Friday, May 04, 2012

Kerwang Markets

A few years back TMM did their motorbike test with 3 good friends. Not so much because any of us had real aspirations to brave the London roads on a death machine but more along the male testosterone ability/one upmanship lines and having another licence to display next to our diving / parachuting / marksmanship / racing driver / kick-box instructor / ski guide / golf pro / astronaut cards (if only). Doing the accelerated  "know nothing" to "full licence" course required a basic knowledge of bikes and so we didn't really get off to the best of starts when our instructor's first instruction, once we were mounted on our 50cc starter bikes, was to "just let in the clutch and ride 10 feet forward". One of us did what looked like an "emergency accelerate", careering off into a fence. Our relationship with our 22 stone bigot of instructor never really recovered.
There were various fond memories, including when he pulled us over to the side of the road "Right lads ..take a look around ..  As a road user what is the main hazard you would be most wary of"  TMM Reply -  "The four blokes standing in the road in  "trainee motorcyclist" vests looking around aimlessly?"

But the highlight, if you will excuse a very rambly start, was when Mr Unpleasant asked us "Do you know why the Harley is called the potato"?  No?  "Because the noise it makes is "potato potato potato potato"".  To which TMM replied, bearing in mind the motorbike the instructor rode, "Ahh! that will explain why the BMW1200 is called the "Kerwang"".  He just looked confused as his instructees broke down in mirth.

And THAT, dear reader, leads us back to these markets (we hope you have worked out the kerwang reference by now) because TMM are feeling like a bunch of kerwangs, Either that or everyone else is. But invoking the old dinner party adage  "If you cant work out who the wanker is, it's probably you" it must be us. April and now the short start to May have evidenced this. We just need to look at our P+Ls and the carnage inflicted upon them.

So what is making us kerwangs?

Our views on Europe? Because we cant see what everyone else can in Europe? They are in recession Ok, but we are not about to lose the Euro.  But we are being undermined by good old fashioned non-binary economics with the slew of rubbish PMIs. Rubbish but still not a complete disaster. At the aggregate level eurozone composite PMI is still only implying about -0.3% Q/Q for Eurozone GDP which is obviously not great, but it's not enough to drag the rest of the world down. TMM think you'd need to see -0.5 to -0.6% QoQ for it to start having an effect. The key thing is not to be paralysed by the shock value of Spanish or Italian PMIs on a low 40-handle. These are not surveys with a particularly long history they likely have the same X-12 2008/9 crisis echo problem with their seasonality and as they only go back to mid-2005 there are not enough crisis-free points to actually figure out a seasonal adjustment factor that is "clean"  (like the NAPM have done for ISM).  Finally, it is worth pointing out that the "50-level" does not correspond with 0% GDP even if that is what some lazy interpreters would like us to believe.

Our views on commodities? We note the recent dump in materials, largely due to an emerging consensus that QE or not, with supply situations improving in base metals and bulks the best days of the sector have come and gone. TMM think this is about right and while gas heavy diversified companies BHP and XOM may pay nice dividends and have upside, the days of making  notes punting small cap ASX names is largely over. We  are short coal, copper and silver. QE doesn't matter for anything (except gold) when fundamentals are this strong for the sell side. Perhaps iota has already started. - The UK FTSE underperformance today despite peripheral Europe gains is nearly all due to the basic materials sector.

Our views on Equities? Super cycle - bond and commodity markets on the wane and equities to lift off as the next "whowuddathoughtit" parking bay for all that cash. Earnings this season at 8% against expectations of 3%. An underlying support from either QE from someone, or growth that will preclude the need for QE. A new bias to go for stimulus in Europe. Thie isn't 2011 its more like 2009. The real money sector paranoid about downside risks and already hedged. That's it basically.

Perhaps we are just kerwangs for even being in this business. TMM have seriously started to consider how they can get public sector jobs. Cleaning road bollards for a south London council seems infinitely more attractive than dealing with half of the kerwangs in this industry.

We wish you a happy long weekend if you are lucky enough to be having one.


Tradebot said...

not so sure about the long equities trade... not enough shorts and/or "mo" to drive it forward. Mkts always underestimate political risk, Europe is going to get interesting in near future.

If you want to play QE3.2 then Tnotes it it. Could break 1.9% and head towards 1.5%.

Sharper tools in the box are buying US structured credit , juicy yield , low valuations as CRD3/4 drives out dealers and bad bank valuations. See MAX CDO unwind from Maiden Lane 3. Sadly , one must know what one is doing , not exactly the easiest asset class to price, trade and value...

Anonymous said...

As usual you make a nicely turned 'rational' case ,but of course the markets are not rational and there is no shortage of other factors that can trump a data forecasting argument such as the one presented. I give you for example, The MayOctic Theorem devised of course by the Mayans who clearly stated sound Spanish Kerwangian tactics were to sell in May and go away until October whenever the Rain in Spain falling mainly on the plain was likely to find Spanish conquistadors heading down The Yucatan for Summer holiday.
Alternatively,seasonality means broad long gives way to selective picking and you picked the wrong one's ?

abee crombie said...

apparently some bigger names are shorting CDS and buying equities of base metals/iron/steel etc.. hasnt worked so far..but if supply side is really that big, I guess shorting the equities is the way to go

I'm stuck pulling my hair out with gold miners

Market vodoo technicals starting to look bad for Spoos, though not china.

Could we see a summer of de-correlation? Europe rebounds slightly, China outperforms and US underperforms. With all the old fart bag money now starting to talk 'risk on/off' I think the chances are good

CV said...

Looking generally ugly today with a nice break on Spoos ... don't blame the NFP though (non event). It was in the top of the range anyway. Also, the barbarous relic is trading inversely with equities here ... eternal hopes on QE3 as the market goes down?

RUBUSD looking like sporting a nice break too as is of course the Aussie (ah, how wonderful it would be for many punters if this cave in). A lot of carcasses have been produced sitting short on the AUDUSD just to watch the carry eat your capital/P&L away.

Bought a little bit of the yellow stuff today to fill the tinfoil hat. Elsewhere, I am getting wankered by the USDINR through a long Indian equity position.

Have a nice weekend!


Amplitudeinthehouse said...

I don't know , TMM...your coming across aggressively in the light of anticipation for the next levitation basically off the fact that the EZ banks have been LTRO ring fenced...

Agree that real money is hedged in and not really looking to cash in in size , just yet.....but thats not to say their not looking for another 10+ and the rest percentage pullback. My guess is the QE 15+ and the rest percentage frontrunning days are gone in USA averages...for now.

ps.....Amplitudeinthehouse was last followed into his local internet cafe, wherein our operative caught him in the process of playing warcraft with fellow gamers...

Anonymous said...

Looks like the the euro is anticipating Sarkozy off/Hollande on

Leftback said...

LB for once has hedges working perfectly. Short energy stocks and US small caps helping to offset a bit of nastiness in the European part of the portfolio, not to mention the yellow metal extractors. Going back in the bar now for the rest of the day....

Anonymous said...

C says'
Very recently I saw two data sets that made me go "Kerwang". The disparity between open interest on managed funds in Oil/Energy and commercials and the numbers of SP futures owned by small retail .
Smells like a meatgrinder situation to me. The expression "Yours" comes to mind.

abee crombie said...

wow the trolls under the 1350 s&p bridge didnt come out to play.. yet

so confused still

Leftback said...

Today's market seems to be mainly bollards, in the US, TMM. Possibly not quite done working off some of the irrational exuberance in energy/tech and the latest IPO of

LB is watching EURUSD 1.30 and DXY 80, and is fairly optimistic as long as both limits hold. Spain is now acting like a market that is going to take off before long, not melt down.

We did hit on a good seasonality trade last week by shorting energy stocks.

[Blind squirrel, acorn etc......]

CV said...

Well played on shorting the energy stocks LB, they have been looking juicy for a while.

As for the EURUSD and the DXY positioning is heavily skewed towards the EURUSD moving into the 1.15s territory. And it should ... facists taking over Greece and 1 trillion in LTRO liquidity sloshing around, but I can't help but feel that it will hold 1.30 and flush out some of the shorties here.


Leftback said...


I think Greece has always been fascist underneath (one law for the poor, no taxes on the wealthy) but was pretending to be democratic for a while. This is unfortunately true in more countries than most realize.

Positioning is indeed very skewed towards a stronger USD, as we are being told a lot about the strong US recovery and decoupling, and often this is from the same people who were rampant gold bugs and haters of Bucky at DXY 73.50 last year.

In addition, nobody and I mean NOBODY, not Gold Trading Expert Dennis Gartman, not ANYONE, likes the gold miners, which all makes LB go.... hmmm....

Anonymous said...

Ol' Dirty Bastard says

Leftback, do you have some links or other color re gold miners ? GOLDS / XAU is at record highs, otoh gold miners still look expensive (looking at 5y or 10y Shiller PEs). I'm not a commodities guy but try to get my head around what's happening.

Anonymous said...

"What's happening" is a process whereupon the market has moved from tryng to hedge against inflation via PM to hedging for capital preservation via the dollar and treasuries and that is not bullish for pm and gold miners.
There's more than enough context available for them to both go further down.

Anonymous said...

NEM looking nice with a stop just under 40.

Nemo Incognito said...

c you are right - lots of people traded GDX as a basket to hedge inflation. Its a few steps removed and has serious issues to be discussed in a post tomorrow. Some of us are short, have been short for a while. Hard to see much good in Aquarius Platinum's future for instance.

abee crombie said...

Gold miners are starting to look attractive on a forward P/CF of about 8-10x for majors. On DCF they look expensive unless you use the industry 5% discount rate. However unlike most equities, you model miners with no terminal value, you just take all the expected cf of the mine(s) out into the future. You will notice most stocks value is in the terminal part.

I like em here, but they are not dirt cheap by any means. Be weary of P/Nav charts showing historical relationships

Anonymous said...

Ol' Dirty Bastard says

Gentlemen, thanks for the insight so far. Especially the "they are not dirt cheap by any means" part confirms my guts feeling (which says otherwise that you shouldn't jump on the S&P bandwagon for the long term until we see it in the 900 range).

Leftback said...

Tradebot called the move in Treasuries very nicely, and we have some long bonds, so that's working. Check. US fixed income (AGG) also steady. Check. A reward for boring old fart asset allocation.

Our single name European and US equities (REITs, telecoms, big pharma, even big cap energy) performing OK. Check.

Biggest Kerwang move for LB has indeed been GDX. Head bowed, self flagellation. My bad. Quite possibly this has been a hedge fund hotel, and it is now liquidation time.

We have been picking through the debris for a few more accidental high yield donkeys, and there are plenty out there. Europe is full of 10%-ers and there are a few beaten up dogs in the US now too.

US HY credit not looking too bad. World Not Ending.

Leftback said...

You can make an argument that this lot will help the bullish case:

7 a.m. Bank of England asset-buy size GBP325 bln
9:30 p.m. China CPI Apr 3.6%
1:30 a.m. China industrial production, YoY Apr. 11.9%

Easing Chinese inflation and any kind of decent industrial production number probably makes China a buy. Whether you believe it or not!

abee crombie said...

gdx has been the worst trading product I have ever seen. Always manages to squeeze everyone out. I hope we get a broad market crash and the GDX gets taken down with it. would be a good buy then. as of now I am stuck in my small position.. some of the juniors looking pretty cheap but they are the ones that get washed out the most in a general sell off.

is there a similar DVY for European high yielders?

abee crombie said...

hmm iDVY yielding 6.3 vs DVY 3.3

Anonymous said...

So 'the world is ending' again thanks to Europe,but the US markets rally off the back session ! Once again I think we might get a bit of a short squeeze for the latecomers.No,I don't equate this with bullishness,just an equity market that still has no excrutiating reason to sell off madly.Tiresome to pick and run,but that's what I think we have here.

Leftback said...

C' is spot on there.

Abee, I feel your pain, re GDX.

LB's equities were up on the day. I do think there are some outstanding European opportunities out there for those with cash and intestinal fortitude.

Sold some US fixed income, seemed only prudent to take profits. We'll see what tomorrow brings. This week might be a long grind.

Amplitudeinthehouse said...

The SPoos & Nazzy 100 still holding March NFP week lows , methinks once that breaks the range is set in....had that week as a bit of an overthrow in real-time...technical reasons of course.

Oops!!..don't forget the fundamentals...not does it get better?..

Anonymous said...

This YEAR might be a long grind, but the sky hasn't fallen yet. Thanks for TEF.

Anonymous said...

Looks like I called that one wrong

abee crombie said...

trolls came out from under FTSE bridge.. brl real making new highs (banks there getting it and a dovish CB doenst help).. but the stress indicators, bund and short term Eurodollar (reds I guess) starting to move lower

thinking of running to hide for cover very soon .. short XLF maybe to cover my high beta book... or HYG (just in bigger size) as it should follow eventually

Leftback said...

Those of us who like TEF etc... we will have a chance to buy more..... DXY still holding at 80 or below.

China data overnight and a much awaited BoE QE announcement may finally start to pull the world out of its plunge. Got an eye on the emerging markets today for a punt. Happy to sell more of my US long bonds to those who want them!

Fasten your seat belts...

Leftback said...

Make that DXY hovering just above 80... 10y dipping below 1.80, 30y dipping below 3.00. Somebody must really want saefty today. Those punters over there who would like to buy my US 30y bonds..... YOURS!

Anonymous said...

Can understand you view,but not everything out there is a "knife".
For example,I've been backing basic food sellers like SBRY and TSCO in the weeks behind because these guys could find the blowoff in comms and now oil a big help in holding margins moreover people still need to eat.Meanwhile they pay off around 5% at these levels.
In other places like Japan /India/China same story for me,but also their banks for the most part are not up to their necks in crap so any monetary loosening will help them and I'm sure that loosening will be on the way much sooner than later now.
For me we are now firmly in a game not of all boats being floated ,but one of picking and running then repeat and wash based upon seasonlity and policy expectations.
I also have limit orders to be filled on energy ,but not yet !