Wednesday, April 11, 2012

Two Wobbles and a Hope

TMM are on holiday at the moment but watching with interest and that interest has picked up to the point that they have been lifting phones and doing trades.

There has been debate and difference amongst the team as longer term macro positions of some were being parried by shorter term positional views of others. But today once again TMM are aligned because the dipstas amongst us have decided that this dip is enough and have covered any remaining short term shorts and got back in, properly committing to longs in equities again.

Why? Well to those playing and whipping up the downside there is a perfect storm brewing as the global triumvirate China, Europe and the US each experience their own negatives [a quick media dig here while we are at it, how come up-moves in equity markets are always quoted in "points" yet down moves measured in "Billions of dollars wiped off the value of"?] But to Team Macro Man it feels rather than being a perfect storm this is 2 wobbles and a hope.

Wobble 1 - We continue to feel that Europe 2012 is NOT Europe 2011. The type of Price is News bluster and "haven't seen these levels since the last time" lines flying around the chat screens was notable in its vacuousness of new news other than the price has moved because the price has moved. We agree that the austerity vs. growth, debt/GDP equation is seeing GDP killed by austerity but we do not see systemic risk to Europe as a whole. This time around, basis and funding markets have not blown out, only widening to a token degree. Simply put, whether or not one agrees that the 3yr LTRO solves all Europe's problems or not, it would be churlish to deny that it has drastically improved bank funding conditions and, absent of forced bank deleveraging, it is kind of hard to expect Europe to "go systemic" once more. So though this is a bigger story further down the line, despite the seasonality of April Euro kickings, we don't think now is the right time.

Wobble 2 - US NFPs One number does not a trend a trend make, and especially one with such a large standard deviation. What can be said, however, is that considering a smoother three month average, that the labour market is a bit less vigorous than previously thought but certainly showing improvement - coincidently, agreeing with Chairman Bernanke. While this certainly does not imply that QE3 is back on the table, it does - arguably - put markets in something of a sweet spot provided that the data does not materially worsen: data consistent with 2% or higher growth is likely to be positive for risk assets, while a move above 3% would risk unanchoring the bond market. To scare TMM, ISM would need to head back to about 51, something that is unlikely when the orders/inventories gap is still supportive of the inventory cycle and when the inventory/sales ratio has not yet begun to rise. When this happened in May 2010 and 2011 it was time to sell.

The Hope - China again. We have laid out our thoughts on China over the past few weeks to a fair amount of ridicule and chastisement but we will stick by our guns. The latest Bo Xi news is not a concern of ours, and if anything the apparent connection to the death of a British expat arguably shows that China is becoming less corrupt in its dealings: while innocent until proven guilty, this is clearly better than being swept under the carpet. We also don't feel that the move to allow CNH capital to move onshore is a sign of desperation, but more one of efficient use of funds - it is simply another step along the line to full capital account convertibility. The Trade data and its slowdown in imports does not mean a collapse of internal economy either. Confusion over data on China reigns and as FTAlphaville has observed, can be used to support any argument but we feel we have done our own homework in polishing the fog from our data specs and are content with our interpretation and would encourage readers to go and look at the regional breakdown of both imports and exports (hint: it's Europe, not Oz/SA etc). China is not crashing.

So with our concerns so out of alignment with the noise we hear around us, we are now united in our hope for the markets to head on back northward and given the positioning and hope behind this dip occurring any discernable base and rally is going to be jumped on hard as no one wants to miss the train again.

We will be back next week.


Anonymous said...

I suspect we have just observed an almost ritual Euro bond auction squeeze ,but actually nothing more than that as it stands.I'm still not impressed by global macro for new market highs,but it also seems to me some sectors have had quite a kicking and within range trading parameters it opened enough room to get some long equity trades on.

I also expect these plays largely arising out of Europe are going to keep on offering trading opportunities like this.

Amplitudeinthehouse said...

Yennish Put still in place folks, move on.

We seem to be confident, in each other demise :)

Leftback said...

Despite my musical offering yesterday, LB actually agrees with TMM and is on the Bounce/Rally bus, at least for today and tomorrow. Whether this is a resumption of the All Clear market or a last gasp Exit Rally remains to be seen.

We got some longs on yesterday, having finally decided to bite the bullet and Kevlar'd some TEF (and some other stuff that isn't working today!). We also stuck to our guns and extended the steepener into the 30y auction tomorrow, and that's working too.

As usual, we are going to let Mr Market and Charlie Chart show us the way for the rest of the week. This market is slowly teaching us that it's better to not have a coherent model and make money than to be logically consistent but lose money... :-)

Leftback said...

Beige book in wishy-washy US growth shock:

The U.S. economy continued to grow at a "modest to moderate pace" over the last month, the Federal Reserve said on Wednesday in the latest publication of anecdotes. The Fed's "Beige Book" use of the phrase "modest to moderate" is the same adjective used to describe the economy in the prior two reports.

So, rates to stay low, and we have a chance to make some more money on the long side, until there is strong evidence of more US weakness or renewed crisis in Europe, that's our take. We are still more inclined to wait for another opportunity to short than we are to go BOLIVIAN.

Anonymous said...

C says'
"This market is slowly teaching us that it's better to not have a coherent model and make money than to be logically consistent but lose money"
Sort of sums up my view as well.

abee crombie said...

For Jan and Feb, everyone was calling for a stock market pull back as most real money missed the rally. Finally we get something and the bears come out. I dont buy 'the world is ending again ' just yet.

MoMo guys will still be buying dips and its the first real chance anyone who has missed the rally to get in. We all seem to agree that the recent spat of bad news is more to be expected in this environment then genuinely 'new' concerns for the market.

That all being said I would like to see VIX get about 25-30 and HYG have a nice big wash out day before I go BOLIVIAN.

Alas, its always easier to call for the dip than to figure out where to actually get in!

Amplitudeinthehouse said...

The Master shit-sandwich eater chart calls for a Yennish Fatigue top in 2015...he was slightly off in August...but then ability prevailed.

Anonymous said...

C says'
Tmm,I apologise if I mistaken ,but it appears to me you may have been found guilty of inconsistency.
In this post you cite "Wobble 2" that US NFP foes not a trend make preferring the smoothed average.
In a recent post if memory serves me well you supported a bullish long China call using the recent March PMI.Yet if your logic was to be consistent you would have preferred the smoothed average and discounted that data point.Doesn't of course mean you might not have other arguments for being bullish China simply that if correct you being inconsistent to use that particular data argument. As I say,apologies if my memory is betraying me.

Re your money missing the train argument you are wrong.This statement has continued to look in the wrong place for the last couple of years.We should not be looking at equity and assessing whether a bullish stance was missed. We need also to be looking at corporate bonds ,particularly junk, and to a lesser extent preferred equity.Look there and you will find I think that the RiskOn (not simply equity on) was well taken up post the New Year.Very impressive inflows.
I don't have the data for US,but when I look back at post 2002 volumes for FTSE it's clear volume has dropped and I ask where is it?
The answer if I am not mistaken is in bonds.I suspect that we will find a change in portfolio allocation leaning away from equity towards bonds,or I should say a higher bond allocation than previously at any rate with alower allocation to equity.
I suspect this is a function of people reacting to disappointing equity performance over a couple of cycles thus trying to lock in an income stream that cannot be chopped in the same manner as the div.In other words they are trying to move up the payment chain pecking order. This may also be a fair reflection that the average age of active investors is getting longer in the tooth and as such they will also be more inclined to lean towards fixed income and away from what they see as volatility in their income stream.
Just my opinions of course.

Anonymous said...

Actually on that last point of active investor profile.Given the GFC washout effect exactly who do we think is the man who has the most disposable income to invest?
Given the nature of the bust and the rush to paydown debt my guesstimate is he's got a lot more grey this time around. The average investor in the younger generations has been squeezed more this time.

Polemic said...

C.. probably.. "inconsistant" is my middle name... ask my wife or kids, though they would go one stage further and suggest bipolar!

KeySignals said...

When James Bullard was in China talking about the Global Output Gap, he was negotiating for a new round of QE to go into A-Shares.

Redrut said...

Certainly no European capitulation in sight but possibly a slow grind into a deflating economy.

The govt has to replace the lost spending with something and although this doesn't have to happen in the near term (we as human beings are myopic). I would expect a blitz on spending in the next 3-4 years to kick start growth.

Anonymous said...

MM's - Solid , reasoned take . Redrut - Spot on . The blitz on spending may not wait 3-4 years. Hollande, Greek elections , German Grand Coalition . Doesn't take much to shift the investment parameters from deflation to expansion . FX back in centre stage by mid-end Q2 after French elections and growth talk ? Politics kinda building up for a shift in strategy .

Anonymous said...

Anon 9.32 ,that's certainly one I have on my radar a political a la 1930's switcheroo.

No worries son I'm just the kind of anally retentive guy who misses no detail,but walks into every other lamp post on Bond St.

Anonymous said...

C says'
One I am tracking that brought me selectively long is the shellacking we have had in the Comms reflective of the lagging in miners to which oils have now caught up on etc.Indeed saw the red ink this AM and had to smile when I saw Shell,if it wasn't 'news' it was going to be something else because the stock selection is rotating on this latest move.
I've been thinking about all the former and what it implies for falling input costs and pressures on margins and of course given the time of year how this could feed through to staples etc etc.
The financials have played an almost textbook move since Autumn so stock rotation looks alive and well right down to Telecoms getting a bit giddy.

abee crombie said...

C. I hear your points. But first to address TMM inconsistencies. I would argue that using one data point of PMI vs NFP is quite different. NFP, is simply too volatile and full of seasonal adjustments to really draw much inference from one 'outlier' where as PMIs can be cross verified with other PMIs and are more sentiment driven anyway. IMHO

Now for the money train argument. I agree bonds and pref's is where a lot of money has and will continue to go (I am investing there as well, and not so grey yet) but my thesis is that you dont have such a large move in equity market like in Q1-12 and then all of the sudden top out. While the move in S&P was nice, it was hardly parabolic. I just think we will have a retest of the highs in the not so distant future. If Europe, EM or Fixed Income spreads lag at that point then I reserve my right to change my mind as to weather new highs continue upward or we take summer leg down as we have in the past.

And equities do matter bc everyone is still closet S&P benchmarked. If you look at a chart of Dow or S&P since 2009 its been textbook trend up with higher highs and higher lows

One last point, I have been seeing a lot of 'rate rest preferreds'. Is that big anywhere else? I think the ducks have been quacking for something and not sure if its a decent investment product or a prelude to another bust. One of my great contrary investment indicators is balls long them at the moment

Anonymous said...

Re your seasonal argument I would have to respond ( ;) ) by suggesting that if your argument was to apply then why wuld TMM have need to model the PMI to remove seasonality? In other words it would imply that both data sets can be 'wild' subject to seasonality .

Re the monetrain we have now diverged to not one argument (money missed the train) ,but a favourite trick of mine,the introduction of another rason d'etre ,that is "parabolic move" and how tops are formed. I actually agree with the latter ona probability basis tops tend to form from failed retests as moneyflow dries up to take on more risk hence their tendency to curve/round. We see more of them than a straight crescendo failure.
As I say on a probability basis I would usually lean towards the latter myself,but as I say this is a completely different issue from the money train argument which I don't believe to be the case here.
Oh well,here comes another lamp post !

Anonymous said...

"rate rest preferred" is a new one on me at this juncture ,but I will look it up.

abee crombie said...

sorry, rate "reset" prefferd.. lots of canadian co's using it

fair enough C'. The argument has diverged from the main point of tops vs money flow. I just think equities are the hated asset class, under-allocated but still have a strong bid underneath. Perhaps the money flow argument is incomplete but I do not think it is erroneous

how one makes decisions in this business is always through a mix inferences, hard data and judgement. The facts are never clear until sometime later.

But you have a sharp eye

abee crombie said...

another rate reset article for the canadian banks

Anonymous said...

@Ab C,

Good to find another Cdn here. Why do you think Oil majors like SU lagg Oil(commodity)? I know gold miners do for cost of extration reasons etc.? Thanks

Leftback said...


No worries son I'm just the kind of anally retentive guy who misses no detail,but walks into every other lamp post on Bond St.

LB has that problem when in London, mainly b/c he is distracted by Top Totty when hammered after a few pints.

My GDX and TEF punts are working out. As of now, we are expecting a slow grind to SPX 1400. Marginally in the JSTFR camp now, not JBTFD.

LB thinks the comments about watching credit are well taken. HY might be attractive but we want to see a little more reward for our risk before we return to that watering hole.

TMM unquestionably correct in their China chart calls of late. Good on yer, lads.

Tradebot said...

I'm not a single stocks man, but TEF does look like an innocent bystander in Iberia drive by shooting. I guess when you make up 20% of IBEX , you are done for when ppl macro hedge.. that is what you get when "risk management" in institutions force decisions on business based on what they read in Daily Mail.

I don't know much about telecoms or fundamentals and if things are cheap they are usually cheap for a reason, but TEF is more exposed to LatAM than Spain so risk reward at these levels look good if you can hold until LTRO3 kicks in. After all, how low can it go? :)

In my case, usually zero...:)

abee crombie said...

I havent looked at TEF in a while but here is my general thesis on the stock (and most of the street at the time). Brazil is growing but rate is slowing. Pressure on high margin wirelines in Spain and in mobile not abating for another couple of years. Add into that a levered balance sheet and management who refuses to cut the dividend (not sure latley) and its kinda like GE 2008. It wont go bust but you can still lose a lot of money bottom picking it

Obviously most of this is factored into the price but to say TEF is without risks is a foolish

Leftback said...

All fair comment. It's not a bank, but it's not immune to the cost of money or to program selling of anything with an Iberian flavor. LB hasn't gone broke on previous Kevlar projects like NZT, but this is one of those "one toe at a time" trades, not both feet at once.

Anonymous said...

re credit and hy my comments were not in any form a suggestion to buy ,but a response to where moneyflow had gone post he New Year.
Personally I used that moneyflow agsint my buys last year when 'doom' was amongst us and I sold into it the other week and like you I expect to have better buying prices when I go back to it.
When moneyflow is as strong as that and as late to take the risk I know amongst it will be enough weak hands to get a shake out.I'll wait for that and if it's right with my views at the time then I will buy from them what they can't hold.We call it trading !!

Amplitudeinthehouse said...

Apparently, NK rocket failed , quick, bring out the doves!!

Anonymous said...

Apparently ,Lil Kim couldn't get it up so that's good news to girls everywhere !

Tom said...

RE: 'rate reset preferred' products.

I can only pray that nobody in Europe is stupid enough to try one of these!

As soon as your soverign rates spike at the wrong time (i.e. a reset date), your private sector is in serious danger of locking itself into nasty unsustainable coupons right?

Canada might be all right for now, but is it really worth the long term risk just to shave a few BPS off your borrowing rates?

Anonymous said...

C says'
Before I close the door on the week let me say some of the positives I keep on the desk in front of me.
In the UK of cousre because I don't get out much!

1.Corporate taxes falling ,tick
2.Personal allowances lifting bottom end (marginal) spending power,tick
3.Easing off of infaltionary pressures of prior years extending consumer spending choices ,tick
4.Major events coming up bringing in more external moneyflows,tick
5.Relative position of being neither Europe nor US,tick
6.Pretty nifty choice of high yielders in equities that to me look a solid as one can expect in an uncertain world,tick

I'm not an out and out bull because I still see an economic world that is pulled between indebtedness wherever it is held (public or private) and an attempt to inflate out of it that actually can continue for as long as it is needed regardless of the crap printed to the contrary.
This has kept us nicely range bound with a range sufficiently wide to always find opportunities with risk being relatively easy to control. Long may it continue!!
Have a good weekend.

Tradebot said...

Not so sure about the UK... I am more glass half empty when it comes down to the UK.

Old Johnny Foreigner always makes the mistake of thinking London = UK. FTSE 100 is not FTSE 250 either, so I would definitely prefer global large caps of FTSE 100 over FTSE 250.

Negatives outweigh the positives (ie. NOT Europe) mainly because private sector deleveraging process has LONG to go. If the manic house price mania subsides even a bit in Bubble Town, the picture even gets worse. Rest of the country is public sector dependent chav infested hell hole, making real cuts in public spending practically impossible. Despite tough talk , Boy George has not actually managed to do sweet FA when it comes to cutting the defict - Much Ado About Nothing.

In addition, no way inflation will subside - when it comes down to inflation projections Merv the Swerve out of his tiny mind. Eventually the GBP will run into a wall... it is kind of UK tradition to have a sterling crisis in every 20-30 years or so.... and we are due!

FTSE 100, yes - good global stocks. Rest is YOURS YOUR YOURS.

Tradebot said...

oh and on TEF and telcos in general , I am not an expert but market might be overly bearish on relative value terms to other utilities. Voice is dead as dodo, but I can see data driving demand as far as eye can see, given the 4G is network is "must" for all the new gadgets (iPads, smartphones etc). Smartphone wars should also allow them some purchasing power when it comes to handsets. However, the sell off probably will accelerate when they start cutting their outrageously generous dividends to pay off debt/capex for 4G. Keeping an eye on this one...another 20% off and it is a good long term value play.

Leftback said...

Old Johnny Foreigner always makes the mistake of thinking London = UK

Agreed, but what about South Shields and Kirkby? In a similar vein, Mayfair resident Henry Hedgefund tends to think the US is booming after a jolly shopping weekend with Pippa Pension Manager in Manhattan.

TEF making new lows this morning on Spanish bank news. LB considering donning the Kevlar once more.

Leftback said...

Siemens at a 4% yield, or US 10y govies at 2%?
TEF at a 14% yield or US high yield at 7.3%?

Even to a lover of USTs, one has to ask whether this market is accurately pricing these risks...? Nobody expects the dividends to remain at these levels (indeed this is being priced in), but even a 50% lower dividend would be superior yield.

IF we view LTRO as the analog of TARP, then not only is this market not going back into the abyss, but also we can expect additional CB interventions. How much pain we can expect before the ECB acts once again is the big unanswered question.

I am staying largely safe for now but you'd be blind not to see some of the opportunities ahead.

Anonymous said...

Perhaps the reason why TMM doesn't see the systemic problem is because the problem is too systemic.

Anonymous said...

From my perch in the North of England which of course means I am not a foreigner ,or indeed Little Johnny I would say I understand fully the interplay of regional differences in the Uk and trust me on this I almost certainly know a lot more about the interplay of London and the International markets,particularly the long standing property influences.

The bottomline is,everyday outside my cave I see plenty of evidence that the Uk situation is already not as dire as some people believe it to be and that is before certain positives start to flow in their direction. My emphasis by the way is never on 'where the ball is' ,but 'where it is going to be' and in economic terms I fully expect people to start feeling much better before they feel worse.

Most of the nifty Hy equity I referred to are of global (duh) need I have added that ? Even the one's that are not though are benefitting from positives and indeed are sufficiently cash happy and in sectors that have cashcow like properties. Hence, comparing these to alternatives in any form of cash or bond yielding much less leaves me wondering when the lobotomy was carried out.

Europe coudl well ne a tipper for the UK just as it could for any country that has a siignificant trading relationship with it,but against that we at least have central banks outside of Europe who to date have shown willingness to to deal with the kind of consequences that Europe might bring about.
As for dear old Merv ,he may not know inflation from his arse,but the CRB has been well under water and if oil/petrol cost moderate at all we will be holding a very strong hand for easier input costs and more optimistic outlooks for consumer spending.

None of the above puts' me in the bull camp,but it is more than sufficient to put me tactically in the postion mentioned earlier.

On the basis of "YOURS YOURS YOURS" you better believe it son.The main thing in my life that made the most money was always taking what other people couldn't afford to holdand making it "MINE MINE MINE".Point made.

Anonymous said...

What about FTE vs TEF? Any thoughts?

Leftback said...

FTE, hell yes. Telecoms are known to be unusually dependent on short-term debt, but one would have to say that a SUBSTANTIALLY higher cost of borrowing is probably being priced in to many European equities. At some point, these costs may fall again, and these equities revert to being cash cows.

It seems fairly apparent that (as the gentleman just mentioned) there are people out there who are now sadly being forced to liquidate stuff, even from the widows and orphans segments of the portfolio. When others are offering us high yielding securities at fire sale prices it would seem ungrateful of us not to take advantage.

Nobody knows what will happen on Monday or next week, but we have been dipping a few toes in the water (wearing the Kevlar boots of course). In my Knife Catching career I have bought T (2009), MRK (2010) and NZT (2011) and have since made more than enough for a few pints. TEF and FTE may well go lower, but we think they will survive intact.

Leftback said...

TEF. FTE. DTEGF. Another one... I am pretty sure these companies will be here in a year or two. I even think that the respective large banks in Spain, France and Germany will probably survive, but bank common stock is not something I want to own (b/c you can bet they will be issuing more of it). Mind you, there are limits. You can have all of Italy and Greece, and I'll keep my barge pole.

There are quite a few preferred stocks in the US that are worth a look, especially now that the US corporate bond market is less attractive. Believe me, if you can make 5, 6 or even 8% a year for doing nothing this decade you will end up being an exceedingly happy camper.

Tradebot said...

well so far market digresses with my "avoid UK like a plague" as the GBPeso hit 18 month high against EUR. Still that is a toilet paper vs toilet paper trade , I prefer to avoid the debate entirely as I hate and loathe both currencies.

Macro view for UK is underperform as far as eye can see - country is populated by semi-illiterate thickos who are leveraged up to eyeballs. Political leadership is incapable to reign in the public sector largesse and there will be no escape. All roads lead to Athens , it is just that some countries travel slower than others.
My view always has been that we have been in long term decline since Queen Vic was running the Empire and respite given by the Thatch was just a blip. But that joyful discussion is pub talk , no good trade can come out it.

Not so sure about FTE under the Hollande regime, I would prefer DTEGF.

Anonymous said...

C says'
Tradebot you need to overcome some shall we call it bias.
"chavs","thickos" etc etc. These are to be kind stereotypical comments that don't belong in any serious consideration of the economic possibilities for the UK.
I've travelled all over and done business all over and as a generic people are people wherever warts and all.No country I have found has a monopoly on the attributes required to buidl an economy ,but they do at any given time have advantages ,or disadvantages dependent upon the hand on the wheel and policy choices that are being made.
I happen to see the UK to be an outperformer at least in Europe for a variety of reasons some of which I have mentioned.
Re the public sector ,I know more about that than I wish to.My comment is this.Chnaging is like steering an oil tanker.It doesn;t happen pvernight ,but just because the average chap in the street doesn;t see it doesn;t mean it isn't happeining. It is ,it's an incremental process and it's moving in the right direction despite the "chavs" and "thickos".

Finally, don't just argue with me do so with the IMF because they have received my consideration on the matter and now posted their agreement (tongue through cheek).