Friday, September 28, 2012

A Not Too Cunning Plan (or Three)

It's all going a bit Europe again, even to the extent that China has borrowed a leaf from the European lesson book and pushed back schedules for important announcements. Namely a new leadership. The announcement is interestingly now after that of the US. Could they really have two sets ready and prepared depending on US outcome? Nah of course not, though "Here's one I prepared earlier" would be amusing they appear to be struggling to produce just one fully baked item.

But back to Europe - Hollande's new income tax schedule has done its bit for London property prices. They are going to have to extend South Kensington all the way to Croydon to cope with the influx from France.

Spanish RPI - How much? We wondered if the high RPI was due to Greek Economics (if your sales halve you need to double prices to stand still), but it's probably just their VAT hike feeding through.

Spanish rumours appear to have done a whole economic cycle in one afternoon. Bank report will be rubbish SELL SELL ! But that means they will go for a bail out BUY BUY! But then they'll have more austerity SELL SELL! But austerity will reduce government borrowing BUY BUY ! But also reduce tax revenue SELL SELL! Oh look its 3pm  SIESTA SIESTA. And finally . "Quick Juan, we cannot make el numero look like we have cooked ze booooks to match the ahhem "expected" 60bio, make it look "real"",  "Hokay, Hokay.. How is 59.3bio?", "Ha! Brilliant! Envoke spurious accuracy and add some decimals! They will never guess it is not real!" Right oh, at this point TMM will rehash an old joke and ask "Is it true that Jim Kerr, leader of the Simple Minds, was originally christened "Juan" and works for the Oliver Wyman Group where he got the idea for the name of his band?"

Month end - Can you hear us above the noise? You can? Well turn it up to Quarter End too then and then try picking out the signal from the noise.

We tend to believe that there really is a general ongoing sea change since QE, but our concerns expressed last week were first, there was too much confidence priced in for Spain and the process for it to reach a more stable outcome. Yes, tail risk has been sliced off by Dr. Aghi , but there is still plenty of rattle room for stress in the rest of the probability bell. Second, everyone had too swiftly piled into the inflation trade. But in the last week we have had brick chucking in Madrid and Athens to refocus the mind and we have had a raft of US data culminating in todays sub 50 Chicago PMI reminding all that inflation may be a little further down the line than spiv-monkeys can hold on to their positions for. We happily got out of Euro and equity index stuff last week and have been using today to take profit on some speculative short term shorts as well. However, we are in a few minds as to how to play this dip from here.

So when is a dip just a dip and when is it a limb shearing Japanese sushi filleting knife in a Doppler shifting descent? Well its normally the latter just after we buy it, that's when.

Plan a) The "It's just a natural shallow dip" - Brick chucking really hasn't done that much to dent price action in Europe and under the old rules, we would all be a dither about Spain and yelling that we are all doomed. Is this a sign that people haven't woken up to the doom and so we have further to fall? Or that it is well known and price has that imbedded and so it is actually all rather supportive? Plan a) relies on the latter. We think that short term has been flushed out on this pull back and have also detected a turn in mood from the medium term players. The equity selling of today has been pretty well flagged as part of month trend reversals for month end portfolio rebalancings, however having price falls into the weekend leaves the press corps, lead by Ambrose Evans-Pritchard, free rein to go into knitting mode stitching all bad news stories to the falls as past, present and future justifications. This should leave the market nicely spooked for Monday and we have a classic Monday sell-off followed by a "buy back Tuesday". As it happens Tuesday is lining up nicely for a load of soothsayer buy signals in risk in general. So Plan (a) is to buy risk things on Tuesday.

Plan b) "It's a bigger dip". We are being infected by the same nerves that are making sentiment swing negative elsewhere re our original premise last week that too much is priced in. There are some key worries that the core and periphery think they have agreed to different things when it comes to soveriegn / bank feedback loop and though this subject has been discussed over the past few weeks it doesn't feel like the market is pricing as if they know that Spain and Ireland are still on the hook for their own banks. We also see some other risk indicators rolling over. Hmmm

Plan c) "Lets get sectoral" - High Yield vs Equities, High yield has a high yield for a reason and don't you forget it. We prefer Equities over High Yield. Europe vs the rest of risk. If we are looking for a general swing higher in risk as post QE trends resume (having washed out the short term and confused the medium term) then perhaps we should hedge out our europen concerns against long risk. Short Eur/Aud again? Or more generally hedge out explosion risk against long term trend grinds. VIX is still ticking along in "not much concern" land and is cheap (though we hate the term) as a cover trade. We have been looking at playing the Vix curve too. Maybe more on that soon.

Which one to follow? We will start with plan (a) but hold an option to go plan b) if there is horrendous  news on Monday. Plan (c) will be implemented if things are calm enough for us to do some finessing.

Team Macro Man wish you a very welcome 2 day break.


Anonymous said...

C says'
Stress tests 'red herring'.Apart from the generally deteriorating data which may now be suggestive of a global recession (until it isn't) I'm surprised we have not looked at the catalyst of a Catalan / Spain breakup. I ,unfortunately, only know what the papers print on this subject.However, attaching even an element of credence to it I would have thought that the posibility of same was more of a gamechanger than any other issue currently in the spotlight.Afterall what price Spanish default ,or exit when Spain might be sans Catalan?
IS this a real issue ,or is it yet another one blown up by the media to be more than it appears?.

I also didn't really get the comments about UK gilts this week at all.I take the view the will continue in their present status for an unknown time yet.As I have said before the UK is a 'man in the middle' player and this has given it certain privileges,even advantages,throughout this entire Euopean issue and should continue to do so whilst the issue remains a global concern.

Charles Butler said...


Support for independence in CAT typically around 20% - half of what it is in Quebec, for example.

The governing CiU is not a separatist, but a right-wing, business interests party. The game here is to force Madrid to remove any conditions from the bailout funds that are quickly coming their way and to lessen the PP's share of the regional coalition guv - if not score an outright majority.

The last time the natives got restless, in 2004, the drubbing that Christmas Freixenet sales took in the rest of the country put an end to the racket. Imagine when La Caixa starts to find itself affected.

Won't get much press because the route to a headline will involve the complexity of two or three bus transfers and will involve the passage of time, but Wednesday's coming 'bad bank' announcement is infinitely more interesting than Wyman. Course, so's watching paint dry.

Leftback said...

LB wants to be the first to make the usual joke about the Japanese business sentiment survey. Ready?

"The Nikkei is Tankan overnight...."

Never gets old.

Leftback said...

Out of concern for the fragile psyche of our US pals, we have decided on the following strategy:

Don't Mention the Golf.

Leftback said...


Someone in our office did in fact mis-read the data on UK gilts this week after we got some duff numbers from Dow Jones. We apologize unreservedly for not checking multiple sources before posting. Stuff happens.

amplitudeinthehouse said...

Macro man with a've covered it pretty well I'd may be worth wheeling out the old touchstone.. every Qe cycle is unique....even more so this time around....not that I'm into measuring ones Cycle to another :)....I prefer to let the macro market show the way knowing full well that underlying sentiment never changes..that is humans impulses for greed-fear ..and my tip for this current one is we've moved on from when duff numbers were irrelevant and into a two way market.. that is coming back to the nikkei... near you.

Anonymous said...

C says'
LB,no problem,suspect we've all done something similar at some point.
I only mentioned gilts because of topicality.That is,I am on record saying I wouldn't hold them ,which as usual isn't the whole truth. I wouldn't hold them as an ongoing investment,but I use them every year since the European issue kicked off for hedging purposes and the topicality is I've brought them back in as the current risk rally got extended.

As for QE,my view is having been rallied so well it falls into the category of what have you done for me lately which means the economic data must show a sympathetic response ,or the QE will fail to have a positive market response.

I think the so called 'inflationary' kneekerk to QE has become more and more muted with each iteration when the subsequent economic data doesn't actually back it up.Good old behavioural learning response in action.

Anonymous said...

C says'
and congragulations to the European golfers on their win. I appreciate seeing people dig deep when they are down.Clique ,but it really is a sign of character.

Anonymous said...

Balls, maybe not Golf.

S&P 500, P&F chart bulllish price target 1550.