Berlitz: China Pocket Guide

Thursday, March 29, 2012

The markets appear to be a game of three halves at the moment. The US markets are resilient with equities holding their highs, Europe is gently slipping but the leader is currently China where equity markets have tanked over the past few days. To many, China has become the cradle of the next crisis. With little else going on in the world the amount of airtime and speculative attention that China is getting has already spilled into its secondary markets. Now whilst Australia may indeed be struggling with its own Dutch Disease the current China concerns are giving the Aussie bears more ammo to load up on positions that can only be described as "covering the table" - short AUD/USD, long EUR/AUD, short AUD/ZAR, BRL, CAD, you name it and the number of structured basket term sheets TMM are seeing relating to shorting Aussie are indicating Tabloid positioning. And we didn't even mention Copper or Chinese H-Shares. Yet much of this new wave is based upon China not paying top dollar for Australian commodities much longer.

The assumptions on China we will come back to in a minute, but the thing that strikes us most is the regionality of the opinions being expressed. US and leverage accounts are particularly negative on China and Australia, whereas Europe and real money accounts are more balanced. As usual though, the Chinese and Australian views remain overall pretty up beat on themselves. As ever TMM will try and explain this with a simple chart:

And it seems that even those with more optimistic views on China (Asia-based investors) have finally caught the "China is slowing sharply" bug and capitulated as February's export data (that TMM have already addressed here, concluding they weren't as bad as they seemed) and most recently the HSBC Flash PMI have provided new bear food, driven particularly by those in the US that view China as a Ponzi scheme. Now, TMM have mentioned before that they sit more in the middle of the two Jims (Chanos & O'Neill), neither of the opinion that China is to spectacularly crash nor become the world's growth engine (at least, not anytime soon). And they don't deny the fact that the banking system is full of NPLs related to the 2009-10 stimulus, and these will certainly be an overhang for the next couple of years. But that is in the price and, when considered upon the backdrop of being largely state owned & directed, TMM find it hard to get too excited about both the impact upon the economy more broadly - unlike in the West, loss-recognition and balance sheet repair (which would likely impede credit creation) are not exactly the priorities of either bank managements nor policymakers.

One thing that has puzzled many China-watchers has been the lack of expected policy easing in response to the weaker activity data and slowing inflation. The trouble is that Chinese data is very difficult to read, and TMM constantly receive somewhat, err, "lazy" analysis from both analysts and punters. A brief list of issues: (i) Lunar New Year plays havoc with January and February, and even can have an effect upon March due to the moving around and distortion of seasonal effects, (ii) the quality of the data is poor due to collection (and "massaging") issues, (iii) the data is not easy to understand as much of it arrives in "YoY Cumulative YTD" format, a relic of earlier central planning (see chart below of China Value Added of Industry YoY Cumulative YTD - a chart that is impossible to interpret in this form), (iv) seasonal adjustment factors have dynamically changed as China's economy has changed in composition over the past several years, and (v) there is an important difference between nominal and real figures (for example, the combined Jan/Feb nominal export growth of 7% was poor, but in real terms, was rather stronger than would have been expected given lagged US/EU orders). Any analysis of Chinese data is only complete when the above are considered - and most of the junk that both the Street & Blogosphere have pumped out on this neglect at least one of the above.

E.g. - What the heck does this mean?

So that's TMM's whinging out the way (and we profusely apologise for whinging at all!).

We digress. Reconstructing the above data, the below chart shows the YoY change in Value Added IP (purple line) and the 6m/6m seasonally adjusted annualised rate (saar, green line). The YoY rate is essentially flat, and while the economy clearly slowed in the latter half of 2011, the weakness appears exaggerated by base effects. The 6m/6m saar (green line), which is essentially a measure of growth momentum, clearly bottomed in December and has begun to move higher. The official China PMI also bottomed late last year (more on this below). Chinese policymakers observing the same data may well have come to the conclusion that easing is not really required - TMM would concur.

Of course, growth is only half the story - inflation is the other ingredient to the Growth/Inflation mix. But this too has fallen since the oil/food price-driven increase last year. Putting these together in a very simple model, there is a reasonable correlation between relative equity moves (see chart below, of the relative performance of Chinese H-Shares vs. SPX [Red line], vs. this naive metric [blue line]). No single driver can explain market moves, but broadly, TMM reckon that (as macro guys) the growth/inflation mix is a principal component. Obviously there are divergences related to the 2007-9 failed Decoupling Experiment, the world not being linear (and neither are returns) etc, but TMM think this is a useful way to think about China.

So, back to TMM's PMI model. This has reasonable error bounds that have caught them out before, functions of dynamic seasonal adjustments, but is nevertheless of some use at least. The top line model reckons a PMI of 52.7 - TMM are sceptical of this given the HSBC Flash PMI was so poor - but stripping out the seasonal produces 51.2, which is a smidge above consensus. TMM, however, are less concerned about the absolute level, and more about the direction. Specifically, should the number come out close to consensus, it would confirm that activity bottomed in December in line with the Value Added IP momentum above. A disappointment, on the other hand, would likely be met with eventual policy easing.

Putting all of the above together with bearish sentiment and interesting technicals in H-Shares (see below chart), TMM have begun building a long position both here and in AUD ahead of this weekend's PMI number, and would look to buy the dip into any knee-jerk sell-off should the number disappoint by only a tad. Again, the trouble here related to Lunar New Year and the other complicating factors mentioned above mean that the turn in momentum that TMM reckon is ongoing will not necessarily show up in the hard data for a couple of months. This is a risk TMM will have to take...

And with that, TMM brace themselves for a ravaging in the comments and wish their readers a profitable Q2.

Posted by cpmppi at 8:41 AM 20 comments Links to this post  

Back to Flat

Tuesday, March 27, 2012

The post-Bernanke splurge saw what in TMM's eyes was a flight of towels from some core bears in US equities. Yet European markets are not that punchy and the FTSE is below pre-Ben levels. With Month-end / Quarter-end / Year-end noise upon us, it's going to be hard to do anything short-term, so we will settle back, put our feet up and switch on the radio. Apologies to the late great Amy Winehouse for the lament of those stopped out of shorts yesterday with our "Back to Flat".



Ben left no time to regret
Kept his options set
With his same QE safe bet
Shares at another high
I just want to cry
Get on without that guy
He went back to what he knew
Losing me me money being short the Spoo
So I tread a troubled track
My odds are stacked
I'll go back to flat

I only bought back yesterday
I held off a hundred times
yet you come off the highs
just when I am back to.....

I go back to flat

I loved the short too much
That's not enough
You love growth and I ZH puff.
And though I hate to gripe
Well, I don't, IT'S JUST NOT RIGHT !

I only bought it yesterday
I held off a hundred times
yet you come off the highs
just when I am back to.....

I only closed it yesterday
I held off a hundred times
yet you come off the highs
just when I am back to.....

Flat, flat, flat, flat, flat, flat, flat,
I go back to
I go back to

I only bailed it yesterday
I held off a hundred times
yet you come off the highs
just when I am back to.....

I only panicked yesterday
I 've died a hundred times
Yet you come off the highs
As I go back to Flat

Posted by Polemic at 4:54 PM 6 comments Links to this post  

13 Questions - Lucky dip.

Friday, March 23, 2012

Team Macro Man really are at a loss for anything interesting to write about so fall back on one of their favorites - 20 questions, but can't even manage that. So here are 13.

1) Are you looking for a dip to buy on?

a) Yes, a small correction would suit technically before I get in for the big one.
b) No, this is going straight up.
c) No, because this is not going to be a dip, it's really going to tank.  

2) Are all your friends looking for a dip to buy on?

a) Yes, but I m sure its still not consensus.
b) Yes, like everyone else.
c) No, I don't have any friends because I don't believe in a dip.

3) Have you any new macro reasons to sell that weren't there (and to be honest were stronger) 2 months ago when prices were 15% cheaper?

a) Chinaeuroperipherlalsunemploymentgreeceportugaliran barfff.
b) Errrrr.
c) This chart says .. NO WE SAID MACRO.

4) Which would you rather be?  

a) How you are positioned right now.
b) Long from lower down and not having fought the rally.
c) Only just taking profit on longs and now joining the "it will dippers".

5) Is the current move in peripheral European bonds

a) A sign of something major brewing in Europe.  
b) Just a generalised move in global bonds combined with a relaxation of post LTRO purchases.  
c) A straw to cling to.

6) What do you do in a quiet market?

a) Stay small long as you know "Never short a quiet market".
b) Whip up a panic using some extraneous factoid about china/Europe and try your best to make it a non-quiet market.
c) Go to lunch.

7) Is this Volatility sell off a sign of

a) A real calm, reflecting that problems have been solved.  
b) A new real trade opportunity based on fundamental and technical analysis.
c) Desperation as we have missed this rally so are selling vol for premium.

8) If you are a hedge fund PM your views on MXN are

a) Just own it, its the buy to counter anything you want to sell.
b) Flashing warning signals now your Mum has called suggesting you own MXN as per the article in Good Housekeeping.  
c) It's the next fire in a night club.

9) Osborne's UK budget was

a) A way of robbing mediumly well-off pensioners of their above average final salary pensions that have been unthreatened by anything over the past 5 years.  
b) A class political manoeuvre.
c) Another excuse for the BBC to interview who ever is worse off (someone always is) and then their mother and blame government cuts.


10) The US takes markets higher everyday after Europe tries to sell it because.

a) They are in the driving seat of growth.
b) The switching from bonds to equities is a long slow glacial move that isn't worth fighting.
c) They ain't frightened of nuthin' unlike those European surrender monkeys.  

11) Apple shares are

a) Cheap on many measures.
b) Like many stock markets showing a technical top and with that in mind lets put them in the dip bucket.
c) To be used as the new European Currency as they are backed by a religious belief  rather than that of an unelected committee who keep breaking their own rules.
d) Will only go down if it is discovered that Apple products are made using whale fat mixed with bankers bonuses, wrapped in a nuclear weapon, Zionist, seal clubbing, child torturing slime of refined oil products (produced by melting down rainforests) and made in a secret factory run by the illuminati whose funds go to make GM crops.

12) The trend is your friend until.

a) It ends.
b) It dips through your stop-loss and then reverses back in the original direction sticking 2 fingers up as it leaves you behind.
c) Your wife calls and says that she's met this nice new trend and would like you to move out but as the trend hasn't a job you will have to keep paying.  

13) The best burgers in London are from

a) Hawksmoor.
b) Goodman.
c) Don't be daft with all your fancy food, its the BK Whopper or a McTasty.


TMM apologise for the lack of posts but there really has been little to say. We wish you a lovely weekend and may the sun dapple the woods you cycle in.

Posted by Polemic at 1:26 PM 14 comments Links to this post  

Didn't Happen Happenings

Tuesday, March 20, 2012

After unanimous agreement TMM have decided that given a choice between doing what they are currently doing and skipping hand in hand with a loved one through woods dappled with spring sunshine then they would be out through the emergency exit and down the stairs (walking, not running, holding the hand rail and in single file as per health and safety instructions) and bounding liberated as washing-powder advert people, across over-verdant grass towards a wood that would be straight out of an AA Milne book. BUT unfortunately they haven't got that choice and instead are watching stuff happen that isn't happening.

First out of the "didn't happen happenings" blocks was China. Well China DID happen, but a coup and the complete collapse of their internal political machine didn't. If the People's Republic wanted to completely discredit "The Epoch" then this morning's shenanigans was a class act. Rumours of gunfire linked to a story written in Washington 12 hours earlier and a general Asian equity slide congealed into a brief "coup in China" flurry. Now TMM are certainly not in the position to know any more about the internal bitch-fights within the People's Party than anyone else, but they do know a market needing a story when they see one. Whatever may happen in the future, for now The Epoch appears to have moved swiftly from "interesting insight into internal Chinese politics for western observers" to "Falun Gong sponsored dodgy rag with a mission, to be taken with a pinch of salt".

Sovereign CDS that did not happen. TMM have been in the bunker for a while waiting for reinforcements to support their core belief that Sovereign CDS is a rubbish product and so are pleased to see today two stories (here and here) that got our full support. So we are very comfortable in re-announcing that the happening of sovereign CDS as a product fit for purpose did not happen.

Next on the didn't happen list, but OK, may be on the yet to happen list, is a large market sell off. This morning might have looked like it is, or was, but TMM will not happily admit that a real pull back (that they DO want) is underway until we have a day that sees the US SELL rather than buy back any previous sessions sell offs. A trend that have been so prevalent for the past few weeks. TMM are being buffeted by cross winds of technicals vs long term fundamentals. The Soothsayer is screaming sell in Spooz and its correlated FX crosses and it looks as though we have a combined asset move. So although we would love to see a good old fashioned turnaround Tuesday we can't believe it has happened... yet.

Now this we really wish had happened but didn't - Being held in our short USDJPY positions, short FTSE positions and some stuff that is so RV complex you really don't want to know. We thought it had happened, but in fact it hadn't happened. We were stopped at a catalogue of "are you sure it was really there" rates that have us licking our wounds, cursing illiquid products, re-entering at cost and magnanimously blaming ourselves because we are obviously Muppets.

And finally, footballer Fabrice Muamba who effectively happened to die on the soccer pitch last Saturday. A miracle of survival, circumstance and modern medicine have combined miraculously to result in it not happening. Extraordinary.

Posted by Polemic at 1:55 PM 19 comments Links to this post  

Peak Taxes?

Friday, March 16, 2012

In TMM's careers there has been no shortage of talking heads calling something a "peak". We've had "Peak Oil", "Peak Housing", "Peak Demographics", "Peak Credit", "Peak Deficits", "Peak Liquidity" etc... All of which come down to some assertion (whether valid or not) that said "thing" cannot go any higher for some sustainability reason. And readers will know, the UK is something of an obsession for TMM given they reside there, so ahead of the Budget - especially given the various calls to drop the 50p tax/introduce a Mansion Tax/introduce a Tycoon Tax etc etc - they decided to have a bit of dig. And TMM reckon that they've spotted another peak: Peak Tax. Or more accurately, Peak Tax Revenues.

Much has been said and written over the years about the cultural willingness to pay higher tax rates in Scandinavian countries, and the relative lack of willingness in Anglo-Saxon countries. TMM do not want to start a political debate about either, and generally consider themselves to not be particularly wedded to any political ideologies having voted for all the main parties in the UK from time to time. They are guided by the pragmatism: if something works, then it's worth doing. Which is why they think this particular subject is important. Because whether or not one believes some form of progressive redistribution is a good thing or not (for the record, TMM do), you can only spend what you reasonably expect to raise in revenues over the cycle.

And this is where the problem lies, because since the mid-1960s, the UK has only managed to raise an average of about 35% of its GDP in taxes (see chart below, blue line), with variations largely being driven by the economic cycle. By contrast, it is clear that expenditure has been on a pretty consistent upward trend (red line), rising to 43% of GDP. Since the mid-1970s, the expenditure share of GDP also oscillated roughly around the same 35% of GDP level, and from the mid-1980s in a counter cyclical manner (Keynesian automatic stabilisers). But then something went wrong. Instead of falling in the aftermath of the 2001 mid-cycle slowdown, expenditure continued to rise and well, you know the rest of the story...

Now, calls for wealth taxes, hikes in corporation taxes and higher income taxes etc all might seem reasonable ways of raising revenue. Except, the evidence in the UK would suggest that they don't. Because over the past 40-odd years the UK has had many different types of tax regimes and combinations of various types of tax rates, ranging from income surtax at 83%, high corporation tax and VAT to low versions of all of the above (see the below chart). Despite all these different types of taxes being tried in many different ways, the overall tax take as a share of GDP has barely budged. It appears that the only reason that taxes on production have increased is due to VAT hikes over the years, which obviously, are really taxes on consumers rather than on companies. Of course, that then reduces the amount of money consumers have to spend on things which may or may not be a good thing as far as rebalancing goes, but it is evidently a regressive tax. It is of some irony to TMM that the highest ever tax share raised came under Mrs Thatcher in 1982.

TMM digress. The gist here is that TMM reckon that the UK has hit Peak Tax Revenue at a cyclically-adjusted 35% of GDP. And that going forward, expenditure will have to take this into account. Because under TMM's pragmatic approach, Keynesian counter-cyclical stimulus during a deep recession would kind of, you know, be nice. It is a shame that the UK has been unable to do this properly as a result of the mistakes made between 2001 & 2007.

The point TMM are trying to make is that it really doesn't matter what the Right do with 50p tax rates or the Left scream about for justice and retribution, the most any of them will receive is a cyclically-adjusted 35% of GDP. Expenditure will have to take account of that no matter which party is in power. A corollary, but well beyond the scope of this post, is to what extent do the various tax approaches/combinations affect the rate of GDP growth, the numerator in this equation. Meanwhile, we are sure that Ed Balls and George Osborne will continue to be the source of many column inches as they fight over the wheel of a ship that is not actually connected to the rudder.

Posted by cpmppi at 10:30 AM 20 comments Links to this post  

King Sadim

Thursday, March 15, 2012

TMM have experienced a six standard deviation day already and its only early morning. We didn't think that it would be possible for all the following to happen at once.

1) Fog.

2) Drivers, who despite being able to see to the next bend in the road as if there was no fog, insisting on doing 25mph AND switching on 3 kilowatts of red fog lights to indicate to the queue of cars IMMEDIATELY behind them that the driver of said 25mph car is a complete and utter moron.

3) Every traffic light en-route to have been hit by what can only be assumed to be the STUXNET virus. If that was you Iran, well done, score 1 point for bringing approach roads to London to a halt. IF however it wasn't you, can someone please fire some more public sector workers from the Department of Transport. Preferably the same ones that insist that closing lanes on the A303 is for OUR safety. We'll decide the levels of risk we'll take thank you.

4) Getting on the tube and realising that phone is left visible in the car in the car park.

5) USD/JPY - short and stopped at the top. So now not short.

6) AUD/CAD did turn but we listened to those who told us not to buy just yet.

7) Had hours of angst when daughter's Facebook status had "is looking forward to being a mum" before uncovering that she had been "fraped".

8) Took off their Bond shorts way too early (like, early last week) and so missed out on the past few days' carnage.

9) Lost money this month despite being bullish. TMM suck.

10) Two of TMM separately received £100 fines from HMRC for a late tax return despite it being said thieves department that failed to supply them with the code they needed to fill in online. TMM will return to pen and paper next year.

So TMM have decided that today they are the opposite of King Midas and will, for today only (they hope), be appearing as King Sadim - everything they touch that is golden turns to rubbish.

With that in mind here is a list of things they are about to touch which will most likely turn to rubbish later.

1) Long AUD/MXN. MXN is ringing Tabloid, TDI and DPI signals (see glossary) in TMM's minds, even if on a macro basis it is beautiful.

2) Short NOK/JPY. Same same, but different. Just as set for a correction and the Norges Bank yesterday was a trigger. Look at that chart!

3) Short FTSE - having cut longs and seen the nano-correction unwind, we are going to have a "JFDI" last swing but will be out at intraday highs. Not Macro but it may well become so if it works!

4) Short Gold through options. The hunt for the next funding currency is on as the USD loses its obviousness. JPY? Well, so obvious everyone is chasing tails and 85.00, but this is SO predicted it's probably NOT going to get there. CHF? Yes, Yes, Yes. And a nice floor too. But we have that already. So what about that funding currency of the late 1990s? The one that Ex-Investment banks, when they apparently DID have morals and work in the customer's interest, kindly persuaded the UK Treasury to participate in. GOLD! As gold goes down fast, up slower and as vols are still low, we are going to look at 2-month low delta puts. This trade is perfectly set up to be reverse Midas.

5) Long lunch. TMM have discovered that angst is best countered in a most un-American way. Instead of stepping up to plates, showing one's mettle or facing adversity they would much rather reminisce about the 90s with a nice steak and bottle of red.

Posted by Polemic at 9:51 AM 11 comments Links to this post  

They Will Come

Wednesday, March 14, 2012

TMM chuckled to themselves upon reading in the FT that the UK is considering issuing either 100 year or perpetual bonds. Because it was only a couple of months ago that analysts were calling for that famous relic of history, the 3.5% War Loan to be retired. Predictably, this led to the usual spike in its price (see below chart) that has occurred on the multiple occasions that such calls or rumours have surfaced over the past 25yrs.

The War Loan remains one of the shrewdest moves the UK Treasury have ever made, effectively shafting those who bought it in real terms. Which is why TMM think it would be a great idea to issue another one to lock in the very low Gilt yields for the future. Predictably, this has led to a sell-off in Gilts today as markets digest the signaling effect of the news.

The UK wouldn't be the first, with Mexico amongst those to have issued a 100year bond in recent months. And the boasting rights for Chancellor Osborne would be considerable... TMM cringe as they imagine the glee in his budget speech: "This government has secured the credibility and faith of markets. Not only are we able to borrow at the lowest interest rates for decades, we have also been able to borrow for 100years". Or something like that.

TMM have had a chat amongst themselves, and have come to the conclusion that it seems more likely that a new Perpetual bond would be issued than a 100year bond. This is for two reasons: (i) the duration of a 100year par bond paying a 3.9% coupon is 25.6, while that of a perpetual paying the same is about 26.6 - there isn't really any difference between the two, and (ii) this would allow the consolidation of the War Loan into the new Perpetual.

Now, TMM certainly don't want their pension fund managers to touch these turds with a barge pole (and will be writing to them to discourage them). But they suspect that should the DMO announce an issue of either, that real money will lap them them up. Just like those 50year linkers at negative real rates. Staggering. TMM can only assume that the DMO will soon be able to issue Zero-Coupon Perpetual Bonds to this investor fraternity.

TMM think that actuaries and pension consultants will even manage to solve Fermat's Last Theorem of Pension Management and prove that Zero-Coupon Perpetuals are a GOOD thing to own, to the delight of the DMO. But in the cold light of day you really can't get over the fact that 100 years is a very long time in finance. Let's look at 100 years ago. 1912. The British Empire was in full swing, the Boer war was over, what could POSSIBLY go wrong for the holder of a newly issued 100yr bond? Well two World Wars were only the icing on the cake of a century that has seen unimaginable changes, the pace of which has never been known since probably someone rubbed two sticks together and shaved the corners off square wheels. So, no matter how actuarial your spreadsheet do you REALLY want to receive 3.9% for a century of risk?

It, of course, remains to be seen who bears the brunt of the joke. TMM suspect that, ultimately, these particular entities that have been instrumental in keeping long-dated gilt yields (both real and nominal) so low are likely to end up as wards of the state. Case in point, the recent pre-privatization "restructuring" of Royal Mail. So, really, if you were cynically inclined, you could accuse Osborne of blatant book-cooking and Ponzi-scheming. TMM is sure that if there's any fertile ground for HeroZedge-style hysteria, the UK surely must be it. However, luckily the UK still abides by the old "Keep calm and carry on" adage.

All that said, there seems to be a significant amount of evidence that can-kicking plus structural reform is a winning strategy. And while those of Mediterranean origin seem to have a problem with enacting the latter, the UK has a long history of success in this respect. If anyone doubted the commitment to shrinking the UK public sector, this morning's figures showing a 4.5% YoY fall in public sector employment should persuade them.

Posted by cpmppi at 11:22 AM 10 comments Links to this post  

Cigars: Smoked and Layed

Monday, March 12, 2012

TMM feel like the guy in the above clip this morning as everything seems to have gone wrong for them. Their desired correction in equities came and went, but was of such minimal magnitude that they missed the opportunity to get long again. Then, having stupidly ignored one of their key trading rules of only buying hedges from garden centres, they have found their portfolios effectively performing as "short risky assets". Oh cock.

But that is not all. TMM also got the Greek CDS trigger wrong. It seems the little darlings at ISDA have managed to salvage the almost ex-parrot that is the Developed Market Sovereign CDS... at least for the time being. So TMM must offer a mea culpa for their evidently pre-emptive and cocky call that the when it seemed likely that a "voluntary" PSI would avoid triggering Greek CDS, thereby consigning these turds to the dustbin of failed financial innovation. But TMM are going to follow that old market adage: when in trouble, double. The reason we are going to do this, is that it seems reasonably clear that the only reason Greek CDS triggered was that Collective Action Clauses were required to get the participation in the bond exchange up from mid-80s to the final 95%-ish number. And the need for that was that Greece's debt burden (and success at achieving primary surplus) was so astronomically large and poor that there was no alternative from a policymaker standpoint.

And this is kind of key, going forward. Because the burdens faced by the other "potential" candidates for PSI (e.g. - Portugal/Ireland) do not have anything like the level of debt relief needed by Greece. Given that Greece managed to get 80-something percent "voluntary" participation in an exchange representing close to a 75% NPV reduction, TMM would view the probability of Portugal getting a similar participation in a 50% NPV reduction as very high. And that would obviate the need for a CAC-trigger on Portugese Bonds.

So TMM reckon that the doubts have now irrevocably been sowed in DM Sovereign CDS... if policymakers can possibly get away without triggering them, they will. The "Voluntary PSI" template is clearly the way that Europe approaches the problem. Which means that DM Sovereign CDS is now an implicit bet on the probability that debt levels approach the point that NPV reductions of the order 65-75% are needed on private sector holdings with near-universal participation. Which looks a lot more to TMM like a binary option on peripheral debt struck at about 35c on the Euro. That is not exactly a "hedge" for Portuguese bond holdings, and TMM reckon that it will become increasingly difficult for the Basel committee to offer capital relief on such packages.

So we are left wondering whether to chase our tails and pile back in OR (and this is where we know we should be more disciplined) just give it a wee touch longer and only pile in when old highs break. TMM remember only too well chasing a market flat out only for this to happen:


The trouble is, that any investment decision at this time is implicitly a bet on Quarter End. And window dressing can be a powerful force leading to either powerful trend extension or abrupt reversal. And TMM have so far not found a particularly consistent model for which of these it will be. But they would proffer the view that the least likely outcome is a sideways drift into the end of the month.

So TMM sit (as their mate Right Field would say) as disappointed bulls hoping that prices dip, providing them a re-entry point. The trouble is, the way markets are trading... slow drifts off, followed by abrupt stop-loss driven moves higher suggests that the weak side is the top side. Leaving TMM left behind... and wishing they could smoke Hamlet cigars in the office.

Posted by cpmppi at 9:36 AM 20 comments Links to this post  

Chinese Trade: Shock or Bore

Wednesday, March 07, 2012

Well, it was worth the wait - at last the roll over. But what is interesting is the current game of "find the fact" with which to explain the down turn. As previously mentioned, TMM have been looking for a turn based on technicals and psychology with diminishing surprise at relatively good data adding to the turn. Yesterdays trigger appeared to come from "Things Chinese" rather than the more oft quoted concerns over Greek PSI or whatever other Eurowoe is in fashion. In fact EUR/AUD's rally could be seen as testament to this.

So with Chinese news under the spotlight TMM were somewhat taken by this morning's "accidently on purpose" leak of China's February Export numbers to the party faithful by Minister of Commerce Chen Demming. TMM's collective jaws drop at the combined January and February export numbers only posting a 7% rise. Or in layman's terms, shit. Using TMM's sticky-back-plastic/cereal box seasonal adjustment tool (see below chart), that would suggest that Chinese exports had fallen YoY for the first time since the 2008 trade shock. Which isn't particularly good.

But TMM reckon something smells. Because such a collapse in export growth would suggest that external demand had completely cratered which, according to data in the rest of the world (e.g. the PMIs) seems not to be the case. Something does not add up. Time for TMM to put on their data torturing investigative hats.

Aside from the usual complaints about China's data being manipulated for political reasons (shock! horror!), it also isn't very good in terms of statistical availability, because the actual important metric is trade volumes rather than trade values, at least from the view of Joe Sixpack. Because if the price of something the US (or EU or wherever else) consumer buys falls, he/she can obviously buy more of it or alternatively, has more money to spend elsewhere... like on gasoline. And this is particularly interesting given that the steel, iron ore and coal within mainland China appears more offered than a night out with Ed Miliband at the Fascist Elocution Society's Annual Ball. So that got TMM thinking... we wonder if the domestic tightening and slowdown ongoing within China had made its way through to export prices. And while some of the this move is clearly base effects, it does seem as though export price inflation has hit a wall (see below chart). So this might provide some reason as to why the reported export numbers were so poor.

To try and see if this is indeed the case, TMM tied the data to their Rack and had a go at trying to extract signal from the noise by attempting to adjust for Chinese New Year and Export Prices. Happily, this fudge adjustment shows real exports growing at just shy of 10% YoY. They then knocked up a quick Blue Peter-style model of Real Chinese Export Growth based upon lagged US/ EU PMIs & their Orders/Inventory balances and came up with a reasonably OK fit (see chart below). In fact, it would seem that this naive model would have expected a more dramatic drop off in export growth, with a rebound over the coming months.

Now, TMM always take everything with a pinch of salt and are certainly on the alert that if the trend does not reverse soon, then something is afoot. But for now, it looks a case of "Move along, nothing to see here".

Posted by cpmppi at 11:42 AM 22 comments Links to this post  

RBS goes British Rail and hikes fares

Monday, March 05, 2012

TMM are in foul moods this morning. You see, it seems that the cottage industry that is the taxpayer owned "world-beating" UK banking industry have decided that they're not content with helping themselves to tens of billions of pounds of taxpayer money over the past few years. It seems that their profit margins aren't quite good enough. Brilliant, TMM thought, that means that they will reduce overheads, figure out what is going wrong and restructure their businesses to deal with increased competition and the so-called "New Normal", helping taxpayers get a decent return on their investment. But no, it seems. These publicly-owned banks appear to have taken on the classic public sector mentality of deciding the above is too difficult, and instead are opting for screwing the fixed client base. Very British Rail.

Yes, over the weekend, Reliant-Robin Bank of Scunthorpe RBS & Lloyds hiked their SVR (Standard Variable Rate) mortgage rates (soon to be followed by the rest of the cartel, having watched the recent carbon copy move by the Aussie bank cartel) by 25bps despite the Bank of England Base Rate having sat at 0.5% for 3years and multiple rounds of Quantitative Easing.

The usual reasons of "tightness in wholesale funding markets" and "increased regulation" have been trotted out by said banks. And certainly, to some extent this is true. But of the former, arguably the peak in the stresses emanating from Europe has passed with the gargantuan LTROs from the ECB. And as for the latter, TMM would observe that this has been an excuse for much of the past 25years. Regardless, the Basel III regulations are to be gradually introduced over the coming decade - they did not suddenly appear in the past few months. TMM are also highly sceptical they will be implemented in anything like their current form.

Anyway, TMM decided to take a closer look. None of this is new, and has been covered elsewhere, but is worth repeating. RBS have around £414bn of deposits, which probably pay around 0.2%, they have Short Term secured borrowings of about £300bn, which probably pay something like 0.8% (somewhere in between repo rates and Libor), unsecured borrowing of about £700bn which is probably something like 3.7% (Libor+CDS) and £70bn of equity which is probably about 10%. Which gives a blended rate of just over 2.4%. Against that, RBS's Net Interest Margin is about 1.45%, which, back of the envelope would produce about £22bn a year.

As TMM have noted previously, they find the behaviour of the Bob Diamonds of the world to be abhorrent. And without wishing to spark a religious debate about whether bailing out banks is a good or bad thing, TMM are generally of the view that if taxpayers are going to write a put on the banking system, it needs to be priced correctly. The value of this is not easy to estimate, but one way to arrive at a guesstimate of the implicit state subsidy might be to look at the difference between Subordinated and Senior CDS and multiply that by the unsecured borrowings. For RBS this looks something like £712b*(525bps-262bps) ~£18bn/year. Whether this is an overestimate or an underestimate, TMM do not know. But they do know that, absent the implicit government put on Senior bonds, RBS as an institution would not be able to exist. Because removing £18bn of that £22bn above doesn't leave much over to cover costs and NPLs...

Now, TMM are NOT bank analysts and the above is probably either wrong in at least a few ways at best, or at worst hopelessly naive. But they do think it at least dents the argument that mortgage rates have gone up purely because of increased funding costs or regulation.

It's just that these banks are not very good.

The chart below shows the historical estimated funding rate (red), the SVR 75% LTV rate (green), the difference between the funding rate and the SVR rate (incorrectly labeled 'SVR Margin' for ease of viewing, purple) and the overall Net Interest Margin for the bank (blue). The banks didn't cut their mortgage rates anything like what might be expected in 2008 in order to try and rebuild their margins lost in 2006/7. Then in response to a relatively small increase in funding costs they decided to try and hold on to these out-sized margins by hiking the SVR over the weekend despite the fact that wholesale funding costs have begun to move lower once again.

Now, regular readers will know that TMM are not Merv the Swerv's greatest fans. But they sure are looking forward to seeing his reaction to the banks sticking two fingers up at his latest gift of QE. TMM have also written to their banks demanding to know why their mortgage rate has gone up despite all of the above, particularly just a few weeks after large bonuses were paid out.

TMM would like to start a competition to rename the UK's public sector banks, and will start by offering:

Reliant-Robin Bank of Scunthorpe

Leyland Banking Group

Posted by cpmppi at 12:59 PM 18 comments Links to this post  

Looking for the Trigger

Thursday, March 01, 2012

As our regular readers know, we are founder members of the growth and recovery bull camp, but they will also know that we have been looking for a turn, which we feel is due for psychological and technical reasons. We had been targeting yesterdays LTRO date as a catalyst. Well, the date was right, but we were handed more than an assist by the real reason - Mr. Ben swapping his Bazooka for his BB gun.

We are definitely in the camp believing that IF QE3 has been disarmed and put back in the armoury (he may suddenly add today "Oh, and I forgot to mention QE3 is a cert"), then it is good news. We know they are willing to use it if necessary so putting it away means they don t think there is need to. More ammo to our long term bullish mood. Not surprisingly the most QE-based trades got shafted. Gold and that uber rates driven pair usd/jpy have been movers, yet equities are not committed and neither are other USD crosses.

But back to that technical and psychological turn. As TMM are well aware, facts often FOLLOW moves rather than lead them, but TMM, being a little more purist, are now, in their desperation scanning the horizon for what could possibly derail or swing what is fundamentally a pretty robust investment background. so what is there...

Oil (or Gasoline) is one for sure. Much has been made of the recent run up in oil prices and the potential knock-on effect upon growth. TMM will take a closer look in the coming days. Europe, as always, offers a good hunting ground for buried woes, though the treasure hunters have been out there ahead of us, leaving most stones turned in their pursuit of the ultimate Eurocalypse. But there are a few scraps left.

Portugal - the price action yesterday afternoon was interesting and, though there was the cacophony of month end in there, the switching intra periphery was notable. BTPS roaring higher and Portugal getting shellacked. Now TMM are of the opinion that in calming markets general correlations drift apart, but THAT sort of detachment didn't look like calm. More like a focused assault. With Greece now on the back burner it does mean that Portugal can be put on full roast. Watching that space.

France - Monsieur Hollande, for those of you who don’t follow continental politics, is a Socialist candidate running in the French presidential election. He also appears to be enjoying a healthy lead, at least for the moment. Hard as it may be to imagine, but Hollande’s also, if anything, more distasteful and disconnected from reality than his esteemed competitor, one Monsieur Sarkozy. And here TMM isn’t referring to Hollande's attacks on the financial industry (with choice soundbites, such as “my greatest adversary is big finance”), but rather his complete and total lack of appreciation of the fact that France, with many other Eurozone sovereigns, is in the middle of a fiscal crisis. Indeed, his suggestions to lower retirement age to 60, re-negotiate the newly minted fiscal compact, remove the advantageous tax treatment of life insurance policies, etc are all likely to make the funding situation for France a lot worse than it already is. Or, rather, “was”, before Baby Eltiaro made everything all OK again. Obviously, one should take everything that Mssr Hollande says during the run-up to the election with a very large pinch of salt. However, if even a fraction of the populist silliness Mssr Hollande is spouting at the moment makes its way into policy, we might find ourselves negotiating a bailout package for France sooner than we think.

We are sure you all have your own favorite flies you are watching in the ointment of recovery and would be happy to hear of them. But for now it looks as though we are fighting a BB Gun inspired attack on thee old favorite QE trades.

...And if all else fails just pray for a weak ISM...

Posted by Polemic at 2:56 PM 19 comments Links to this post