Thursday, July 07, 2011

A Tale of Two Sh1tties

We have been pondering for the past 4 days what to do and our preponderance has been based on our heads saying buy equities sell vol and gear for a phase of growth, especially in the US, but being tempered by our concerns that Europe can blow up again dragging everything down again. But our indecision on how to handle this has been simply rectified. Having yesterday asked the question of how contagious Europe actually is to the rest of the world, we are going to separate the two concerns and play this as a decoupling.

As far as we are concerned Europe can sink, but it needn't necessarily take everything else with it. So we are looking for the recent Italian noise (TMM have been receiving BTP yield charts from every Tom, Dick and Harry) to die down and return to the "not systemic" price action of decreasing intra-EMU spread correlations and a range for the bipolar currency. With such a (justifiably) large market risk premia priced into BTPs, TMM find it difficult to get bearish here with the country only running a Current Account deficit of a little over 3% and essentially running a primary surplus. TMM reckon the past few days have seen a spike in "Tourist Traders" getting short that reminds them of the Egyptian-driven Oil spike and subsequent stop loss sell-off back in February. For what it's worth, TMM's naive and simple macro model of the BTP-Bund spread shows Berletchsconi's IOU's around 100bps too wide (see chart below).

Now we don't know if our overseas readership is keeping up with the latest "its disgraceful" public outrage in the UK, but the newspaper News Of the World, owned by Murdoch's behemoth "News Corp" has been accused of tapping the phones of victims of crime in times of grief for salacious tidbits. The result has been a humongous backlash from the public that has destroyed the credibility of News of the World but, as importantly, has damaged the credibility of the parent group to the point of threatening other major projects the company has for expansion (e.g. the BSkyB takeover deal). Doesn't this sound remarkably familiar to the major market story we have been tracking for the last 18 months in Europe? Where a small subsidiary has wrecked the credibility of the whole conglomerate? TMM can not imagine that News Corp will now be preparing to follow the model Europe has employed over Greece. We can not imagine the Times, the Sun, Fox News and Sky TV, together with all sorts of overseas holdings, being cajoled into supporting a bail-out plan for the News of the World. We can not imagine News Corp arguing that the death of NoTW would mean the end of the whole of NewsCorp. and so will be kept alive at any cost. We can not imagine NC issuing moral guarantees backed by the high moral ratings of The Times of London and being on sold to Asian readers. No. TMM expect NC to amputate NoTW, probably after kitchen sinking every other dodgy deal into it, and rising forth morally cleansed. Which is exactly what Europe should have done and yet do with Greece.

To the consumer, the problem with such huge institutions losing credibility is one of substitution. Trying to find a news publication that isn't owned by N.C to move to in protest is difficult. The same applies for the ECB and Europe. Europe has spent the past 15 years selling the credibility of its single currency to the point that it has become the world's first choice reserve currency for many. If the credibility is threatened further where does one go with ones currency reserves? TMM have noted various papers suggesting that the likes of CAD, CHF and AUD should be considered as a separate reserve bloc and certainly they have been major beneficiaries of safe haven and reserve manager flows. But these countries are tiny compared to some of the flows being thrown at them and distortions affecting local economies are becoming more than worrisome.

We could ramble on now about the plights of CHF and AUD and the effect the current FX rates are having on the local economies but will do more on that soon. For now we will leave it at that as we await the predictable outcome of ECB rate rise foot in mouth insertion.


Anonymous said...

Quick note from 'confused in Cheltenham'.Afterall that what conclusion did you arrive at?
Buy BT when the BOE hold rates?

Sorry,but that post today was more than a little confusing and if the conclusion was Europe can go pop without the rest of the world catching fire I do believe I have to say good luck with that I'll see you on the otherside.

Polemic said...

Er, yes sry about that. Written in a rush. Conclusion is eurowoes decoupling from general risk. Can be long US for ecample with less negative impact from europe woes. And even within europe dome things are too short term stretched. Eg BTPs. And finally News international in similar pos to Europe with Greece and how Europe can learn a lesson in how they are about to handle it. Finally substitution away to tiny alternatives will cause bubbles.

Hope that helps. But feel free to buy BT if thats how it still reads!

Cheers pp

Anonymous said...

Thanks from 'confused in cheltenham' so it's really buy ATT not BT.

I do understand ,but I'm a little wary of that viewpoint because 'decoupling' only seems to exist when all other reasons for a market to go up have been exhausted and ultimately we find that the global intermarket relationships are aways coupled at times of stress ,or liquidation.
Therefore the question remains will those relations really be decoupled if the Eurozone goes pop ?
On the plus side for your argument markets can only sustain worry over anything for a certain level of time before they decide to move on and perhaps that is where we are.

Anonymous said...

Risk on baby!

My link from marketwatch,"June U.S. Jobs Could Be Made In Japan" -came true.

BTW, love this Macro Man - don't know the old guy.

Thanks for all your efforts!

NTWSC said...

I like the analogy, but I guess there are other similarities too.
It has indeed taken the great British public until this latest revelation to express its contempt, whereas it quietly smirked when the only information in the public domain over the last 4 years or so was that the victims were peripheral celebrities.
But in the same way that Europe refuses to unfetter Greece too soon, so too Murdoch may not so easily dump NoTW. Ball park figure, (up to now of course) that publication brings in £40m, whilst the Times and the Sun each make losses to the same tune.
And now that his BSY game of monopoly is threatened what are the chances of him selling out all three then ...

All is fair in war so they say.

Polemic said...


If Europe blows completely yes it will certainly have a large knock on... but until it does, the market is becoming desensitized to the bad news along the way. (cf reactions to Libya [where?], Egypt, etc) so we can venture forth elsewhere until something seriously horrendous happens. At the moment this is panning out just like 2010 re: psychology.

If that was the winter of our discontent then this is going to be the Summer of our Content.

Leftback said...

You might be right about a temporary Decoupling, Polemic, but that only occurs during Silly Season.

Betcha US markets are forced to curb their enthusiasm tomorrow, TMM. The ADP survey has a history of being wildly wrong, usually by being over-optimistic, but they actually got it right last month, so by the principle of mean reversion.....

Still a lot of very good reasons to be in cash or even to be long a few Treasuries, as we explore the top of the recent trading range. US local and state layoffs continue, Washington still d*cking around. So it's a Things That Make You Go Hmmm for LB.

Anonymous said...

Dr Copper racing thru 9700 as-we-speak today on all that bullish US econ data and despite China rate hike. Crude oil not doing badly either with Brent > 116 and wti touching 100. Foolish to be short hard commods if you ask me in 2H-2011....impl vols in copper cheap so fill yr book with 10,000 calls dec11.

Ambo said...

TMM, if your comparing now to 2010 in regard to market psychology,naturally your line of thinking is the market thinks its frontrunning(say the least)the next expansion phase(9mth +)with the help of ECB being the quasi QE2.

I'm looking at the march lift off in our QE era of trading.The Dow shot to the moon 874pts in 16 days,only 4 red days, not one LL prv 3 days, correct me if I'm wrong but wasn't that something to do with that Japan QE thingymebob.

The levels we're at now are to shaky for QE and bailout related continuationmoves in my book.For now anyway.ahem!..I'm flat.

I wonder in 20 years from now if we're be sitting at the bar telling war stories from the street to our pals...Yeah I got QE1 by the balls...ah and QE5...not so much QE8.

Polemic said...

Well fancy that..


Ambo, for 2010 revisit, i was thinking more of a general rally after europe rubbish extending thru the summer with the mkt looking at US again, but the diff this year is that the rally is on growth hope rather than qe hope. Resulting in similar respite but for different reasons.

Of course it can still all fall over later in sept, but for now? Apparently the world is fine. Ahhm

NTWSC said...

Ha yep one down.

Re the rest of our wet summer, notwithstanding the fact that the next bailout likely won't be agreed until September, there's a pesky budget to dodge over the next few weeks amid all the other slings n arrows. The market is prone to chronic ADHD relapses, but only until the trebuchet is loaded with another boulder.
Reckon I'll stick with me wellies rain or shine and hope they don't get stuck in the mud.

Anonymous said...

good riddance but we still need to see charges laid; now we just need every other rag to go

Anonymous said...

absolutely BRILLIANT. your blog is fantastic, keep it up.

Manc Trader said...

^ Agree great post in a series of great posts.

chancee said...

Amid all these new proclamations for what kind of market we now have, can I just point out that we're still in a 'holiday week.' Many, many traders I know took the week off, including myself.

I give no credence to this week's parabolic move higher on low volume. It was to be expected, and everyone knew that as recently as last week. And I find the Herculean efforts of the financial media to stamp this rally as legitimate, comical. It never ends...

I think people should be reminded they're really doing themselves in with regards to any kind of QE with all this nonsense. Just where do they think the market is going if we break above the 2011 highs? Nowhere! But they will spend the rest of the summer and half the fall trying every trick in the book to push the market higher. (hint: it doesn't work anymore without gobs of free money).

Then where does that leave us? It leaves us too far along to conger up any kind of meaningful let's-pillage-the-US-even-more free money program before Christmas. Christmas!