Thursday, January 03, 2013

Mark to Market - 2012 Edition

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.


marcusbalbus said...

jack bone

Phallus Majorus said...

Snobi Brits!

Leftback said...

Welcome back, TMM. A Happy New Year to all of our occasional Roman visitors as well.

The non-death of Spanish banking continues.... not only were Spanish 10s briefly trading below 5.00% today but BBVA successfully sold €1.5B of 5 year paper, and deposits at Spanish banks are finally rising as some of the capital flight to other EU countries has reversed.

Spanish Bank Deposits Rise

Leftback said...

WOW. Didn't expect this so soon.

Fed Expects Bond Buying to End in 2013

That upset the apple car today. Not for us, though, we are short the long bond. Smirk...

Leftback said...

One indicator of a pick up in US small business:

F Series Truck Sales

Anonymous said...

Nice ace up the Beard's sleeve. Brilliant timing as well (wink wink), if you think of comments earlier in this space about 'solving fiscal issues with monetary solutions'

Now, call me obsessed but I'll ask again. How large a move in the belly and at the back end of the curve before those holders of 2% 'blue chip' coupons start having ants in their pants?

Also, a nice reminder that there is a very helpful USD component to that USDJPY back to century theme.

- DD

Leftback said...

LB thinks they may have more than ants in their pants tomorrow if we get a robust jobs number.

Steepeners are always enjoyable....

Anonymous said...

Anonymous said...

Happy new year gentlemen !


Anonymous said...

C Says'
As the week closes I think we are at a great juncture to consider macro in terms of the worlds major economies.
For some reason I keep coming back to an issue I made quite some time back. What would the world look like IF the US$ goes strong on the back of better control over energy,labour market flexibility,relatively cheap housing benefitting consumers;growth;global rebalancing and so forth ?

abee crombie said...

here are a couple of my macro trades for 2013.

AUD goes no where

Gold drops below 1600 ends year down less than 10%

EU Equities outperform

MXN continues to strengthen

Copper drops near year end ending down on the year

Leftback said...

Goldilocks jobs number, 155k. Markets will slumber?

Not a bad thing, it's been madness the last few days, but generally in a good way for a change.

maximm said...

Getting to Canary Wharf was generally fine....FYI

Leftback said...

LB"s Non-Prediction #1:

The Market will not rally 4.5% every week in 2013.

Sometimes when you are BOLIVIAN, and have a really large directional trade on, you can be quietly emotionless when it is going against you, completely fearless while it is going in your favour, but then the minute you take it off, you start shaking like a leaf after considering the risks....

If ever there was a day to take a bit off, this was it.... LB wonders if others can relate....?

amplitudeinthehouse said...

I'll let you decide over the weekend..

Anonymous said...

C Says'
This isn't the typical 'inflation scare' QE RORO move,because the associated stuff that should move didn't.
Appears to me allocations finally decided we might have sufficient growth that neither govt debt safe haven ,or goldbug haven, are 1st choice ROROs anymore.
I'd explore why they might now actually be about to be wrong going forward.
Prior inflation scares tended to zero in on input costs attributable to everything ,but labour. Little tag on personal incomes might now tell us that the so called output gap holding down labour costs is not has wide as we thought.
How can that be with unemployment so high?
It can be because growth is now attributable to areas where unemployment constraints apply.
To get this we need to consider how in the much of the West we have over two decades driven ourselves in certain directions. That is away from Engineering/Science/Tech and twoards Economics/Finance/Social in the education sysem and thence into career paths.
I nod the head therefore to thge cause and effect of this long run trend being that we have created a higher level of structural unemployment tha historically was the case. Yes,we may have high unemployment,but many of them are actually irrelevant interms of employment/labour cost constraints because they are actually unsuited the type of employment areas where growth is going to happen.

The conclusion that I am building towards is that personal incomes and rising labour costs should be the focus of interest,becuase unemployment levels are going to lag when it comes to identifying where the next pressures are going to build.

Priya Shah said...

Happy new year to all...very informative post.thanks for posting!!

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