When will the profit-taking come?

One of the sad realities that Neil highlighted in his recent guest piece was the propensity of markets to take profits swiftly whenever there is a decent move.  Part of this is of course a function of the aimless nature of macro in a zero interest rate world; part of it is also a function of the "five minute macro" mentality that so many punters embrace (willingly or unwillingly) as a function of their risk management framework.  No doubt some of it is also the various "puts" sold by central banks which tend to push assets back towards some mean.

Regardless, at a charity golf outing on Monday Macro Man heard several anecdotes of profits being taken in the euro after a whopping 3.5 big figure move.  Of course, 3 days is a full market cycle in 5minutemacroland, and positions have no doubt been subsequently re-added.  Yet with major event risks looming, Macro Man cannot shake the sad idea that a deeper bout of profit-taking might be in the offing.

Sterling, for example, is following the precedent of CAD in 1995 almost to a T, weakening to its lowest level several days before the referendum, then drifting slowly higher.  Yesterday's poll result obviously gave cable a kickstart higher;  with that weekend gap looming at the time of writing, what odds that we close it before the referendum just to screw everyone who sold last weekend's poll result?



Eurodollars, meanwhile, continue to dribble lower on the back of the SF Fed research paper released the other day.  Macro Man regards that as little more than doublespeak- a regional Fed research department doesn't necessarily speak for its regional President, let alone the FOMC as a whole.   Just ask the freshwater economists in Minnesota, who were eventually sacked by that notorious monetary smackhead Kocherlakota for disagreeing with him!

Anyhow, the usual-suspect contracts are now at levels that have generally held over the summer.  EDZ5, for example, has much liked it below 98.90, except for one brief foray that ended with the Fed's blase policy announcement on July 30.


In the "good old days" of 5 years ago, of course, when you saw a trend emerging you hopped on it and added as it went your way.  Obviously, in a mean reverting world that's not the greatest idea...especially when everyone else is taking profits.  Of course, there's the rare exception to the rule (USD/JPY in 2012-13, for example), which perhaps unsurprisingly have been prime sources of macro returns when they occur.

Nevertheless, it's been a good run over the past six weeks, and with the Scottish vote and the Fed in the pipeline, it would be surprising to see those with profits not cash in at least a few of their chips. As always, the trick is to figure which trends have been noise and which are set to continue.  For choice, Macro Man likes Z5/Z6 steepeners in EDs, and prefers USD/JPY to cable....
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Anonymous
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September 11, 2014 at 10:32 AM ×

Higher Vol => higher VAR => selling off assets. IMHO. VIX is up from the really lows but still no go..

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Kurt
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September 11, 2014 at 11:35 AM ×

imo right now - why? S&P 500 >2000

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amplitudeinthehouse
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September 11, 2014 at 11:49 AM ×

Profit takers?..don't know, but something inside me screams not to jump into the SP500, have a look at its form!

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amplitudeinthehouse
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September 11, 2014 at 12:12 PM ×

I kid you not , the SP500 has done job on me , the neural plasticity within Hippocampus is at this moment hard wiring the after effects of being overloaded with Neurohormones that swept into Hypothalamus when the Amygdala came under constant attack from the future traders in the pit.
I kid you not , I haven't seen any competition like it.

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Nico G
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September 11, 2014 at 12:27 PM ×

this is what going long SPX at 2000 must look like

https://www.youtube.com/watch?v=QBG79cKaxv4

narrow window, but so exhilarating

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Anonymous
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September 11, 2014 at 1:50 PM ×

Lamentations 3:46 says...
Rising interest rate expectations in the US finally starting to impact asset prices.
Strong dollar is the warning sign. The SF Fed report as the straw that broke the camel's back.
The sell-off has started in low-yielders (GBP, EUR, NZD) and high-yield (take a look at HYG US?). Starting to hit other currencies others, e.g. AUD, ZAR. Expecting EM FX to start moving soon - short IDR anoyone?
I would have thought that equities will get hit soon enough. US small cap underperformance is telling a story... But the good news is that vol is still quite cheap - anyone buying puts before FOMC?

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Macro Man
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September 11, 2014 at 2:28 PM ×

Nico, I was a little sick watching that...

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Anonymous
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September 11, 2014 at 2:35 PM ×

Pimco...everything going to plan? ( All quotes )

This process has been unfolding for well over a year now, ever since Ben Bernanke signaled a plan for ending QE3, a necessary condition for the FOMC to even consider lifting off the ZLB. The early stages of Wall Street’s re-pricing, now known as the “taper tantrum,” were rational, even if violent. Ever since, Wall Street has been in a “price discovery” process for what the post-Liquidity Trap “neutral” Fed policy rate should/will be, once the Fed begins liftoff from the ZLB.

Long-term bond prices have rationally not recovered all the ground lost in the taper tantrum: Removal of the Fed Put axiomatically should lift the term premium for duration risk. But yields have fallen, also rationally, as the market has rejected the FOMC’s rounds-to-4% blue dot: PIMCO’s New Neutral before your eyes!

Stock prices are, of course, higher than before the taper tantrum, and rationally so: If bonds reject the FOMC’s 4% blue dot, then stocks should, via a Gordon Model, rationally follow suit. And they have.

Thus, Wall Street has, so far, gotten lucky twice: the Unjust Moment followed by The New Neutral. Somehow, it just doesn’t seem right. And it isn’t; it just is.

This implies that the dominant risk for Wall Street is not bursting bubbles, but rather a long slow grind down in profit’s share of GDP/national income. And you can stick that into a Gordon Model, too!

http://www.pimco.com/EN/Insights/Pages/Escape-Fandango.aspx

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amplitudeinthehouse
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September 11, 2014 at 3:11 PM ×

As the old timer over there at West Coast knows only too well, never give'em a second chance do you in again. The new normal is here to stay.

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Anonymous
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September 11, 2014 at 4:09 PM ×

UBS: The current shortage of bills is so severe that even small purchases (by the BOJ) is likely to push yields into negative territory.


BOJ's Kikuo Iwata: “I don’t think a negative yield would create an obstacle for buying operations."

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Leftback
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September 11, 2014 at 6:12 PM ×

Decent demand for the long bond auction today. We were buyers of US 10s and 30s yesterday. That yield curve flattener has a long way to go, imagine if we end up with 2s10s at between 50-100 bps? Not much positive once can say for US 2s unless global equities start to sell off. Obviously, only Mr Richard Head has been hiding out at the short end ever since the Euro bond debacle....

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Anonymous
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September 11, 2014 at 6:52 PM ×

30y results:

http://www.treasurydirect.gov/instit/annceresult/press/preanre/2014/R_20140911_1.pdf


30 day TBill in USA back down to 0.01%

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Leftback
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September 11, 2014 at 10:14 PM ×

Another nice squeeze lies ahead for bonds. Thanks once again in advance to the many shorts for kindly bending over ahead of FOMC and US macro data, and to the media for the usual misrepresentations.

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macrottt
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September 12, 2014 at 9:34 AM ×

@ Macro man & Leftback

On Fed doublespeak...

Dont you think that the 2 other papers - by tobias on QE fuelling financial risk, and more important by the fed staff on the labor participation rate being mostly structural after all (contrary to stan fisher speech), are much more important than the SF paper?

What do you think of the idea that Yellen has been trying unsuccessfully so far to inject some risk premium into the market to quell investors optimism (I developped the idea before jackson hole in my blog on http://bit.ly/1xSa1CM , if you have time to go through it and tell me where you disagree it would be great).
To me her speech was fully in line with that thesis... all she was saying was maybe, if... etc. But apart from robin harding and hfe, nobody seemed to interpret that as a sign of upcoming regime shift.

???
txs guys

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Anonymous
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September 12, 2014 at 3:03 PM ×

League table of G7 asset purchase programmes. ECB firmly rooted to the bottom, even after last week.

http://imgur.com/C3rU5CI

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Anonymous
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September 12, 2014 at 3:06 PM ×

The Treasury has been working overtime since the Great Recession. I wonder if they are using imported labor :)

http://imgur.com/9kevrCe

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Anonymous
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September 12, 2014 at 4:25 PM ×

@LB, filling boots time?

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Leftback
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September 12, 2014 at 4:40 PM ×

Anon @ 4.25. Boots? Yes, I think so, although we may see further weakness in USTs heading into the FOMC meeting next week. Volume is quite low here, so this isn't Taper Tantrum 2. If today's retail sales data is actually the nugget driving this move then I'll take the other side of that trade, please. Volume will return next week post-FOMC, one way or another.

MM has discussed this a lot here, so let's run it again. So what if they DO actually say something overtly hawkish next week, like name a rate hike date for FF and issue a specific schedule of reverse repos (a POMO schedule in reverse)?

Even if this did happen (it won't), there would surely only be a momentary knee jerk jump in rates, as the biggest trade would be a fear-driven draining of liquidity out of HY and equities and into safer vehicles like Treasuries. An unexpected liquidity crunch is what causes margin calls and precipitates a crash, especially in infrequently traded vehicles (cough: junk bonds). It's not going to happen, not this month. Equities may rise or fall, but it is more likely to be on earnings forecasts than the Fed, for the time being.

I still think next week will see a vicious squeeze in bonds. Far too many shorts.

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Leftback
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September 12, 2014 at 4:50 PM ×

Just to extend the argument, the FED's precious US housing market (alleged engine of the vibrant US recovery) is already stalled out at the moment. A move to a more hawkish stance here would be more or less the equivalent of Trichet's infamous hike right in front of the global financial crisis. Dame Janet doesn't want to look like a complete donkey.

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Mr. T
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September 12, 2014 at 5:51 PM ×

Commodities complex getting hit pretty hard lately. WTI/Brent spreads to multi-year lows, with cracks (and refiner pricing advantage) getting hit proportionately. I'm increasingly nervous about the viability of US domestic production. A lot of these guys have substantial leverage and are FCF-negative @ $100+. If prices continue to fall the E&P need to continue (grow) production to service debt, creating an environment for reflexive losses.

Not to pick on a particular name, but CLR (one of the Bakken biggies) is FCF negative to the tune of around $1.2bil on $2.8bil of cashflow. The stock is up 50%+ YTD with estimates lower over the same period.

At the same time, FICM has consistently been showing HY energy issuance topping the charts with this WEEK @ $8bil of new issuance.


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abee crombie
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September 12, 2014 at 8:03 PM ×

Interesting thoughts Mr T. I dont know the name so well, but isnt most of the FCF going into 'growth CapEx', as it is for most of the Texas names as well. Pretty sure many of the well known names are still profitable at $70. Canadian oil sands, well that is another story.

LB, I have to take the other side on housing. I still think that market has lots of legs. Construction co's are a great buy here. New home sales way below LT replacement.

I cant decide what to say for EUR here.

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Leftback
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September 12, 2014 at 8:04 PM ×

Junk bonds are more or less flat today, even as Treasuries and REITs are selling off. Yet as Mr T points out, commodities, emerging markets (seen Brazil anyone?) and all kinds of miners are getting hammered (VALE, PAAS).

This quixotic set of price observations isn't at all consistent with rising inflation expectations. Just another misdirection for investors here along the long road to the New Normal. One more day of this strong dollar surge on Monday, maybe, and then we'll be back to the usual slow growth trade.....

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Leftback
admin
September 12, 2014 at 8:13 PM ×

"New home sales way below LT replacement."

Exactly. Because there is NO DEMAND at current price/wage ratios, which are artificially inflated by ZIRP. Supply siders are going to be very frustrated with what transpires, as this will be a 20-year demographic trend, cf. Japan. You can't just build 'em if nobody is going to buy them and all the Boomers are selling/vacating their "enhanced" Capes and raised ranches by the tens of millions.

EUR may have made a bottom this week. There is now nobody left who thinks that US growth won't leave EU in the dust.... wait until October 3, when the September jobs number comes in as sloppy as August and we'll see this turn around in a hurry. This dollar surge seems like a big deal but is merely a blip in the greater scheme of things.

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rossco
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September 13, 2014 at 6:56 AM ×

@LB - some of your best posting in a while , you seem to have a real knack for seeing the woods for the trees.

Investment grade credit spreads still underpin the equity trade IMO but that seems besides the point. If QE is inherently inflationary and non meddling is deflationary then buy the rumour sell the fact.....is it that hard. ?

For every Wall Street equity strategist writing pukeworthy nonsense about great rotations and other such bs apparently so.

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September 14, 2014 at 8:52 PM ×

Find home based jobs of link building, facebook marketing, add marketing, add clicking and much more jobs.
www.jobzcorner.com

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Anonymous
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September 14, 2014 at 9:03 PM ×

Real Medium Household Income, United States/Total Assets, US Federal Reserve

http://imgur.com/KmRZkR0

Meanwhile, the fraudsters and grifters continue to scheme and defraud...

http://mortgagefraudblog.com/

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Anonymous
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September 15, 2014 at 12:05 AM ×

TMM using IB charts, jajaja,
Good on ya!

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amplitudeinthehouse
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September 15, 2014 at 5:46 AM ×

Anon, 12.05

TMM says his glad you appreciate it, though he didn't doubt ya would.
The charting package isn't difficult to use, if trading at night use the dark moving averages, and when day trading keep the moving averages even darker :)

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Anwar Fazil
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Anwar Fazil
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