Thursday, June 30, 2011


Its like working in a nightclub.


Turn that bloody month end down, I can't hear a damn thing in here. Seriously, the risk on "choon" in the club is so banging, it appears to have dragged everyone out of the VIP onto the floor. TMM's inboxes are full this morning of "why we have to buy risk" pieces and from a gamut of very respectable sources. Which includes those that have been claiming to have been holding back whilst Greece played out and are now emerging from under their stones, those that have suddenly found their "risk" measure models turning higher (self-fulfilling because the prices they look at have moved up), those that are extrapolationistas and have seen 3 days of bounce and finally those that have been cut from their shorts and have swung long through desperation.

But TMM are firmly covering their ears as, to them, this is far from a risk on anthem but just that month end noise turned up to 11. The Modified Newtonian Dynamics of finance it may not be but we feel our MEN (Month End Noise) theory sufficiently explains most of the phenomena listed in the current spate of "risk on" arguments, even if some purists disagree. Models have been chasing prices higher again too, though one particular bank's new model is taking the buy side by storm, resulting in a lot of people looking at the CHF/RUB cross (Bloomberg figures confirm this)!

Basically, the last 24 hours have, in TMM's mind, killed enough bears to leave it safe for us to go and sell again.

NONONO. Oh Forget it, lets get out of here


FX said...

To many nightclub biscuits ya think?

Leftback said...

Confidence does appear to be "ouzo-ing" back into the markets today as a "Gyro rally" propels the Spooz back up towards resistance at 1325.

It's hard to feel constructive about any equity rally that is driven by DGDF and a crowded and by now jaded commodities market. Crude and energy stocks still appear to be artificially levitated.

Initial claims are still high, so expectations for the July 8th NFP number might be somewhat tempered, and Q2 earnings will likely be a mixed bag at best.

We went long a few times in June, notably at the VIX spike and the VIX right hand shoulder, and we have been short the long bond for a while. Right now we are thinking about cashing out and taking some of that risk off the table before tomorrow's ISM, we'll see what happens after Uncle Sam has his annual fireworks party.

We're not sure that the Risk-On Club is where we want to party next week. It's the beach for LB....

Anonymous said...

Treasury longs still taking it Up The Gary today.

karen said...

Fantastic post.. resonates perfectly in my ears. I've had AW's no no no.. on my brain since Monday : )

Anonymous said...

All agreed for sure. But in FX land it seems that the position monkey is killing everyone. Euro is text book stuff. Everyone was short and got dinked, they couldn't believe it so went short and got dinked again, when they looked at it it still looked wrong so they went short and got dinked. Looking at the way it traded today they have repeated the same game again.... So I worry that we get another leg yet as everyone I speak to is selling the rally still....
I can't see how this doesn't all fall over again for sure but maybe we need Voldermort to pop a proper offer in and stop the rot..?

Leftback said...

A stunningly superficial post below suggesting that the easy money has been made in Japan (which may be true) but suggesting Brazil and Russia as alternatives (which I think is dead wrong).

Japan v Russia and Brazil

Anyone familiar with EWZ and RSX knows how heavily those ETFs depend on oil companies. With governments apparently determined to crush the energy speculators, is this really a good time for the commodity-producing emerging markets? Tyler pointed out Brazil YC inversion yesterday, that's sending a message.

If energy costs do moderate, the much-maligned Japanese economy might have a modest upside surprise in store for us after all. Just my 2c.

Tyler said...

One thing that gives me pause on being too bearish on US equities is valuations. Obviously what appears cheap can get cheaper. But do current valuations provide some downside cushion?

Look at earnings yield gap (BAA Yields minus SPX earnings yield) going back to 1986 and stocks look incredibly cheap. take it back to 1962 and they got a ton cheaper in 74, 78 and 79.

So is the whole argument that valuations are attractive missing the possibility the idea of regime change?

TMM - clearly you feel the slowdown argument trumps all. What are your thoughts on valuations? cheap? irrelevant?

Nemo Incognito said...

On energy I think worst has been seen for the year - depletion rates continue and fracking is being shown to be the somewhat questionable story it is with things like Northern Oil and Gas coming under pressure.

Sorry folks but we are running out and until Carlos Ghosn sells everyone EVs it isn't getting much better.

Vasastan said...

Re Tyler and valuations: the only predictors that have (sort of) worked historically are the q and CAPE models, and these show a bleak picture for the coming 10-year annual return. Not the lowest on record, but not far from it either.
The earnings yield has historically been a weak predictor of future returns, but in the upside-down world we inhabit these days - who knows?

BlackRaven said...

I've thought exactly the same, uncomfortable to hear I'm not alone. When I get stopped out a couple of % higher is clearly going to be the time to really sell it.

abee crombie said...

Is the majority always wrong?

Action in fixed income over past 3 days is quite interesting. Big moves around the auctions even though they werent so bad. Any ideas?

Tyler said...
This comment has been removed by the author.
Leftback said...

A good day to hold selected longs and stand aside and watch punters play the indices. Especially when a lot of bigg playaz are down the sho'.

Nemo, whatever the longer term prognosis for oil, can't help feeling we see the $80-90 range established not long after July 4th. The China slowdown scenario seems to be playing out here and we will all be watching Brent and copper.

Long (US, Japan) and Short (EMs) still seems like a decent pairs trade to embrace.

Ambo said...

Cold steel indeed!that's a weekly bar only the skin a bulls ball could love, I'll wait.

Alen Mattich said...

You know when ultra-value equity investors like Hussman start talking about participating in these short term rallies/squeezes that bears are tired of being routinely gored. They know they'll win eventually, but it might have to wait until after the second coming. Until then, they've got some fees to earn. Maybe when Albert Edwards throws in the towel, we'll know the end is nigh.

leftback said...

No kidding.
"COLD STEEL, Captain Mainwaring...."

karen said...

"It was really easy getting that mortgage in Hungary, and the best of all, denominated in Swiss Francs, so the interest rate was low. Such a great plan, if it wasn’t for that currency risk."

Swiss Franc and the possibility of huge mortgage defaults in Central Europe Affecting Austria

Leftback said...

Treasuries are beginning to look more attractive as the carnage comes to an end after unwind of the EoQ2 safety trades.

A few reasons why we might see USTs find a bid next week or later in the month: 1) Munis 2) Italy 3) China slowdown 4) Gyro (EUR) squeeze more or less done.

Anonymous said...

Nemo, LB

Re Oil/energy -

How does China's drought(diesel consumption) and potential hurricane season(La Nina) affect oil prices?

Guess, I will wait to see what happens next week( end of QE2, earnings and driving season demand fully priced in).

Thanks for sharing your thoughts

NTWSC said...

Well I'm thinking the way you are LB, as of yesterday oil's my new favourite toy to blast away the summer doldrums.


Leftback said...

Crude: so much supply, so many speculators, so much leverage, so much potential for global government intervention, such a crowded trade.

It will all end in tears.

Anonymous said...

Equities are cheap as long as profit margins remain at eighty year highs and interest rates remain at all time lows. Both of those are mean reverting over time. Stock markets tend to do particularly poorly during said mean reversions (falling profit margins and rising interest rates).

chancee said...

Better yet, stocks tend to do poorly in the absence of QE from the fed. Not once since spring 2009 has the market trended higher without free money being dispensed.

Yet... with the economy on the cusp of slipping back into a recession, the fed's policies mostly a failure, housing still horrible, corporate margins at all time highs, and massive unemployment...risk is back on? Maybe for a week or two.

Just long enough for all the squids to herd everyone onto the long side and then rip their faces off when these inconvenient truths are 'suddenly remembered.'

Anonymous said...

and as of Monday after a c5% move in most equity indices and a face ripping rally in credit we have most major brokers going "tactically" (meaning if they roll over again it was only a "tactical" call anyway!) LONG

AUD looks like a standout from the short side given the ugly macro and the collapse in rate expectations