Wednesday, April 03, 2013

One over Zero and Decoupling

Europe woes have not gone away and though it feels as though the market's ADHD has already confined Cyprus to the toy box, TMM still see it as a jack-in-the-box. Lid down for the moment but there is a nasty clown about to bounce out again. S"EU"prise!!!

Yesterday's Euro  PMIs weren't a great shock but are confirmation that Europe is suffering from both of its perennial problems at once, politics and economics. In the past when we have seen economic crises the political will has held firm. Perceived breaks in the unity of policy have only tended to shine through when the economics were supportive enough to allow luxurious room for "debate". But now we appear to have greater policy split than ever occurring as the economic outlook is getting worse. TMM still vote with their P/L on Europe and call the zone lower.

Meanwhile the US markets are doing OK leading to calls that US has DECOUPLED from Europe, but the US is playing a two speed game. We note that US earnings are diverging depending upon their US vs ex US exposures. CAT and Fedex in the naughty corner, homebuilders, telcos and other domestic names are leading the charge. However the general tone is that US recovery, spurred on by its new found cheap energy and free money, is the story of the decade and to be long anything US vs the rest of the world, especially Europe, is the best trade in town. So local has DECOUPLED from international.   

Cheap money is changing many equations as one divided by zero gives an answer that is hard to use. Though we have long understood that if you fund at zero then any dividend paying equity can be attractive, the price can be anything you like for div/price to still be greater than zero. We have heard this quoted today re P/E "should be at 30".  but why stop there? It could be anywhere, pick a number.   

This has seen an argument flourish that equities can go up  based on them having a yield and be damned with the price risk. Which is interesting, because it is another example of DECOUPLING. This time from the bond markets where the reverse logic is being applied. You can't possibly buy bonds because despite their yield, the price is "obviously" going to dump.   

This leads on to another current belief, that Emerging Market Debt is a great buy as the only risk is if US treasury yields rise and you believe in the link. But EMD investors are being told that the asset class has DECOUPLED  from Treasuries and are a buy on their own merits of better debt dynamics, growth and  inflation. 

We hear the cry of decoupling everywhere. The usually steady path of AUS$ tracking the Aud mining index has DECOUPLED, Cyprus is assumed to have effectively DECOUPLED from Europe (Scotland could soon be DECOUPLING from the UK)  and we could say that Bitcoin has DECOUPLED from the USD. US data is even DECOUPLING with itself with this week seeing a sudden slew of softer numbers, but that's ok, it's only decoupled. It's getting to the point where decoupling arguments are being used to sell any old rubbish. 

Whilst we understand the effect zero has on some investment equations and whilst we also understand that the Japanese may be about do an "Exxon Valdez" with global liquidity, TMM have a simple decoupling rule-

"Decoupling works really well right up until the point it doesn't, which is just after the point everyone says it does".

And that would appear to be right now.

24 comments:

abee crombie said...

agreed TMM. starting to see lots of divergences in this market, even intra sector. Momo and Dividend monkey's beware. I'll be watching to see how gold reacts. Getting itchy fingers around here for a punt.

re US energy, whats you favored way to play. I am starting to like the Midstream segment given the risk/reward profile

Anonymous said...

C Says
I don't believe you can really have such a thing as decoupling in a global marketplace that has virtually no borders and still contains the ability to use excessive leverage.
You can have over and underperformance of course,but decoupling as a concept seems to always be disproved when the stress level rises high enough to trigger the margi call.

Leftback said...

This is usually the time that the monkeys get decoupled from their wonga, Mr. P!

Teddy Bears Picnic.... today/tomorrow/Friday? It's been a while since we had a 3-day event.

Leftback said...

Williams just used the "T" word.

Tapering.....

theta said...

I was wondering when you would first mention bitcoins.

abee crombie said...

LB, since you have been all over DVY for years, whats your take on the Utilities sector, which has a 30% weighting in DVY. I think it is looking ripe for a short soon. 8% ROE, 3.9% yield and earnings has been pretty stagnant.

I just dont think rates are going much higher soon, so not sure what the catalyst is.

Anonymous said...

C says'
Resembles a perpetual card game more and more

US bids $85b pmth

Japan bids $75b pmth ,but raises $140b p mth 2014

UK bids a we will cover your mortages forever and withs with a Carney trump card to play

ECB whoops it still looks like a joker.

Anonymous said...

C Says
The morning 'dash for trash' does not look to be wroking out too well.

Anonymous said...

Here’s an exchange that lists puts and calls on bitcoins:
http://mpex.co/

From the link above, here’s a contract for a $125 bitcoin call (I assume)
http://mpex.co/?mpsic=O.USD.C125T

This exchange costs 30BTC just to be able to trade (in order to keep out trolls, I assume).

The FAQ is interesting (from a tech perspective):
http://mpex.co/faq.html

Leftback said...

abee,

Utilities look overbought like everything else, a repeat of last year's rush for yield. Mind you, with the DX now heading for 84, and commodities falling, they will probably outperform the spoos in Q2. But that's why all the long only guys have been buying them lately and rotating out of small caps, energy and materials.

Would I buy here? Absolutely not.

LB did some good business being short TBT the last week or so, but we got rear-ended by the BoJ's Shock and Awe. They weren't bluffing....

Leftback said...

LB has to say that, even at his most bearish, he could not have conjured up today's 385k claims number. It is a measure of our market's current madness that SPX rallied this morning. Bad economic data? More QE!

The probability of a nasty jobs number on Friday, or especially next month, has risen significantly. By nasty I mean <150k for this month, and perhaps something far worse ahead of us in May (0 or worse).

Anonymous said...

LB,

I haven't been following the data closely lately (holiday takes its toll after all) but it seems like Hussman had a point when he claimed the low claims figure is due to a statistic artefact (extrapolation of the last 44 weeks or so of data).

We shall find out soon...

Eddie

Leftback said...

Mr Ten Year obviously isn't expecting a really good number tomorrow. He has already stuck his head down and he isn't coming out. He seems to have decoupled from the media "rising rates" story.

On the other hand, today's dip buyers are, more than ever, convinced that NFP has decoupled from ADP, Spoos have decoupled from earnings, and markets have decoupled from risk.

EURUSD spike today was probably just one big post-Draghi squeeze... let the dribble downwards continue henceforth....?

Leftback said...

A bit of Ambrose for those who might be feeling cheerful. AEP is on the old soap box here, mates, reckons governments are "canceling the debt by printing". Anyway, AEP reckons there will never be an exit from QE. Talk about Gloom and Doom....

AEP: NO EXIT

Mind you, if you look at the way US long bond yields are following the trajectory of the JGB, you might think he has a point. No Exit for a wee while, we would suggest..... this is the essence of The Widowmaker™, after all. Not only is short TLT the new widowmaker, the old widowmaker is still slaying victims today!

Zagen Germaine said...

You only pay 28% on the amount over that taxbrackets2013.com, so if it's only a few hundred or thousands, it should not have a big impact.

Anonymous said...

C Says
A the end of this week I wonder if we have just seen Japan sell the news? 4.5% up and close on 1.5%.No idea of the volume ,but that leaves a decent 'trap' going into a weekend.Wouldn't much care to be in it myself.

You get the sense that markets have pinned such a lot on the US being able to drag the rest up. Yet this year the US is trying it's first fiscal cntraction and that has not had a good outcome anywhere else where it has been tried post GFC.

I'll stick with my view that this was a good year to get yourself a late cycle buyer to give you an exit.

Leftback said...

Might not be a good day for monkeys. Sometimes the selling starts long before the number, and then at some point it actually doesn't matter what the number is.....

Yesterday's dip buyers may prove to have been in the lower decile of the IQ scale. Wednesday was perhaps a taste of things to come. If earnings are 10% over-estimated, then there is a fair amount of correcting that has to go on between now and mid-April.....

If you talk to an actual real working US person who makes $40-50k/yr, they will tell you that the 2012 holidays went on the plastic and that last year's 0-2% raise, the payroll tax change and rent increases left them with much less cash in their pocket this Spring than last year.

Leftback said...

Re Japan, wild volatility in govies is not exactly what you want to see as a basis for economic prosperity. Satan (aka Soros) was on today, pointing out the dangers of Japan's latest QE binge, and presumably looking at another currency opportunity....

JGB Volatility

So Japan wants a lower yen? Be careful what you wish for......

Anonymous said...

C Says
Must be looking at the wrong page 88K NFP !
That isn't a miss,it's a find a bid.

Leftback said...

C,

It's Mourning in America.

abee crombie said...

Euo luxury taking a hit and the chart are looking ugly. I'm kinda interested in Euro autos here though. I think eurostxx dip buyers come in here and short cover..

Rotation, rotation. Oil stocks just getting blasted. RUB as well.

Leftback said...

Retail employment is being hit especially hard according to the jobs report, and although that is an annual seasonal phenomenon that was maybe a bit delayed this year, it has been exacerbated by the payroll tax change. The Wal-Mart leak really should have tipped people off. That's the target audience that is feeling the pain.

Anyway it's a horrible number for bulls, and there is a possibility that something truly unpleasant awaits us next month as the Sequester rears its ugly head. We've Only Just Begun.....

LB has been BOSIVIAN for some time now, especially with regard to the XHB (homebuilders and related retail), which has resulted in some considerable discomfort in the sphincter region on days when the Great American Housing Recovery has been trumpeted, leading to the insertion of some Cold Steel.

But today it looks as though the boot is on the other foot, as some novice Monkeys may be about to find out that some days you just can't find anyone to buy those slightly over-ripe bananas..... remember, he who sells first, sells best. Now, Monkeys, do form an orderly queue at the window, and NO PUSHING...!!

If you find that the phone is ringing and it's a Mr Clark on the line, then you might want some puts later, come talk to me about 3pm. We can arrive at a deal by 3.55 or so.... until then, have fun!

abee crombie said...

I stand corrected. Oil related (RUB and equities)looking at a nice bounce so far

Leftback said...

Monkey see the dip, monkey buy the dip....
Amazing Pavlovian behavior.

Monkey don't play no jobs or no earnings.
Monkey JBTFD.