What now?

It's times like these that Macro Man really misses his Bloomberg account.  Not so much for the news- life without the "red headline" is just fine, thank you very much- but more so for the charts (in terms of the breadth of chartable instruments) and especially the downloadable data.  Unfortunately, the kinds of ad hoc studies and indicators that have generally made this place so much fun to write (and hopefully to read) are just not possible without having reams of data close at hand.

Nevertheless, it is still possible to comment upon the doings of the financial world, even if it's from a more detached perspective than your author would prefer.  Indeed, a somewhat detached perspective allows one to maintain a sense of equilibrium when it seems others may be losing theirs.  The current environment may be just such a case, if some of the missives that Macro Man's received are any indication.

What do we know?

* The SPX has broken a 2 year uptrend line and breached the 200 day moving average for the first time in a couple of years.



By an amazing coincidence, the Federal Reserve is about to stop purchasing assets for the first time in a couple of years.  In the QE era, there has been a very strong inverse relationship between the degree of policy accommodation and the level of equity vol.  As such, from Macro Man's perspective, the current "collapse" merely represents a normalization in the Sharpe ratio for holding equities, credit, other risky assets etc.

* The Fed reacts asymmetrically when the newsflow turns somewhat negative.  Dodgy growth in Europe, Ebola, a strong dollar....pick a card, any card why hikes need to be priced out.   This is hardly a new development, however, and recall that a couple of the notable hawks will feature on the committee next year.

One of the reasons that the last few years have been challenging for global macro investors is that key assets haven't really gone anywhere, oscillating within ranges that sometimes are broad and sometimes aren't.   One of the key features of this environment has been that central banks have tended to "push things to the middle."   CBs have tended to lean against price extremes in markets, most notably against overtly hawkish developments in monetary pricing and "undue" weakness in risky assets.

EDZ5 is now at (actually, slightly though) the top of its yearly range.   Macro Man's call to fade strength late last week was clearly premature.  That being said, key Federales have kept singing from the "mid-2015" hymn sheet; even if that's proven incorrect and rates don't move til September of next year (Macro Man's base case), pricing LIBOR at just 80 bps for the end of next year looks low.




* FX corrections are painful.   Industry performance reports suggest that macro is fully engaged with the long dollar trade (as forecast here!), and the research-sphere was awash with "OMG Record $ length on CME" emails over the weekend.  Let's leave aside the fact that the CME captures CTAs, not "macro"; they may overlap in the Venn  diagram, but they aren't the same thing.  CTAs don't care that their Twitter feeds are going haywire with panic or that the Ebola headlines are pretty scary.   They push the button and do what the model tells them.

Now, an uptick in market or portfolio level volatility may encourage some position reduction to  maintain a constant level of portfolio level VaR.  But the meat of the $40 someodd billion dollar long won't be cut until the main signal turns.   By Macro Man's read, we're still a ways away from that.

Which leaves discretionary macro.   USD/JPY has fallen 3% from its peak and looks more offered than glossy photos of Roseanne Barr in a leopardskin bikini.  The euro has corrected by about 2%, but somehow feels like it's less than that.  This probably tells you where the positioning was (and still is?)  Early returns for the industry this month have not been encouraging; one can only assume that they have deteriorated further over the last couple of days as a flock of flamingos takes flight.

Having crossed the proverbial P/L Sahara for much of this year before finding an oasis in August/September, it seems unlikely that punters will wish to venture forth once more with only a thimbleful of water.   In other words, the impulse to protect what gains remain in the tank will be very strong indeed.

From Macro Man's perch, this is not 2000, 2007, or any similar market-topping analogue.   While there has been some financial excess, there is nothing like the kind of real economy excess to produce a proper meltdown/recession.  As noted above, what we are observing is the start of a normalized volatility regime, at least in certain segments of financial markets.  If anything, the proper historical analogue for next year will be 1994 or 2004- two years when stocks kind of scuffled as monetary policy was tightened for the first time in several years.  (For fun, look what happened to USD/JPY on Valentine's Day 1994.)

While your author is not yet dipping his toe into equities to re-engage, nor is he selling any more at these levels.  Standing pat might be a luxury that professional longs don't enjoy...but it's one that he's going to exploit while he can.
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Anonymous
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October 14, 2014 at 10:09 AM ×

Roseanne Barr....leopard skin bikini.....very, very funny!

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Anonymous
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October 14, 2014 at 10:42 AM ×

C Says,
End of QE for whatever reason appears to be culminating in a view that low inflation is as far as the eye can see. Trouble is this doesn't look very appropriate for equity price multiples that reflect considerably higher growth forecasts.
What we don't know though is how much of this outlook for inflation is really structural and how much is attributable to temporary issues like Russia , like oil/energy competition.

I remain with the short I have been building for months and I expect to get paid. I don't see this a la 2007/8 either. Though I do think the leverage players have shot their bolt and did so early in this year. They need flushing to get us back to balanced risk/reward. Not there yet.

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Anonymous
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October 14, 2014 at 11:08 AM ×

Nice post. As a recently bloomberg-deprived fellow, may I ask what are your platform(s) of choice to fill the void?

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Anonymous
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October 14, 2014 at 12:18 PM ×

Why don't you try Metastock Pro, you get Eikon with it which is a reduced version of Reuters but still rather handy. Affordable on a private budget.

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Anonymous
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October 14, 2014 at 12:52 PM ×

The fact that ebola was listed as a reason at all, let alone the second thing that comes to mind, shows how silly and unsubstantiated this latest stock market panic attack really is.

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Nico G
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October 14, 2014 at 12:58 PM ×

i love how everywhere you read in US media it is about US assets down mostly on worries with Europe - dude, how about record speculation and leverage? move along there, nothing to blame.. the complacency in 2014 has been exorbitant, and still is

i mean even here among smart individuals... in September the discussion was on what had to ramp up in Q4 so that macro funds etc may finally see performance if i remember well the possibility of a severe correction was not even mentioned

i wrote that that Q4 would likely be ugly but probably looked like a clown with lipstick i mean, Santa had been a given the last 6 years so if you were reasonably up by Q3 2014 after a monster 2013 year you still HAD to expect a squeeze in Q4 to get paid handsomely well

the deconstruction is in motion imho, and it takes a lot of further damage to wear off, the negative psychology is in, with people angry at having been greedy and not willing to sell 'here' since they missed the Ali Baba turn

as well as 666 in 2009, they had to print 2014 in 2014 just to toy with you. Those are just numbers, now what numbers can longs endure on the way down and stick to a standing pat: 1800? 1700? 1540?

1700 looks pretty obvious imo everyone and his dentist would wait for a 1965 kiss back to sell everything i wonder if market will be that cute again, for longs.


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Anonymous
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October 14, 2014 at 1:23 PM ×

You don't need Bloomberg, just put some elbow grease into finding some (admittedly poor substitute for) data.

I was thinking of 2004 also.

Ebola my arse

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Anonymous
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October 14, 2014 at 1:24 PM ×

2007/8 are you joking, i haven't even had a nosebleed yet.

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abee crombie
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October 14, 2014 at 1:28 PM ×

Call me simple, but a bull market is one with higher highs and higher lows. So far US equities fit the bill. I will consider this market done with when we get lower highs and lower lows. Fairly straightforward.

Right now I tend to agree with MM that we are having a VOL adjustment. HY has been offer for month and small and EZ equties are taking the brunt of it. Perhaps we are in for a 2011 style swoon, certainly price action feels similar with yesterday massive 10pt move in 10seconds in the eMinis.

Gold's strength here has been interesting. Playing into Napiers ultra bear thesis

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Polemic
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October 14, 2014 at 1:30 PM ×

Don't buy til you see the white's of their socks. But there are flashes of white form the barrow boys out there and though I stick to my 27th Oct plan. I have opened my pure speculation (hoping it doesn't become a speculum) box and gone for a Turnaround Tuesday punt. Plummets and banter support the idea that a bit of a psycho-capitulation occurred yesterday re the mkt falling on its face on the close. So, with my stops below todays lows on equity futures I'm willing to run a rally.

Knowing my luck it could all be over by 3pm Ldn, with the speculum position well implanted. But, hey, what's a punt between friends?

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Nico G
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October 14, 2014 at 2:08 PM ×

abee spot on a lower high is all there is to watch for in coming weeks - I've reduced 80% stoxx short now and want to see what happens at 1965 spx kiss back

it better happens for i want to load short again, timeframe a coule of months, i do not think we should laugh at ebola at all

watch for feverish, self contaminated isis assholes rubbing elbows at your next rave party i loathe the thought of it so much i hope im bring a pussy

but then again never underestimate stupidity, in and outside the truing pit - when the going gets weird, the weird turn pro as the good doctor said

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Leftback
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October 14, 2014 at 2:27 PM ×

Another arse transplant for Treasury shorts this morning. Those higher rates scares seem a long way off now.

I am going to vote along with everyone here. Polemic, for a bounce this morning, Nico for a probable retrace to 1950-1960 before further cliff diving resumes, and MM for this isn't 2008. I mean, with the Fed balance sheet this extended, we will not see total panic sales in all assets.

However, with rates doing what they have been doing lately, we might be wise to anticipate a winter of discontent and ultimately enough US economic weakness to bring us down to levels for Spoos that are considerably lower than those currently in view.

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abee crombie
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October 14, 2014 at 3:18 PM ×

Mauldin out with some bearish thoughts (though he has been saying similar things for a while)

https://www.mauldineconomics.com/frontlinethoughts

Move over Russia, the market is looking to Venny now. It looked like it was all clear last week after the gov't made a 1.5B payment. While it probably wont be a big contagion, since most of the Venny bonds are owned by wealthy latin real money, its not something the financial markets need right now.

Nigeria's success is hopeful for ebola. But it is damn scary how nurses and doctors keep getting it

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CV
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October 14, 2014 at 3:29 PM ×

Great post MM, in essence I share LB's sentiment so not much to add. On Mauldin (Hussman, Edwards etc), I will only say that the road from 1200 to 2000 is paved with the carcasses of the top-pickers clinging on to every straw in the attempt to usher in the end of days. I have been reading this stuff every week, found myself agreeing with it, in spirit, and then simply discarded it.

Now may be the time to listen of course, and I certainly do agree with C and Nico that this recent bout of volatility does feel different. We must all take the necessary precautions and make our bets accordingly ... I certainly am.

The easy street trade is still very much in play mind. Long USD through duration courtesey of Uncle Sam. That won't fail ... right? ;)

Claus

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Nico G
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October 14, 2014 at 3:31 PM ×

one good output of ebola would be to remind the bravery of doctors and nurses to the world, those unsung heroes who lost their prestige to 27 year old long short traders and Vogue cover models

Mauldin has been bearish for years now, i blame him and my ursine incontinent nature for loading shorts too early

you are either too short, or not short enough a brilliant blogger used to say

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Anonymous
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October 14, 2014 at 4:37 PM ×

@MacroMan,

Can I recommend Reuters Metastock Xenith which is essentially only a very slightly scaled down version of the full blown Reuters Eikon for prices around USD 99 -150 per month. Just a hint as you keep on missing Bloomberg.

I love your blog and follow it and I think Reuters Eikon at this price tag should give you all the data points and market data you ever want. Full data download capabilities in Excel included...

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Nico G
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October 14, 2014 at 4:39 PM ×

i was right about ebola:

http://www.thedailymash.co.uk/news/health/everyone-at-heathrow-testing-positive-for-ebola-2014101491696

strangely markets have not reacted yet

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Anonymous
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October 14, 2014 at 5:49 PM ×

From the Tower of Babel...

*FED’S WILLIAMS SAYS QE MAY BE NEEDED IF ECONOMY FALTERS: RTRS


Stephanie Pomboy said this back in May:

http://online.barrons.com/news/articles/SB50001424053111903301904579561672621644240

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Mr. T
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October 14, 2014 at 5:55 PM ×

Well this got ugly quickly. Books are too big.

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Anonymous
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October 14, 2014 at 6:58 PM ×

Oil futures in the $81's from March 2015 on out for next 2yrs

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abee crombie
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October 14, 2014 at 6:58 PM ×

last one for me...

Hedge fund stocks in cyclical sectors (industrial, materials and energy)look to be in all out liquidation mode. LYB, LNG, ALLY, CFX, TRBAA

but surprisingly the fan fav's in tech and biotech holding in there. Even financials not so bad..

HYG and JNK shares outstanding not moving with the price decline

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Anonymous
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October 14, 2014 at 7:04 PM ×

185 on 2-10yr curve . LT low is +183

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Leftback
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October 14, 2014 at 7:29 PM ×

Yes, agree with Pomboy, and not at all shocked to hear this mooted by John Williams. At the height of the "early 2015" Fed rate hike speculation I was insane enough to suggest here that not only would we not see a hike in 2015, but we might actually be looking at QE5 (or is it 4?) by late summer 2015, ad we should all bloody well go out and buy the Long Bond. Evisceration followed in the comments section, but the market voted in my favour, as The New Widowmaker culled the Treasury shorts all year long.

This Williams statement is a sign that he and Yellen at least subscribe to a continuation of the Bernanke doctrine, to the effect that Japan did it right, but just didn't do enough of it, and if we just continue to QEase we can lick deflation, damn it....

Now sell all those effing dollars already, will you? (This was perhaps the real intent of Williams today. The USD rally has been inconvenient.)

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CV
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October 14, 2014 at 7:34 PM ×

The script could(!) look something like this ...

Chinese slowing/Oil supply binge -> Squeeze in oil -> Levered energy companies get taken to the cleaners -> liquidity crisis in US high yield centered on the energy sector spreading to the wider market -> that should be good for 15-20% on Spoos, and a world of pain for corporate bond funds.

The upshot is that financial institutions will be fine ... they have excess reserves up their arse and are just buying long duration, but they can't provide liquidity to a starved credit market because of regulatory changes. Leading to the obvious result that the Fed will have to do the bid in US non-financial corporate debt markets. Note the SIFMA daat ... there are more of this shit, non-fin corporate debt, outstanding than there are MBS! It only makes sense that QE4 (at some point in 12 months time etc) would take a page out of the ECB's playbook and buy private debt.

That would be movie script for a crisis rather than waiting for a repeat of 2008.

Claus

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Nico G
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October 14, 2014 at 7:37 PM ×

one reasonable man

http://www.marketwatch.com/story/investor-who-predicted-the-subprime-crisis-says-stocks-will-fall-10-plus-2014-10-10?page=1

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Anonymous
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October 14, 2014 at 8:03 PM ×

Fixed investment in oil E&P, pipelines & railroads has grown at 4x the rest of the economy 2008-2013: lower oil will hit US capex hard

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Anonymous
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October 14, 2014 at 8:05 PM ×

Piece of the puzzle is missing...2yr UST has rallied over 5bps today , 3yr by 7bps , 5yr by 8bps

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Leftback
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October 14, 2014 at 8:06 PM ×

Claus, agree, the purpose of QE programs is to buy under-valued securities and hence provide liquidity, so it might be beaten-down corporate bonds next time. The 1930s depression was as bad as it was because of a lack of credit to mid-size businesses as well as the delayed response in fiscal and monetary policy. Or they could go all BoJ on us and buy REITs to support housing and CRE. That would work, I still get my tasty dividends and the value of my beaten down stocks would double...

Now, crude. Let's take a step back. I agree Chinese demand is a factor but we've seen the evidence of 2% growth there for some time (cough: sorry, I meant 7.1% and declining by exactly 0.1% every quarter). Why it's taking such a steep dive is not exactly clear but we can guess that leverage is involved. A few clowns might have gone asshole long oil futures after Ukraine and Iraq, and now being forced to liquidate by slow demand and stronger dollar.

Looking at the long term charts, the lower $80s area has been strong support since 2010. I would venture to say that this is usually where OPEC talks about turning off the taps and that does the trick. A sustained break below $80 would be unexpected and perhaps a sign that things are going to get a lot worse than most of us think. The big non-US oil stocks all start to look like a screaming buy here with yields between 5 and 6%, TOT, RDS, BP etc.. assuming DX has peaked.

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Anonymous
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October 14, 2014 at 8:53 PM ×

C Says
LB,
Yield based screaming buy on sectoral rather than index breadth has not been working that well lately, but go for it if you are inclined.
Meanwhile here we go again, morning session up and late session dump. It's a loose rule ,but I reckon I am in a bull market when more oft than not it rallies EOD. When I start to see the reverse I reckon I'm no longer in a bull market ,but one where the middlemen are conducting an orderly withdrawal as far as they can until they can't. Doesn't of course match up to that $1000 dollar Bloomberg service!

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Nico G
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October 14, 2014 at 9:18 PM ×

asshole long

haha - the tale of 2013/2014

back to my favorite topic BBT the buy back team:

http://tinyurl.com/m7wcrz4

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Anonymous
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October 14, 2014 at 9:28 PM ×

Random - US might lift crude export ban under intense lobbying. Poor old Canada. And the Oil King.

Fixed & oil have seen this coming a long way off. Equities finally reacting to geopolitical, global slowdown, end of QE and ECB mess.

There must be scope for an LTCM style move, what, with the shadow banking and all.

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Anonymous
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October 14, 2014 at 9:38 PM ×

anon 9:28pm

"US might lift crude export ban under intense lobbying"

We are now exporting oil via "redefinition"...

http://tinyurl.com/o65lhhx

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Anonymous
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October 14, 2014 at 9:45 PM ×

CRB index now a 273+ handle .... just 1+ for a 52 week low

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Anonymous
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October 14, 2014 at 10:05 PM ×

Congruent or mirror symmetry...

http://imgur.com/KCp8ML7

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Nico G
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October 15, 2014 at 6:34 AM ×

oil dump is less scary expressed in non USD currencies

now now for the clever cats who thought of exporting oil in other currencies...

it must hurt like hell (Putin)

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Anonymous
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October 15, 2014 at 11:22 AM ×

Obama threatening to approve Keystone or tap SPR would put Putin in his place and out of Ukraine by next week.

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Polemic
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October 15, 2014 at 11:33 AM ×

Speculum trade stopped. Back to the 27th Oct plan.

15% fall in oil in 2 weeks? Spec and positional adjustment surely. Fundamentals in such a hiiige market don't change that quickly. So question is .. was that a) a schism jump to where it should have been all along or b) a complete load of wash out spec bollocks that will readjust ( lets say to 95ish)

I ll take a B please Bob

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abee crombie
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October 15, 2014 at 11:36 AM ×

I read the pomboy in Barron's, also some bob janjuaha from the blog that shall not be named and even some Russell Napier. Let's call them the deflationist camp. Their thesis is that the us and world economy is still too weak to go without QE. For the past month, market action seems to be following thier script. Lower yields, commodity prices, expected growth, and gold is sorta holding in there.

But you also have the mainstream long short us equity hedge fund,which isn't changing thier bullish overall outlook until they see signs of a recession on the wall,. And then there is the fed who I hyper attuned to asset price changes, notably the stock market. And on the consumer side, they are slow moving and highly exposed to jobs and the housing market, both of which are moving in the right direction, IMO.

So is this the deflationary turn, I dunno, but I will make sure I understand that narrative in case it keeps going. But I will also remember the other players in the game as well.

Lower rates might be just the spark needed to wake up the housing market

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amplitudeinthehouse
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October 15, 2014 at 12:50 PM ×

I really didn't want to post as I'm content at the moment with the Football ratings until I hear better news, but you've dragged me out and I'd like hear others opinion.


It's said that we aren't in a bubble b/c of the low level of retail participation.

Question: When do you think their coming back.


We're in a QE induced low rate environment which has been bullish for equities.

Question: When do you think enough is enough.

The answer to the last one has to be psychologically biased , surely.

A two way market is coming to a screen near you!


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CV
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October 15, 2014 at 1:08 PM ×

Meanwhile in German, the joker a.k.a Werner-Sinn just kicked Italy in the b'lls.

http://www.welt.de/wirtschaft/article133298951/Sinn-warnt-nach-Milliarden-Kapitalflucht-aus-Italien.html

Oh, the timing!

Claus

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Anonymous
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October 15, 2014 at 1:47 PM ×

C Says
Does this mean I should shelve my plans to retire in Lucca ?

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CV
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October 15, 2014 at 1:48 PM ×

On the contrary C ... if they end up converting to Lira, you can buy the town square ;)

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Anonymous
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October 15, 2014 at 2:27 PM ×

30 year bond...2.84 Down 0.1740 (5.77% STILL THE CHEAPEST AAA CREDIT

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Anonymous
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October 15, 2014 at 2:40 PM ×

10% pop in mortgage refi's ...but purchases fell again despite sub 4% rates

US real median net worth...

http://imgur.com/6gmS9dr

US real median income...

http://imgur.com/hBn6Iht

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Anonymous
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October 15, 2014 at 2:59 PM ×

C Says
This has got a lot to do to see SP 1965 any time soon. I was Yogi I was be going Boo boo on any worthwhile attempt at a rally from here until further notice. The latter just means tempt me because you know I love cheap ;)

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Nico G
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October 15, 2014 at 3:14 PM ×

yep the 'expiry bounce' expected has not happened - unless they puked it hard enough in the next hours to mark a swing bottom

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Anonymous
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October 15, 2014 at 3:33 PM ×

HYG absolutely cratering

12mo US TBills at 0.06%

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