Which of these things is not like the others?

1) The quarterly annualized run-rate of retail sales has been at its worst level since the crisis:




2) Forward earnings estimates have stagnated for the last year




3)  The SPX makes a new all-time closing high.

Yeah, yeah, the Fed's on hold, ECB QE, blah blah blah.  But unless one literally believes that a zero discount rate renders the equilibrium price of financial assets to be infinity, it is reasonable to ask at what point will equity investors quit letting Janet Yellen do all their thinking for them?
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Anonymous
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May 15, 2015 at 7:36 AM ×

Exactly. Central banks get it wrong and, when they do, the results have a profound impact.

Why is this time any different? Because asset prices are going up?

"don't fight the FED" etc. Well, the global economy is fighting all Central Banks and winning.

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Polemic
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May 15, 2015 at 7:49 AM ×

And.. add to that.. the discount rate you referred to at the end is rising fast re bond crap out.

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Anonymous
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May 15, 2015 at 8:08 AM ×

Shouldn't someone stand up and point out that dividend yields are still a bit higher than bond yields, thus equities are still the superior investment ? What is your take ?

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Polemic
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May 15, 2015 at 8:19 AM ×

Dividend yields should be higher than bond yields as equity risks are higher as a rule. You get your capital back on a non defaulting bond. Not neccesarily so on an eq. Eq is a perpetual bond with variable coupon.

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Anonymous
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May 15, 2015 at 8:31 AM ×

Dax futures were circa 30/40 points above a 10% correction from highs yesterday morning. A few months after Draghi launches QE.

Spoos looking set for another leg higher. Ignored Yellen's valuation comments, bond move, economic data etc. Drifted higher on low volume. Thing is, it feels like no one is trading it. Pops a little on NFP, goes quiet, read the same for 10Yr auction, USD moves, PPI. But, maybe, as it breaks range higher, it gets new money in ala Mr.T in previous comments section.

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CV
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May 15, 2015 at 9:24 AM ×

Agree with that MM, and with Polemic's comments too. But the answer to this;

"it is reasonable to ask at what point will equity investors quit letting Janet Yellen do all their thinking for them?"

Could be ... "for a lot longer than makes logically sense"

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mcr
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May 15, 2015 at 9:30 AM ×

Comments from Draghi to Swedish Riksbank today saying that too aggressive QE can lead to financial instability and worsen income inequality, hence these consequences needs to be managed. He also said that not doing QE would lead to other risks.

They will print and print until the needle moves.

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CJ
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May 15, 2015 at 9:54 AM ×

The 3m/3m annualized retail sales chart doesn't look that bad on a real basis. I'm not a fan of looking a nominal retail sales in this environment given the massive deflationary/disinflationary that we saw over the past six+ months.

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Jaimini
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May 15, 2015 at 12:11 PM ×

In a post QE world, what if rates moving up is simply indicating anticipation of an improving economy.

Look at aluminum, steel, construction stocks. During the QE trade, these guys were pounded, bc there was no growth.

I am quite skeptical of a market breakout to be honest, given weakness in large cap divvy stocks, transports, etc. Lack of leadership from small caps and semis.

Think this continues to be a traders' range bound market IMO.

Thank you for your blog and have been reading it for years. I am more of a bottoms up trader as you may have noticed and find your analysis very helpful!

Have an amazing day.

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Mr. T
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May 15, 2015 at 12:44 PM ×

it is reasonable to ask at what point will equity investors quit letting Janet Yellen do all their thinking for them

Yes, its a valid question and yes, its an uncomfortable rally. If you want to look at stocks through the lens of trailing economic data the only way to get long is through a 'cleanest dirty shirt' relative approach. Bonds have so many issues, the latest being the uptick in vols. The thing is that the street is perpetually optimistic about the 2nd half, so it's fairly easy to come up with models that justify current levels without resorting to discount rate contortions. And the beauty of this is that there is always another 2nd half.

I'm not particularly optimistic on the US economy, but I see policy as so amazingly screwed up right now that the real risk here is that noone has any idea what stuff should be trading. Spoos are essentially like gold now - an asset that is very difficult (if not impossible) to draw any conclusions on the right price so its all just flow. I don't think the tenor of the conversation would change much with SPX@2500 or 1750.

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washedup
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May 15, 2015 at 1:05 PM ×

Macro Man - thought ur ginzu 2000 equity model was outperforming everything else in this entire rally - u know - the one referenced in this post,

http://www.macro-man.blogspot.com/2014/10/a-hobbesian-correction.html

annotated with this MM gem -

"In this case, the 12 month projection is still well above the historical norm, and has even improved slightly after a small hiccup over the summer. As long as the model is this bullish, Macro Man struggles to adopt a secularly bearish stance."

Are your struggles over then? I am extremely intrigued - do elaborate.

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Corey
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May 15, 2015 at 1:44 PM ×

Wait, you're using fundamentals to value equities?! What pray tell are those?

Just the sentiment pendulum gently swinging back from, "oh mir gosh, they are going to finally do it" to "the economy is dead long live ZIRP." This too will change when the data prints finally show some improvement or the fed wakes up and realizes that the economy is at potential and there is no point in being ultra accommodative, whichever comes first.

Of course they may not get there in time, they are quickly losing credibility and becoming the fed who cried wolf when it comes to rates.

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washedup
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May 15, 2015 at 2:17 PM ×

corey - i think we may be approaching a worst case where the fed finds labor and employment conditions are improving rapidly but only resulting in a very small GDP growth - don't think its possible? productivity has its own long term cycles.
When that happens, equity bulls will find very quickly yellen is not quite the asset inflationista they assumed her to be - does anyone seriously think a 15-20% decline is US equities, in and of by itself would cause mass layoffs?

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abee crombie
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May 15, 2015 at 2:37 PM ×

The one thing we have all learned the past 6 years is to never underestimate the S&P.

So many sell in May calls and now the market will do what is the most painful to all. And that is grind higher.

Rotation underneath the headline as well. The oil/consumer discretionary trade is being unwound along with transports and large cap tech (FX bounce) and all Financials (steeper curve) heading higher. Meanwhile EU still looks likes its consolidating and I'm not sure the bund is finished going down yet

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Corey
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May 15, 2015 at 2:56 PM ×

Washed - I've got no doubt Yellen has what it takes for liftoff. I was merely commenting on the fact that she is going to find it more difficult to communicate that "she really means it this time" the longer time passes which becomes increasingly dangerous to a market that is as MM pointed increasing on something other than fundamentals.

No, her weakness is she is chained to backwards looking models that necessarily change as there has been a structural economic change - business/credit cycle is dead as we know it since you can't releverage a deleveraging economy. You could helicopter drop all you wanted and consumers first preference would be to pay down debt before spending a dime. And anyone without a PhD can tell you something smells fishy about asset prices. The wealth effect only works when it is based on something that is real. People will not go consume more based on higher stock value is they don't believe in the valuations. They are distorting capital markets with zero net benefit only negative externalities. In the long run we may all be dead, but Keynes is going to make sure of it.

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Anonymous
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May 15, 2015 at 3:47 PM ×

Corporate bond issuance yesterday at $16B plus, for the second day in a row.

The amount of money being made available to companies (via corporate bond sales and M&A) to engineer stocks higher is growing at an accelerating pace, and it is way more than fundamentalist/macro economist sellers/shorters can face up to.

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Anonymous
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May 15, 2015 at 3:51 PM ×

TLT looking nice again

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wcw
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May 15, 2015 at 4:27 PM ×

What CJ said: back out gasoline and food. Here, look, YOY: http://research.stlouisfed.org/fred2/graph/?g=1btI

If you squint, the YOY sales number is on the low side, but you have to squint really hard to make it look meaningful.

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abee crombie
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May 15, 2015 at 7:18 PM ×

From the tone of this blog and some other places I have been reading, the path of interest rates will likely play a driving role where equities go for the next 6 months.

yes the data has been crap but if we start to see some improvment imagine where 10yr rates will go. They will be the driver, unlike FX last year or equities in 2013

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washedup
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May 15, 2015 at 7:50 PM ×

abee - its like the last cycle - risk off is usually first reflected in a secular currency/commodity move, then a secular bond move, and equities always correct dead last. The twist this time is that the risk/off bond move this time could be a selloff, but I admit my conviction is rather low.

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Anonymous
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May 15, 2015 at 8:31 PM ×

Is there a point where the risk of peripheral bonds (& French) gets re-examined? Where it is no longer desired as pary of the QE trade? Nothing has really changed in Spain Italy or France apart from the backstop. Possible we see the core periphery trade again?

If you're holding a turd for asset price appreciation and you got it, when do you exit? A bit like sub-prime.

It's clear real money sees value in US 10yr @ 2%.

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Nemo
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May 15, 2015 at 11:56 PM ×

"...longer than you can remain solvent"

WWFMD (What Would FunnyMoney Do)?

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Anonymous
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May 17, 2015 at 4:32 AM ×

http://www.ejinsight.com/20150513-msci-decision-on-a-shares-due-june-9/

"MSCI Inc. will announce next month whether it will add China’s A-shares to its widely tracked emerging-markets index. The decision will be revealed “shortly after” 5 pm New York time on June 9. Adding A-shares into the MSCI Emerging Markets Index could prompt global investors to increase their weighting for Chinese stocks, adding further fuel to the rally in the mainland stock markets. Separately, MSCI is on schedule to add overseas-listed Chinese stocks to the index later this year. Including both A-shares and stock listed outside China, Chinese securities could account for about 37.5(!) percent of the index."

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Anonymous
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May 17, 2015 at 2:55 PM ×

http://imgur.com/rZOeOnB

BOOM !

Hahahahaha...

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FunnyMoney
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May 17, 2015 at 4:06 PM ×

Nemo said...
WWFMD (What Would FunnyMoney Do)?
May 15, 2015 at 11:56 PM

He would buy equities with both hands, scooping them up like a child in a sweetshop. For it has become clear to FM that you are all weak. Giving precedence to heresies such as: logical thought, valuation measures and/or macro themes, you lack conviction in the all omnipotent Central Banks.

No doubt many of you will blindly sell in May and go away, to watch in bewilderment as stocks get driven higher in the biggest bull market to which we will ever bear witness. By Dow 20k, the pain will become unbearable - but there will be no turning back. As the Fed removes all pretense of a rate rise & the PBOC start QE in earnest, at the opening bell we shall hear the lamentations of your women and children. Equities will go stratospheric as the world's debt is monetized away in wanton fashion and asset price inflation reaches levels of hitherto unforeseen magnitude.

FM has spoken.

"The CBs will wipe every tear from their eyes. There will be no more deflation or recessions or bear-markets or pain, for the old order of things has passed away." - Revelation 21:4

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hipper
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May 17, 2015 at 7:50 PM ×

I'd atleast be very interested on what the book of FunnyMoney says about treasury bonds? Is it BTFD yet, or shall we wait that more false prophets and infidels run amok the face of the Earth claiming the great Deflation theme is dead, long live the Reflation and the resurrection of the (anti) Christ is getting closer?

For if it is written that the world is doomed to low (and further slowing) real demand growth for decades to come and the Central Bankers will try to fix everything with a sledge hammer, then surely one would want to seek salvation from them. Long term history has proven this prophecy true thus far. Oh please guide us FunnyMoney, we seek your wisdom and clairvoyance.

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Anonymous
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May 18, 2015 at 3:36 PM ×

The power of the central banks...

"If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality."

http://www.bloomberg.com/news/articles/2015-05-18/nobel-winner-s-math-shows-s-p-500-unhinged-from-reality-or-not

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Mr. T
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May 18, 2015 at 4:00 PM ×

I'm pretty skeptical of new-school valuation metrics, but Tobins-Q needs to die. For the majority of modern public companies its a horrible metric. Should it really be a surprise that I could buy all the "factories, machines and inventory" of FB and still not equal the cap? Could it be that in the modern digital world the share of intangibles has grown, even eclipsed the value of the factories and machines? Consider a company like ELLI or WDAY or CRM even, who because they do everything in the cloud have no machines and factories - are they worth zero? Okay so maybe I'm being a bit pedantic referring to the machines, but ultimately this is a question of the book values. FB has $22bil of intangibles on their balance sheet, $18bil of goodwill. So they are valuing their social network, brand, algorithms, ability to attract people etc all for <$4b. I think most rational people would agree that those assets are worth more than $4bil, if they are instrumental in generating $6b in cashflow per year. Or put another way, if someone gave you $4billion, do you really think you could replace FB?

And its not just the tech companies - pretty much all parts of the global economy are rich with IP that are difficult if not impossible to accurately carry their values on the balance sheet.

Every couple years they trot out this metric and each time it looks more tired than the last time. I'm not arguing that stocks are cheap, but insightful analysis requires more than just dividing two arbitrary numbers together.

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Anonymous
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May 18, 2015 at 4:25 PM ×

Dalio says we're not in a bubble, people. Wake up and get long.

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Leftback
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May 18, 2015 at 5:48 PM ×

Banana skins are a ubiquitous feature of summer investing. You don't see it at all, until you are on your arse with a suddenly inverted view of things that are going distinctly pear-shaped.

I am going to have a nap now.

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Anonymous
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May 18, 2015 at 7:54 PM ×

This is what summer will look like everyone...a slow grind higher on light volume. WIthout a major macro trigger, we aren't coming down.

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Anonymous
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May 18, 2015 at 8:01 PM ×

Front of the VIX board getting destroyed. We made low volume ATHs on April 24. Where are we now? making low volume ATHs again

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Anonymous
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May 18, 2015 at 10:28 PM ×

Via ReformedBroker -April had lgst $$ of new bback announcements ever @ $148B. Mar, Apr & May-to-date show $500B in corp bond sale. Any Qs?

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hipper
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May 18, 2015 at 11:05 PM ×

Have to wonder which data is going to count in the FOMC meetings? SF Fed calculates Q1 real GDP growth was 1.8%, not 0.2%:

http://www.frbsf.org/economic-research/publications/economic-letter/2015/may/weak-first-quarter-gdp-residual-seasonality-adjustment/

I think we might all more or less agree that Bunds are still on the drivers seat also responsible kicking UST's around. And Bund performance further is connected to the recent European growth spectacle and the rise in oil price. However what has been driving the recent European growth spectacle so far? Whatever positive effect low oil prices and FX had which were dominant during Q1, so far Q2 they seem to have faded off. So it's possible the sharpest advance of Q1 has been blunted for now.

If that's the case and as it becomes evident there might be relief for the bunds and as a result buying opportunity in long UST. Also amazed how well gold has persisted during the recent DXY advance. I'm not bearish euro equities, think it's not a bad idea to add some proven divvy payers on the dips, bearing in mind that the unfolding, never ending Greek farce might create better opportunities for that.

S&P500, the biggest worrying fact right now is that nominal sales growth contracted during Q1 and there might be more to come. Not sure there is much more room for further productivity improvement or cost cutting and probably the single most important factor masking top line contraction and net income weakness is the humongous buyback and outstanding share reduction, which might be assumed to be a by-product of ZIRP world which, currently might be perceived to be eroding. Thus when buy backs start to contract we will start paying more attention to what's really going on beyond EPS figures.

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Mr. T
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May 19, 2015 at 5:23 AM ×

S&P500, the biggest worrying fact right now...

At the risk of turning this into a FM echo chamber I really don't think any of those fears matter now. The whole thing has turned into a liquidity driven squeeze that is just not looking at sales declines or why EPS is what it is. We rally on big volume and small volume, bad data and good data. And it'll continue until the fed decides to go after it, and even then it'll probably take a good 6 months for them to kill it.

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Nico G
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May 19, 2015 at 7:28 AM ×

funny money you are clearly copying the style of The Fly but lack his wording genius

like someone else wrote there is no point debating spoo level it resembles Chinese air no matter how polluted, people will still breathe it

Europe offers much much more opportunity for shorter term trading

http://fistfulofeuros.net/afoe/are-the-imf-and-the-eu-at-loggerheads-over-greece/

greetings from Myrina

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FunnyMoney
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May 19, 2015 at 9:15 AM ×

@Hipper (May 17, 7:50 PM): Bonds are the devil's work... I will have nothing to do with them.

@Nico G (May 19, 7:28 AM): If I was copying The Fly's literary genius, there would be far more expletives in my posts. But I agree, his writing style is v good. However the real point to note might be that he is also hugely long equities on the basis of CB largesse, and is up circa 30% this year as a result.

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Anonymous
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May 19, 2015 at 9:39 AM ×

Front loading QE for the holidays. Buy in May and go away.
Nice test for an increase in QE. Wonder what inflation will look like after Summer.

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Leftback
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May 19, 2015 at 1:20 PM ×

UK in deflation. Now where's that BoE rate hike that was imminent in 2013?

Bucky back in control today, we told you staying long Europe would be tricky and require a lot of € hedging. Now are we about to see another round of carnage in the energy complex and emerging markups? It's a good point about the corporate buybacks, btw, but at this point I'm more interested in how the sellers are going to react. It's not going to be VIX<12 all summer. The action in HY credit is going to be worthy of attention, there is some pain out there.

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washedup
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May 19, 2015 at 1:49 PM ×

I feel at this point bucky's fate really depends on whether external (non US) economies weaken or strengthen further (I would bet on the former) - I think people are already putting a fork in the US growth miracle/divergence story, so it doesn't really matter what happens here. What could make things very interesting is if US core (ex energy, food) inflation data strengthened regardless of weak growth, and I have a strong hunch thats what we are setting up for.

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CV
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May 19, 2015 at 2:14 PM ×

I am not biting into these new highs, sorry chaps. I am more inclined, re LB MM etc, to watch out for banana skins. The thing is, if the U.S. economy roars back in Q2, it will be enough for Yellen to move I think, and then suddenly that chart MM showed could be in play, at least for a while.

I am still net long, but with a good dollop of downside protection here going into the summer "lull". MM, you WILL tell us when you're holiday won't you, that is usually when the whole thing kicks off.

Also, don't buy into this nonsense about ECB frontloading, that is silly. They always retained the option to do that, even more so now that they have probably realised that wielding a sledge hammer in the market when Mr. Bund and Mr. Oat are on holiday could probably lead them to REALLY distort the market. Couere's comments today on lack of liquidity is the real point I think.

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Nico G
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May 19, 2015 at 6:34 PM ×

FM yep he is long and brash and uber bull-ying and it will be fun to read his anger when a heavy train hits his face

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Anonymous
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May 19, 2015 at 7:07 PM ×

usually when a heavy train hits someone's face you can't really read their expression!

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