
4) Long Ags: A crowded trade that has likely seen its best – front end contracts in wheat are already taking a pummeling and cotton is ending the only way it could – badly. The one to watch of course is corn which can, using a combination of wastefulness, human stupidity and enormous subsidies into a combustible fuel.
TMM have no doubt that there are others and we would like to hear from you. One thing is for sure – with a lot of crowded consensus trade and lot of unwinding to do it is going to be a very ugly month and likely quarter end for a lot of people.