Thursday, September 22, 2011

Towels at Dawn

TMM isn’t sure we’ve seen this ugly a start to the day in Asia since 2008 – or is that Pearl Harbor? Going into the Asian close we see the indices have really taken a spectacular turn for the worst in Asia for a whole host of reasons.

1) Talk of Chinese Regulators Tightening Shadow Lending: Chinese developers kicked off the swan dive with talk of regulators pushing companies to report dealings with Greentown China Holdings which is one of the sketchier China property developer credits out there. While it doesn’t have much high yield out TMM gets to about a 1350 odd spread on their CBs. IG it ain’t. The implication of this is that China is getting concerned about either shadow / trust lending (more tightening) or thinks that some developers are close to failing (real estate market terminal). TMM don’t like the credit or the equity in this space and do not see an easy solution here: either China loosens or a lot of these companies will have big problems. It does not help that SOE developers are rapidly cutting prices on apartments to raise cash in the interim. TMM have learnt that in a crisis, just because your model says something in cheap does not make it cheap if the drivers or the derating are still very much in force. And on that point, we can’t see what could make any of that improve barring a pretty massive Chinese stimulus or a move towards more price driven credit controls (higher rates) since we’re getting to the outer limits of what the real estate sector can take from a credit point of view. Now TMM would like to point out means that when we are at the outer limits of credit the equity may be worth zero. And don’t get TMM started on the solar sector where senior secured offshore high yield for LDK solar now trades with a forty-something bid at some dealers. Suffice to say, for a number of sectors in China its high noon at the OK Corral.

2) Momo Plays Crying For Momommy: Sometimes a picture says a thousand words and this one is a good summary of what happened to 3 big popular themes: rare earth metals (Lynas), “the cloud” (Netflix) and EM macro (Indonesian Stock Exchange). As can be seen, there is nothing so utterly unsafe as a position that is heavily owned. Anyone who says that this isn’t hedge fund deleveraging needs their heads examined.

3) Further Pain in EM FX: TMM aren’t sure whether to include AUD in this but frankly AUD is looking more and more EM in how it trades. Hard to see daylight here until we go a week or two without a global growth downgrade.

4) No news from the EZ that is even vaguely useful, aside from a few platitudes from our dear friend Jurgen. Otherwise known as a "Jurgenought"

Which leads to the question, what Is TMM thinking? Views vary somewhat but what we are seeing is pretty clear here: and equity buyers strike until policy issues get resolved. Some of these are easier (China loosening) and some of them are much harder (dealing with eurostriches). In the interim, we
can’t see much of any way that risk on trades can recover without some kind of a circuit breaker here. In the meantime, we are hoping that this screen gets the attention of regulators and governments - time is running out, and with US short term paper downgrades we are perilously close to a major breakdown in US money markets.


Secret--Sauce said...

I'll leave EM FX to the Macro Mavens, but would say that massive EM cash equity margin calls could be very close.

That hash mark may be yours. Wipe accordingly.

Anonymous said...

C says'
"TMM have learnt that in a crisis, just because your model says something in cheap does not make it cheap" ,yes that sounds like me !

If we are lucky ,very lucky and I don't know if we will be then the Western banks as an issue may get seperated out from the Asian /Growth fallout because really when you look at the falls already sustained by the banks they really offer less meat to short than other sectors at this point.However,for that to happen we are going to need to see some cohesive action sooner rather than later.
To be frank the way in which the politicians and central bankers have stepped away from getting to grips with multiple serious economic issues is almost unbelievable. Indeed some of them have behaved appallingly and I can only put it down to them being retarded and not fully grasping what is happening.

Anonymous said...

so this blog been bearish all the way up and switched to bull stance just in time to watch things trade 20%+ lower.....

Leftback said...

Anon @ 5:07. You are a plonka. "Bearish all the way up?". No stupid, just pointing out the bubbles was what was going on here. "Switched to bull stance?" Idiot. MM told you to "Run AWAY" before the big move down, and are now suggesting that there is some value out there in equities.

So looking at your little offering here, we would say, mate, that's a really shallow and stupid comment, are you 12 years old? Piss off sonny, and come back ONLY when you have a handle and something intelligent to say...

The blogosphere is INCREDIBLY negative today, witness the wailing and gnashing of teeth over at Barry's house....

Extreme Blog Bearishness

We do agree that FOMC was sending a message to the Austerians in Congress as well as to the gent in the White House. "Quit yer bitching, jackasses, and do something useful for a change".

Nemo Incognito said...

LB, thanks. Folks - there are a few different people who write for this blog and suffice to say occasionally we all agree and sometimes we don't - apologies we don't put all our trades and memos up here but if you'd like the output of that show us your $5mm and we'll show you 2/20 and a PPM.

In the meantime, read the blog header.

Marshall Jung said...

I'm a noob compared to TMM, but I've found this blog to be one of the very best.

If you are not educated in the technicals presented here, do your homework. Then you will see that this blog pretty much offers you uncanny macro trade ideas for 2/20 of $0 invested.

Leftback said...

It's clear there is a mild panic on, and as C from C points out, at some point panic, margin calls and liquidation can overwhelm technicals.

However, as one who has profited from the recent range trade, can I point out that DAX 5000 and SPX 1100 are still in play as supports? It works, until it doesn't.

We will return with another edition of YieldWatch™ later on. It's possible that "it's different this time" and that a 1.77% 10 year will prove to be a cracking buy. But let's at least examine the alternatives....?

Leftback said...

This article by Tony Dwyer is clearly written, and pretty much reflects LB's position on US equities for the time being, although we think $95 EPS might be optimistic as the banks may kitchen sink this quarter and next. So we will go with $92 and a P/E of 13 = SPX 1196.

Retest Underway - Now What (Tony Dwyer)

We also are cautiously optimistic about Japan, and even Germany, simply because they are so washed out. In the US credit markets, plenty of liquidity and ZIRP make high yield attractive.

Emerging markets may have some bounces, but a stronger dollar isn't a green light, as Nemo points out. Wait for the DXY to top out, then watch a while for the Wizard's inevitable wand waving to signify QE3 - and then pile into EMs, energy and so on.

Chris of Stumptown said...

Gold/PM equities getting bludgeoned as well. Gdx is off more than 6pct which is actually off the low. PM equities are another hedge fund fave so more delevereaging evidence here. In the long run equities and metals prices converge, probably, but at times like these, you sell what you can get a bid on, right?

I am trying to think of a clever phrase for US politicos on par with Eurostrich. Seems like they find the Sarkozy/Merkel/Trichet circus worthy of emulation. Markets are looking for signs adults are in charge but realizing it's all clowns under the big top.

Leftback said...

REM called it a day but it's still The End Of The World As We Know It over at ZH. "Unhinged" is the word of the day over there:

Sky Falling. Plague of Locusts Imminent

willem said...

thanks for sharing the Dwyer post, great read. I love this "in a post-crash environment and intermediate-term bottoming process, there will be periods where the market acts like it is off to the races or about to crash with very little progress either way."
So true as we swing back and forth between the collective euphoria and panic with investors trying to sort of the new norm.

PPM said...

I think that EPS above $90 is optimistic, given the accumulating factors in favour of economic contraction, around the world. It may take one or two quarters longer to manifest, but earnings can not sustain their current levitation when the US is at stall speed, Europe is imploding, and Chinese domestic demand has yet to convincingly assert itself. Oh... and the central banks are out of bullets, apparently.

Leftback said...

Interesting article on Austria. One can't expect to buy into a fiscally conservative country (Germany, Austria) and assume safety, b/c it's what the banks have been doing that matters. In this case, they were up to their nuts in CHF-denominated Hungarian mortgages that are now being refi'd by Hungary, with the Ö banks taking the hit:

<a href="> Austria ETF Underperforming in 2011 </a>

Leftback said...

Interesting article on Austria. One can't expect to buy into a fiscally conservative country (Germany, Austria) and assume safety, b/c it's what the banks have been doing that matters. In this case, they were up to their nuts in CHF-denominated Hungarian mortgages that are now being refi'd by Hungary, with the Ö banks taking the hit:

<a href="> Austria ETF Underperforming in 2011 <a/>

Leftback said...

Austria ETF Underperforming in 2011

Chris of Stumptown said...


One of the bull vs bear battlegrounds has been profit margins. Bulls say they are high which is good, but bears say they are high which is bad. The bulls have clearly been right over the past 5-10 years.

John Hussman observed in a recent commentary that transfer payments now represent a large part of national income in the US:

22 cents of every dollar of U.S. personal consumption is now financed with transfer payments... In effect, the elevated level of profit margins is largely a reflection of government deficits that maintain transfer payments, and by extension, consumption demand - even in the face of wage compensation that has never been lower as a share of GDP.

The Tea Party movement is going to do whatever they can to reduce transfer payments. This is very possibly the pin that could prick US profit margins. Seems to me that the time has come to let discretion be the better part of valor in estimating earnings.

Anonymous said...

C says'
" you sell what you can get a bid on, right?"
And that's why I am ereally interested in technicals adn ranges that should suppot right now because as we all should know they simply don't work when there is wholesale liquidation in process. I have not yet seen evidence that we are not looking at that right now.
I've caught my share of falling knives ,but usually it's when I can see some a kind of one issue that's blown a position out.
As it stand right now I can see a number of themes all trying to unravel at the same time and that concerns me enough not to want to try a 'catch'.

Leftback said...

This is all about the dollar and HF positioning. The Asian data caused an unwind of crowded trades by DGDF geniuses, and everyone else was caught offside.

Bucky closed 2010 at 79.028, just above today's high of 78.80. That might be resistance. Above that, DXY 80 is probably a firm ceiling. The FOMC can operate swap lines, and it's not like the US is actually strong, although it is muddling along.

I went out at lunch and there was all kinds of fiat-based commerce going on, and no bits of the sky landed on me at all. Nobody was offering to sell phones or potatoes for bars of gold. In fact, the same was true in London and Vienna recently.

Bear in mind that LB is usually not bullish and has never ever been a permabull. Anyway, if you want a good panic, then you go ahead and jolly well have one, the little chap at the Treasury will be only too happy to sell you some paper today.

European banks are now trading at prices that suggest that not only Greece but also Italy and Spain will default. We would submit that there is a finite chance that this will not in fact occur.......

Anonymous said...

C says,
That should read "I'm not interested in technical,ranges,"
When you are forced to raise cash you don't typically have choice on whether to sell the good ,bad or indifferent so models and technicals stop working then and momentum takes over. With multiple themes clashing I'd be concerned that that is where we are at.
I also don't see eanrings standing up when the lagged data from what will have been a credit crunch period starts to make itself known.
Lo's of stuff warning us here.Low mortage refis,supermarket price wars,Ford CEO stating "it's starting to hurt,get a grip".
With cash mountains on the bluechips they can afford to hold or even increase divs for awhile regardless of growth etc ,but investors can see that clearly and if they can't also see a change of business climate moving in the right direction they will start to discount future price because they can see their earnings coming right out of the balance sheet.
Means we can't afford much of a continuation of this policy that thinks fiscal contraction is the sole answer to servicing debt load.
If that's an ongoing we are all german now then we're screwed.

Anonymous said...

C says'
LB the US might not be "strong" ,but it doesn't carry the Eurozone uncertainty factor right now so I suspect that means don't think it can't go higher because the Euro is the deciding weight in that dollar basket and if it's going to go any great distance then that baskets going to go with it. In that sense the Euro political risk and their ability to get a grip will be either a brake to momentum or not as the case may be.Meanwhile in the RED corner we have a seperate issue that is also connected to the dollar which is all the bozos who were flipping 'noodles' at th Eurodollar in exchange for 'hard stuff' that could be collateralised. It's a mess and we don't know how deep yet.

On a get a grip basis that evoked some policy change as well I'd at least buy some yield for a counter trend rally ,but not until then.

Leftback said...

It really does look like liquidation. You look at certain people's holdings of reflation vehicles and they are being slaughtered. Some shorts must be having a larf today.

Another Red Hot Poker, Mr Paulson?

So another Paulson holding is absolutely cliff diving .. it's just too funny....! Talk about a one trick pony, that guy couldn't make a dime unless the game was rigged first. Wonder what Tepper's Crap-A-Loser Asshat Management is doing today? He was another BAC lover, ACI etc... all being taken out and shot.

Anonymous said...

I'm not panicking mate,it's not in my gene's .I'm simply recounting the overall context that I am looking at that determines what I should be doing. IF you ,or indeed anybody sees it differently that is not a problem because as I know well I am not right all the time by a long chalk,but I always do what I think needs doing then when it goes wrong at least I have no one else to blame.
C says'

Leftback said...

No arguments, C from C. Not in mine, either.... your opinion is as good as anyone's and you have been spot on lately. Good on ya.

Leftback said...

Although we are serial knife catchers, these waterfalls are rarely one-day wonders. LB's Kevlar Gloves are staying in the drawer, for today at least. Let's let Bucky complete this run overnight first.

Never get in the way of a really brutal FX squeeze, especially when the dollar shorts have their bollocks firmly in the vice....

Leftback said...

Yield Watch™, presented without comment, other than to say that we are tempted to go BOLIVIAN:

Yield Watch (values are approximate)


2y 0.20%; 5y 0.78%; 10y 1.72%; 30y 2.79%
LQD 4.51%; JNK 8.50%.

Equity index ETFs

QQQ 0.97%, IWM 1.46%; SPY 2.19%; EEM 2.41%; DIA 2.91%; DVY 3.78%;

DOO 11.1% (DOO is Intl. divvy ex-financials)

Equities (random selection of US stocks)

JNJ 3.59; KMB 4.03%; SO 4.45%; MRK 4.91%; T 6.21%; PBI 8.06%; FTR 12.2%; NLY 14.7%

Foreign equities (random selection)

BCS 4.17%; NZT 9.23%; TEF 11.2%; STD 11.5%.

Anonymous said...

C says'
Sorry about this but if you are going to get sued by all means hit the edit/delete button otheriwse I just have to say;

The problem we have is ideological. The bloody germans think because they get up early and get their towels out first they actually know more than the rest of us.Unfortunately ,their brains are typically mainly in their muscles hence their productivity ,but ideologically they are as thick as pigshit which is why they always made good Prussian soldiers out of them.
This is undoubtedly racially biased ,but to hell with it. There problem has always been they know how to start a damn war better than how to stop one.Which is why you never want them in the LEAD role !!
Clearly with the Germans in that role we are going to have to actually experience the pain because from a sado masochistic german point of view no pain no pleasure is ideological their approach to economic policy regardless of whether a rational policy alternative might prevent that.
Well shoot I feel better after that ;)

CV said...

Well, always a pleasure to follow the thread on a day like this.

C.f profit margins. Did anyone catch Napier's latest missive? I am skeptical that he is right, but surely the crowding out argument has some merit.

The only problem I have is that when it comes to buying the excess flow of USTs, then if the Fed does not decide to monetise it directly they will do so indirectly by imposing negative interest rates on excess reserves thereby forcing banks to buy them.

Yet, on profit margins they do seem very elevated at the moment surely some earnings "marking down" is yet to baked into the cake here.

I agree on Germany LB, but look at France too. Bank run imminent, etc etc. French industrialists are now trading at 2009 lows or very close to it. You think French families will stop buying UG's baby haulers?

(talking my book, I own PSA).


Anonymous said...

C says'
I would say that this is a fair assessment of what we can expect from the very best managed companies and much less from those are either not as well managed ,or simply do not have a business model/moat like this.In other words they are adapting downards to a deteriorating economic enviroment .It isn't panic stuff so days like today will over run the fundamentals becausee days like today were about children being where they shouldn't be playing.Nonetheless,the context is simply not expansionary for price performance and won'tbe unless we get some policy action.I'd also like to apologise to every german reader right after you have had some therapeutic couch time .
Little bouncey because who wants to take a biggggg profit into the weekend.

Anonymous said...

referring to ;

“Revenue and earnings increased significantly in the quarter due to strong FedEx Ground performance, improved FedEx Freight results and the continued success of the company’s yield management actions,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “While the economic environment is challenging, we remain confident FedEx will improve earnings, margins and cash flows this fiscal year.”

…”The U.S. and global economy grew at a slower rate than we anticipated during the quarter,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “While FedEx Ground and FedEx Freight achieved improved operating results despite lower than expected growth, the more rapid decline in demand for FedEx Express services, particularly from Asia, outpaced our ability to reduce operating costs. We have slightly reduced our earnings forecast to reflect current business conditions and are aggressively working to adjust our cost structure to match demand levels.”

Anonymous said...

LB: Don't go BOLIVIAN until the PINheads have puked up their inventory.

I think I am getting the hang of the new jargon.

Leftback said...

Music for the market day;


and especially for my beloved gold/silver bugs today, b/c LB cares deeply for them....

Everybody Hurts

Anonymous said...

C says'
Didn't take long for the G20 to start trying to talk the market down. The problem is at this point some themes have now gone into reverse and they won't reset in the same way,or should I say in a way that reflects the same scale of moneyflow.That won't happen because a fair amount of that moneyflows been destroyed this year in the sense that it is no longer held by the same players.
What they can do IF they get past talking abd start doing soemthing is they can put soem control back into market action has the effects of previous monetary policy are unwound.What they won't get because it is behaviourally unlikely is they will not now get people coming back into the market with the same 'risk' profile because they have badly botched confidence in the political process this year and that will linger as the issues to be dealt with are not a quick fix.They'll require all sorts of regulatory actions going forward.
Meanwhile absolutely any risk on wth weight can get expensive because the damage to data is already done. The last quarter as it feeds through inparticular I would expect to be on the nasty side and in a nervous market you could whipped to death trying to build weight on a trend following theme that just isn't there.

Anonymous said...

C says'
By the way LB I didn't disagrre with your relative yield line up other than it will not obviously be quite as attractive as you suggest there.Nonetheless I confess I already hold some 12% bonds and I have plenty of cash to buy much more these until the cows come home so IF there are any other children out there playing with things they cannot really afford to own please speak up as we go forward .

Charles Butler said...
This comment has been removed by the author.
Charles Butler said...

We'll try it again..

Go here, LB, follow the green and yellow lines from left to right and ask yourself whether SAN, on its home turf, is actually in the banking business any more. Then calculate the chances that a dividend cut is already priced in... or not.

Dee Dee Humberside said...

Its not just the dividends either. As C from C pointed out, this is going to be seen as a credit crunch retrospectively. So not sure stuff like HYG is going to work that well with forward defaults probably much higher than where the consensus still is.