Monday, July 04, 2011

U-Turn or U-bend

The plan to sell the rally on Friday looking for "normal service to be resumed" after the Month End Noise and US holiday was going just fine until those ISM figures came out. Our cheapo TMM ISM model that we knocked up using tin foil and sticky-back plastic has been crumpled up and chucked in the bin. We hate to admit it but maybe it is worth paying up for the PhDs' versions.

The problem is that we have been blindsided by the stunning performance of the ISM which we feel really is the figure du jour when it comes to importance. Especially having come on the back of the bounce in various regional PMIs. On the face of it we should really press our thought and positional stop loss buttons and reassess everything. But we are a bit split re timing. If the ISM is a game changer then we should abort and buy for the next run up to 1400, however if there is a chance that this is just an uber-expression of the risk run up we were expecting last week then perhaps we should just wait to see how the next 36 hrs pan out. It is easy to see punters become comfortable with the mid-cycle slowdown coming to an end, but it is also easy to see the A-Team screw up somehow or this week's data disappoint with ISM being the "outlier". TMM have not yet reached a consensus on this.

Apart from the ISM how else has the world changed over the last week? Well the Euro-package is already having its stitching unpicked by S+P suggesting that the French 12yr olds' plan may still involve partial default. TMM are amazed that the Eurostriches feel that they can get away with another summer of head and debt burying combined with STFU policy.  But the market so far appears to be worryingly fooled.

China slow down figures continue to grind out which on the face of it fits in with TMM's DM vs EM master plan but, once again, the market appears to be completely off any argument that could halt the last week's risk rebound. But it's a slowdown none the less and will no doubt be resurrected as and issue as soon as markets roll over.

So where are we left for today? On this special day where the US celebrates the independence of its national debt from that of the British national debt, we should be out celebrating, but instead we are debating what to do.  The heart says hold but the head says fold.  We will try to hang on for 36 hours hoping the markets start to once again go down the U-bend before we follow our heads and do a U turn.


abee crombie said...

off topic q... any one read Antti Ilmanen's book Expected Returns? Any thoughts

WellRed said...

With the S&P a whopping 1.5% from it's May 2nd close (vs 6% from it's recent low close), I am much more inclined to sell here than buy. My gut is telling me that we will see an intraday high above May 2nd's close sometime soon. Should that happen, I will be selling (with relatively tight stops)for sure.

Moving above May's high despite (incomplete?) downgrades to economic growth would strike me as ludicrous. I have yet to hear enough discussion of the impact of the cuts the Dems and Republicans are currently negotiating on GDP (and business confidence)moving forward.

But hey, I have been wrong before.

PPM said...

There was a post on Zero Hedge regarding new orders less inventories as being a leading indicator for the ISM. Here it is:

Any thoughts on this? Certainly inventory additions contributed meaningfully to the ISM, and new orders were weak.

Aside from the Kansas City Fed report, I don't see any other indicia of the end of the "soft patch." Thoughts?

Nemo Incognito said...

abee crombie viz ilmanen its the absolute shiznit. I've bought a copy for my interns so that when I am too busy to mentor they can at least help themselves.

And viz China folks, looks to the ne plus ultra of EM inflationary shitshows in Asia, Vietnam. They just cut rates in face of 20% inflation - I still think the trade in the middle kingdom is long risk and receiving shibor. They are going to let credit rip again and hurt the shorts before they well and truly wet the bed in 2012/2013. Price action in copper was indicative of positioning.

Sid said...

"I still think the trade in the middle kingdom is long risk and receiving shibor. They are going to let credit rip again and hurt the shorts before they well and truly wet the bed in 2012/2013."

Agree with you on that Nemo. Actually, Wen Jiabao's famous FT editorial provided a nice entry signal.

CV said...

Doesn't the stock/inventory point to a sub 50 ISM print?

The indicators we are looking at, at the office confirms the slowdown but not a recession. If the leading indicators deteriorate for one month more though, it is a recession call. Negative surprises though are at an extreme and levelling off.

I am in the 1400+ camp, for now ...


Nic said...

Hello long time.
Technically there are some big weekly bullish reversal signals.
For the coming week I think we see the 3-day holiday reversal rule. The trend into a big holiday weekend is almost always reversed the week following so expecting some pullback and consolidation this week.

Anyone else think the dollar and stock indexes can move in tandem?

CV said...

Right Nic:

"Anyone else think the dollar and stock indexes can move in tandem?"

One big fat pink flamingo about to be slaughtered here


Anonymous said...

"June U.S. Jobs Could Be Made In Japan" -

BTE job #s coming up?

Rajat said...

Well, the ECRI weekly leading index is still pointing down and Lakshman Achuthan has been on CNBC every week saying how their long leading indicators are pointing to a multi-quarter slowdown. So the ISM may have been an aberration.

Anonymous said...

Humbling isn't it? Still long bonds? Still short stocks? Well if you "experts" here cannot tell a short covering rally from another leg up, its time to take a walk fellows! Or just join your nemesis and be part of the JBTFD crowd :)

abee crombie said...

I still think we need fb, zynga and groupon to IPO go crazy before I get really confident to sell. And if China primes the presses why fight it now

Price action in LNKD has been a good tell of risk monkeys

Thanks for the advice Nemo re: ilmanen

Leftback said...

Interesting grab bag of comments! Agreed with almost everyone:

1) There is/was a soft patch, but
2) It isn't going to be over (1-2 months?), until
3) Crude falls into the $80s, on
4) A firmer dollar, which
5) After a near-term pull-back, is eventually
6) Positive for US/Japan equities, hence
7) Not a good entry point here for bonds, and
8) Higher interest rates lie ahead, and
9) DMs outperform EMs on
10) Inflation worries in Asia!

So that lot has us positioned long US/Japan equities and modestly short energy/submerging markups for the time being. Anyone who thinks the US market is super-healthy should look at the banks today. When the banks get spanked, the spooz tend to lose.

Leftback said...

Readers may be interested in Primary Dealer forecasts of EoY 2s/10s. Some very aggressive "recovery" numbers!

P/D Rates Forecasts for EoY 2011

Some highlights (2y/10y):

MF Global 1.5 3.9 (1.5, what are they smoking?)
Deutsche Bank 0.5 3.25 (front row Euro seats)
Nomura 0.85 3.15 (best punters of late)
Taleb 27.8 16.9

(oops, kidding - my Greek forecast there)

Leftback said...

U-bend is known as a P-trap in the US.
In the interests of transatlantic understanding...

Jim said...

With excuses for short term performance in abundance the next catalyst will be Q2 earnings, and if I had to bet, markets will focus on guidance and guidance from CEOs will be rosey...

Jim said...

Actually think EMs, particularly in Asia, will see rally in 2H11. Inflation fear trade has left some very attractive values. Tighter policy has been a headwind but this will neutralize and be a positive for equities. Assuming China doesnt blow up...