Thursday, January 03, 2013
Happy New Year!
Well, once again it's that time of the year where TMM mark to market their non-predictions for the prior year and foolishly attempt to make new ones about the coming year. As JK Galbraith said, economists forecast not because they know, but because they are asked. Wise words to bear in mind indeed. P&L wise, for TMM 2012 was a reasonably good but not stellar year, finishing a smidge better than their peer group, which they'll take, but like 2011 before it, they hoped to see a bit more reward for the effort put in, particularly in their rates trading. Anyway, enough with the moaning and on to the laughing at the ludicrous things we didn't predict...
1) 10yr Gilt yields will NOT finish 2012 below 3%.
BIG MISS. Well that was completely wrong as their macro model for Gilts diverged even further from the market (it actually currently points to a "fair value" of around 3.70%!) as QE and the flight from European bonds into safe havens as a fear of EUR-redenomination/Grexit overwhelmed any sense of value, particularly from our friends in Japan & Switzerland. TMM are still searching for a catalyst to reverse this hideous overvaluation of Her Majesty's Gilt-Edged securities.
2) 3yr CNY Shibor swaps will NOT close 2012 lower on the year.
HIT. The much mooted "hard-landing" for China didn't materialise and as activity & exports began to rebound in the autumn and the market begins to focus on the potential for tightening in response to a rise in food inflation by mid-2013 these closed the year not far off their highs.
3) 5y5y forward UST will NOT finish the year below 4%.
MISS. A similar story to Gilts. While ISM did indeed move towards 55 in line with TMM's model forecast, economist GDP forecasts and the overall number for 2012 GDP looks to have been around the 2.2% (close to trend) growth TMM expected, bonds were primarily driven by Grexit fears and then expectations of (eventually delivered on) of further QE. A case of getting the macro "right" but the market response to it "wrong".
4) The RBA will NOT cut more than 25bps and the Cash Rate will also NOT finish 2012 below its current level of 4.25%.
BIG MISS. Well somehow, TMM managed to break even on this theme by a combination of playing the range, but more importantly, luck (we all need a bit of that!). Along the lines of our belief in a soft landing for China (which proved correct), that the labour market would not weaken anything like the dire predictions of an unemployment rate north of 6% (which also proved correct, as the unemployment rate sits at a mere 5.23%), growth would be robust (which was also correct, looking like an above trend 3.5% for 2012) and that core inflation measures would remain in the middle of the band (which proved incorrect, as the RBA's trimmed mean measure moved down to 2%) would mean higher, rather than lower rates would be required. Unfortunately, the fall in inflation and overvalued (though not grossly so) Aussie Dollar led the RBA to capitulate on its view of China (and the mining sector) and also on the domestic sector, cutting rates. TMM reckon that policy is now far too loose in Australia and the risk of an about turn in policy is very real and they resold the front-end into December's rally.
5) Platinum will NOT under-perform Silver.
HIT. Not really much movement here over the year to be honest, but this is still a trade TMM like.
6) Copper is NOT going anywhere.
HIT. While finishing up around 8% on the year, volatility realised around 22%, meaning selling Copper vol at 40% produced a tidy profit.
7) Oil vol will NOT disappoint.
HIT. Well, only just... realised vol of 26% only just beat the 23% implied.
8) EM Equities will NOT repeat 2011's under-performance of DM Equities.
HIT. Again, only just, eking out just shy of a 2% outperformance. This is a theme TMM expect to continue this year, but more on this in our 2013 Non-Predictions.
9) Equity Bears will NOT stop trying to argue that earnings will fall as a result of margins contracting from multi-year peaks, but S&P earnings growth will NOT disappoint the consensus of 5.5%.
MISS. Equity Bears did indeed spend a good deal of the year arguing that earnings will fall as a result of margins contracting, but for all the hyperbole, margins only fell by 10bps which is neither here nor there. And earnings still look like they will have risen by just below 3% YoY, but that is shy of TMM's 5.5% threshold and so this is a "miss". However, TMM still walk away with an intellectual victory in that margins neither collapsed, and nor did earnings, something they consistently point out only happens during a recession (something the Herozedgers never cease to predict...!).
10) The ASX200 will NOT reverse its poor relative performance and will remain a laggard of global equity markets.
MISS. While the ASX200 was no stellar performer, it was also not a laggard, finishing in the middle of the pack, as RBA easing offset the high Aussie Dollar. Getting this one wrong is a corollary of getting the RBA call wrong.
11) Ed Miliband will NOT be the leader of the UK Labour party by the end of the year.
MISS. What a difference a year makes with him sitting 8% ahead in the polls. TMM desperately hope that Cameron & Co. can pull a rabbit out of the hat by 2015 as otherwise the UK will be faced with a the most left wing government seen since the dark days of the 1970s. Shudder.
12) The BBC will NOT stop linking any justice anywhere in the world to the UK Government spending cuts and will NOT stop generalising anyone working in a bank as evil but will manage NOT to generalise all journalists as phone tapping, family destroying, moral bankrupts.
HIT. Well... that *was* an easy one wasn't it...?
13) Consultants will NOT find life easy. Shareholder backlash to senior management pay will NOT leave middle management untouched. A crackdown in inefficiency will lead to more focus on the production of the final product and less spent on the luxuries of "corporate awareness" and all the associated "consultants". However, IT & HR departments will NOT lose any of the control they have over the business lines they are meant to serve.
MISS. While the latter part of this non-prediction proved correct, TMM really must've been off with the fairies when they came up with the former part.
14) The Olympics in London will NOT be the disaster many expect, yet during them, manned flight to Mars will NOT be harder than getting to Canary Wharf. However, the Olympic tradition of the host nation losing money on the whole even will NOT be broken.
HIT. TMM don't know anyone who attempted to get to Canary Wharf so we'll have to leave that part unanswered. However, the Olympics proved a roaring success. And while the final financials will not be known for many years, TMM hope their dear readers will allow them the luxury of awarding this point. TMM really will eat their hats if LOCOG manage to break even on the deal.
15) Greece will NOT stop taking the piss with pricing in tourist restaurants. As shown by their inability to change their macro economy, there is little chance of micro Greek economic theory changing.
HIT. TMM's contacts recently in Greece assure them that a coffee still costs 4-5 Euros. What a rip off.
16) Kate Middleton, Duchess of Cambridge will NOT announce that she is expecting a baby.
BIG MISS. Whoops...! Well... it could've been worse, we could've been the Daily Mail who must've splashed that she was pregnant about three times over the past year.
17) The Mayan predicted end of the world will NOT occur in 2012. TMM are offering believers immediate delivery of ayuverdic tea and Himalayan pink salt lamps against Dec 22nd delivery of all their worldly goods (excepting their tea, lamps, wind chimes, tin foil beanies and Peruvian wooly hats).
HIT. Well, that was also an easy one. Sadly no-one took TMM up on their offer.
So, to chalk that up 9/17 or 53% which though marginally better than evens is nothing to shout about, and unfortunately down on last year's 62%. TMM hope to do better this year and will follow up with some of their 2013 Non-Predictions over the coming days.
Wishing all our readers a fun and profitable 2013. Good luck.