Out

As of yesterday, your author is out of all his macro positions, buying back the last of the EDZ5 he was assigned from Friday afternoon's silly expiry squeeze.  It's been a good run for him, largely as the result of a successful "pin the tail on the donkey" exercise in the aforementioned eurodollar contract.

From here, he is happy to sit tight and watch to see if prices move to any sort of overbought/oversold extreme.  Bitter experience in  2011-12 taught him that expecting rational market responses to what can only be called more nonsense in Greece is a fool's errand, and there's no point playing if he doesn't have to.

He doesn't trade Russia, as he makes it a policy not to trade the asset markets of countries that invade other sovereign states, unless they speak English.  Nevertheless, last night's panic rate hikes may introduce some more two-way volatility into markets, even if they ultimately prove unsuccessful.  Macro Man cannot shake the image of Putin as the little Dutch boy trying to plug a dike with his (middle) finger.

And of course, we have the case of the Federal Reserve and the game of "will they or won't they" with respect to the "considerable time" language.  Ordinarily a 300k+ payroll and an unemployment rate damned close to what used to be NAIRU would make a mockery of the question (let along current levels of Spooz, Treasuries, credit, etc.), but obviously we no longer live in ordinary times.

The collapse in oil prices clearly will have an impact on headline inflation, and while the Fed has spent much of the post-crisis period arguing that core is really what matters, one cannot help but worry that they will execute another "cherry pick the factor supporting ZIRP" pirouette.

One factor that does not argue for ongoing ZIRP is the level of capacity utilization, which is nearly back at the highs of the previous cycle.  True, prior cycles enjoyed much higher levels of CapU, but for reasons that Macro Man will detail in a future post it is probably unreasonable to expect those levels to return any time soon.  As the chart below illustrates, there is a solid general relationship between the Fed's monetary stance and CapU; suffice to say that we're well past the threshold that typically spurs the onset of monetary tightening.



How will the Fed play it?  Macro Man reckons they'll jettison considerable time and replace it with "patient", probably this month.   How will markets react?  Not  much of a clue.  Last year's December tapering helped "spur" a rampant equity and dollar rally into year end.   On Monday's evidence, neither of those is in the offing this time around.  Throw in the Greek mularkey and what still seems to be heavy USD positioning, and Macro Man feels like he doesn't have an edge.  And when he has no edge, he has no position.  So he's out....for the time being at least.
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Anonymous
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December 16, 2014 at 10:17 AM ×

C Says
You summed my thoughts precisely.

As to Russia. Is it cheap is the question and who knows is the correct answer. I say this because it is absolutely useless using typical Western accountancy standards in a country where so much quoted equity is to all extents and purposes an extension of the goverment in terms of being a policy tool. Normal rules simply do not apply. There is no edge to be had using fundamental analysis. You may as well take a bet on the rank outsider running in the 3 o'clock based on the idea it hasn't won for a long time ! :)

The rate rise was perhaps the ultimate sign of weakness/desperation and even if it works in the short term to staunch the flow one cannot help wondering that having done that have they not really played their last significant card? What's left if it becomes needed ? A rise to 25%? The obvious threat here is if it does not work next month and the month after that then perhaps all that is left are capital controls which makes this rate bait akin to an animal trap.

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Anonymous
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December 16, 2014 at 12:11 PM ×

Rub just printed 80.....

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Polemic
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December 16, 2014 at 12:54 PM ×

Cheapness of Emerging FX should only be measured in the PPP of a cup of coffee in a cafe. 2014 has just seen a reversion to more normal levels of the most extreme - Russia , turkey and a few others had a way to go. they are nearly there.

remember this ? http://macro-man.blogspot.co.uk/2014/01/emerging-market-fx-questions.html

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Macro Man
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December 16, 2014 at 1:05 PM ×

RUB-a-dub-dub
Three men in a tub,
And who do you think they be?
The tyrant, the banker, and some other wanker
Who all went long $ at 80!

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Polemic
admin
December 16, 2014 at 1:30 PM ×

MM- as you are exiting your profitable trades Im going back in having been out for the last couple of weeks. So here is a carol for you -

In the bleak midwinter

In the bleak midwinter, investors gripe and moan,
Oil and stocks and yield sank, faster than stone;
Ruble had fallen, low upon low, how far can it go?
in the bleak midwinter, only losses show

Dear God, CBs cannot hold them, nor growth sustain;
Buyers bids shall flee away, I can't bear the pain.
In the bleak midwinter. a stable price sufficed
But no, oh God Almighty, Jesus Christ.

Bears and doom have gathered there,
Calls for lower thronged the air;
yet a madman only. would dare to buy this
As into a gale, taking a piss.

Yet iI want to buy, poor as I am.
As I am a stock, I would buy right here
But if I were a Wise Man, I wouldn’t take part
Yet I’m about to go long, it’s in my heart.

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abee crombie
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December 16, 2014 at 1:49 PM ×

You could argue at $70 or $80 oil whether some shale is still profitable. At $60 current projects probably still get the go ahead and you highgrade production. At $50, you dont spend CapEx and leverage gets killed. But remember the high decline rates means that after 1-2 years production is going to tail off quickly

The EOG's and other US oil names in the good regions (Baaken, Permain and Eagle Ford) are holding in there. Will be interesting to watch them today

RIG and SDRL, though are probably gonna file for bankruptcy. You really have to wonder if this kicks off a wave of HY default (with some collateral dammage to other sectors) or if it can be contained.

I said all along it would start with credit, and its odd that now that the US economy is doing pretty well, we might have that moment. It still hard to really rationalize selling Sprint or TXU bc oil prices are lower, but hey didnt we say the same thing about subprime. I dont think its quite the same but keeping my eyes open here.

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CJ
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December 16, 2014 at 1:55 PM ×

We need to be very attune to NPLs and loan loss provisions at TX & OK banks. In particular, I am investigating the use of short TX banks w/ high energy exposure (IBTX, HBHC, BOKF, etc) vs long KRE. If the credit problems are real, a repeat of the 80s banking crisis that ultimately resulted in the failure of Continental Illinois (largest bank failure until WaMu) is not a zero-delta possibility. I wonder how effective the Texas Dept of Banking is as a regulator...

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Polemic
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December 16, 2014 at 1:56 PM ×

Tax oil and use it to buy out the too big to fail cripples debt.

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Anonymous
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December 16, 2014 at 3:49 PM ×

I adore your capacity utilisation chart Vs rate level.

the way i read it is that the Fed DECIDED NOT TO FOLLOW ECONOMIC DATA FOR ITS OWN AGENDA.

they are so behind the curve that they are not even looking at the path anymore. Their agenda is "pedal to the metal to inflate asset prices and find any excuse for not hiking"

almost all developed countries would dream to have US unemployment figures... still, Fed keeps rates where they are. Dropping considerable time for patient is another way to continue the soap opera.

let's go Steelers!

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CJ
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December 16, 2014 at 4:01 PM ×

The Fed may remove "considerable time" language this week, but I don't know why there is such an impetus to raise rates when you have such benign inflation data. Ultimately, DM central bankers have effective tools to fight inflation, but significantly less effective tools to ward of deflation. Given the asymmetry of their policy effectiveness, it makes sense that they continuously move the goalposts to avoid rate liftoff.

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Mr. T
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December 16, 2014 at 4:21 PM ×

Nice work MM, must feel good to have nothing on the books.

This decline has become a bit more spirited than I expected but remain convinced that nothing that matters to asset prices (commodities excluded) has really changed. Zero chance fed is going to even hint at a hawkish stance - this is exactly the type of environment they are afraid of. Long end, short end, spooz, blues - you buy um all. Major markets are off a lot more than s&p, which will be driving their current round of cherry picking. The argument that 'they need not be concerned S&P is 3% off its highs' is also guilty of cherrypicking. If fed is watching eurostoxx, they see a different story - one that plays to the fears of the interconnectedness of the financial system.

I'm warming up to LB's weak DXY for a trade thesis, based on the idea that all that really matters (still!) is fed liquidity and posture, and we are going to get a glimpse of Yellens bazooka (whatever that means).

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Polemic
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December 16, 2014 at 4:22 PM ×

General reversals everywhere .. look at EURNOK on the day +5% and down again .. Signsevrywhere of turnaround tuesday http://polemics-pains.blogspot.co.uk/2014/12/in-bleak-midwinter.html

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abee crombie
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December 16, 2014 at 4:43 PM ×

i bought a little RUB just now. HYG taking a big jump up, same for stoxx, and now oil

have to see where we close (probably unchanged) and also if where we close the week, but perhaps that was the worst of it.

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Anonymous
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December 16, 2014 at 4:46 PM ×

C Says
Pol,
What else do you expect but cover buying pre Greece and FOMC ? Plenty of people out there who will want some gains in the bank given the context.
The real question other than Mom Pol :) is will it have legs to hold for more than a couple of weeks? I couldn't get any kind of grip on that so sidestepped a la Gareth Davies.

BP pinging around a prior low circa 360p wouldn't be a bad tell to cover.

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Leftback
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December 16, 2014 at 4:54 PM ×

LB awoke to carnage, invoked Polemic's mantra "don't worry about things you can't control", and promptly ignored the meeja cacophony playing out in front of him. "when you are in a hole, stop digging" is another old saw that played in his head.

Still, LB couldn't help but notice a few things as he sipped his coffee, finger firmly on the mute button while the CNBC apes performed their usual stunts in front of him. The MICEX was up in rouble terms this morning, despite the USDRUB kissing 80. A few of his favorite oil stocks (STO, BP) began to stir, even with Brent pounded below $60. Even his junior gold miner was showing signs of life. One more thing...

On the TV, suddenly there was that extreme right wing neocon-type woman who always comes on to spew bile and hatred about any country that is currently experiencing difficulties, whether it is Greece, Brazil, France, Argentina or Russia. She wants you to sell it, sell it, burn foreign flags and buy something 'Murkin, dammit. No doubt she wears stars and stripes underwear as well.

LB mused to himself, "this is getting silly. usually when this old slapper comes on, we are about to see some real face rippers soon in a variety of asset classes". He returned to his coffee, took a shower, and then returned to find that crude had done a U turn, the RSX had fallen to 12.50 and then risen to 14.70 and Mr Shorty seemed to be rubbing his bottom in some distress. Amazing.

As Polemic says, don't worry about things you can't control.....

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Anonymous
admin
December 16, 2014 at 4:58 PM ×

other than YNDX any Russian stocks people like? Grocers/consumer ones?

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Polemic
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December 16, 2014 at 5:01 PM ×

Well C, what else would I expect? Thing is it isn't what I expect but what everyone else expects and today on the street it had to be one of the grimmest and most extreme with respect to other peoples expectations. IF everyone expected things to go up on short covering prices wouldn't have got so low.

I dont blame you for sidestepping but there is a general turn in loads of things. My crappy 'keep an eye on for beta pulls' oil stocks have all gone up dramatically today too.

I am still of the belief that most of this down move has been leverage not daring to hang on to anything that may turn a loss and buggering up their yearend getting out.

there is just a much chance of a rally as daft as the falls. and watching the spikes ( and I refer back to that EURNOK chart as an example) then I don't want to pile into the recent trend thinking they are going to continue from here into an ever decreasing liquidity market. And low liquidity can case market rallies as vicious as falls!

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Anonymous
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December 16, 2014 at 5:41 PM ×

C Says
Pol.
I wasn't implying everybody' ,but when some things have travelled as far as this and as quickly as this and yu've watching the calendar don't tell me those of us who watch this stuff were not already getting off the treadmill. Indeed, if you look back even to last week you will see enough mentions to that effect.
Now how far it goes ,no idea ,but on any rally there are some technical points now taht are going to serve as resistance for people who want to reload. For example ,BP pinging it's last low will get a warm welcome .what 10 to 15% mark? Extend that to Shell etc.
Unless oil miracuously soars we have a gamut of oils that are going to be in a race to instigate costs cuts vis a vis the alternative of messing with the divs. If I had to guess lot's of vol and lot's of chop as opposed to any unidirectional recovery. I would say their moats been drained to misquote Buffet.

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Polemic
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December 16, 2014 at 5:44 PM ×

Understood C thanks.

the twists in oil stock vs oil I bet are a hedge/arb'ers dream. And I do wonder if there are some liquidity games to play. Buy up the stocks with greater liquidity . then buy the oil to make em move. Seen it in gold before. I dunno just supposing ..

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Anonymous
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December 16, 2014 at 5:45 PM ×

Dark Pools have been SELLING All Morning on the back of Algo Driven Buy Programs here in the U.S.

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Leftback
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December 16, 2014 at 5:47 PM ×

Hedgies and other players who are leveraged and are currently short oil may well decide to call it a year here and unwind these big winning trades ahead of a known hazard - FOMC meeting may affect not only USD itself but also a lot of USD-linked markets.

These small markets (oil, gold) that are played with a lot of leverage can cause a lot of trouble when they become linked to other larger ones (FX, bonds, EM equities) via algorithmic trading systems. Watch for a lot of predictable asset classes to rally if the DX rally continues to stutter.

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Anonymous
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December 16, 2014 at 5:58 PM ×

Brian Reynolds, Chief Strategist at Rosenblatt Securities, known for his credit cycles ideas.

In 2012: "So, we don’t see an end to the periodic panicky stock market drops that have defined each of the last three years."

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Leftback
admin
December 16, 2014 at 6:00 PM ×

DX hadn't touched its 50 day since July, when it was at 80! We did tell you we wouldn't see 90... starting to fall out of its trading channel. The much maligned EURUSD broke above its 50 day, finally. Looks like we might be nearer to the end of this FX regime, no wonder correlations have been all over the place.

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Anonymous
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December 16, 2014 at 6:10 PM ×

C Says
LB,
90 was a fairly obvious target area ,BUT what happens next isn't clear at all IMO. With relative gaps in post recess recovery having been playing stronger to the US (and still so) relative to Japan and Europe et al there is an argument for 90 to become a consolidation area rather a radical correction. Declaring my interest here that's what I will be setting up for. Wouldn't we be surprised not to see some profit taking and consolidation? I would ,but thereafter until he data points economic data points elsewhere I want to find buying points for the dollar vis vis Yen and Euro.

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CV
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December 16, 2014 at 6:19 PM ×

Ah quality commentary as always chaps, I think the state of play here is simple.

Either low oil/commodity prices are going to unleash a bullish run in non-energy assets unlike something we have ever seen (this is to say a proper late/end of cycle mad run) as central banks throw caution to the wind and keep the pedal to the metal. Or equities are about the hit the brick wall of deflation and the global economy will be in a recession within six months (and yes, it could actually happen that fast). I maintain my cautious, but hopefully not foolhardy, optimism that the first version is most likely, and I am rooting for Polemic and his Turnaround Tuesday call.

Meanwhile, we watch and wait I guess … the cost of staying in can be high now, the cost of staying out … well have a drink with Hussman, Ambrose, Albert Edwards, Zero Hedge etc down at the pub, we all know the story, maybe it is true this time. Maybe there is actually a wolf lurking in the wilderness. Or maybe not ...

CV

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Anonymous
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December 16, 2014 at 6:29 PM ×

Hedge Fund Manager Who Remembers 1998 Rout Says Prepare for Pain

http://tinyurl.com/lzwx5l5

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Anonymous
admin
December 16, 2014 at 6:31 PM ×

C Says
CV let's say you buy oil co's and for arguments sake let's say you a fairly quick 10%+ on the rightside of the line do you want to hold them approaching New Year earnings? I'm saying wonderful TT ,but what lies beyond?

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Anonymous
admin
December 16, 2014 at 6:31 PM ×

Pouring water on a drowning man...

KUWAIT OIL MINISTER SAYS OPEC COUNTRIES IN AGREEMENT OVER NOT HAVING ANOTHER MEETING EXCEPT IN JUNE

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December 16, 2014 at 6:33 PM ×

Drama when i've seen eurnok at +7%... I've doubled and exited this evening at loss... Bought again statoil and Russia...
Also now a position on em govies HC..
Short on spooz on rebound...

If i could i'll sell short alla real estate in Versilia... Summer place for wealthy Russians in Italy

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Anonymous
admin
December 16, 2014 at 6:33 PM ×

Corporate EM Bond OAS (+430 bps) has widened, but still lower than the 2013 highs (450). Much lower than the 2012 highs (510), 2011 highs are over 200 bps higher (640) and 2008 is in a different class (1723).

In contrast, EM SOV spreads are approaching the 2011 highs. Corporate EM is trading more in line with US and Europe corporates rather than EM sovereigns.

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CV
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December 16, 2014 at 6:36 PM ×

Very true C, but then the question is really a more fundamental one. Are you sector rotating or not. Let us say that you buy said energy companies and make some money in the next six months, then you rotate into another sector etc. For me the MAIN story this year is not the S&P 500 bull market, but the significant divergence across equity asset classes.

I mean do people really think that Latin American beta will never, ever perform again. This is NOT an environment where EVERYTHING is trading at nosebleed valuations and the entirety of the G4 central banks are "normalising" rates. We need to be careful with recency bias ... the next "Recession" will not be like 2008.

Staying in the bunker just seems to me to be leaving too many obvious opportunities on the table right now, even if this does not mean you have to just pull the lever and expect another 50 points on Spoos.

CV

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December 16, 2014 at 6:44 PM ×

Cv.... Totally agree with equity sector/regionale divergence and opportunities

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Anonymous
admin
December 16, 2014 at 6:59 PM ×

C says
CV,
So cutting to it you would be holding into earnings then fi you are talking '6 months'.

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Mr. T
admin
December 16, 2014 at 7:16 PM ×

just pull the lever and expect another 50 points on Spoos

For the record, that is precisely my game plan here.

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washedup
admin
December 16, 2014 at 7:42 PM ×

sure - whats not to like abt spoos - usual 3.5% pullback from the high-hos and then a friendly flirtation with the yellen trendline before a reversal to finish the day handsomely in the green. Seriously it does not get any easier - Santa will personally blow the bulls while simultaneously ramming it to the howling bears as Janet videotapes proceedings to later email it to draghi, fisher sulks by the exit , and Putin morosely prepares to wear a pink flowery dress.
2100 here we come, but don't get used to the handle because it will soon be 22, then 23 by May on the back of EM strength.

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Leftback
admin
December 16, 2014 at 9:06 PM ×

I think MR T has this situation to a "T"... (groan)

We just sold some really big blocks of TLT and AGG, to complete some profitable trades. Some of the TLT we have had since it was in the low 100s and 47/47 sell side economists said rates are going higher. If bonds rally after FOMC tomorrow, we will sell more. Also we bought some EEM, XLE and IWM, for a pure trade. We are at pretty high levels of fear here, seems like a very good time to take a punt on the long side. We also have some cheeky options punts, but that's another story.

Emerging markets are definitely in "blood in the streets" territory. Both RSX and EEM made higher lows throughout the session today. Even crude and the XLE made a comeback today. HYG, not so much.

There have been a few FOMC meetings where VIX spiked into the meeting and then volatility was absolutely slaughtered as risk assets rallied. Why should this one be any different? Tomorrow morning might well prove to be a bit scary, but many FOMC days are a tale of two tapes.

For my money, the Santa rally begins tomorrow, with Dame Janet wearing red and going ho ho ho as the shorts are trousered after the Fed and the sleigh rolls on to New Year. SO, my friends, we are in - for about two weeks or so.

Good luck, punters.

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washedup
admin
December 16, 2014 at 9:25 PM ×

good luck with those knives LB - i reckon u guys are playing it thru c spreads and the like so sooner or later something will stick.
One thing that made new highs today is my respect for MMs trading prowess (ref article) - we may well look back at December and go, jeez, would been nice to be in CASH, FLAT, and focused on the little appreciated things in life, such as the kids Santa, not to be confused with the one that comes raising Spoo benchmarks for managers.
Sometimes the best fight is the one not fought.

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December 16, 2014 at 9:31 PM ×

Always wondering about how many of you are worried more about equity than bonds/FX... Big money or loss are in the second ones... Big damages in absolute and relative terms had been in bonds world this year.. At least this is my impression for total return portfolios

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December 16, 2014 at 9:36 PM ×

Yes.... Huge envy for MM... Respect!!!

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Leftback
admin
December 16, 2014 at 9:42 PM ×

Almost every single big hedge fund or bulge bracket blow up in history has been a result of bonds/FX rather than equities, indeed. Leverage always the poison, invariably self-inflicted along with a dose of hubris. Lehman, Corzine, LTCM, the list goes on and on.

By far the worst performers this year until the recent commodity carnage would be found among the funds that were short the US 10y all year, in other words, the guys on the other side of my biggest "trade" of the year.

As for knives, we all like to use the Kevlar gloves here, but the rule as always is play small, limit losses by using options, and avoid leverage at all costs.

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Mr. T
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December 16, 2014 at 10:18 PM ×

Corzine - man he would have crushed it with those Italian bonds @ 8% if he had managed to stay solvent.

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Leftback
admin
December 16, 2014 at 10:27 PM ×

Exactly. He probably could have stuck with it if he was back at Goldman. A lesson to us all.

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Anonymous
admin
December 16, 2014 at 10:41 PM ×

Energy is not worst performing HY group in credit. Financials are (not good). Energy is 2nd worst

While stocks were in lala land briefly at 2011 $ESH5, HY CDX were screaming sell

Bear raid via CDX started few days ago, with credit players pressing equity futures shorts. But why such swings? Buy the dip Pavlovian perpetual crowd goes into meat grinder

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Anonymous
admin
December 16, 2014 at 10:48 PM ×

Eric Scott Hunsader:

"Take a look at these 31 $SPY trades today worth $3.7 billion. Anyone know what they are from?"


https://twitter.com/nanexllc/status/544941976215617536

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Polemic
admin
December 16, 2014 at 10:54 PM ×

anon 10.41
are you @dannyvis ? if so can you look at Demark on oil for me? we got a daily 9 tomorrow on sequential?

if you aren't dannyvis you have exactly the same turn of phrase as his tweets

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