Tuesday, June 12, 2012

European Duct Tape

 Yesterday the markets reminded TMM of the English climate. Eight months of winter followed by 4 months of shit weather became the markets  4 hours of relief followed by 8 hours of shit trading, which has left all around us commenting a conviction of "That is it, the rally has failed so the only path is downwards". So does TMM agree with this? TMM doesn't like agreeing with masses once the mass gets over the Pareto figure of 80%. Applying Pareto further we might suggest that 80% of the bearishness is coming from 20% of the news. Which is fairly easy really when the amount of visible news is probably only 20% of what is really going on. Hence all this micro-analysis of non-statements from Europe.

Yesterday TMM tried to apply a "could" ratio to news headlines and  use it as a bearish indicator (counting the ratio of "could", "perhaps" and "maybe" against the "wills", "haves" and "agreeds"). On that basis yesterday must have hit a new nadir of mood as surmises failed to pin down what exactly a promissory 100bln of Spanish bank support actually entails. Indeed TMM agree, it's not clear, it appears ill thought out and it does look like another sticking plaster applied to a flimsy framework. But the Eurocrats do have a habit of creating elastoplast art that is bordering on the structural. But can it be successful? The assumption is no, but we are reminded of that myth-busters episode where they manage to make a fully serviceable floating boat purely out of duct tape.

Perhaps we should not dismiss out of hand the efficacy of this version of European policy. It may just work.

But back to today. We have had little time to get deep but we do smell a bounce after consensus towel chucking yesterday combined with the positional information, the "Price is News" action focusing on Spanish 10 year, the risk of shock of a good headline vs bad and basically our guts. With the long term still a lottery over the Greek elections, TMM are going to play counter sentiment extremism, go short term and pile into some short term risk longs to hopefully supplement some pained portfolios. If there is one thing we have learned, it's that getting the position on before things move is lot more profitable than spending 3 days analysing it, missing it then back fitting facts to explain history to justify why you were right but yet unprofitable. We leave that to the strategists.  



JB said...

Playing with a duck tape boat looks far more iteresting than watching various products on my screens trade as though they are suffering from AHAD!!

If anyone has any spare tape pls forward on

JB said...

Sry, typo, its meant to read ADHD!!

Anonymous said...

On the weather... and bare other tings


Amplitudeinthehouse said...

.....let's just pop that bottle away,OK..I"m back.

I have to question the suitability of applying the Pareto principle from a macro-trader viewpoint at this point of the business and Qeasing cycle...but you did say short-term, so what am I gibbering about?


abee crombie said...

seemed like the easy trade yesterday, sell the GAP... Traders and Algos 1, Long Term Buyers 0... but for the rest of the week who knows... I dont give too much weight to yesterday's move, just a traders play.

Question: Does anyone really think after June 18 the market will have 100% clarity on what things are going to do. Seems to me like this big anticipation will prove to be an ongoing process just like the last time

Anonymous said...

C says,
I agree with your post in it's entirety.Obvious amateur risk on newsplay got stuffed by those who knew better. Nothing of note past that day imo.

light on macro,but explains perfectly why we have 'summer' markets. If it's your paid clocking in job you've got to be doing something and if Pareto floats your boat to get up and do it then to hell with Fibonacci I say.
A market made up of people who shouldn't be playing playing against people who have to play is my summary ..game on.
I doubt if real money are that interested at this point.

Meanwhile one wonders if Greeks know how many Europeans are now in all likelihood actually hoping they do vote for Wolfie Smith and do hope that he shouts "power to the people" whereupon they can all shout back via their Eurocratish reps "take it outside (the EU) and leave the rest of us to be more European".
Merkel versus Wolfie and Wolfie is dogfood before his secretary has time to file him under hasbeens! In the political game called fiscal integration I can see the easy sell for Merkel and other PIIGS is to point the blame finger at Greeks departing backs and use it to sell a faster route to integration to their electorate who think Greece belongs as a neighbour to Venezuela.
Trouble is they're likely to vote 'safe' in which case in the words of Freddie Mercury the show must go on! Endlessly, escrutiatingly so.

Bob_in_MA said...

I have no idea what the direction of markets will be, but I find your general faith in the EU/Germans to control the situation curious.

If Greece leaves (as they almost certainly will eventually) the drachma will fall 40-50% and the Euro will go up. Making the situation in Ireland, Portugal, Spain, etc, more difficult while Greece is likely to beginning a recovery.

The arguments of people like Michael Pettis, who's made a career out of studying these things, seem pretty convincing: a currency union without unified monetary and fiscal policy, and free mobility of labor, is ultimately doomed.

Leftback said...

Yesterday was all about traders getting out of their Spanish punts and a few unwary buyers getting burned. I have rarely found a good reason to buy anything at the open, except a few diving dividends now and then... better to nibble at the close on the inevitable towel-chucking days.

Holding on to my European and Asian longs, some gold miners and energy stocks but holding a fair amount of cash. Not really liking the broad US market at all, waiting for technical catalysts for that one, or I may just stay away completely. Certainly don't feel yesterday was capitulation.

Fiscal cliff not yet eroded and QE on hold for now. Lots and lots of silly buggers still juicing sky high valuations in technology. Here and there I can see some value but the strong dollar/yen days are going to wash everything out. It may get worse before it gets better. One more Europanic before Greece agrees to sign up for more Gem├╝tlichkeit from Mangler?

The general feeling is growing that only a really massive bazooka - of sufficient size to stabilize Italy and Spain - will finally quell the uncertainty. The trick, of course, will be to be fully on board ahead of the event, as the resulting melt-up may be almost a quantal event, with an overnight gap of 5-6%. We have one leg on the pirate ship and one on dry land for now until they host the Jolly Roger.

Anonymous said...

C says'
On Uk equity I saw some nice looking PM session volume and price action.I don't want to talk book ,but it's where I have traded in and out already this spring and it looks ready again to make for some sellers remorse so why not.
Actually ,LB I'm much more of a "close" man myself. If I ever do see something I want on the open it's invariably done on a limit order and if it doesn't fill so be it. It's really about trying to control what you can control if you know what I mean.

Anonymous said...

C says'
you appear to be the fixed income man so what do you think of this.
What would happen to treasuries if BB didn't do QE next week and Greece didn't fallover either?

I ask because it appears the common assumption is that equities to rise need QE,but it appears to me that without an external panic trigger treasuries are the asset group that need QE to stay at the low low levels they currently occupy.Were they to flush on no QE then whitherto the moneyflow ?

Leftback said...


My current understanding (limited though it is) is that Treasuries (bunds, gilts and JGBs) are being supported by a) fear b) assumption of future QE and c) a dearth of Tier 1 capital available for banks to accumulate on their balance sheets.

a) is reversible on a short-term basis. b) is nailed on, it will happen at some point, but would be transient, Tsys usually sell off on the actual QE announcement, but c) is a real issue and much less evanescent. Tier 1 capital requirements will be with us for a while.

The real longer term risk to Treasuries (bunds, gilts, JGBs etc..) would appear to be real downgrades of sovereign credit. You would have to say that Japan and UK is closer to that situation, but US and Germany also carry debt/GDP loads that are arguably larger than Spain, although less than Italy.

Short term, I want no part of US fixed income. High yield and IG spreads are too tight for a slowing economy, and Treasury yields are extremely vulnerable to a 50-100 bps spike if the world doesn't end (e.g. the Greek election results, Spain and Italy bank recapitalization, LTRO-3, ESM actually working, or ECB entering bond markets to buy Spanish, Italian bonds).

No reward, all kinds of risk. Better off in cash.

Charles Butler said...

The world's with you, LB. Bund futures shed 1.36 today. Something in the wind, anyway. Merkel eschewed a glorious opportunity to say something really stupid today.

Looks like Fritz has got on the bus.

Clive said...

You can fix anything with duck tape and cable ties ...except...this unholy mess that is the eurozone.
Did you see that Credit Suisse give it two months before the first French bank gets its begging bowl out. And then what? Deutsche?

Leftback said...

Bobby Banker's cunning European crisis game plan, Clive is more or less as follows:

Short the piss out of your own national govies.
Create a credit crunch and liquidity crisis.
Watch your own govies rise in yield to 7%.
Inform your politicians you need recapitalizing.
Sell everything that isn't nailed down to raise cash.
Announce sky falling, real money sells in a panic.
Smirk knowingly among yourselves.
Await governmental largesse and bailouts.
Receive bailout. Smirk knowingly.
Buy your own national govies at 7%.
Watch yields fall as crisis is averted.
Sell your own national govies to dumb Real Money.
Buy riskier or dividend producing assets.
Trouser the ensuing profits.
Await monster bonii at year end. Party On.
Resume cocaine and hooker consumption.
Continue to make capitals overpriced to live in.

Anonymous said...

C says'
On the behalf of "real money" I doth protest ! "Real money" can also be "smart money" and if it's grown to any signifcant size through sound management it probably is in which case it understands the process outlined and the game of 'piggybacking' ensues.

Now Europe has a problem Huston and it is they need some Linguistics skills sooner than later.Taking the "Austrian" comments yesterday as a point in question.Talk about Faux Pas.They could clean up their mess by agreeing that at least their publically appointed officials would agree to channel comments on their "crisis" through one centrally appointed spokesperson rather than conduct a multichannelled public argument which invariably results in confusion,contradiction, and ever increasing uncertainty. Resolving the contradictions in their public messages prior to having them released would at least cutdown some of their communication problems.

"In the political game called fiscal integration I can see the easy sell for Merkel and other PIIGS is to point the blame finger at Greeks departing"
I see from todays' FT that Osbourn is speculating along similar lines as I did yesterday. Will Greece become the sacrificial pawn in this game?
It's now a valid question because judging from the escalation of events internally I'm not sure how you restore the kind of business enviroment that would have any kind of chance of continuing in this economic EU game even if they voted to do so.

Leftback said...

"C" missed a little bit of the Satire™ in LB's comment, which was partly intended to satirize anti-banker rants.....

Hopefully the management knows a Satyr when they see one. Dull day in progress. 10/30y auction may not be pretty unless someone can whip up a panic...

Greece's pants are on fire !!!

The Poles
In a Hole
Showed some Soul
Scored a Goal

The Greeks
May have Peaked
Defensive Leaks
Made them Meek.

Amplitudeinthehouse said...

Bear flagging\wedges around the traps leading into the Greece election, the trend-followers know how to manage from here...not so much the buy-hold troupe....

Anonymous said...

C says'
No I got the comic take which is why I replied in kind leading of with a quasi shakespearean "doth protest". I don't really talk like, honestly.
Then I went off on a tangent indicative of needing atleast one more coffee to get on track.
"Piggyback" was just my ref to using selling pressure to buy some very good debt.Whether ,or not banks actually pressured it to retire it at advantageous rates,I wouldn't know. I just "piggybacked" the pressure.

Aethel Hard said...

i read it,
that is very nice post,

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