Near term bottom or the pause that refreshes?

What are we to do with the euro?

Macro Man has been running short for some time now, doing a little trading around as circumstances warrant.  After the excitement of the past few months, however, recent price action has been downright boring, with tight ranges and little net daily movement.  The question naturally arises whether EUR/USD is trying to form a near-term bottom, or whether this is the pause that refreshes as the pair gathers steam for the next down-leg.



To be sure, recent rumours from Greece have ostensibly turned more positive, as evidenced by yesterday's eye-watering 8% rally in Greek stocks.  Then again, someone once noted that those types of rallies don't occur in bull markets.

Either way, yet another postponement of the day of reckoning does little to suggest any reason to buy the euro beyond short-term profit-taking.   A six month-postponement simply means another date at the danse macabre over the summer.

Kicking the ball further downfield hasn't worked for the Greeks since 2004, and (to repeat a joke made by TMM), hasn't worked for them against the Germans since the Golden Age:



Obviously, a few days of sideways price action does little to dent the underlying thesis behind a short euro position.  Frankly, news of a short-term extension for the Greeks doesn't, either.  That said, it somewhat bemusing that the euro has largely shrugged off both the US employment data and the consequent back-up in rates.

For now, Macro Man is going to stick with his position, which is, after all, manageable.    A little short-term boredom is a lousy reason to trade out of a winning position, particularly when the prospect of a parity party looms somewhere down the road....
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Cityhunter
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February 11, 2015 at 10:27 AM ×

Bravo MM!
I'm with u. Risk gone up too much than justified - build up my short European index position this morning.

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Anonymous
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February 11, 2015 at 10:53 AM ×

we could see a brief retracement in european equities but it will be short lived

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CV
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February 11, 2015 at 11:51 AM ×

Thanks for the view here MM! The Eurozone recovery story is clearly short term overbought, but I agree with anon @ 10:53. I think the market has made a "decision" here with the break to new highs, and it will ultimately be the "wrong one" for the point of view of the bears. Don't take your eyes off the EUR corporate bond market for one minute ... crazy stuff is happening, and it will get crazier. Outperformance of EUR HY this year was such a no brainer on the Fed/ECB divergence, and this theme is just getting started.

As for the euro, well I don't disagree with MM that parity might be coming. But I have a nagging feeling that the market will buy "fully" into the Eurozone "recovery" story this year with both equities and the EUR rising in tandem. Cue structural eurozone bears of course ... I agree with all the arguments, I just think that the market can trade off a different narrative this year.

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theta
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February 11, 2015 at 12:02 PM ×

Question: if EURUSD goes to parity, how many times Denmark's GDP will Denmark Central Bank FX reserves will grow to?

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Anonymous
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February 11, 2015 at 12:41 PM ×

CV @ 11:51;

My view exactly, with a caveat: I think the new narrative will hold until end of Q3 early Q4 at best; then, european equities will probably be overextended and the law of gravity, spanish elections and probably Grexit will come back to haunt the last ones to join the party.
Still, buy the dips should be a good strategy till then.

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Cityhunter
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February 11, 2015 at 12:56 PM ×

Agree with anon@10:53 and CV. Short is difficult and will be short lived. The price action yesterday has once again demonstrated the JBTFD power, and it will continue I believe.

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Polemic
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February 11, 2015 at 1:26 PM ×

I don't think we can treat all Europe as one when it comes to assets and trades. Germany vs peripheryis tough in equity and bonds as credit worthiness vs growth arguments clash. Safe havens vs value etc.

The money to be made probably is sectorial in equities and in country spreads in bonds. And I can't work out where precisely. Help required.

But back to Europe vs US. agree with MM the rate scenario with US rates moving higher up the curve and EU Unch then the tide remains against EUR/USD - except of course everyone knows that soo.. is it already in the price.

Bunds have now not made a new daily high for longer than since the post Oct panic spike. Probably put that fact in the 'Does that really tell us anything' bucket. Just my wishful thinking as I remain short DAX and Bunds.

Pol

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Leftback
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February 11, 2015 at 1:52 PM ×

Agree with CV and the Anons, and our friend Funny Money. Add in my own perspective on the Faux US recovery (back to this later) and we think most of 2015 will be OK for EURUSD.

A quick reminder that Greece won the Euros and beat Ronaldo's Portugal once by playing a tight and tense game, tenacious defending and then scoring on corners or breakaways..... will it be Varoufakis with the corner, and the delighted scorer.. Tsipras for Greece? A Russian ref, maybe??

Do you really think someone won't pitch in $15B to prevent Europocalypse? That was a mere week of Dame Janet's QE3 largesse....

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Anonymous
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February 11, 2015 at 1:54 PM ×

All so very normal...

Germany is getting paid by investors to borrow: Sold €4.03bn March 2017 Schatz at avg Yield -0.22%, Bid-to-Cover Ratio 1.9.

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Anonymous
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February 11, 2015 at 2:02 PM ×

I refuse to look at this chart anymore. I strained my neck looking up at it...

http://imgur.com/lWSxu3d

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Cheesehedge
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February 11, 2015 at 2:12 PM ×

Interesting. Is your conviction in the parity party at all challenged by 1) the huge balance of payments surplus advantage opening up in the EZ versus the US; and 2) the divergent trends in economic surprises in favor of Europe over the past 3-4 months. Even if EURUSD to 1.00 is the right trade it seems rare that such a big move would occur without at least one big countertrend rally. Myself, I find the euro a difficult trade right now. Good Luck, Cheesehedge

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Anonymous
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February 11, 2015 at 2:24 PM ×

Time to fix ze Autobahn!

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Anonymous
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February 11, 2015 at 2:29 PM ×

theta:

Breaking a currency peg for a country with current account surplus is a long-term prospect. It requires breaking the political will to keep the peg.

Danish foreign currency reserves (yellow) compared to Switzerland's (white). Per 6 Feb. 2015

Both in Danish kroner.

http://www.demetra.dk/finansblog/de-danske-valutareserver-er-en-dvaerg-i-forhold-til-schweiz/

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Leftback
admin
February 11, 2015 at 2:32 PM ×

"Bunds have now not made a new daily high for longer than since the post Oct panic spike"

We are running out of panic buyers, they are also paying Nestle to park money there too...

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Macro Man
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February 11, 2015 at 2:52 PM ×

Cheesehead- Obviously the BOP is a consideration but in my experience it doesn't matter until it matters- and right now, it doesn't matter. We are trading capital accounts, and I would submit that the net demand for euros, even inclusive of the EZ's widening trade surplus with the US, is much much smaller than has been the case for most of the period since the early 00's, thanks to the paucity of reserve accumulation by China, the oil producers, etc.

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Leftback
admin
February 11, 2015 at 3:00 PM ×

It's Binary Event time. At some point, we will be in a genuine tightening regime and someone will be made an example of. That's not where we are, it's still a case of who's easing next? This isn't 1994, 2007, or whatever. The 1930s analog is still the best guide and it isn't 1937, not yet, (and hopefully never 1939).

It seems to LB that there are a whole lot of people out picking up pennies in front of steamrollers. Some of the asset allocation going on ahead of this binary event smacks of the Pension Fund Risk Management Committee where everyone suddenly wants to be the guy that lost 3% instead of 30%. Usually those risk management skills get what they deserve.

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Saul Bollox
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February 11, 2015 at 3:08 PM ×

The mainstream media is foaming at the mouth with Europhobia, and Twitter has reached Peak Grexit. Time after time since 2009 we have seen Shorties pile on late, only to experience the joys of Cold Steel.

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Anonymous
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February 11, 2015 at 3:44 PM ×

20yr chart on oil inventories in USA . That last 6mos build just incredible

http://imgur.com/WHinMm6

Oil production similar to iron ore producers..

ANZ...
"The global iron ore surplus will more than double to a record this year as low-cost producers keep on expanding, according to Australia & New Zealand Banking Group Ltd., which cut price forecasts as much as 30 percent."

Keep pumping, keep mining, full steam ahead.


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Anonymous
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February 11, 2015 at 4:14 PM ×

anyone going long treasuries here in honor of Keith McCullough?

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Anonymous
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February 11, 2015 at 4:39 PM ×

there's some very strong inflows to EU eq vs US eq
I think parity party will remain a dream even if we go -ve in 3m eurib or some such (obviously barring total catastrophe like grexit)
sq eurusd here fwiw
ta,
JL

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CV
admin
February 11, 2015 at 5:52 PM ×

Well well, MM seems to be a loner on the EURUSD here, maybe he is right then ... ;)

Meanwhile Pol; in terms of sectors. You could do worse than having a look at ENI, Rep and Total. Imagine two pink flamingos (short EUR, short oil) being taken to the abattoir at the same time. Now that would make unhedged long EUR positions in these things real treats.

You could also buy some banks, although I am happy to admit utter defeat here. I have been long these things since October, and I have not been able to trade my way out of a wet paper bag with them. DBK appears to have a good correlation with the German yield curve, and thus if the German 10y yield nudges higher it could be a real good good trade (long DBK, short bunds). Meanwhile, BNP, ah my nemesis ... that thing has chopped me to bits! Anyway, just buy these things, they will be fine ;).

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abee crombie
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February 11, 2015 at 6:03 PM ×

As for what is working in Euroland equities, i think you buy small and mid caps. SXXP. HEWG is a good option for US based traders

EM FX taking a beating the past few days, watch out! And EM equities are losing steam, especially SHCOMP.

AAPL and SPX longs, stay the course but have an eye on the exits should things liven up, then you can buy the EU dips

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Leftback
admin
February 11, 2015 at 9:21 PM ×

"Anyone going long Treasuries?"

Well, clearly a lot of foreign buyers are, since the 10y auction was remarkably well bid. I'd have to say that we would like to see two loads of risk premia that have made Treasuries a safe haven driven out of the market before going long again. Firstly the Ukraine war premium, and secondly, the Grexit premium.

If we can get that lot out of the way then we can all go back to handicapping the Fed's planned rate hike due to the overwhelming growthiness of the fabulous job-creating US economy and its red hot momentum toward incipient escape velocity [note: activate irony detector here]

Speaking of which, there was an article on "who is getting hurt by the strong dollar" and I expected to see a picture of LB, but it was actually all about the lower earrings guidance for the big multinationals.

CV: We are long all that lot: TOT, Rep, Eni check check check, and ömv, Sto and BP as well. Banks, yes, got SAN, BBVA and NBG (got to have at least one lottery ticket).

Abee: Do not want to discuss (sub)merging markets today after suffering a Brazilian peel for weeks. Too early as usual, but presume a lot of this is simply Bucky and the associated reflexivity.

In late 2009 into 2010 we saw a bold Bucky rally of close to 15% as 4-5% GDP calls were bandied about and the wise men all predicted rate hikes to limit inflation. That fizzled, and DX declined rapidly by 5% or more within a month or two.

Look at £ in 2013 and we saw the exact same thing, sterling was bid ahead of an inevitable BoE rate hike that never actually transpired. Still, it's probably Different This Time....

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Leftback
admin
February 11, 2015 at 10:00 PM ×

CNBC is carrying a story that a "deal has been reached in principle" with Greece to stay in the Euro and within the "bailout structure".

Who knows whether this will survive until the morning, and then as always the Devil is in the Details (which always seem to emerge on a Monday). It's probably good for a nice squeeze in Greek govies though!!!

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Leftback
admin
February 11, 2015 at 10:21 PM ×

Already being denied by the Greeks !! Looks like we will have to wait until someone credible (FT?) puts out something we can actually believe.....

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Leftback
admin
February 11, 2015 at 10:36 PM ×

Perhaps it is a case of semantics, for the Greek electorate. "Syriza isn't accepting the old Troika bailout", but "we have made a new deal (also actually a bailout), a great deal for the Greek people". That kind of thing...?

Wave some flags, drink some ouzo, short bunds.

Meanwhile NBG is up 22% in AH trading. Obviously, as we are long NBG, one rather hopes that yet another shoddy deal has been struck (that will serve only to enrich bankers and subject the Greek people to another decade of servitude) in order that the Greek banking sector is going to exist tomorrow. As such, with the banks chock full of GGBs, which one assumes will be bid, then ....??

.... it will probably all go pear-shaped again before morning... where's Polemic? I can't supply all of the cynicism alone....

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Anonymous
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February 11, 2015 at 11:47 PM ×

No agreement, and no deal, another opportunity to load up on equity risk for FM

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Anonymous
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February 12, 2015 at 12:13 AM ×

Oh, wait, FM is already long and there are not many bears left alive to support a short covering rally, are there?

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Polemic
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February 12, 2015 at 12:31 AM ×

fiver says FM covered on the spike to take advatage of all the muppets who didn't listen to him and are going to get creamed when he buys against them at the next low. (Low to be announced the week after the low).

the world is a pretty sad place if eth EU cant even issue a joint statement saying that the coffee was nice.

I suppose we have had a clue there though through the price action on the good news. Even US stocks went up on greek news. Probably some lost amazonian tribe is wondering why the bean/frog poison spread in their village has gone up . EEESA GREECE INNIT !!!

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Anonymous
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February 12, 2015 at 12:36 AM ×

FM is infuriatingly correct though no?
Good new/bad news he just keeps parroting buy DM equities and he's always right... just saying'...

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Anonymous
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February 12, 2015 at 12:43 AM ×

Anybody still like GDX? I'm turning into the proverbial "long term investor" on that one.....

-Whammer

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Nick
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February 12, 2015 at 1:11 AM ×

The stocks do go up until they turn, don't they? The risk of a major (by the recent metrics) melt down in risk are significantly higher at the current juncture. Greece is an old story but there are a few factors which are very different this time around. Pricing is very tight; stakes for players are higher (let the Greece have it's way and Spain will follow; fail to deliver on election promises and somebody who will is going to take your place); the system is arguably ready to take some stress in exchange for more liquidity. At the end of a day, 6 good years are very decent run.

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Nick
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February 12, 2015 at 1:29 AM ×

The game is indeed at a different level now if parties could not agree to this:

http://blogs.ft.com/brusselsblog/2015/02/12/the-almost-agreed-eurogroup-statement-on-greece/

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Leftback
admin
February 12, 2015 at 3:25 AM ×

It sounds as though Ukraine is getting a bailout along with a ceasefire - just what they deserve in Kiev for wearing those little US cheerleader outfits.

Now it would be churlish not to toss another $15B or so at the Greeks, just to persuade that nice Mr Tsipras to play nice doggie and not offer Piraeus to Putin as a nice new warm water port? Russians love a bargain so picking up a port and shipping fleet for pennies on the rouble would be welcome. No way the US lets the EU allow that to happen.

The EU can let Syriza play with the next bailout for a couple of years while the State Department begin advisory discussions with "Colonel Stavros Papadopoulos" and "Colonel George Papageorgiou" about a future "national unity government". They always go for the Army when they run out of ideas.

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Leftback
admin
February 12, 2015 at 3:30 AM ×

We probably need to consider the fact that this small yet symbolic negotiation is more political theatre than anything. A Grextension deal may in fact have been reached already, but both sides now have to drag it out a bit, and work on the language and the rhetoric of the agreement in order to polish the optics of the deal for their respective political bases.

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Leftback
admin
February 12, 2015 at 3:34 AM ×

Whammer - GDX is usually thought to be favoured by a simultaneously high gold price and low energy prices. Gold as a safe haven may decline after Greece and Ukraine deals, at which point presumably it resumes its traditional (inverse) relationship with USD. Take your choice...

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Nico G
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February 12, 2015 at 5:14 AM ×

you are still underestimating Tsipras' resolve: they are AGAINST selling Greek hard assets at a fraction of the price and they want to revisit the Chinese deals

half of the $320bn debt is GONE abroad so unless you start taxing the Greek kleptocrats on their 'worldwide income/assets' you will never see a penny of that money back to Greece

the new government just repeats that there will be no more pretending, that Greece is bankrupt, that the troika made things worse throughout the last years blablanaki

Greece just wants to give a finger to Europe it is quite incredible that hardly anyone sees that and more so to see smart people buying European banks at this point

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Cityhunter
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February 12, 2015 at 9:35 AM ×

Covered my short just before yesterday EU close. As said short is difficult, but hey, I'm still alive, and agree with FM to JBTFD. Market has decided Grexit is never gonna happen, Fed will never gonna raise rate...

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FunnyMoney
admin
February 12, 2015 at 9:46 AM ×

Morning chaps. I see EU & US equities have gone thru the roof again :) The talking heads will debate nonsense reasons, but as I foretold you all - it's all written in the tea leaves.

Here's my future analysis:
EU equities: Up.
US equities: Up.
Rates: The Fed will delay their rate hike (The last thing US corporations need is even more USD strength). Everyone else will try to cut rates. (I know its not PC to say a currency war is in progress, but it is).

I would like to put a target on DM stock markets, but I cam't count high enough. Enjoy your day.

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checkmate
admin
February 12, 2015 at 10:17 AM ×

Look FM in terms of the KISS principle you're in danger of growing on me although I am prepared to wake up sometime soon to find out you're still in primary school and wearing short pants. :)

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Anonymous
admin
February 12, 2015 at 10:29 AM ×

Checkmate, you are probably spot on and FM is of a primary school age, otherwise there is no explanation why he started commenting here so late in the cycle. With FM logic and iron clad belief he should have been retired by now. It's either extreme greed or his / her young age.

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Anonymous
admin
February 12, 2015 at 11:17 AM ×

FT says:
or it could be that FM is right and has seen, as some others here, this 5th (in Elliot terms which, I know, is closer to voodoo than trading:)
It's almost as painful not to be in as to be on the wrong side....

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CV
admin
February 12, 2015 at 11:26 AM ×

Chaps, don't encourage this!

Meanwhile, the punters who forgot everything about what changing "sector leadership" really means will be left wondering why the indices can continue to go up. It actually isn't that difficult. With perfect hindesight, I bet you that being long/short the RIGHT combination of the GICS 1 sectors on Spoos is one of the top, if not the best, performing L/S strategies in risk adjusted terms at the moment.

And I would say that the environment is still fully consistent with this strategy working quite well.

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checkmate
admin
February 12, 2015 at 12:01 PM ×

CV,
I don't know what you mean ..."don't encourage this". Are you trying to say that I might be wrong to be fully invested 700% long Japanese small cap (Kamikaze Plc)?

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Polemic
admin
February 12, 2015 at 12:09 PM ×

One index that is pretty static is FTSE

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Anonymous
admin
February 12, 2015 at 1:02 PM ×

Hi,
Regarding the Fed next move,
in term of cost/benefit, it is rather sensible for them to hike gently but make sure expectation don't run wild for the long end of the Treasury curve.
This might take a few meetings to achieve.
and this cycle will not see rates go to 5% for sure. just going to 1.5/2% fed fund rate will be more than enough.
Not raising rates this year would look more like a lack of confidence and more importantly would put the credibility of the Fed at risk. This would be a very costly path to try .

Travis

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CV
admin
February 12, 2015 at 1:33 PM ×

Fair point Polemic ... I think the beaten down energy stocks here could give this one a boost. But I am generally wary of election risk as we move further into this year.

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checkmate
admin
February 12, 2015 at 1:36 PM ×

The ftse index has been the ultimate rotation play for nearly two years. At any given time one or more heavy sectors have been given the boot and others have been bid up. Nobody wanted to give the yield so they rotate.
I'm still running a short on it and I'd probably add to it as we get closer to election time.

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Leftback
admin
February 12, 2015 at 2:03 PM ×

$45B for Ukraine as a reward for allowing the country to be looted by domestic kleptocrats for years, and now they can be looted by international kleptocrats. How can they turn down Greece now? The EU will call it a bailout (not a bridge loan) and the Greeks will call it a bridge loan (not a bailout). It is what it is.

A song for the day, Eurobears, please take note:

I never seen you looking so bad my funky one
You tell me that your superfine mind has come undone

Any major dude with half a heart surely will tell you my friend
Any minor world that breaks apart falls together again
When the demon is at your door
In the morning it won't be there no more
Any major dude will tell you

Here's the track: Any Major Dude - Steely Dan

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Leftback
admin
February 12, 2015 at 2:22 PM ×

More weak US macro today. Retail sales weaker than expected, and initial claims up. It's not that we are "economic permabears" as suggested by some, it's just telling it like it is in the US, which is slow, and so far short of "escape velocity" it is laughable.

The Nomura guys (who have been spot on with regard to US rates for years) were commenting on US growth earlier in the week in a similar vein, btw, and here is Mizuho's Steve Ricchiutto:

No Hike Until 2016

US fixed income now a tug o' war between sellers exiting the safe haven of USTs and buyers viewing renewed US weakness. We are going to give it a wide berth for the time being, while we enjoy the non-death of Europe. (Like Mark Twain, the demise of Europe has been greatly exaggerated.)

I am not dissing Funny Money, btw. He/she may well be right.

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Anonymous
admin
February 12, 2015 at 3:02 PM ×

BoE Carney:
Jan: "Rates may rise sooner than the market expects" Feb: Zero inflation, more rate cuts & QE on the way...

yes, it's one big circle jerk

https://www.youtube.com/watch?v=1RiJzV04UyE

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Anonymous
admin
February 12, 2015 at 3:04 PM ×

Drop it again baby...

Denmark's 2-year yield dropping to -1.032%. Expecting another cut?

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Anonymous
admin
February 12, 2015 at 3:08 PM ×

God, the whole planet is sated

http://imgur.com/958AgIX

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Bruce in Tennessee
admin
February 12, 2015 at 3:21 PM ×

I also don't see how Janet can raise rates...the strong dollar is just beginning to hurt overseas sales, and mortgages (assuming non-Chinese bubbas still get those) should be getting more expensive, as will credit of all sorts. Somebody once equated that with liquidity..

Add that to Lefty's remarks above, and throw in some Ukrainians and Greeks and Pootin...well after 7 or so years of this ZIRP and now NIRP, how can we not all be Swedish today?

I think Janet is well and truly...well you know.

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Leftback
admin
February 12, 2015 at 3:31 PM ×

Bluffing?

Exactly. Carney was Bluffer-in-Chief for a while and then it was Janet's turn. Big business in the US has already signaled that King Dollar is hurting them.

Bucky is on the canvas today. Prize-fighter that he is, I know he will get up for a few more haymakers, but that funny looking € guy is looking strong, and even ¥ seems to have drawn a line in the sand. Don't look down, Bucky, big retracements are ugly.

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Anonymous
admin
February 12, 2015 at 3:41 PM ×

Why are some so unsettled by FM comments?

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hipper
admin
February 12, 2015 at 3:54 PM ×

I hear ya LB but just don't know on the euro.

Bad US macro data along with a bit better-than-expected EZ data might trigger a counter reaction for EURUSD but then again maybe MM is correct in saying that extension deals and kicking the bad sovereign debt can down the road just postpones the inevitable parity party a bit. A short term blip on improving EZ data needs to run for a bit longer, say like a quarter or two to prove something solid.

I don't know how far the Euro narrative can run on mainly relying on the weakness of the US and beginning to believe that Fed might actually hike it a bit: if for no reason else than for their credibilities sake and just that they can claim to have room to "maneuver" the next time US gets hit by a recession, which is probably already steaming towards us, considering that this cycle has been going on already for 6 years. It's just really hard to think that they would actually sail right into the middle of the next storm with zero rates.

But on the other hand CV also made a great point that Mr. Market might decide to run on the Euro narrative despite the long term structural problems. When the spooz already have such demanding earnings multiples and some currency headwinds coming their way, the narrative may well actually be chosen according to picking between a bad and even worse choice, this time the bad choice being the Euro equities. And if the EZ macro data actually could keep up it's run for a bit longer, that's probably enough for the narrative to take off and keep flying for a while for an unspecified amount of time, until something else happens along the way.

Also adding in the QE beginning in less than a month (running through Sep '16), that should actually tip the scale to the Euro-narrative option. So actually agree with everything here. I'd just like to see a bit more Greek-o-drama to create a JBTFD-moment to take advantage of. Syriza looks really really tough and stubborn and with a bunch of different negotiating chips on the table they'll probably get what they want in the end.

If the Germans wanted to get rid of Greece they'd already done it by now. The fact that there are negotiations tell that they actually don't, and that's probably because what would eventually happen with Spain and Italy.

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checkmate
admin
February 12, 2015 at 3:56 PM ×

Anon 3.41
"Unsettled" may be your view ,but actually that does not describe most reactions. The latter are best summed up by the concept of risk adjusted :)

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Purple Haz
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February 12, 2015 at 4:30 PM ×

Long time reader, first time commenter. Thanks to all for some great insights.

I'm having trouble getting my head around Japan at the moment. Things seemed lined up squarely behind the equity market (except the economic data, though it's not like that always matters much), but the train is having trouble getting out of the station since the announcements at the end of Oct.

Interested to hear thoughts.

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Mr. T
admin
February 12, 2015 at 5:36 PM ×

Anybody still like GDX?

I'm still in there. I don't know what "long term" means to you but I'm looking at a couple quarters for this to meaningfully work. A new low below $17 would force me to take a harder look at the thesis, but for now the tailwinds are still there - low fuel costs, stable(ish) gold prices, volatile fx, low rates.

After filtering out the noise from Europe (and it is all noise), things are very calm. Frankly I can't imagine a more benign environment for the fed to begin raising rates. The cries that it'll cause further DXY appreciation to the point of killing corp profits are silly.


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abee crombie
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February 12, 2015 at 5:40 PM ×

Its beginning to feel a lot like last year in EM FX. Begining of year news flow and technicals lead to a sell off but then as the worst approaches, we slowly bounce. If spoo's and world wide equities keep driving the bus, perhaps we see a few month bounce..

SPX has some still favorable seasonals so I am not pressing the contriarian button yet but I want to see how it does on new highs. Nasser (aka AAPL), looks OK. R2K in the zone as well, so far so good

The easiest trade remains to just be long dax.

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Anonymous
admin
February 12, 2015 at 7:11 PM ×

"The cries that it'll cause further DXY appreciation to the point of killing corp profits are silly."

Really?

http://research.stlouisfed.org/fred2/graph/?g=10Cf

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Anonymous
admin
February 12, 2015 at 7:11 PM ×

@T,

Wouldn't the calming in Euroland and Fed's raising rates (likely 1 or 2 quarters away) be negative for GDX?

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Mr. T
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February 12, 2015 at 7:49 PM ×

I'm not saying rising dollar does not hurt profitability, what I'm saying is that the DXY move has already baked in a raise, thus the argument that "the fed cant raise because it'll cause a DXY spike" seems off. If we are looking at rates going 300bp higher its a different story.

If rates go up significantly it should have a negative impact on gold, but the beauty (for me at least) of the GDX trade is that it does not really need gold to rally. The last time GDX was at these prices, gold was around $800 with oil around the same as today. I don't think anyone is discounting anything based on Greece or Ukraine, so a calming there means nothing.

I'm not a "gold guy" and am wrong frequently...



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Anonymous
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February 12, 2015 at 7:55 PM ×

Thanks LB and Mr. T for your GDX thoughts. The impending DXY strength that would come with a Fed rate hike started getting me worried, but then again, both oil and gold should come down with that. I'm thinking that the drop in oil has been so dramatic vs the price of GLD that I can hang in there a bit.

-- Whammer

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hipper
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February 12, 2015 at 7:59 PM ×

Rio Tinto earnings today. Looks like miners can adequately survive even in this kind of environment with a "lets-just-dig-our-way-through-the-commodity-slump" strategy and some heavy capex cuts.

Of course if everyone decides to increase vol, it might backfire at some point.

http://www.reuters.com/article/2015/02/12/rio-tinto-results-idUSL4N0VM36M20150212

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Leftback
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February 12, 2015 at 8:06 PM ×

Some of the miners and drillers probably did a great job of hedging during the commodity dump. The ones that didn't? We will see evidence at some point, perhaps in M&A activity.

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Anonymous
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February 12, 2015 at 8:07 PM ×

FT says:

I'm not sure you can base your GDX valuation solely on a gold (revenues) and oil (costs) price comparison:

1) a lot of miners are hedged for a spike in energy price; hence it will be a while before they benefit from the current diesel price

2) there has been a bit of M&A in the sector with the buyers paying hefty prices which leads to my next point:

3) a lot of miners are running low on cash with leveraged balance sheets after years of heavy investments in new mines...

case in point ABX

I think the precious metal complex can go much lower and will only bottom with the end of the bull in equities (or close to it). cf 2000/2001
There will be some false starts in the meantime like the one we had early this year.

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Leftback
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February 12, 2015 at 8:09 PM ×

I have some gold, silver and copper miners, b/c they were so cheap, but I am not a "gold guy" either. It's just an expression of my feelings about the USD and the fact that we will not see eternal disinflation under the current Fed regime.

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Leftback
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February 12, 2015 at 9:34 PM ×

Sensible discussion by Marc Chandler - who buys bonds with negative rates and why?

Fishing for the Limit

Some of us here would probably add: "tools" and "the pension fund risk management committee", aka "brown trousers brigade".

Ugly day for USD longs, btw. Just sayin'....

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Skippy
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February 12, 2015 at 11:56 PM ×

LB, having had to manage capital for some of those groups you are absolutely correct. Particularly for insurance companies, lower yields increase their liabilities, and force them to buy more bonds and reduce equity risk. Put another way, the "risk committees" force them to buy more of the expensive asset (bonds). Of course, regulations contribute to this problem.

However, often this buying occurs at the maximum point of stress and can coincide with the low.

I am a near term bear on bonds. Not because the US macro news flow is robust, but because it isn't robust enough for Dame Janet to lift off. Payrolls aside, the macro news flow might imply "more policy", not less. Perversly, that might support cyclical equities and Treasury yields higher.

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Leftback
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February 13, 2015 at 4:19 AM ×

Yup, generally agree with every word of that, but don't like US equities as much as Euro and EM on the idea of upcoming fund flow rotation out of US safe haven once Greece and Ukraine issues are "solved".

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February 13, 2015 at 4:49 AM ×

Re: Mark Chandler's commentary on why investors would pay to loan funds

Darn, I was hoping I would finally understand negative interest rates. But I do not feel like I learned anything new.

Running through Chandler's list:

"Passive bond fund managers who track an index; they seem to have little choice."

So an investment 100% guaranteed to beat your index -- i.e., cash -- is unacceptable?

"Investors who think deflation is going to deepen."

Er, cash is a better deflation hedge than a negative-interest bond.

"Investor who expect interest rates to fall further."

Sure, you can always buy a worthless piece of paper for $100 and hope a greater fool will pay $110. But we are talking about an investment that is 100% guaranteed to lose value, so this is taking speculation to a whole new level. Is that it?

"Investors expect currency appreciation, buying a bond denominated in that currency is one way to express that view."

Holding that currency is an even better way to express that view, and in fact will outperform a negative-rate bond no matter what the currency does.

"Related to this are investors that believe that there is a serious risk of a collapse of EMU ..."

Related is that Euros will outperform negative-rate Euro bonds in every situation.

"Some investors may find that buying a security with a slightly negative yield is preferable to deposit rate that could be more negative."

How much does it cost to store physical currency? How does that compare to the cost of storing negative-rate bonds?

Maybe I should be embarrassed by this, but I really do not understand why anyone would lend at negative interest, ever. No explanation I have read makes any sense to me at all.

Would love to read a rebuttal.

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FunnyMoney
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February 13, 2015 at 9:00 AM ×

Funny Money Does It Again
-------------------------

FunnyMoney has his detractors (above), for sure, but Dax is up circa 3% in 24hrs (again). Nasdaq/Spoos are ready to make new all-time-highs (as I predicted a few days ago).

I rest my case your honor.

I think it's pretty clear that cycles & valuation analysis are not where it's at. Rather we're witnessing an unlimited CB bid that makes ZH sound conservative ;-)

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Dan
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February 15, 2015 at 2:51 AM ×

@self-evident.org

Sub-zero YTM bonds happen because of scale issues, political issues and security issues.

In the case of FRN, the largest denomination is only $100 which isn't enough for a night out in any global city. Take a look at the cash holdings at the different Fed branches and you will see the scale problem first-hand.

We've seen the money stock multiply since 2008, but the growth in currency in circulation is not increasing at the same exponential rate right now. There simply are not enough FRNs to roll out of bills/notes/bonds into zero coupon, infinite maturity bonds (FRNs).

The more credit that is originated, the more things bought with "deposit liabilities" experience price inflation.

Lastly, security is a very real issue at all levels of society, but I would say it is asymmetrically so the more wealth one controls. These days you have $15/hr. bankers at deposit institutions with access to intimate depositor information.

Asymmetric security risk is huge today.

Political influence is also important to consider for your really heavy-hitters. 50 shades of financial bondage.

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