One of the elephants in TMM's room has been the behaviour of the markets in the US morning. Strange things have been afoot that have had us scratching our heads as to what piece of macro is missing from our puzzle. But of course as we alluded to yesterday, one can never just focus on one of the many functions that drive a market and indeed TMM are following a scent that leads them to an old favourite - positioning.
Glancing through some of the recent performance figures at some of the larger CTAs, it's apparent that the last month has not been a time of deep joy. So putting 2 and 20 together, along with some clues from some recent regular intraday move timings, TMM are getting the sense that the past two weeks' correlation break down can be explained by CTAs reducing their equity and bond longs, and also their Usd/Jpy shorts in a "Help! I'm a CTA, get me out of here" exodus.
Interestingly, whether because of the "get me out of here" move or just because of [insert popularist reason for equities going down], Eminis have now done a 5.01% (remember spurious accuracy confers authority) move peak to trough. One argument we have heard from bears was that we haven't had a 5% correction for ages. Well we have now. Will that do? the 100day moving average is not far below around 1391, but without further significant CTA unwinds it may be hard to breach.
Now something else. As one goes through an existence in markets one of the human characteristics that displays itself is, despite all logical reasoning, spurious pattern recognition. In fact the market and media rely on it. It was only a week ago that every down move in equities was being blamed on the 25th anniversary of the 1987 Great crash. But anniversary events are rarely repetitious. Ok, yes they are in a calendar terms and yes, some of TMM's family Christmases have been exceedingly repetitious re sock presents, but anniversaries of horrors rarely repeat the horror. If you are concerned about anniversary dates then we recommend a temporary flip back to the Julian calendar from the Gregorian and then back again thus avoiding the problem. Just as we advise reciprocating round numbers in FX to avoid "Bigfiguritis". 1.3000 Eur/Usd becomes a lot less important when it's 0.7692307 Usd/Eur.
But having said that, there has been burnt into TMM's mind a couple of seasonal turn dates. One has been the 16-18th of July and the other has been that you buy October the 27th. This has always been a supposition rather than anything proven but we did find THIS that does sort of substantiate the feeling.
Of course we have a wee event coming up that we should meld into our date selection. US elections. Sitting on the London side of the pond TMM get the feeling that our US friends are still overestimating how close the election will be and we wonder if this actually due to a reporting bias coming from our Wall Street brethren, driven by their own desire to have a tax cut (Tin Hats TMM - Think that might light the comments column up as we have just broken rule 1 - Never mention politics, religion or gold prices). But we do have to have a look at our scenarios.
Option a) (our expected one) Obama wins - perhaps we see a knee-jerk sell off in SPX - But we buy the dip.
Option b) (not expected) Romney wins - look to sell late December given his economic policy will be sure to cause a near term recession.
But whoever wins we think equities run higher 'til Christmas.
So when do we buy? Well to be honest we have a fair amount onboard already and are toughing it out despite some delta adjustment style trimming, but what little room to add we have we will be using on Monday and then the famed election.
But for now, whilst the CTAs cry "get me out of here" TMM are hunkering down eating Witchetty grubs hoping they don't get voted out of the competition.
46 comments
Click here for commentsTMM. You are smart enough to know that Romney's election alone will not guarantee his budget plans will be implemented. The real question is which party controls the house and senate - and the degree of their control in each.
ReplySeems to me that if Obama wins the Presidency, the Republicans may just be pissed off enough about it to obstruct legislation to prevent the fiscal cliff. The odds of them not having the votes in one of the houses to do that are just about zero..
IMO, your analysis should look more like a matrix, with all outcomes in the legislature (Republican control, Democratic control, and most likely, continued deadlock)
Yes, agreed, beyond the noise, swing states appear to lean Obama.
ReplyBut no need to look for conspiracy. Much like the sell-side depends on volumes and volatility (or is that vol of vol?), the MSM likes to manufacture controversies when there are none. "Obama very likely to win" sells much less copy than "Shocker reversal, election goes to the wire", doesn't it?
Was last year that different to all the history? Nick
Reply1 year anniversary of Mario Draghi at the helm of ECB, 1st of November 2012. He is all but one guy against many. Nick
ReplyYour man on the ground in NY suggests that another dynamic in play as this week ends is the prospect of NY traders perhaps having difficulty getting to work early next week. Last year's Halloween storm and power outage memories are still quite fresh, LB noticed the train was rather empty this morning as people check generators, stock up on candles, firewood etc.
ReplyThe delightfully antiquated power infrastructure in the Northeast is quite fragile, and when it goes down it often takes transportation and the internet down with it. So a lot of people may be squaring positions ahead of Sandy's arrival. As usual, the most likely outcome is we just get rained on, but the tail risks associated with a large hurricane direct hit to the NE are quite significant.
I should also add that based on last year's recovery by the horse and buggy outfits that distribute power over here, an absolutely massive hit to the NE power grid might make the electoral machinery very difficult to guarantee for November 6, only 7 or 8 days after the storm. Unlikely, but possible.
ReplyTo change topic, the yield on AAPL is now > than the yield on the 10y. Technically speaking, AAPL has more "cash on hand" here than the US Treasury and has less chance of being downgraded. (Of course, the US can always print more "cash on hand"....). Either way, the equity alternative looks more compelling here than it did a month ago.
This looks like a good day to review risks, Walls of Worry and bifurcated outcomes like the election. LB will be back later with some daring predictions and non-predictions. Had to laugh the other day when one of the WS GOP types was darkly predicting that bad things would happen "if Obama comes in". Well, mate, he's ALREADY been in for 4 years and most of the time we have been coining it and so have you !!!
Recent election forecast data, more or less up to the minute. Of course, if you are on the right, the data herein are obviously evidence of "media bias", and are being further distributed by those "pinko Brits":
ReplyElectoral Map Forecast
So, let's review all the stuff that we are supposed to worry about, the stuff that makes punters want to hide in T-bills, UK gilts, Schatz, bunds and long term Treasuries yielding less than the rate of inflation. Here they are, in no particular order:
ReplyGREXIT. Greeks make a drachmatic currency switch.
SPANIC. Spain and Germany refuse to play nice.
RYAN BUDGET: Romney wins; Ryan's knife cuts deep.
FISCAL CLIFF: US supertanker hits iceberg. GDP falls 5%.
RECESSION: US grinds to a halt. Christmas canceled.
CHINA HARD LANDING: China sneezes, Asia gets flu.
DOLLAR HOLLER: FX markets ignore QE, bid up USD/JPY.
TURNING JAPANESE: The US 10y hits 1.00%.
TRADE WARS: Romney labels China a manipulator !
MARGIN SQUEEZE: US company profits tumble.
Hmm, scary. TEOTWAWKI if we get all of that lot. Now just for argument's sake, let's say most of that doesn't happen. Let's just take a quick look at the other side of the coin, in an alternate universe:
GROLLOVER: Greece gets extension of current loan agreement.
SPAILOUT: Rajoy requests and gets a bailout from ECB, ESM.
RYAN'S PRIVATES: Romney loses; Ryan gets Quayle Award.
FISCAL FUDGE: Obama cuts can-kicking deal with GOP.
SEASONAL RECOVERY: US prints +2.5% GDP in Q4 and +3.0 Q1.
CHINA SOFT LANDING: Chinese growth finally bottoms out.
DGDF/YGDF: Worldwide QE policy pushes investors into risk.
YIELD SPIKE: Safe havens sold, US 10y, gild, bunds +100 bps.
TRADE BOOM: Slow European recovery awakens shipping, trade.
EARNINGS UPSIDE: US jobs recovery drives gains in earnings.
Clearly there are some tail risks here that a few people in the media are not currently taking into account. Some of these seem to us to be well worth a speculative punt. A repeat of QE1 would see the 10y move +200bps (2009, from 2.00 to 4.00%), and while nobody expects anything like that to happen, even QE2 saw a move of around 100 bps over a few short months. Note that the announcement of QE was front-run in each case, and then after a pause, risk assets were bid as Treasuries were sold.
Hurricane update from over here is that it is still supposed to hit the Jersey Shore and it is going to be messy on the N and E of the impact. Flooding fears largely overblown, as we are all used to it, but power outages more likely than not in the region and most people will stay home. Subway and other transit likely off tomorrow into Tuesday, hard to see US markets being very busy before midweek at the earliest.
ReplyOnce NY comes back on line we are looking at US jobs data and then the election. The next week or two is going to be quite a ride....
C Says'
ReplyWhen trading is out I often think of it as a particularly vunerable market because so many are at least temporarily helpless and exposed to anything significant that may be taking place. I do hope that I am not tempting Guy Fawkes to rise from his grave and try again.On second thoughts !
nice blog
ReplyLB, hope everything is ok with you. Best of luck.
ReplyC says'
ReplyGot to say i do not fancy bearish with AAPL having hit $600 on pretty high vol.
I had the dubious privilege of trying to get into an Apple store just a few days ago. Have to tell you I was punting under 10's left and right trying to get in.Left humbled and defeated by the little blighters. This is some weird kind of recession we have supposed to have going here when toy's like this are so de rigeur. Somebodys' kidding somebody I think.
Hurricane clean up in progress in NYC, flooding worse than anyone could have believed. Subway tunnels under the East River flooded and service out for what may be a long time.
ReplySo it's likely that trading will be subdued for a day or so until everyone who wants to participate finds a platform that works, and with several entire towns in Connecticut in the dark some hedge funds may be struggling.
My rather dire predictions about infrastructure and electoral disruption may well come true. It's a mess.
C says,
ReplyReading a shilling excerpt I took this albeit not the way it was meant.
"Many savers also are deserting money-market funds for the safety of accounts covered by the Federal Deposit Insurance Corp. This is shown by the collapse in M2 velocity of money. The ratio of M2 to gross domestic product indicates that money is just sitting in accounts, despite returns that are almost zero in nominal terms and distinctly negative returns in real terms."
Shilling refers to the hurt done by low rates to income payable on interest. I think it is interesting,because it shows more clearly the hurt that comes from behavioural actions that are based upon the fear of previous events being repeated.
C says;
ReplyI often note some people talking about indicators and the fact they don't use them,and indeed when I do read that then i am often left with the notion that the writer is exhibiting a form of intellectual snobbery as though the use of indicators signifies the absence of some form of higher true knowledge of all matters financial.Therefore would not deem to lower themselves to a world of lesser mortals via the use of indicators.
Personally,I'll use anything that might add some extra value. Right now an indicator that i would ignore probably 80% of the time draws my eye,and that is the ADX for equity. At the current very low level it shouts we are due for a trending move far sooner than later. The other component just confirm what the eye sees in price which is we have compressed to the point where further compression is most unlikely.In terms of direction it offers no foresight that I am aware of.For that we must look elsewhere.
How very LBR of you C
ReplyMC
C says'
ReplyI'll bite. I am torn between;
Loser Beyond Repair
and
Lets' Be Real
LB thinks that the recent event raises the probability of Grand Infrastructure Reconstruction projects in the US above the level of zero. Many carpenters and plumbers are grabbing their tool boxes in anticipation of work.
ReplyThis isn't good for the Glove Man, who has vanished from the media. As long as Big Ears gets out there, feels people's pain and sounds presidential with promises to fix everything with gubmint money, he should win handily. Losing a few austerity votes in Utah isn't an issue at this point.
I'd be selling Treasuries here. The long bond is a vote for Ryan and Romney, and they are dead in the water after this storm. Top marks, by the way, for local governors (Malloy in CT and Christie in NJ) and NYC Mayor Bloomberg for being appropriately cautious ahead of the storm. Disaster preparedness was much better than in the past.
Transportation damage is severe. Really severe. Once employers expect people back at work, the stress on NYers will be severe. Parts of the subway system may not run until 2013. It's that bad.
C,
ReplyI'm a big user of the ADX,when applied to the dailies, it helps to implement a time variable..eg,rolling 8 week close for direction to prevent you getting chopped up....out of all the indicators if I had to chose one , then I'd stay with the ADX\DMI then the current ones. Been a rough experience in indicator land and to finally find myself with a single indicator,let me tell you..it's going to stay that way for a while yet.
Some buying of Treasuries this morning (some of which is scheduled buying by NYFRB), and strength in bonds is really a natural and understandable reaction to all kinds of uncertainty in the days ahead (including those elephants thinking Obama's re-election is The Apocalypse), but we think this trade will turn out to be dead wrong in the weeks ahead.
ReplyLatest electoral college forecast:
Electoral Map
Obama only needs one or two of the states currently labeled "toss up" to win, Romney needs them all. Turnout is key, and polling stations being operative is not a foregone conclusion in all states.
The sun is out, finally...
These maps are all libruhl conspiracy, LB. Hannity tells me Romney in a landslide.
ReplyHope you're well btw. The stress on NYers might be severe, but at least they don't work at a swiss bank. Short UK / long US real estate?
its funny how all the other world markets pretty much stoped when NYC was down. I feel bad for them. Buses are going to be crazy
ReplyOf course, Abee, if one is a hedge fund manager domiciled in Greenwich, one can always trade from one's yacht, even though it might be in dry dock, so to speak, sitting on someone's lawn right now....
ReplyIs it just me, or is there is some complete insanity out there at the moment among nouveau bond bulls about ways to arb the yield curve, often in leveraged and byzantine trades that seem almost guaranteed to bring disaster if it doesn't actually remain flat for ever.... ???
Treasury Bulls Have Fun With Derivatives
Some of this is getting a bit Long Term Capital Management .... it will all end in tears.
C says'
ReplyOther day I read,was it the Pimco guy,holding forth we might have an equity bubble.Be a fisrt for me because I don't ever remember a bubble being so underinvested .For the last couple of years I seem to think I was in some kind of contest to find out who could be the most risk free.New kind of bubble I guess.
In terms of Sandy,sounds like a rerun of Grease,I try to bear in mind that typically , the initial response to disasters tends to turn out to be the wrong one.
Chaps,
ReplyI know you're catching forty winks. When you awake you'll find China PMI over 50. World Not Ending. You read it hear first. That would be the first of a series of TWINE data points/events over the next few weeks.
Bears don't like it up 'em, Capt. Mainwaring...
For those who like to don the Kevlar, today's falling knives were Western Union (WU) and National Bank of Greece (NBG). Speaking of bubbles....
Reply@ LB,
ReplyASX200 was unimpressed with the CHinese and Korean PMI prints. Kevlar ON
C Says'
ReplyAnon,do you know the sector weightings for the ASX? Because in this market the devils definitely in the details,that is sectors and individual stocks.That's actually stating the obvious for any market that is not currently trending.
Of course faced with the last trading session of the week the overall test for this pudding is do the sells of last night get held unto the weekend ,or covered?
Personally,it appears evident to me that w are still seeing stubborn buying demand in bank equity,equity financial/investment, as sectors.Corparate debt HY is not obviously being sold and bank debt is the same.Whilst this situation lasts it's hard for me to get bearish.I guess I'll have to keep on keeping on as Curtis used to say.
C says'
ReplyI could get tired of saying this,but in my view the world is mending.This appears to be totally what many people don't want to hear about. The media inparticular seem stick in a timewarp unable to sing any song that doen't fit with their favourite mantra of economic doom and gloom.
Perahps the sooner we all just relaise that banks are a vital part of the economy and as such will find a way to make aprofit from what they do,the better. I doubt the profit will originate in the way it has done in the past,but profit there will be. property will recover broadly and with it bad debt will become a smaller and smaller problem.After 5 years should we not at least entertain the notion that people who couldn't service their mortgage debt have been mostly washed out?
Indeed if we hadn't built up a big new industry that sees suing banks for passing wind as a whole new means of generating a passive income then the banks would be whizzing away even faster.
I find it ironic that so many are still out there cheering every time some idiot fines a bank for something.Don't they realsie where the bill will eventually land?
Rant over.
Punditocracy in the US falling over themselves to paint the latest US data as negative, of course the financial media are predominantly conservative and their politics at the moment is still Love the Glove.
ReplyOf course they are also pragmatists, so many media folk will be ready to turn on a dime as they say here and do a Chris Christie if Big Ears is re-elected. Rosie still defending his recession call this morning even though it just doesn't look likely on the evidence of the data. He pushed it back a bit, though. Sorry, Rosie, this is an ex-recession....
Lots of people are long bonds and now desperately hoping for fiscal stalemate in Washington. Of course if anyone is going to actually run this delightful but crumbling country the first thing to do will be to Stiff the Cliff and put on some infrastructure projects paid for by taxes on private equity billionaires. Sorry, Mitt. A 5% drop in GDP isn't the best way to start your term in office.
US investors are not happy. They are damned if they will buy this market now. No Siree, Bob, not now, no way, no how and definitely not right before Big Ears wants to be re-elected and take the country on a Slippery Slope toward Socialism.
ReplyEuropeans seem to be far less concerned about this possibility and are absolutely ramping the markets this morning, as Halloween is behind us and the somewhat scary specter of The Glove running US foreign policy seems to be receding.
Oh yeah, there were positive numbers out of China and the US, but investors don't want to hear that, not while they still clinging to the hope of Bain Capital veterans running Treasury while they are enjoying the benefits of a 1.71% 10y.....
What's up with Greece? Mkt down last two days and attacks on immigrants encouraged by a neo-nazi party? Maybe the Germans will let the Greeks slip while the world attention is on U.S. East coast?
ReplyNBG has been No Bloody Good this week, but might be worth a punt for Kevlar enthusiasts. We don't have a position but we did have a cheeky punt on the Greek phone company at 85c this summer.
ReplyGrollover, Grextension etc... seems a likely scenario here, don't you think? No point in triggering a huge panic before the US election, is there? There is no Love for The Glove in Yoorp, peeps. Mitt's recent trip to the London Olympics didn't exactly win hearts and minds.... European markets will rally for Big Ears.
More charting. This is for others who have proposed the EM over DM theme for Q4, Shanghai this time, showing the famous inverted head and shoulders pattern....
ReplyShanghai Update
Tomorrow is an entire day without FRBNY buying bonds at the long end. They will be back next week to buy another $13B...
ReplyOMO Timetable
....and over the same time period they will be selling $14B at the short end.
Electoral disruptions....
ReplyPolling Stations Wiped Out
NFP today, how does one know this,well... we recently we're out and about just before the trading session begun and the contrarian indicator is rattling.....not in direction, but volume...one should remember the golden rule, any one of fashionista persuasion is to be chucked out of calculation,as it happens, there we're quite a few of them, you know the type , slouching in front cafes , wearing skinny jeans and looking in desperate need of a shot testosterone, be that as it may, sorry guys I have leave your crowd out due to risk reward expectation.
ReplyIt just isn't worth it..
C says
ReplyMr Whippy continues to have fun is about the only I can say to end this week.
Some people found out the cost of trying to be short on a day when decent earnings realeases combined with those end of the month /start of new month investment flows as divs get reinvested etc etc. One or two substantial ouch moments.
However most of our Western equity markets remain in range plays,and the key to follow through comes after the initial start of the month investment flows taper off.
All of that looks to coincide with the US elections.
In the east it appears the closer to the China story you are the better you are doing.By the time that ripples out to Sydney it's more like a drip than a tsunami which reflects where the monetray policy is coming from the most.
Indeed my 'top' indicator is now going to be where this withered old crone on the edge of the gobi desert is quited as saying how she loves her Ipad mini so much she sold her goats to pay for it.
C says'
ReplyEurozone PMIS's just make it starkly clear how much is riding on Asia and the US to keep the taps for growth wide open.Under those circumstances the US election looks supremely important.Any hint of austerity/fiscal contraction from the state,and imo it is game over for risk.
Decent US jobs number again, not really a surprise given seasonality, as we have suggested in this space previously. Conservative media desperately spinning to make the report weak. Bond longs are tottering and taking a standing count. Factory orders may be the upper cut to follow on from the left jab....
ReplyT-Notes looks like they are setting up for a nice move soon. and Nasdaq and by default the rest of teh US market appear to have thier legs chopped from under.
ReplyI guess no one wants to be too aggressive before election but near term price action is not so positive.
some of the momo 'frugality' theme names (dollar stores) appear to be taking a nice hit). will the XRT start to as well.
Hard to read much into the pre-election sessions, this looks like a fear trade, Monday will probably be dead quiet or we may get more selling.
ReplyA big relief rally in risk assets is out there somewhere on the other side of the electoral chasm.
Big Ears surging ahead of The Glove in the polls:
ReplyObama Leading in Ohio
Meanwhile something bad has apparently happened in Stamford. Did Dick Bove sit on the keyboard?
Rochdale Seeks Capital after Phat Phinger/Rogue Trader/Sheer Incompetence Leads to Portfolio Calamity
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Nice piece of Bangla spam there. Now for some opinion on the markets and issues ahead this week. This is a reasonably well-written although rather long winded analysis.
ReplyAll the succinct stuff is in the section right at the end:
The Week Ahead By Jeff Miller
The gist of the argument is what we have been arguing here. Once election uncertainty is removed, risk on. No recession, fiscal fudge and many investors piled into the wrong instruments (bonds, gold and low dividend payers). Every risk is being touted in the media except the upside risk that equities outperform in even a mildly reflationary recovery.