Thursday, August 11, 2011

I Had A Dream

Do you ever have one of these days where you wake up with a burning feeling with respect to a trade and that the rest of the world just can't see it but they are about to? When all the little bits of information that your brain have assimilated while you have been asleep has some how coalesced into a nugget of conviction? Well TMM has that feeling right now but is scared stiff by it because they can't really pin it on any one thing in particular and are worrying that it is emotional rather than rational. There are 2 ways of coping with this: the first is to act on gut feel and get the trades on before it moves on the basis that gut response often beats reasoned response. This isn't as daft as it sounds as Malcolm Gladwell describes in his book "Blink" in which, as "wiki" says, "describes our ability to gauge what is really important from a very narrow period of experience. In other words, this is an idea that spontaneous decisions are often as good as—or even better than—carefully planned and considered ones".

But we are more cautious than that so have at least had a quick scan of what has been going on to substantiate this mornings "feeling". The past few weeks have seen pretty uniform panic across the board and TMM have as usual seen a lot more noise than signal in market moves. So, lets step back a bit and look at what is going on here: Europe is still messy but anyone looking at peripheral bonds will see that JCT and the A Team are not messing around. All that dangerous vol and chop in BTPs appears to be getting suppressed harder than a Syrian block party (see chart below).

While haircuts are still above where they were a few months ago if they keep this up they won’t be for long. TMM are not sure how long the ECB can keep up the heavy lifting but for now it is working and the market seems to be ignoring it. Assuming the ECB can credibly continue buying the dip here the carry monkey cannot be far behind.

In equities, TMM are coming to the view that this has an awful lot more to do with a couple of high profile liquidations than anything else. As often happens in this business, people who practice the same kind of investing tend to do well together, get AUM together, and then when what they do stops working get stopped out together. Incredible dumps in names like Microsoft, Bank of America and the like appear to have a lot more to do with positioning than anything else. How does TMM know this? Lets look at it this way – if the US housing market were to explode then Annaly Capital Management would be in serious trouble and a lot of the action in banks would be consistent with that. As it happens, Annaly has not done much while Bank of America has traded down 50%+ YTD. TMM are generally of the view that US banks will be sued for an indefinitely long period of time and could be a longer term value trap as they de-lever. That being said, 0.33x Price to Book seems crazy – it is even lower than Japanese banks now which have been on the low-to-mid single digit ROE grind for some time and took much longer to have their “come to Jesus” moment on marking their books. Even during the 90s the Topix Banks index (see chart below) traded consistently higher than that.

But what about European banks? Here TMM would like to point out that not all banks are created equal. One party trick we learned from a guy in equity research is that if you want to know how much AAA or sovereign stuff is on a banks’ balance sheet and you can’t be bothered to read the annual report then compare total equity/assets to tier 1 capital. You see, if the bank is long a lot of AAA stuff and you think there is a AAA/sovereign bubble then those things will be a long way apart – as is the case for Soc Gen, BNP etc. What TMM cannot work out, however, is that regional banks in Europe with much lower leverage and are not facing insane sovereign issues or a deflating real estate market trade at the same multiples. Regional French banks in particular. This is another indication to TMM of how utterly disjointed the markets have got and in particular how cheap quality is to systematic risk land mines. Which brings us to European equities and European industrials in particular. Looking at Eurostoxx Industrials, Net debt to EBITDA is… wait for it... a whopping 1.2x EBITDA. Down materially since the start of the decade and way down since the bad old days of 2008. When things like Hochtief with a net cash balance sheet trade at 4.2x EV/EBITDA you really have to believe the world is going to end and while TMM are concerned about that, selling Dax futures is not the way to do it. If that is the case then there are plenty of other things we don’t like that don’t do so great in a global growth shock (BRL, AUD, ZAR) and which are plenty expensive already.

TMM's version of the Fed Model (see chart below) now shows equities as cheap as they've been since 1981. Of course, a good part of this has been due to TIPS yields falling sharply, but that is the aim of the Fed. And while arguments can surely be made about a return to the policy chaos of the 1970s - something that has been forced front and centre in recent weeks - TMM are not buying those arguments just yet, especially given the Fed's message on Tuesday.

TMM aren’t sure that we are out of the woods, but being a carry monkey in FX looks a lot less appealing than being a carry monkey in Eurostoxx or, our real favorite, European dividends. Having been through all of the above that original waking up feeling hasn't gone away. It's just got stronger. Rather than dawdle ECB-esque and miss any potential moves we are going in to pick our weapons of choice and fight back against the recent rioters in the markets. So armed with long EUR/CHF, long FTSE and SPX and short Dec11 EuroSwiss (more details on this next week...) and protected by exceedingly tight stops we are fighting back. For today we call a turn.

61 comments:

Anonymous said...

"Welcome to the jungle it gets worse here everyday
You learn to live like an animal in the jungle where we play
If you got a hunger for what you see, you'll take it eventually
You can have anything you want but you better not take it from me
In the jungle, welcome to the jungle"

Ken Veksler said...

Guy's

I'm inclined to agree (at least in the short term) with your SPX view. Catching it on a dip which thanks to the European banks (as I type) getting hammered... again, knock on into the US open etc... Looking for the SPX to contain itself around the 1100/5 mark.

Essentialy in my view what we're seeing is akin to dropping a tennis ball from a standing start and watching its bounce back in a half life fashion. Mentioned it in my post this morning (@KenVeksler on twitter, fancy following?)

Otherwise its scary how oftern I'm inclined to agree with your teams views...

Dublin Dundee Humberside said...

I would have though TMM would be the type to think that Malcolm Gladwell is actually quite daft himself. Or maybe that was the joke.

Great post other than that. Although my own LB-like dividend inclination (Total at 7%, yes please) is not feeling the background bottom-picking noise we're hearing everywhere this week - including, yes, the cash equity sales desk.

MoreLiver said...

Funny.. I am having the exact same dreams of the equity market. When I woke up (in Europe), I felt something is wrong with the rally. I looked at the recent drop, the panicky sentiment, hordes of cash waiting to buy, insider buying (vs selling at the top), ridiculous bond yields in U.S., the yield on stocks even if earnings would be a quarter of what they used to be. Today's linkfest out in 15 mins. You beat me, but earned a linkback.

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Anonymous said...

Also, Japan did not set the PoG off, US did. That mountain of maturities does not look good vs the drain originating from MMs…

Swap lines anyone?

Tricky indeed.

CV said...

Now, that(!) was a good post TMM!

But, You think it is already time to bottomfish? I am not so sure although some highly shorted single names are getting interesting just as a call option on the inevitable short squeeze which will arrive at their doorstep at some point. Generally, we are still too volatile I think for it to make sense to punt a rebound.

More generally, the SNB is panicking and I am starting to like the "kill the safe havens" trade. Traders at my office (I am of course an analyst who spends his time doing real stuff, hum, hum) are going frantic about morning stars in the USDCHF and margin money is being rolled to the front lines to take advantage of the coming puke of CHF longs.

Question is though, will they get suckered yet again?

But short JPY, short CHF, and (eek) short Gold seem to be the bonus maker du jour at the moment.

Not to jinx it or anything.

Claus

VandalsStoleMyHandle said...

I heartily agree with today's post and have positioned accordingly, but this countertrend trade seems pretty consensus; everyone seems to be punting the same handful of megacaps, and sentiment seems to be holding in pretty well. Wouldn't be surprised to get one more big shakeout to test the faith.

Ken Veksler said...

To the bloke that decides to have a go under the cloak of anonymity, I say get under from under your rock and perhaps say something worthwhile, how about it chief?

Ken Veksler said...

sorry was meant to read *out from under

Nic said...

Credit is in full blown panic mode and French bank stories won't go away. You might get a nice flush to buy super cheap TMM ;)

Bob Dobalina said...

. One party trick we learned from a guy in equity research is that if you want to know how much AAA or sovereign stuff is on a banks’ balance sheet and you can’t be bothered to read the annual report then compare total equity/assets to tier 1 capital. You see, if the bank is long a lot of AAA stuff and you think there is a AAA/sovereign bubble then those things will be a long way apart – as is the case for Soc Gen, BNP etc.

You were led astray. Forst of all, I think you mean "Tier 1 capital ratio", not "tier 1 capital". Second, "Total equity/assets" is going to include goodwill and other intangibles in the numerator while the Tier 1 ratio does not.

So pardon my impudence but what I think you really want to do is get to the average risk weighting of the bank's tangible assets. Which I think is what you meant to write.

FYI one might think-- in light of the French selloff-- that average risk weight would be a good explainer of share performance but I get an r-squared of .03 in my regression. Must be those Scandis (SHBA at an appallingly low 25% average risk weight. The safest bank in Europe!) throwing off the regression

Ben said...

Good post, but regarding $NLY vs. $BAC a key difference is that $BAC, $C, $GS, etc. are all in the OTC derivative business and Annaly is not. Not a cause for comfort in my mind.

PPM said...

Can anyone suggest any European industrial ETF's to use as a vehicle for this trade?

Alen Mattich said...

Ummm...."TMM's version of the Fed model"?

I was under the impression that nobody other than stock market shills took the Fed model seriously.

Oh. And Alan Greenspan.

Secret Sauce said...

Interesting thoughts. Just to play devil's advocate, I would throw out that the level of disgust and revulsion with the market still has not reached a basing level.

Whole-heartedly agree about the divies (as long as the marks don't cause you visceral pain).

1 minor quibble about old Ms. Lee: Since "substantially all" of the company's assets are agencies (i.e. backed by Treasury), problems in the housing market would have dire ramifications for the taxpayer, not old Anna.

Polemic said...

Ah, good.. TMM are being bombarded by reported sightings of Battledeathcrosstar Galacticas.. the bringers of doom.. except of course they rarely are.. take last year for example, showed the base.

Anonymous said...

The key to the whole thing is "if" the ECB can keep up the heavy lifting - fought to know for sure.

WellRed said...

Looking at gold down $60 from the overnight high makes me think TMM was right to pull the trigger this morning.

Insiders seem to agree with a lot of the comments about there being a ton of value out there: last week had the highest insider buying since March 2009.

Anonymous said...

Noises out of the ECB would seem to indicate they are not prepared to be the long-term buyer of last resort. Apparently that task is slated for the new Euro-GSE (Germany Sponsored Enterprise.)

Nemo Incognito said...

Viz the equity research trick we do adjust it for tangible..... But that is tomorrow's post.

CV said...

On another point, remembering LB's suggestion that the buck start to trade WITH risky assets. Is this coming to pass?


Claus

Anonymous said...

'Confused from Cheltenham' says' put your emotions to one side and what you are left with is intutive based experience.Ignore it to your cost.Persoanally I work off this more than a slide rule and a week of a analysis which typically brings me to the same conclusion.

Looking around if the world is not ending we are in for some low growth propped up by the G20 stepping all over financing costs with plenty of low labour costs thrown in for good measure. Next year UK starts getting all kind to corporate tax for awhile and consumers get of a release from the blowoff in energy etc plus the base rate for paying any tax continues to rise.

So business has pretty low input costs infront ..kindness on the tax line and a f..g great boatload of numpties just bought safety ,but buying safety comes at a price IF you don't really need it ,but bought it out of misplaced fear due to the fact that you were looking back over your shoulder at 2008.

We know the reality is much depends upon the G20 acting in a more orderly fashion than of late and not tripping up the global economy ,but for now recent events have provoked them into more cohesion and I have no intention of selling that!

Ambointhehouse said...

You timed those Swissy blondes beautifully TMM.Outstanding!!!!!

WellRed said...

*Applause*

Well done sir.

Anonymous said...

You don't see moves like that every day in treasuries ,but that's the price of fear these days.
'Confused from Cheltenham' is so offering cut price sessions at the psychologist for any one suffering from safe haven trauma.
Friday night this week hubby is going to have to explain to wife why their holidays this year will be in the gardenshed because safety is not always where you think it is.That should be an interesting conversation.

ntwsc said...

Dunno why you worry cfc, most wives I know understand hubbies' obsessions with their sheds, they consider themselves lucky if there's only one involved.

Anyway maybe gold's on its way now to closing a gapette $100 lower.
Easy peasy huh.

Leftback said...

Outstanding.... well played, sir.

It was a Swiss Miss today for late entrants to CHF. It was only yesterday that LB pointed out the infamous "Matterhorn formation" on CHFUSD. Those margin hikes worked a treat, we can expect to see that device used again in future panics. They should use it in the CDS markets too.

Margin hikes beat jawboning and short selling bans any day of the week. The little guys get scared quickly, and then the medium sized funds look at the VaR change. Once the trade starts to go away from you, even the big shops can see this could be very expensive.

Leftback said...

Options expiration isnt until next week. So the likelihood is that we will see more turbulence before we enter calmer waters.

Of course this is scaring the crap out of bewildered retail inwestors, who are bailing in droves, leaving all kinds of yield opportunities available at bargain prices to the professionals. Which is, presumably, the point of the exercise....

Anonymous said...

"Turbulence" !!

With Europe shutting down shorts I think "turbulence" is guaranteed and good luck managing your risk if you can only be long.
'Confused from Cheltenham' is sold and gone to cash because I too "had a dream" and it was of illiquid markets.

Dublin Dundee Humberside said...

The yellow metal is one thing, but I also wonder to myself how breakevens can stay where they are relative to nominals if markets are indeed fretting over heightened recession risks.

They are both one and the same trade, no matter how much people try to push the notion that gold is the new fear index. And so is UK housing as TMM once mentioned.

CV said...

Good point "Confused from C", but I am kind of in the middle. I fully expect the market to breach the 1120-1180 range to the downside at some point to test the conviction of TMM et al but I also think that this is fundamentally different than 2008 and that those who buy into the TWINE discourse and thus a SPX at 700 and the US2y at 1%ish will be disappointed.

As for the shorts ban on French banks, well ... plus ca change. It will only add to the volatility.

Yet, if LB is right and retail money is leaving in earnest then surely the rebound cannot be far away.

Claus

Anonymous said...

'C from C' is not buying into anything of any kind that is the point. I don't worry about a rerun of 2008. The toherday Iwas happy to cover my short and buy long at the same time expecting a string bounce into the hole left by selling.
What I will not buy into is a market without the ability to manage risk through long/short.
I certainly will not do also when the economic data is printing growth slowdown and the economic policy of the day throughout Europe is fiscal tightening.

Stop and consdier one of the features of the recent past. The explosion of Absolute return funds post the two crashes of the last decade.
Now with an increasing bigfoot inprint over shorting a widening areana of assets how do we think they are going to control the risk on those funds?
What are they going to do next with current postioning?

I have ansolutely no idea ,but I am not a gambler so when I have no idea I go to cash until I do. No ability to read the future here and never have had. I just read the present and that is just a place right now where whatever I do is just a coin flip.That's just not good enough so i am gone.
I offer anyone taking the gamble and winning on that basis my best wishes ,but it isn't the thing that I do.

Dublin Dundee Humberside said...

Fund flows out of equities were second most on record this week, so yes I think LB is onto something here.

Anonymous said...

The positioned accumulated over months got swept.That's obvious and the moneyflow that follows is also obvious earlier in the week.
What is less obvious is with this shorting ban only coming in now what are the Absolute Return Funds going to do if they cannot go short? I doubt if they were the one's swept out of the market this week for obvious reasons indeed they will have performed far better than naked longs.When the penny drops on shorting strategies though what happens then?

Secret..Sauce said...

MLK had a dream too. That didn't work out so well.

Anonymous said...

My good friend Serge got me out of gold the other day...

http://www.etf-corner.com/markets/2011/08/gld-gold-crash-imminent-.html

Anonymous said...

LB is as right as Jim Cramer was on FED pronouncement. Growth halting to a standstill and liquidity drain coming up to a Eurobank of one s choice…

All hopes pinned on Fed whose committee could not even agree on mid13, Mr. Tricky the mad man & the imminent fiscal consolidation / Eurobonds….

Even Greenspam sounded healthier…

If LB is right – better long dong silver tho. t would be epic.

Anonymous said...

'C from C' makes only one point.
After huge move like this people reposition and generally buy the stock they have been waiting for and let the crap stay on the bototm so you get a rotational look to the move.Looking at the sectors they are all moving in tandem. What that tells me is we have the converse of what we have just had...Selling panic followed buying panic. I don't believe I dreamed that at all.

On a yield basis this was a buyable dip albeit against a detriorating macro econimic picture which might test the strength of the hands that are holding.What we have actually got though is much more than that.

Anonymous said...

'C from c' says' you better hope for a decent increase in volume later.

Laurent Jeanmart said...

If you believe in hedge Fund liquidation, just look at the performance of the HFR global hedge Fund index against the MSCI World (normalised). You'll see that hedge Funds have not underperformed on a normalised basis, and that rules out the liquidation hypothesis (if they really hold all the same positions, which i at least partly agree with, then a liquidation would have led to massive HF underperformance in a large equity selloff).

Secondly, if you believe in the micro-macro discrepancies, you'll be better off in this environment buying short-dated corporate credit than equities. The absence of catalyst leaves you vulnerable to prolonged depressed market sentiment and short-term credit solves for that.

Leftback said...

One or two HFs forgot about the H, and probably did have to liquidate. No sign of HFs globally having problems.

Financial press telling the little guy to stay away, news flow uniformly bad, consumer confidence at 1980 levels. This is the kind of market that could rip to 1275 in a few weeks before retail even lets go of the blanket and takes the pillow off its eyes.

I will not start worrying again until the news flow changes to positive.

Leftback said...

There is some really good stuff at FT Alphaville and Smellygraph today. I will drop some links on you lot later, but the footy's on now.... Teaser for later:

Richard Koo on the Japanese parallels.
Ambrose thinks sky may be falling.
Some thoughts on why QE isn't inflationary.
Musings on how to get money out of reserves.

Hint: the problem is not a lack of money..... at least not in the US. Or a lack of rain in NY this morning.

We may also discuss why the much-derided Swerve has been ahead of the curve this time.

ntwsc said...

Not keen on ePritch at the best of times, but here's this evening's rendition if you must
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8700782/ECB-is-eurolands-last-hope-as-bail-out-machinery-fails-to-resolve-crisis.html

Roger Bootle's a proper bloke and always a good read, but he's away atm.

No cricket today ... bugger ;)

ntwsc said...

The official line is um Himmelswillen ... but Germany's edging towards accepting joint Eurobonds.

http://www.welt.de/wirtschaft/article13544173/Transferunion-als-letzter-Ausweg-aus-der-Euro-Krise.html

It's Sunday, and I don't do translations Sundays.

Leftback said...

Quite so, not a big fan of Ambrose, my point was that AEP ALWAYS thinks the sky is falling even when it's just a few pieces of plaster off the ceiling. So, AEP Gloom/Doom pieces are usually BULLISH short-term trading indicators as they are always post hoc.

Now for some better stuff, a nice comparison with Richard Koo of the Japanese and US Zombie Banks, (oh sorry, I forgot Dimon said the US banks are totally healthy and all loans will be money good):

US Banks Turning Japanese, I Really Think So

and some rather interesting thoughts on QE and reverse repos:

Thoughts on QE

My own view on QE is that it isn't inflationary, b/c:

a) it encourages banks to increase reserves, b) high unemployment means wage inflation is zero, and c) the QE-driven commodity speculation has the effect of increasing oil/gasoline prices and ultimately decreasing consumption, resulting in deflation or at best flat prices on average, hence it is a zero sum game.

Leftback said...

The Swerve knows the history of the Japanese experience, and hence knew that there were little mini-bursts of inflation following the QE interventions, but they always faded, which is why he didn't run around like his pants were on fire, whereas Tricky hiked right into an ongoing peripheral debt crisis.

About time someone defended a central banker. They can't all be f*ckwits, at least not all at the same time....

Mangler alert for Tuesday, if anyone can end this brief rally, she can...

Anonymous said...

Apparently Soros' weekend Eurobond siren song didn't have the desired effect. Interesting to note his hint re: China as the "mysterious buyer that keeps propping up the euro."

If Japan is rather unable their own exchange rate, not clear why the Politburo feels they can do so for their friends in Brussels.

Anonymous said...

* unable to manage

Ambointhehouse said...

Yep!..the swerves tell was on the ball.

Leftback said...

NOK up massively on takeover speculation after the GOOG-MOT news. After all, that was my rationale for picking up a wheelbarrow load of the cheap Finnish phone maker last two weeks.

Better to be lucky than good.

Leftback said...

XLU surging 3%, the hunt for yield is on. We have only been predicting the rotation from growth to value, from cockamamie internet and chinese solar stocks into dividends for what, about two years now...?

(Must learn to think like the herd...)

Leftback said...

Mr Shorty looks like he had a bad day. He was sitting there minding his own business at SPX 1195, when suddenly.... anyway, he won't be sitting for a day or two. Now we are all at the mercy of the Mangler...

CV said...

Right LB, that last 10 point move towards the close will have tested the conviction in earnest.

I think it might make it to 1250 here as the high of the new range, but would also be a strong sell then imho.

Claus

CV said...

Obviously, looking at ESU1 today this could be the "famous last words". We have not really tested the lows at 1100-1120 yet which also makes me a bit worried.

Claus

Anonymous said...

LB,
At this juncture you have bog standard countertrend rally ..period.Nothing else to be said about it.
Anyone still short has now had the opportuntiy to sell it again.

Leftback said...

Quite agree with CV and Anon. Expect to see a slow crawl to something in the 1235-1250ish range as a 50% fibo, then maybe 1150, although some kind of retest of the lows is not out of the question. Mind you, we do have to keep half an eye on economic data, sometimes it does actually matter.

Leftback said...

We do seem to have "Wall of Worry" conditions here and not a lot of complacency. That makes me a little bit more comfortable, even with Mangler and Sarko even now engaged in a cozy tête-à-tête.

Leftback said...

Equity rotation in play again here. XLE, XLF the weak sectors, while XLU and IYR are outperforming. The new reality of a slower growth, lower interest rate environment is sinking in slowly here, with even some of the momo reflation crowd allowing more than one investment idea to permeate their thick skulls.....

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