Tuesday, October 16, 2012

All Talk and Missing the Action

We should do that more often. When we want markets to move we should write about them being dead because it's all a bit interesting again and debates have been raging in camp TMM. 

It all kicked off in the TMM camp this morning with a debate as to whether Krugman was a genius, or just a once genius who has now been swept up by political hackdom, accidentally wandered into the BBC anti-austerity camp, been given a cup of tea and if not careful will go all Niall Ferguson on us.  Let it be recorded that to allay further dispute an entante cordiale was signed amongst us agreeing that the BBC were so stuffed with their own economic sensationalist agenda that it was THEIR fault and we'd leave Mr K out of it. His genius (or not) should not be judged over a bleeding obvious "may or may not" statement as to the worth or failure of UK austerity plans. Maybe Krugman is to the BBC what Jack Welch is to conspiracy theorists.

Next came the discussion that QE operators may be considering ripping up the debt they bought. Not much of a debate, but where Gold would go on it was, mostly resting on the number of noughts on the end. 

Then there was  *GERMANY OPEN TO PRECAUTIONARY CREDIT FOR SPAIN, LAWMAKERS SAY, Leaving German debt asking the market-  "Do you expect me to Pay" and the response -  "No Mr Bund we expect you to die". It does smell as though the Spanish comments for no need for ESM may because they are actually arranging a "Bailout Lite". 

Then there was Canada - Carneys dovish comments have shoved CAD off its perch and even the stalwart last bastion of AUD shortness,  AUD/CAD has started motoring higher. (no bad thing for TMMs AUD positions)  but Carney's status led to further debate over the next Governor of the BoE and how, as with Soccer managers, it is no longer compulsory to have a CB governor of team nation origin. Soon followed a resurrection of TMM's game of Fantasy Central Bank, where we select our dream team of central bankers and policy makers for our ultimate "Policy Makers United" team. Judging by past England football performance perhaps we should leave Italians and Swedes out, but Draghi's heroic efforts at the ECB have him a firm favourite. The results will maybe make a later post.

Whilst all this was happening we were steadily missing the development of what now appears to be the strongest possibility we have had for a break higher in markets for a while as various earning continue to "surprise" to the updside. How many "surprises" make a "huh"?

  Finally TMM are getting a little bored of random indicators popping up and being lauded as heralds of either the next big crash or rally or Mayan end of the world. Coppock has cropped up again and we add it to Hindenbergs, Battledeathcrosstar Galacticas and all the other "no no really, it really works" indicators with silly names they have in their bottom drawer of indicators that don't work.

If it really is that easy then TMM wish to join in and launch their own TMMLTBI (Team Mystic Meg Load the Boat Indicator) 

TMMLTB Indicator - Team Macro Man have developed the TMMLTB Indicator with one sole purpose: to identify the commencement of bull markets. The indicator was devised for use on making shed loads of money but is suitable for use on any market index or average, pint of beer or bottle of wine.  

This indicator is currently sitting at BOLIVIAN.(see glossary)


amplitudeinthehouse said...

I haven't got enough cash on me at the moment to be part of the action ...please forgive me , as it's sitting in TLT bonds waiting to find that special one :)

The Original said...

Nah, you guys whiffed. Krugman sold his soul to the great political Satan and is now a hack of the highest (or is that lowest?) order.

Leftback said...

LB has been BOTAIL* for some time.
*Balls of Titanium, All in Long.

We also have a variety of crafty medium- and long-term bearish positions in US Treasuries, (aka The Widowmaker).

Anonymous said...

Today feels like the plan is working, QE is supposed to move investors out into a more risky part of investment spectre: well GS did benefit from risk rally in Q3, 1.8 bn in Investing and Lending from only 200 in Q2: now US is cheering and financials are leading SX5E.

Leftback said...

Exactly, the idea was for risk-taking punters to front run the Fed's Qe3, by buying Treasuries, MBS and mREITs. If you look at the markets from April onwards that's clearly what has happened.

Now once the announcement is made and as the dust begins to settle, we will see exactly what we saw after the Qe2 was announced. Unwary shorties creep in during quiet market periods, and then those larger punters are able to sell volatility.

We will see a procession of punters leave safe haven assets in search of higher yields, with HFs and SWFs in particular worried about performance yardsticks and aggressively moving out into a variety of riskier assets, high yield bonds, equities, Spanish debt and other forms of derring-do.

The interesting thing will be what happens when US Real Money moves, as it must inevitably do. Even a modest rise in rates from here will be increasingly uncomfortable for R. Worthington Carter III and his mates on the ever-nimble pension fund and university endowment investment committees. As under-invested as they are, the effects of that shift out of fixed income could be fairly seismic. Once the little guy decides to buy in to the market, then it's nearly over.

Anonymous said...

C says'
At the risk of puncturing the slight rise in euphoria yesterday. I should point out that the broad US and UK index remains within what is a sideways range regardless of the action on the day.I should also point out that following a week of debt issuance running into an option expiry week this type of action has also been common.
As usual it will all come down to follow through ,or lack of it.
In that sense I think we need look not much further than action in safe haven debt. If pressure continues there then equity risk will more than likely be a beneficiary of the flow. If however that debt remains hanging tough without shakeout then we are in a different game.
Asia I think gives us as it stands at least a chance to be in a game slightly divorced from the US and Europe.

Anonymous said...

C now says'
The Uk equity arkets broken to the upside. Oh Santa ,you are too kind.

Anonymous said...

C says'
Actually ,I'm being presumptive in that comment ovrlooking the run-in to the September expiry.jury still to confirm therefore.

Leftback said...

Keep the dismal forecasts coming, my little furry friends, meanwhile we are making money.

Spanish 10s coming in by a cool 26 bps today. That's nice for us Spanish bank punters. Not so good for Spanish CDS holders.

Any fear out there in fixed income land yet? UK 10s out another +7 and US 10s out another +5 bps.

Drip, drip, drip.....What's wrong, Mr Bund? You look like Schatz today...

Dee Dee Humberside said...

I have my eyes on MXEF these days, and whether it can break from the 1000-ish range it's been stuck in for the month.

Also, not to beat a very dead horse, but homebuilders are almost 40% up since July. It all starts with housing innit?

Leftback said...

Brilliant, there are still some kn*bs pushing retail into corporate bond ETFs. This equity rally will have legs as long as this sort of commentary continues. Here's another entry for our prestigious Knob Of The Week contest:

Knob Of The Week?

Among other highlights herein, this chappy Jeff Reeves draws parallels to 2007 (yeah, I mean rates and liquidity conditions are so similar*, right?) and tells us that Greek unemployment is 25% (ooohh the stunning insights, i bet he thinks Greek yoghurt is tasty...!). Overall this is a masterpiece well worthy of a KOTW award. Enjoy.

* Engage Irony Detector.

Leftback said...

Dee Dee, if the hated homebuilders can rally (nice call a while ago), can the despised shippers finally get off their arses? The Baltic Dry Index is off its September lows already, but shippers have been moribund on China Slowdown, Spanic, Grexit and Fiscal Cliff.

Baltic Dry

If Chinese data suggests some actual international trade is occurring, could they finally bust a move?

Bust A Move

Anonymous said...

It's encouraging that after couple of weeks US selling pressure in the mornings abates a bit. Always good when market does respond as it should to a number or two.

Dee Dee Humberside said...

LB, don't you know, US Investment Grade is up 10pc since LTRO. All this on a 3.5% coupon. What could possibly go wrong, right?

Leftback said...

LOL. US companies are issuing a ton of debt lately, so it must be a good deal, right?

When "non-traditional" investors enter an asset class that is new to them, it is usually very late in the day for the rally (internet stocks, 1999-2000; MBS and REITs, 2005-2007).

There are probably very few younger retail investors who know anyone who has been badly burned by a sharp rate spike. Some may even be unaware that their bond ETFs and mutual funds can in fact decline in price.

For those playing the steepener at home, we are thinking about lightening up a bit today and taking some profits. The FRBNY timetable lists an OMO tomorrow and another on Monday, so there is a large buyer ready to come to the table to buy the long bond. We will load up again next week.

Tonight we will be glued to the Chinese data.

Noob said...

Bond yields have gone up a lot today....
... that's good for my bond funds, right?


(echo chamber)

abee crombie said...

3.5% for corporate bonds, where?!! LQD is YTM at 2.9% wow great deal. But I'm not shorting yet.

Despite the lack of retail participation I still think this will end badly. Look at the sectors holding up the market. Retailing & Housing. I have been a believer in US housing for some years but the move is just too quick to fast. There is going to be a spark of activity, but I dont see a robust market coming back. Look at TOL, SHW or HD. I guess they can go straight up, but if you look at the fundi's ppl are expecting a lot of growth. When it doesnt happen they will take a hit.

As well, equity market BULL phase is getting long in the tooth. Avg bull market is about 40 months...we there..

Anonymous said...

C says'
Consider that the so called average length of a bull market tends to strongly reflect the underlying monetary policy and the stance taken.There is simply nothing particularly average about the post gfc period and the monetary policy enacted. In my view ,because the sheer scale ,and severity of of the bust, the reactive cycle that you are citing has been and will continue to be elongated.
Just my view, but for the last couple of years at least people have been citing historic metrics, and so far they've been almost universally wrong.
One day of course, what they say will come to pass ,but it won't be because they found a magic formula to predict it.

Leftback said...

It always ends badly. It's a question of how much money you can make before it all goes pear-shaped, innit?

Anonymous said...


Then the question is: in the face of this new world, if easing and low interest rates. What can make this whole thing go bust again? I think it's only a political impasse that can cause such an event, barring something horrendous like a massive terrorist attack. Which with American political polarization, and EU 12 nation politics, seems unstable enough to cause such an event

Anonymous said...

C says,
Political risk has been the major wall of worry for almost 2 years now. The world though is still here.Each year the pop gets' that big larger and so does the economic actviity that it generates. And here is my other ace in the hole.Baby boomers,you know what?Never has an issue been more misread !.Because of the
events of the last decade and movement in life expectancy and modern healthcare...these old buggers (he says' looking in the mirror/worshipping his temple)are going to go on and on ...yes ,you got it...working in ever invreasing numbers !! Adding to the productive capacity of the
world right when the consensus thinks they are going to be a larger fiscal drag upon same.
So,what do you want to do ,sit and wait and bet against that directional trend because polticians might make a misstep?
How could they make more cockups than they have already made in the
last years?,Or JBTFD?

Dee Dee Humberside said...

abee 3.5% starting point if I remember well. Tighter spreads AND lower rates. Forget Ts, shorting IG corp is the new widowmaker, despite those seemingly absurd amounts of duration risk being taken on by all those involved.

hmmm ... C another interesting point you're making there (more and more, you're starting to remind me of an old classics professor of mine but I digress) Isn't the demo argument more one of cratering demand (the old having to pay for their diabetes treatment and so forth, and the youth being crowded out of jobs by the CfromCs) rather than a productive capacity problem.

I am willing to hear the counter argument though, for sure. I used to think the Koo-type framework was elegant, but the demo train has gotten a bit crowded lately.

Anonymous said...

c sAYS'
DD, the real fiscal drag that concerns most people will trun out to be facetious.It's the product of sungualrity of thought. By that I mean the direct connections between aging population and the so called costs of looking after them keeps missing the core reason why the human race has moved to the top of the food chain. That is,we are supremely adaptive in nature.
Arising out of same we are already transtioning to a new life profile for want of a better description. Those older people who actually do retire according to prior trends will tend to do so because they are already financially self sustaining. Moreover many of them are in rude health and living larger than they have ever done before. Many of those not in that enviable situation will continue to work albeit they will hold down part time jobs and likely those in service Industries. First and foremost this will serve to add to global economic activity ,not subtract from it. My opinion ,this will not crowd out employment amongst youth except ina temporary sense which is what I think we are seeing as we speak.Remember we adapt and the most adaptable of all are the young. they will go where the work is.
As ,but one small indicator that I am on point with this consider the data this week. Numbers in employment in the UK are at a record level ,and most of this is attributable to part ime jobs ,and almost half of this activity is based in and around London (where else woould it be if you hold my statement to be possibly true?).

I am deadly serious about this issue. I firmly believe the media stories form so called experts have never been wider of their mark than they are with this.I see their thinking on this issue to be extremely superficial in missing the most important underlying behavioural trends.

Dee Dee Humberside said...

I'll just say that from an investment point of view, the shift from Ts being universally hated by the sell side risk merchants (remember that MS 5.5% call?) to the argument that it's OK to be in bonds "cause y'know, old folks will need to buy them too" hasn't gone unnoticed by this humble punter.

Now discomfort within a crowded bus doesn't mean I am fully ready to go full 180 on this, but this surely is an interesting way to look at it you've set out here. You'll forgive me for sleeping on it and/or putting it at the back of my mind for future discussion.

Anonymous said...

"High yield bonds are a stealth inflation hedge - If you get inflation, the debt coverage ratios improve because the real value of the debt is falling. So if the business is growing with inflation and the real value of the debt is falling, debt coverage ratios improve, which means that the spreads can collapse, which means that you have a rich starting yield and capital gains. For that reason, if you go back historically and measure the correlation of high yield bonds with inflation, you find that the correlation is higher than the correlation with TIPS" - Rob Arnott

Anonymous said...

C says'
Mr Rob Arnott is a clever man.
Back in the day when property yielded me between 15 and 20% pa I could not have cared less about principal values. Unfortunately, there is an unwritten law of investment in tangibles. When they deliver this type of yield you can go to the bank with the idea that at the first signs of growth it will trun into a switchplay with a gradual exchange of dropping yields and improving capital values. Ergo mispriced bank debt has the most recent example.
For "growth" I could have substituted the word "inflation".
I actually don't remember when this did not work this way.