Tuesday, January 29, 2013

New Paradigm? Run!

Sorry for the lack of posts, TMM have been sliding down hills in Austria and very nice it was too. Germany and Austria were as clean and efficient as ever and that includes the "Après ski" where the Austrians are still (in our eyes, so please pipe down any Canadian readers) the masters of "Après".

 So back to the markets. The last couple of weeks have been of no great surprise to TMM as the stresses of 2012 unwind and positioning tries to revert to a more normal balance.  FX land has seen the safe havens unwind and it is interesting to hear the background excuses that cite local yet really its all part of the same great relief trade. For example GBP's tanking is, in TMM' s eyes, just as much about money going home as it is to the new focus on potential "Carney cuts" or recession part 3 (Which makes us wonder what will happen to the top end London property market. Time to play the Chelsea/Chester regional house spread -not that we can)?

Equities have done us proud over the past months but we are getting a bit wary. Not so much towards equities themselves, but the global mood backdrop as expectations have pretty much converged on -

- US recovery - Agree, but looking at the Citi surprise index for US data sitting on zero we would suggest that s in the price.
- The Bernank prostituting money supply like a 5 buck hooker
- Europe will not die today. ( even Greece today announcing the worst is over)
- Asia is just fine.
- Japan will Bernanke the Bernank out of the Bernank.
- Yields will all rise.
- Equities are the no brainer. - Well we would agree that they WERE a no brainer, but as per above, we now have doubt.

  Lovely - so what could possibly go wrong? Even our friends at Hero Zedge appear to be scraping the bottom of the barrel for new negatives. (US lost the German's gold? Purleeese!). But the debate within TMM is how isolated different assets can remain if or when we start to see pressures build in other areas. For example, EM credit structures where rising US reference yields are making things pop and squeeze. Add to that the weight of positioning in that field that has been chasing the last bp in TMM's eyes EM High Yield credit is looking shaky. Recent moves in EM FX are predominantly being blamed on potential  FX wars in Asia but we think there may be more behind this.

 But how infectious would a credit sell off be? The pressures  of "Risk on Risk off" have appeared to diminish and the fast flowing Roro river  has hit the low planes allowing it form a delta with different asset classes feeling they are no longer influenced by other flows. Backwater micro analysis proliferating in the absence of daily changing macro news. Already the debate has opened up as to whether 2013 is a brave new world, a new paradigm in contrast to the paradigm rule book of 2008-12. This is almost as good an indicator in its own right. As soon as we hear the words "Paradigm shift" we worry.

So if we are already seeing positions being justified on the "No, this time is different",  we are ready for the next "Oh that shouldn't have happened" event to occur to remind everyone of Mark Twain's quote about rhyming history. We don't believe that we can have a panicky sell off in one market without it starting to infect others, (Pink Flamingo rule 1)  so despite equities being our "least worst" long option compared to bonds and commodities, we are putting our P+L where our thoughts are and have unloaded all our equity index longs in anticipation of the next unseen unseen. We would go further and suggest that that unseen is going to come from Emerging Market Credit.

 What else? Well if we are looking for an EM wobble then the least we can do is look at the high yielding NAFTA favourite the MXN. Everyone's darling but if we get a big enough wobble we could see USDMXN easily pushing through 13.0000. While we are surmising a turn perhaps we ought to even look at GBP turning back up for all the opposite reasons that world has sold it. So let's go mad and buy GBP/MXN.


CV said...

Nice one TMM ... you are being contrarian on the contrarians ... buying GBPMXN, you utter madmen!

I love it!

Look, I know the markets can be difficult, but over the next month I see very little juice left in the risk on trade. Book your gains and sit back and enjoy your winnings.

In FX land, I still think the EUR will continue to grind up as complacency and feel good attitude about Europe grows. And then of course, pop ... but not yet.

We had a nifty call on some GBPUSD vol a month back (put options obviously) and that came in nicely. As per your trade, maybe the GBP against all odds will see bid? I am not sure, I think 2013 will the year where the GBP definitively and with a bang loses its safe haven status.

Equities you say? Well, just wait for those daily RSI readings to come down. It will happen through a pull-back or the market moving sideways, but it WILL happen.


Anonymous said...

Nice call Claus. we were wondering a couple of weeks ago between AUDUSD vol and GBPUSD vol, and decided in favour of the former given the EM rollover channel (and audjpy potential temp retrace). Wrong pick so far. Stick to what you know as they say.

Leftback said...

EM equities may already be reflecting some of the credit market stress you discuss. EEM did seem to have rolled over last week. Today may be a good day to sell strength in EEM, which we have been long for months.

The China story will probably be good for most of the year but EMs are always vulnerable to a run up in the USD and the upcoming austerity discussions may be the trigger for that, as would any hint from the FOMC that Infinite bond buying may not be Eternal.

Europe is a more difficult call, EURUSD feels like it should be lower but that was true for most of last year as well. Charts for European indices look more constructive than EEM for the time being so we will stay with our equity positions for now and attempt to hedge against the FX risk with some modest EUR shorts over the next couple of months.

Gus said...

"The latest equal-weighted P/E multiple for MSCI Europe, at 13.2x, has just moved to an outright premium vs the last 10 year average."


Anonymous said...


Just put on a modest long VIX position as it is difficult to see the VIX grinding much lower.

You may thought the same on virtually all implied & realized vols only to see them grinding ever lower since the beginning of Q4 12. Anyhow, there should be a bottom somewhere, should there not?

With virtually no real big problems being high on the agenda I feel its about time that either an old one gets back to the limelight (Europe, Iran, China, US debt ceiling) or some new ones being put on the agenda and causing a little shake up of the markets.

What is your view?

Leftback said...


A few quick points about Europe.

1. North American observers have been bearish Europe for six months, and totally WRONG. Mainly this is because of ignorance of ECB mechanisms and a complete inability to understand EU politics.

2. P/E ratios for Europe have tended to be lower than in the US. But, as in the US in 2009-2010, earnings comparisons in Europe will be made to the 2012 crash period going forward. So this is a good example of why trailing P/Es are useless.

3. Finally, let's say Price Is News and we don't care about fundamentals, only about charts? This chart is LOLHOR. It makes no sense to sell this yet:

European ETF VGK

There may be a time to sell Europe, but this is more likely a time to hedge.

Leftback said...

Just to follow up, we normally find that credit leads equities. European spreads, e.g. SPAGER at 343, down from 633, are at 52 week lows.

Euro Spreads at 52 Week Lows

There is really no way that this can be read as bearish. If you cast your mind back to 2009, as credit spreads for US high yield and EMs tightened, equities simply continued to climb. Until we see a marked deterioration in peripheral debt, we are not going to see those equities under pressure.

Note that France (and Germany) is excluded from this analysis. Like the US, yields may have to rise.

Leftback said...

If you are looking for a credit problem, there is one on our doorstep in the US. The usual suspects are on the hook for this (banks and taxpayers):

Overdue Student Loans Reach 15%

Anyway, don't let me distract our North American readers from their xenophobia and locality bias... let's all scoop up the homebuilders and social media stocks, b/c after all, the Fed is going to inject liquidity up America's arse indefinitely.

Anonymous said...


you might want to have a look at Robert Shiller's homepage, especially at the cyclically adjusted PEs (CAPE).


(too lazy to look up the tags for hyperlinks)

His CAPE is based on the S&P500 but that should be good enough. Long term average is around 16, 16.4 iirc. Right now it is 22.2 which means the market is pretty rich.


Leftback said...

You want over-priced? There are plenty of US small cap stocks up there in the stratosphere of valuation (cough: social media), curiously existing alongside very reasonably priced "real economy" (industrials, REITs, energy, semiconductors) issues.

This tends to happen when there is ample liquidity. It is also, and quite invariably, a reversible phenomenon.

Gus said...

Thanks LB/Eddie. Great comments. Just one of the reasons I love this blog.

Leftback said...

Facebook certainly exemplifies the New Paradigm. Who cares about earnings when you have clicks? The stock is down 5% on the day.

Insiders (or "associates of insiders") running for the exits? Telephone touts, sorry, of course I mean "information arbitrageurs" hard at work down by the beach in Stamford?

"Stevie, are you there... there are some funny clicks on this line...?"

Anonymous said...


get the cycle right and everything else follows.
Late summer/fall was about understanding that the global cycle was not about to crash.
Now it is about the question, whether activity indicators will show enough dynamic to induce earnings upgrades. if so, we still have at least a quarter of boring micro markets with slowly rising indices.

Anonymous said...

I am looking at the crude oil chart from 2006. Looks to me like we're about to break out of the consolidation from 2011 and start creeping or flying up this summer.

Frankly I see the next resting place at a minimum of $115, and I hope for my own arse a max of $135


Of course I could be wrong and usually am, but just highlighting it as a potential wrench in the spokes, so to speak.


Leftback said...

WTI? Really? $115. It's possible I suppose, and it would be the typical seasonal trade into the Spring, but it would surely be a trade supported by a falling dollar if it occurred.

From the other side, if I might (and I have no position) offer a counter-argument, what about all this 'fracking' oil and natty that we are apparently pumping out all over the place in the US lately like there's no tomorrow?

Isn't it likely to lead at some point to a supply build in US energy and thence to lower oil prices, like $60s in the summer, for example? Of course this assumes the absence of a great big rollicking global recovery?

Brent is another matter entirely, however. Even wider WTI-Brent spreads? Don't rule it out for a few years, unless Uncle Sam produces more than it needs and actually starts exporting the stuff to Western Europe.

Anonymous said...

Every vol feels cheap. Front s&p at 10. Gold at 11.5. Crude in low 20s. Em ccy at 8, even after krw 2d ago. Cdx hy vol. That being said, the term structures are steep, so all gamma all the time. Is it really just a California beach city crushing vol in all assets?

Who says you have to give up your longs?
Why run not delta with convexity at these prices?

The past three years have shown as many up shocks than down shocks anyway - eq skew is wrong.

Anonymous said...


do you think Uncle Sam will export oil, LNG or whatever to Europe ? Besides legal issues to be removed I would presume an increased supply of cheap energy for Uncle Sam in whatsoever form is equivalent to throwing a pile of chocolate bars into a Weight Watchers meeting. The US of A saving energy or even exporting if when it is cheap and in abundance ? That goes beyond my (European) imagination.


Anonymous said...

C Says'
Bizarre describes current behaviour to buy Euro and Euro equity. With few exceptions Europe is still struggling mightily. The bright spot buyers would suggest are those multi nationals etc.The export companies and indeed for Europe to climb out of it's hole requires those exports keep firing. The Euro at these levels indicates we can expect data to come that refelcts that becoming more difficult. The Yen is weaker. I suspect the Won is just truning the corner reversing it's strngth against the $ because Korea as it's own debt problems.
Now I can understand that virtually all through 2011 and 2012 has left quite a lot of people underweight Europe and all things European. My problem is being underweight something that now appears to hold little prospect of imporvement in future quarters looks to be the right place to be.

There are brighter spots in the world,and they are mostly priced in many now recouping their positions to what they were before the late 2010 'peak' in inflationary fears.

The collective sigh of financial relief on Europe looks to me more than a bit preemptive. That appears to be a lonely place to be given I read little that doesn't seem to suggest otherwise. I am grateful for the opportunity it has provided to reallocate my portfolio at better prices.Best prices I have no idea about other than I expect to get a chance to see better than current levels again virtually everywhere.

Anonymous said...

The Bernank is sure doing a good job in making his currency globally competitive. EURUSD drifted through the 2012 March high of 1.35. It's not just USD, but more or less pretty much every direction you look at compared to EUR.

Am thinking that since the EUR guidance rate still has some distance to fall, it's going to be doing just that at some point of time. Juencker was worried already and no doubt at the current economic state strong currency should start causing some problems soon enough.

Anonymous said...

Almost forgot...


The recovery seems to be well underway.

Anonymous said...

Are we talking about MooserWirt? Of course we are.....