Wednesday, April 25, 2012

For Frack's Sake

And relax. BBVA results not the shocker disasternistas were hoping for, the cult of AAPL continues to fleece its disciples and it is looking more as though that was NOT the big one re Europe. TMM can’t help but think this has got a july 2009 feeling about it. We had the QE sugar rush from mar09 to jun09, then the market sold off because no-one believed it. But then the earnings season was good and the market ripped higher, never looking back. OK it may be a bit premature, but with all the noise subsiding and the market blaming the quiet on “waiting for the FOMC” which to be frank no one really cares about, TMM are more inclined to believe that the markets are “shagged out after a long squawk”. Whatever the reason, we will be invoking the “do not short a quiet market” rule and expecting more up drift.

Whilst it is quiet we will have a look at something we believe is about to change the world much more than any Apple iteration – the changing shape of energy supply. TMM would like to start today’s post with an interesting chart showing energy costs per Gigajoule for major fossil fuel sources in the US. White is Power River Basin coal, orange is henry hub gas, yellow is oil and pink is international coal (Newcastle spot).

As you can see, the big story of energy prices going to the moon over the last decade remains very much intact but gas has been doing something very unusual – after spiking hard it has gone into a massive decline and is almost as cheap as powder river basin coal on a per GJ basis. The cause of this is the fracking revolution in gas production which has massively increased the US’ fossil fuel reserves. It is already being keenly felt in power markets where US coal companies are being killed by the increased competitiveness of gas fired power generation as the portion of the day in which it makes sense to burn gas is longer and more profitable, reducing those peak time margins that coal fired power plants make much of their profits from. For coal equities this is hardly news – Cliffs Natural Resources, Alphadyne and Arch Coal have not been feeling the vim and vigor of a resurgent US economy. Similarly the US’ strategic exposure via oil imports to the Middle East and less than friendly regimes like Venezuela is waning judging by the chart below. Crude import percentage from Saudi in white, Canada in orange and Venezuela in yellow (Note the post Libya ramp in Saudi imports – that won’t be around for long).

TMM can’t help but feel that the money for the “war on terror” could have been better spent, but the US appears to have been a classic case of “better lucky than smart” in that regard since they have secured a reduced exposure to middle eastern madness through oil sands. Now, not that oil is mattering as much as it used to – below are vehicle miles travelled in the US in orange, inferred gasoline demand in green and average MPG of sales in white.

Not hard to see what is going on here: a period of high oil prices has pushed consumers into buying much more efficient vehicles and vehicular travel has peaked. Much like any business if unit sales and prices are down revenues are down a lot. TMM are wary of hockey sticks though so we thought we would do the comparison of a new efficient hybrid, say a Prius C and a Corolla. In summary – it’s ugly, and the google docs link is here. You need $2 gasoline to even think twice about not buying the hybrid. In addition, companies like Ford are offering vehicles in gasoline, electric and LPG versions. No points for guessing how gasoline stacks up in the lifetime cost analysis there. Simply put, the vehicle mileage hockey stick is going further, a lot further unless WTI halves. It would be particularly disturbing if people widely moved to plug in electric cars which essentially allow you to do what the power grid does – determine which fuel is cheapest to burn then burn that. In that case you would expect oil and gas to converge on a per GJ basis which would be a catastrophe for WTI.

In summary a few very important things are happening in energy, but particularly so in the US:

  • Energy prices are falling for gas, with knock on effects for other markets in which it is substitutable. Similarly, vehicle fleets are becoming more efficient and gasoline demand in DM is probably in a structural bear market on that alone. This has major implications for US inflation most of which has been from food and energy in recent years despite motor fuel being only ~5% of CPI basket and heating and utilities being another 5%. It may be the case that even if housing recovers and “rent equivalent cost of ownership” (~40% of the basket) stabilizes that the US has a very benign inflationary environment for structural reasons. Buy all the gold you want, but if people’s gas bills cease to exist or go into a nominal decline then that will take the bite out of a lot of quantitative easing in commodities.
  • The historic segmentation of the energy markets into transport fuels and utility fuels is starting to blur and is likely to continue to do so. For that reason, the pricing per GJ for each should converge over time. You may not be able to make everyone in the US buy an electric car tomorrow but the ability of WTI to command a big premium over henry hub will weaken over time.
  • US energy imports are falling fast and will continue to do so as the vehicle fleet turns over. This is going to have major implications for US defense spending – how much does the US care about the Middle East, ex oil? TMM would note that if the straits of Hormuz are closed, China has more to lose from it than the US. In addition, it has major implications for US tax receipts if people buy LPG cars or electric ones. US utilities pay cash taxes in the US, Saudi Aramco does not. The major problem of the US from a macro standpoint, its twin deficits and high debt may be reduced materially by these trends and the historically cheap USD may be the best buy in FX for the next decade.
  • Make it in America? The US and particularly the Democrats have developed some kind of romantic attachment to manufacturing and politically astute CEOs like Andrew Liveris of Dow have picked up on this theme and have called for the US to have an industrial policy, aka, handouts for corporate along the lines of China. TMM see this for what it is – getting something for nothing and think it is largely unnecessary for most businesses. It is highly unlikely the US is going back to making garments or in any way competing with the scale efficiencies of southern China when it comes to cheap labor, especially as China’s factories increasingly replace labor with capital. Where it can compete however is in areas that are skills or technology intensive (when in doubt, buy out Asia’s best and brightest with grants) and anything that is energy cost intensive. Liveris notes that labor is <12% of COGS at Dow and Energy is 25% or more. TMM think that $2 gas makes a much bigger difference than looser labor laws or tax holidays.  

The Downside….
There is another side to all this aside form extolling the virtues or hope of a resurgent America, and that is the effect it will have on those on the long side of the commodities trade. For the likes of the Middle East and Russia TMM have this to say:

Saudi and Russia in particular have developed fiscal arrangements (Saudi’s covered well here) such that their economies “don’t work” at much less than $90 WTI. Russia is not that much better and is more dependent upon gas, something that the European buyers they have held to ransom for so long might not want to buy if they can frack their own as Romania is currently exploring. For that reason TMM are hard pressed to think of currencies they dislike more than the rouble – all the terms of trade frothiness of Australia with a boatload of political risk and a much bigger credit bubble as can be seen below. 

Even in the case of Australia all those lazy RBA terms of trade and commodity price projections may go awry if China manages to produce a lot of fracked gas – China SOEs have never been ones to shy away from renegotiating off take of commodities if it suits them though that is likely a late 2010s / early 2020s problem. Some countries have the political wherewithal to take such a crunch in terms of trade (Brazil, Australia) others might not make it and require some institutional change when they can’t deliver their side of the autocracy / milk-and-honey trade.

Of course the real crunch comes against renewables. Whilst cost differentials have been narrowing between traditional fossil fuels and solar and wind,.  will the energy addicts be able to resist dirt cheap carbon emitting gas for the benefit of the environment? TMM think not as austerity drives people to short term survivalist individualism rather than long term community spirit though that is arguably in the price these days. The larger shock is that by the time we start running out of gas energy prices might be following solar's quasi Moore's law - which wouldn't hurt any of TMM's power bills.

Tuesday, April 24, 2012

Dude - where's my current account surplus?

Well, today is a very important day for markets, as the largest religion company in the World reports earnings. Despite the strength of the earnings season so far, names have found themselves lower just a couple of days later as profit taking has come in. In the short term, that seems reasonable, but does not detract from the trend that the economy looks pretty good with companies making money - that seems pretty "normal" to TMM. Of course, against that, it seems that everyone TMM speak to expect AAPL to sell off post earnings, regardless of the actual top or bottom lines. Make of that what you will. TMM will most definitely NOT be watching the AAPL release, and will instead be getting pissed down the pub.

Anyway, we digress. In amongst the usual bollox arriving in their inboxes this morning about Europe and concern that a certain Shampoo brand (how do we know the girl in JAWS had dandruff?) was going to portent the end of the world , TMM were asked why, despite Oil prices having rebounded from their recessionary depths, Canada was running a Current Account deficit of close to 3%. Given we're fed up to the eyeballs of anything Europe, we thought we'd have a look.

It's kind of interesting actually, that this particular subject has been brought up given that on that long list of supposedly great macro trades that has so far refused to perform is that old chestnut "Short AUD/CAD". Now please forgive TMM for their snarkiness but, in our opinion, this is one of those trades dreamed up by a group of punters we shall now term as the "Off The Cuff Macro Numpties". This particular group are known for their use of a little knowledge, a few good charts and their favourite hobby "Bubble Hunting", which essentially consists of looking for something that has increased in price by 10-20% and yelling "Bubble!". Oh yes, and telling TMM that we are clueless in the comments section below.

But back to Canada. Looking at the Trade Balance (see chart below), indexed such that Q4 2006 equals 1, it is interesting to note that while post-crisis, both import growth and export growth don't actually look that different, the level of exports fell far more sharply and has not really recovered particularly well. Well, to TMM that exports have not recovered tremendously is not that much of a surprise given that the US recovery (Canada's largest trading partner) has so far been rather tepid. That imports have re-accelerated is perhaps more interesting, particularly in the light of the strength of retail sales in Canada since the recovery began.

Now TMM are unconvinced, as discussed before, by the idea that there exists a housing bubble in either Australia or in the UK. This is primarily because of the balance between housing construction, housing supply and household formation. It is not obvious to TMM that valuations are out of line when the above conditions are either in balance or in deficit (not enough housing supply) when many can be explained by structural falls in interest rates (and interest rate volatility) amongst other things. A full discussion of this is well beyond today's post, but TMM do think that these factors are significant in explain why the US and Spain experienced a spectacular crash in house prices, whereas the UK and Australia (at least so far), have not, despite - well, specifically in the case of the UK rather than Oz - very similar macro outcomes and policy responses.

So why do we bring this up? Because TMM do actually reckon that Canada *may* be a candidate for a housing bubble, given the dramatic run up in house prices, interest rates have arguably been kept too loose post-crisis (understandably so, given the external risks), TMM have received plenty of anecdotes and adverts that evoke déjà vu of 2005 in the US. But most importantly, housing construction has been widespread, it is a big country with not too large a population and housing starts (~215k) have been running above household formation (~170k) for a few years now. TMM haven't looked in enough detail to come to any firm conclusions as to whether Canada's housing boom is a bubble or not, they do reckon that it is different enough from Australia's to matter.

So Canada has clearly had something of a consumption and investment boom. What about Australia? The trade dynamics in Australia look almost the mirror image of Canada's, with imports having recovered to around the pre-crisis, while exports (to China in particular) have roofed it So is this perhaps a case of the real trade *not* actually being a case of long commodity currencies etc, but a case of being long the stuff that people actually want. Because the above evidence suggests that there isn't, y'know, that much demand for Canadian oil and other stuffs.

But that's not the end of the differences. A little observed portion of the Current Account balance is the Current Transfers balance, usually confined to those of us bean-counting remittance flows to Mexico or the Philippines. And it is notable for two similar sized economies that over the past few years that Canada has built up a sizable transfers deficit (white line, chart below) while Australia hasn't (orange line). Now that could mean one of many things, but the most likely explanation is US construction workers having found work in Canada's tight labour market sending their earnings back home.

So given all the above, it would appear to TMM that perhaps the confidence with which punters keep trying to sell AUD/CAD may be misplaced. Because it appears to us that Australia is selling stuff people want, while not experiencing a domestic consumption boom, while Canada appears to be precisely the opposite. Canada also appears a more legitimate prospect (though this is far from certain) for a housing bubble than Australia, and increasingly, migrant labourers are sending their earnings home adding an additional headwind to the currency. Combine that with the popularity of the short, the rather tepid response to the soft CPI print over night, a market now looking for a 50bp RBA rate cut next week (after famous idiot well-followed Aussie Journo McCrann has started predicting it) and a soothsayer "Buy" signal on Friday, and TMM reckon it could be time to squeeze some gonads and scoop up some AUD/CAD.

Monday, April 23, 2012

Is THIS your wave?

Mood is not good in Camp TMM this morning and it does feel like a camp. Encircled by whatever the politically correct way of referring to Red Indians is these days. For here we sit with a pile of Spanish stocks, our background long equities in general and our view that the world is not about to end and whooping and hollering all around us. There is hardly any point in us going over old points on Europe as Europe (come to that, most views at the moment) has effectively become religious in point of view. We remember all the past cults of markets and it would appear that the last 5 years have programmed a new generation of market participants that the cult of Roubini brings you fame, fortune and credibility. True, TMM themselves could have been classed as the biggest contrarians in 1998 - 2000 mocking the likes of Abby Cohen, and also suffering near depression on the run up to 2008 shouting "can't you see it?" but to TMM this current Cult of the Black Swan is creating a new Mordor where everything is BLACK!

But this disasternista thing is tiring. And we are tired. Roller coasters are fun and the thrill of the big fall is exhilarating to the point of wanting to have another go straight away. But after an hour or so it's uncomfortable and, more boringly, predictable. But with a roller-coaster you do at least get the guaranteed big fall every ride. However perhaps this is more like surfing, with the doomsayers out on their surfboards hanging out at the back waiting to catch the big one. Waiting as the sets roll in, watching the eager young pups jump on rides that just fizzle. If THIS isn't the wave, then just wait .. the big one will be coming along soon.

Is this the big one? It certainly feels like plenty of folks have decided to catch it, as Holland and Hollande (don't they make guns?) on top of a set of weakening PMIs result in what feels like an old fashioned YOURS. One of those YOURS that revolves around speed and momentum (the steepness of the wave) rather than new thought or process. But to TMM this isn't the big one and we will sit it out as we ponder -

1) If this really is the "End of Europe" play, why the heck is eur/usd effectively flat
2) The corporate splurge. Looks like the flood gates are opening on those piles of cash with today's offering being Nestlé's purchase of Pfizer's baby food - for cash.
3) There is virtually no difference between the fiscal policies of Sarkozy and Hollande in terms of budgetary consolidation.
4) Isolation of the German view in Europe is, we would argue, a positive given that the market has been calling bluff on the "Austerity Only" policy prescription that has largely failed in the periphery so far. You can add to this Holland's move to reject Buba orthodoxy and Merkel's likely election loss to the SPD next year.

The compression and isolation of Germany is of course the end-game, when it comes. However it would appear that for them to acknowledge that they need to share the burden, they first need to acknowledge that they are also as guilty as the Greeks. Culturally that is not there. Which reminds us of an incident we experienced when skiing in Italy this year. The Italian waiter gave our order to the guy behind in the queue by mistake. The guy knew it was in error and yet he said nothing. When we told him he was jumping the queue he told us that it was not his fault - the Italian waiter was stupid. We asked if he was German and he replied asking why would that be relevant - in a VERY German accent.

This move does feel forced and it isn't for us, except in commodities and commodities-driven EM. TMM has a sneaky suspicion that those catching this wave are a little too clever for their own good and may be using one of these.

Thursday, April 19, 2012

Spanish Kevlar Gloves

First TMM would like to thank the wonderful folks of Cyprus for their hospitality, fantastic go-karting facilities, interesting beverages (we imagine that a few local producers are retiring to Monaco after our custom) and their UK weather, imported especially to make us feel at home. Special Cyprus weather. We will be back - or at least our teenage children probably will be. So now we are back on planet "caffeine free" let's look at what's been going on.

Before our departure to overcast climes last week, we mentioned the 2 wobbles and a hope in the triumvirate of global economics so it's worth seeing how things have changed. The most obvious thing that greets us is that China is no longer on the front page of "Bear Weekly". Now this, of course, suits TMM who have been long of H-Shares for the past 3 weeks and we have no plans to change that position. The US picture, post the NFPs, had appeared to have also stabilised and despite a shake down in AAPL things are noisy but flattish, having said that, the Philly Fed and Housing Data is not helpful.

But China and the US appear to have been shoulder barged out of the way by Spain. Poor Spain, doing an impression of a Wildebeest at a crocodiles' pool party, with even Argentina tearing off a limb whilst it's underwater. That move by Argentina should make for some interesting politics. Perhaps the UK should hire Repsol to explore for reserves off the Falklands. That could even end up with the Royal Navy and the Spanish Armada on the same side.

But back to Spain, or now Europe. because after the sort of OK-ish Spanish auctions we thought there would be two options - Buy some carry and wait for the next event date for there is nothing that kills a bear more than nothing happening OR decide that whatever happens, this is just can kicking and so refer back to the holy bible of Euro2010/11 for guidance "For was it not writ that should the Spanish yields hit 6% we should trash Italian stocks, start rumours of French downgrades and argue that the German population will not support the rescue of Spain"?

TMM do prefer scenario 1. What do Europe sellers expect to happen? To TMM it would appear that the only scenario that supports selling right now is one where Spain crashes, doesn't receive assistance, defaults and the Euro and then Europe break up. Now call us picky but though that indeed is one potential outcome there are a lot of other scenarios and most of them involve some internal resolve, even if it does involve printing your amount of money. Elections may change the leaders of some countries but as the UK Con/Lib coalition is finding out, they are but the tip of the iceberg of the machine that is government. There is enough mass below the waterline that knows where its true interests lie to stymie any threats to them. Yes Minister indeed.

Having piled back into equities last week the current mood should be considered as red flags to us and we really ought to run with the pack, chop the longs, swing short and whip up the doom. Instead though TMM have decided to do the reverse and have broken the glass on the cabinet containing their Kevlar Gloves and bought some Spanish stocks of international appearance ( braced for comments). Hold on tight !!

Saturday, April 14, 2012

Cyprus Special

TMM are today feeling old. Yesterday was a struggle. Despite a 30 minute power-nap before dinner they felt "urrgh" throughout the meze-athon in a Cypriot restaurant decorated in a melange of authentic style and black marker-pen client graffiti. But then this is day 2 into a tradition that stretches far back in history. As Socrates famously wrote, "Many hours have I sat in solice, drinking beach buckets of luminous green fluids and shot glasses of equally vivid pink liquours, contemplating the origin of this maddness for I am wracked as to the primordance of the concepts of marriage or those of the stag party"

This place goes by the name of Ayia Napa. It sits upon ancient ley-lines that twist the very fabric of space and time, for was it not 9pm a fleeting moment ago, when we wanted to go to bed, and yet now it's 3.30am and sorry I can't hear you? And that ley-line twisting continues into the minds of the club designers (how do you get that full size pirate ship to stay on the front of your shop?) and twists our minds to even cope with being here.

Of course TMM could say that they are here to celebrate Greek Orthodox Easter, but that would be even more of a lie than "yes, your club looks great and wow how many bottles of sambuca for 10 Euro? I'll go and get my 15 friends and be back in 15 mins.. I promise" but not quite as big a lie as the swarthy fellow on the door with "Don't worry, I do you 'special' price".

TMM have discovered if you order anything in Cyprus, say x, you get "special Cypriot x". Special, made in mountain/village/family goat by uncle/grandfather/family goat. And it's very special indeed. But basically Cypriot x is similar to normal x and only differs in being more expensive and... shite.

For example. White wine.. "This is special Cypriot wine, it's like a sauvignon blanc....". but is not and smells of BO. The red? "Yes we have Cypriot red, very special, it is like a cabernet" but it is not and it tastes of musk ox. Very special.

What's this? "This is special liquour, we call it (sounds like "ghalachosinosisisos") it is made using grapes and we take them and turn them into special drink, come come I bring for all. It is made in the mountains using old tradition that no one can remember, to make special taste, that taste like brown sticky fluid in the bottom of food waste recycling bucket after 5 week bin-man strike.. Eees very special. We serve it frozen so you can taste it a little less.. very special"

Last night was "Opening night at Bedrock" which was much like a cross between a BBC Radio One roadshow, Butlins and a McDonalds - if McDonalds were to make McShots, McJaegerbombs and McWhats-this-one-i dunno-just-drink-its.

"And come, I show you, my club full of special pretty friends, yes very pretty, they is made using recessive genes from Northern Europe that would never normally see the light of day, notice how none of them have any dorsal line symmetry? And, ah yes sir, you cannot work out where their dorsal line run? Too many kebabs perhaps.. "

Taxis are special too. They are all stretch limos and come with a special fixed price which switches to a special dynamic price that goes up between departure and arrival. "Because it is special Cyprus price" Ahh, we see! And there we were thinking it was because we are getting special Cyprus driving, where which way you go around roundabouts depends on the shortest route to your exit.. "no ees ok, it not high season, not many cars"

Well at 3.30am after a special bar bill, (made using special Cyprus maths taught to Cypriot waiters from the age of 2) and a special unnecessary hot dog.. (ees special as it no easy to make a food product out of crude oil, you like? Perhaps your friend ..he likes?). We arrived back to the hotel for some special sleep. It's like normal sleep only much much shorter and one wakes to find one's head nailed to the pillow, a dead hedgehog in the mouth and a gallon of battery acid in the digestive system. "Eees special Cyprus sleep, you like?"

So what does today bring? TMM are writing this from the special 2 hour bus trip to the special wine tasting in special mountains wondering if they can squeeze in a special nap, despite Swedish House Mafia's "One" rocking everyone around us, before we all head off for our big special night out in the special clubs of Limasol.

TMM are slightly concerned that Day 3 could be a bit special.

Wednesday, April 11, 2012

Two Wobbles and a Hope

TMM are on holiday at the moment but watching with interest and that interest has picked up to the point that they have been lifting phones and doing trades.

There has been debate and difference amongst the team as longer term macro positions of some were being parried by shorter term positional views of others. But today once again TMM are aligned because the dipstas amongst us have decided that this dip is enough and have covered any remaining short term shorts and got back in, properly committing to longs in equities again.

Why? Well to those playing and whipping up the downside there is a perfect storm brewing as the global triumvirate China, Europe and the US each experience their own negatives [a quick media dig here while we are at it, how come up-moves in equity markets are always quoted in "points" yet down moves measured in "Billions of dollars wiped off the value of"?] But to Team Macro Man it feels rather than being a perfect storm this is 2 wobbles and a hope.

Wobble 1 - We continue to feel that Europe 2012 is NOT Europe 2011. The type of Price is News bluster and "haven't seen these levels since the last time" lines flying around the chat screens was notable in its vacuousness of new news other than the price has moved because the price has moved. We agree that the austerity vs. growth, debt/GDP equation is seeing GDP killed by austerity but we do not see systemic risk to Europe as a whole. This time around, basis and funding markets have not blown out, only widening to a token degree. Simply put, whether or not one agrees that the 3yr LTRO solves all Europe's problems or not, it would be churlish to deny that it has drastically improved bank funding conditions and, absent of forced bank deleveraging, it is kind of hard to expect Europe to "go systemic" once more. So though this is a bigger story further down the line, despite the seasonality of April Euro kickings, we don't think now is the right time.

Wobble 2 - US NFPs One number does not a trend a trend make, and especially one with such a large standard deviation. What can be said, however, is that considering a smoother three month average, that the labour market is a bit less vigorous than previously thought but certainly showing improvement - coincidently, agreeing with Chairman Bernanke. While this certainly does not imply that QE3 is back on the table, it does - arguably - put markets in something of a sweet spot provided that the data does not materially worsen: data consistent with 2% or higher growth is likely to be positive for risk assets, while a move above 3% would risk unanchoring the bond market. To scare TMM, ISM would need to head back to about 51, something that is unlikely when the orders/inventories gap is still supportive of the inventory cycle and when the inventory/sales ratio has not yet begun to rise. When this happened in May 2010 and 2011 it was time to sell.

The Hope - China again. We have laid out our thoughts on China over the past few weeks to a fair amount of ridicule and chastisement but we will stick by our guns. The latest Bo Xi news is not a concern of ours, and if anything the apparent connection to the death of a British expat arguably shows that China is becoming less corrupt in its dealings: while innocent until proven guilty, this is clearly better than being swept under the carpet. We also don't feel that the move to allow CNH capital to move onshore is a sign of desperation, but more one of efficient use of funds - it is simply another step along the line to full capital account convertibility. The Trade data and its slowdown in imports does not mean a collapse of internal economy either. Confusion over data on China reigns and as FTAlphaville has observed, can be used to support any argument but we feel we have done our own homework in polishing the fog from our data specs and are content with our interpretation and would encourage readers to go and look at the regional breakdown of both imports and exports (hint: it's Europe, not Oz/SA etc). China is not crashing.

So with our concerns so out of alignment with the noise we hear around us, we are now united in our hope for the markets to head on back northward and given the positioning and hope behind this dip occurring any discernable base and rally is going to be jumped on hard as no one wants to miss the train again.

We will be back next week.

Friday, April 06, 2012

Easter Poem.

Easter comes as every year
And with it brings a dose of cheer
For the bears who look again
To Eurowoes, this time from Spain.

For when we note their yields rise
It's time to sell in decent size
The other debt that Europe calls
"Defendable", as it always falls.

But slice the links
And as Spain sinks
She shall not drag
The others down

L T R O for all its flaws
Has shielded them from big bears claws
So though great profit is our aim
This time be warned - It ain't the same.

And far, far east where junks are kept
The "junk" you sold has now all leapt
As markets bounce as data cry  
"Growth is back", yet you deny.

It must be false! They made it up!
Coal sales are down in Buggerup!
For I know best, as I sit here
Eight thousand miles from the land I fear.

So now the mere is crowded out
With hides of hunters who all shout
"Mine's the Swan! The blackest one!
That I will down with my short gun".

But normality is not like that
For most its creep and crawl, or flat.
A drift, no thrills, just gentle grind
Where quick return is hard to find.

So cease thy bets on tails and jump
Back to the fat that's in the hump.
One day we'll die, yet doesn't mean
In coffins waiting we'll be seen.

Thursday, April 05, 2012

Stopfest City Limits

What's the news ? THE PRICE IS NEWS!!

This is good old fashioned psychology and some of Team Macro Man really enjoy these markets. It's when opportunities open up due to timing issues and people having to do things through money management decisions rather than bigger fundamentals. Otherwise known as a STOPFEST. As we mentioned yesterday the preponderance of lines on charts all converging in a holiday week is all too much to ignore and is far too tempting not to run at considering the stops that lurk beneath.

This method of unzipping a market reminds TMM of an old tactic they used to use to arrange boys skiing holidays. As ever the mission was to unzip the invitee's from their partners who may either want to come themselves or resent being left home alone. The method went like this - Onboard the single males first and then approach the weakest linked couples to easily get the buy-in of the guys. Next approach the stickier relationships and when asked by the partner who was going list the other pre-assigned men (normally the most laddish).  Realising no other girlfriends were going the partner would relent. Save the toughest couples for last and insist that BOTH are invited and you really really wanted them both to come. The girlfriend/wife would ask who was going (by now 14 blokes) and realise she would hate it and would insist that her partner went alone and apologise with some irrelevant excuse for why they couldn't come too. Job Done.

So it appears today that the markets are employing similar tactics to unzip positions via stop losses. Starting with the weakest and using the building momentum to finally tackle the toughest. This started as an FOMC inspired anti-QE trade. The moves from that sucked in European Peripherals which sucked in Spanish background, which had always been there but was being ignored until prices started to unravel. This started to unzip equities which have now broached some key trend lines. These trend line breaks have seen acceleration which has further helped USD up and Euro down. Meanwhile, European bond markets pick up momentum to the point where, combined with all the above, there is enough momentum to have a crack at breaking the most tough of pairs. EURCHF. Yes the stopfest has now managed to crack the floor in the house of SNB. Or has it?

It would appear that once again those to make the easiest buck in non-exchange traded FX will be the lawyers as debate is already raging as to the validity of prices sub 1.2000 with respect to barriers and stop losses. Credit issues in machines will always mean highs and lows are debated until someone "decides". TMM are very glad they are not sitting in the middle of one of those disputes but, with resolve tested after that sneak attack we think the SNB will be out sticking fingers in the dykes to an extent that CHF is our favoured short against anything we want to buy.  You can't do a sneak attack twice.

So we are left here hanging. Holiday ahead, stops driven, is this really the environment to load up new risk off positions? Not in our eyes. NFPs falling on Good Friday is bad enough without all this noise on top of it. So far Price Is News. We will wait for next week for real news to come back to the fore before we take action. And anyway, who wants to get stressed when on Holiday?

TMM wish you a happy holiday and may the Easter Bunny bring you far too much chocolate...

Wednesday, April 04, 2012

Choose your Poison

 Haven't we had one of these before? FOMC doesn't hint at QE3 so we trash everything as there will be no more free money? But no more free money because free money is not needed is not a reason to sell everything. Bonds - Ok that makes sense,  but equities? We are pretty sure that QE3 WOULD be back if needed but if you are beating up the QE trade then you buy usds, sell bonds and sell gold. But do you REALLY trash equities? US markets closed pretty stable and it had only been Asia pushing things lower but now Europe is trying its best to have a wobble "all by its own self " as if the FOMC wasn't enough, with the reason morphing into a Spanish event.

But what of this Spanish event. Is it real? Not yet in our eyes. Or is it just the soft underbelly of Europe to be next jabbed at by the Bond Vigilantes? Perhaps. Or is it just the cat that is being kicked, the kicker having been irked by lack of performance in short US and China growth trades? Perhaps.

But we do feel that leverage and short term specs are desperate for risk to sell off for a multitude of reasons and the scepticism that was present at the beginning of the year is still with us. The key point we believe most important to those players with strong hands (real money) is that the growth backdrop is good and improving in 2 out of 3 of the world's growth engines. The arguments for risk to sell off seem centred around theses that are either plain wrong in our eyes (china hard landing), or are not yet systemic - take your pick from the list of Eurowoes that the current Spain move is exemplifying and are as yet unproven (April/may seasonal data rollover). We also hear arguments that the rally has gone on "too long" (SPX did 55pc off its lows in 2009 with no more than a 7pc correction) and hear those arguing that one stock cannot make a market (AAPL). The trouble with this view is that for every potential risk that bears come up with, we can come up with a positive. So our "Big picture" remains that this still looks like a Wall of Worry. Add to that, positions are still not large in the medium term space i.e. real money and  long/short equity hedge funds look as though they are running only 35pc net long vs 60-65pc in every 5%+ correction we have had since 2009.

Our shorter term worry is that prices are today getting smaller and charts are being waved showing important lines. And we know from experience that lines on charts are the troll bridges of markets under which hide large ugly stops that will gobble up little bulls no matter how cheery their long term views.

Monday, April 02, 2012

Bear Food With Chinese Seasoning

TMM were somewhat chuffed to see their data mining and manipulation last week pretty much get the China PMI spot on. But what is the point of getting the number right if the market doesn't respond as expected? We know that China is still on holiday and so hasn't had a chance to act but the fade in Asian hours from opening highs in nearly everything "risk" is somewhat frustrating. Why does everything have to be soooo HARD? Can't we just for once have a "there's-a-good-figure-market-goes-higher" event? This morning though, trying to suggest that the data is good appears to be as difficult as arguing the origins of fossils with a creationist.

The heart of this morning's scepticism with respect to the NBS PMI centres around that old chestnut, seasonality. The trouble with this argument is that it's not exactly as if the realisation that many data series exhibit seasonality occurred suddenly overnight. Indeed, one would expect that expectations for the number embedded such seasonal adjustments, thus expecting on a seasonally adjusted basis that activity *fell*. This clearly has turned out not to be the case. Secondly, as TMM pointed out in their piece last week, there is a good amount of evidence that since 2005, the seasonal factors have been dynamic. Specifically, the 2005-2007 period appears optically to be very seasonal and the 2010-2012 period appears to not be that seasonal, if anything looking a lot like the movements in the PMIs from the rest of world. Which brings us to the 2008-9 period which is known to have caused echo effects in the X-12 seasonal adjustment process elsewhere. Indeed, the very large moves in those years mean that simply comparing the average March vs. February change is somewhat naive and biased. Next, the divergence between the HSBC and NBS PMIs, which can arguably be accounted for by considering the changing composition of Chinese growth becoming more orientated to inland cities over the past year or so.

While this is rather dry and geeky, TMM have become utterly fed up with the Mickey Mouse laziness exhibited by both punters, economists and the media as far as the analysis of the Chinese data goes. TMM's analysis that attempts to take note of the above issues by using a dynamic seasonal adjustment approach, suggests that activity moved higher by around 0.7ppts. Bears: just get over it.

But whatever TMM think or say, a mass escape of bears at the bear house in the national bear institute, Ursine city, look less bearish than the commentaries landing on their desks with respect to China this morning. But the price falls we are seeing so far are more associated to European peripherals and especially the European banks rather than Asia. Do we therefore suggest that the China PMI has been put on the backburner and a new bear toy box opened with respect to European PMIs and slowdown? Very Seasonal that. April - Don't we historically start taking a pop at Europe during April?

As TMM mentioned last week there is a regional flavour as to opinion on China so perhaps we just need to get through a complete trading day cycle before we get a true representation of reaction, but TMM are going to stand by their guns as far as China goes and if we are going to start seeing some spurious euro trashing we will play this as a regional cross trade rather than a global play. But for now .. hold fast boys.