Wednesday, June 29, 2011

Kebabs, Sushi and Big Macs

The market's noses are firmly pressed against the shop-glass as never before have so many people's lives been touched by the outcome of a fight in the kebab shop.

Greece combining with Month End madness, rolling into a half year end of poor performance, together with a July the 4th long weekend has produced an intensity of noise on TMM's market TV set that has them wondering if someone has yanked the aerial out.

30yr bond noise appears to have at least a partial explanation for some of the shenanigans earlier this week.

As for month end noise, TMM have been looking for the clues of an oft quoted guestimated $30bio of US equities to be bought for the equity/bond rebalancing but the volumes in cash, where we would assume it to be, have been very light with the futures seeing more of the action, which leads us to presume that the model/CTA community is chasing price and the real money is not involved. Are they bearish enough to ride out a rebalancing or even not need to do one?

The key data point over night, Japanese Industrial Production (see chart below), did bounce back in line with consensus forecasts, which has added ammunition to the PhD community's call for a V-shaped recovery in Japan, and general rebound in the global industrial cycle. TMM take a more nuanced view based upon the fact that for the entirety of TMM's careers, they have learned that the Japanese *always* disappoint, and betting the farm on a Japanese "anything" is a recipe for P&L tears. IP may well be bouncing back, but TMM are unconvinced that the rebound will be anything like as vigorous as the collapse and even if it is, whether the global supply chain being fully operational will result in a significant bounce across the board. Don't get us wrong, there will inevitably be a rebound, but as readers will recall, TMM do not think that this is just about Greece or Japan...

...The reason TMM have been of this view is that the ISM Orders/Inventories ratio and Order backlog measures haven't been providing any particularly dramatic evidence of the supply side being the principal problem in terms of the manufacturing outlook. And to that end, TMM constructed a (very) naive model of the Shoku Chukin survey (see chart below) based upon those lagged components and its lagged self in order to get a sense of the balance between demand issues and supply issues. The model has understated the dramatic moves in the Shoku Chukin, which leads TMM to the possibility that the global slowdown in the industrial cycle is not merely a function of Japan-driven supply side issues. Of course, natural disaster-driven moves are often highly non-linear and TMM are wary of reading too much into this...

...but it looks to us like there is little room for disappointment as far as both markets and the PhDs go. TMM were amused to discover (when bothering to work out the blended consensus GDP forecast for the year ahead) that said community merely track ISM (see chart below). Overpaid, perhaps, as TMM's equivalent model only took about five minutes to knock together... But, in seriousness, there has been little towel-chucking from these guys, predicated on the above discussion. TMM reckon that unless ISM moves back into the mid-to-high 50s that growth expectations are going to have to be revised quite a bit lower... especially in the context of their ISM models suggesting a high probability of a 49 print. TMM are unconvinced that the market is ready for a sub-50 ISM.

Which brings us on to that other important event that is about to get underway: the earnings season. TMM have been very surprised at the lack of earnings downgrades in the context of the macro backdrop and, given their rudimentary earnings growth model (see chart below) is pointing a sharp fall in the rate of earnings growth. TMM reckon earnings are thus going to disappoint.

As a result, TMM are holding on to their negative bias positioning, but the market does appear to be fighting to hang on to short risk positions which makes us think there could be a bit more upside pain through the next 2 days noise before we can return to "normal service". We suspect that this weekend will mark a turn back to the downside and TMM will use the squeeze to convert their light shorts into proper shorts!


The Angry Russian said...

another excellent post fella's

Tyler said...

Excellent post TMM. I deeply appreciate the clarity of the last line as sometimes I'm a bit thick and the read-through isn't always apparent.

Ten year IG corporate CDS near last summer highs; Brazil 10's minus 2's inverted, India is about flat and China at ~34 bps.

Warming to your view TMM.

Anonymous said...

Any chance of some detail on the earnings growth model?? Cheers

Anonymous said...

a slower EPS growth is certainly what the market has been expecting, but back in 2007 when yoy EPS growth was in the low teens and with Baltic rapidy retracing from historic highs, the market still managed to hold for months before Bear Sterns knocked some sense in. So I am still not convinced cognitive dissonance will result in risk assets retracing, yet. ANother point you have not covered, why are bond yields moving up? Maybe the market is already pricing in a new debt ceiling and some "visibility" to the budget debate in DC. Bottom line, I think the market will try to stay around this level until Aug Jackson hole.

Ambo said...

Another Digestive period indeed mac,the boots on the other foot this time.

abee crombie said...

ECRI folks of the same macro, slowdown view. I dont really know where the economy is heading.

But I do know that 1250 S&P is a nice level and if we break it, some stops will go off.

Corporation have been killing it the past 2 years. I'll wait until they start disappointing b4 I get short though

Leftback said...

Anon at 12.16am:

Bond yields - exogenous influences - yields moving up almost entirely b/c of unwind of the Greek default safety trade.