The only loony chart was the...err....loonie

Hurray, the Greek vote passed, the bailout is on!  OK, now how long til the next debt restructuring/writedown/foregiveness/default?  Even the IMF acknowledges that Greece remains completely, utterly stuffed- bailout or no bailout.  Perhaps that's why the euro, at the time of writing, hasn't budged on the news.


Let's see what Signor Draghi has to say about Greece and the ELA this morning.

A number of commenters and twitterers on yesterday's post observed that the very act of observing the three month pattern of crazy days was likely to negate it.   Such seems to have been the case;  while one need not be Mystic Meg to have deduced that such a random pattern would not continue, Macro Man has frankly been a little surprised that the market did not move more violently in the run-up to and aftermath of the Greek vote.

Of course if one wishes to cherry-pick, he could argue that yesterday's action in Canada qualified as a little crazy.  The Bank of Canada delivered a somewhat surprising rate cut, and in his comments Poloz hinted that QE could potentially be in the offing.  Sigh.  There remains essentially zero empirical evidence that QE boosts economic output or inflation; the latter in particular is subject to global secular forces of oversupply in manufacturing and labour markets.   The best its adherents can do is offer lame counterfactuals about how bad things would have been without QE; these counterfactuals, of course, are outputs from the same macroeconomic models that have signally failed to deliver anything remotely resembling accurate forecasts in the post-crisis period.   Garbage in, garbage out, as the saying goes.

In any event, the CAD got trolleyed yesterday, and is looking very interesting indeed from a technical perspective.  USD/CAD has broken out on the daily chart and looks set to test the March 2009 high of 1.3250:

Beyond that level, there's a lot of fresh air.

The chart of GBP/CAD is even sexier, with a very strong breakout after quite an extended period of consolidation and then sharp swings.  Loathe as Macro Man is to hitch is wagon to Sideshow Bob  Mark Carney and his magic flip-flops, this one does look like ti could go quite a bit higher.


As for Janet Yellen, your author saw relatively little change in message from what she gave us last week.  For more than a year now, his base case has been a hike in September of this year, and at this point it still looks like even odds that he'll be correct (though Fed funds futures are pricing more like a 1/3 probability.)
 
What's interesting is that she sounds, if not desirous, at the very least resigned to the notion that ZIRP world really ought to end sooner rather than later.  The irony, of course, is that the global economy might have been better suited to such a move a while ago; as someone once said, he who hesitates is lost.

Nevertheless, it's an interesting question as to what will happen to the US short end in the event of a September hike.   Although Yellen has already more or less promised that this tightening cycle will be sponsored by Foghat ("slow ride....take it easy"), the market continues to price relatively little even with that proviso.  Of course, some of that may be a function of the uncertainty surrounding how rate hikes will look.  Will the Fed target a single level for FF, or a range?   If the latter, how wide will it be (i.e., how wide will the corridor be between IOER and the RRP rate?)

Do two hikes put FF at 0.75%, and assuming a basis of 15 bps, LIBOR at 0.90%?   Or do two hikes put FF in a target range of 0.50% -0.75%, with the practicalities of the market flooring it at 0.50%, and thus putting LIBOR only a bit above 0.60%?

Inquiring minds want to know.   In any event, it looks like risk is being deployed to price only one hike; a lot of "pin the tail on the donkey" tight call flies have traded looking to target 99.50...more or less where we are now.  That's consistent with pricing one hike this year, with FF at 0.35% or so and 15 bps of basis.  Could that happen?  Of course...but a lot of these structures have been financed by selling puts, which could end up biting someone in the arse should Janet get the bit between her teeth.

Either way, markets are going to be very interesting indeed in a couple of months' time- and won't even need a calendar pattern to "prove" it!
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Anonymous
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July 16, 2015 at 7:21 AM ×

CAD and AUD already had the benefit of QE with their commodity lottery. If they couldn't use that to set up robustness in a downturn, how is their own QE going to boost their economy in a sustained way?

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Anonymous
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July 16, 2015 at 7:46 AM ×

Took a little longer than expected for the Greek can to be kicked. Assuming other countries vote this in, and Draghi talks all dovish, today could be the final face ripper into opex before politicians and bankers head off on their holidays.

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CV
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July 16, 2015 at 9:13 AM ×

Good overview MM! I completely agree on the U.S. ... September is still in play, and it is ALL about the U.S short end. I find it difficult to believe they can "manage" expectations so that this part of the market remains "orderly", but I could be wrong of course. Going back to my previous point, forget about the 2s10s, look for the 2s5s!

Meanwhile, on this;

"A number of commenters and twitterers on yesterday's post observed that the very act of observing the three month pattern of crazy days was likely to negate it"

Just tell us when you're off on holiday will you! :)

Claus

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Leftback
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July 16, 2015 at 1:37 PM ×

Bucky is clearly on a roll again, as we predicted. He will really get some giddy-up if and when the short end decides to move. Another run up to DX 100 seems possible. We tend to side with MM here and take the recent statements at face value. Dame Janet seems determined to prove her mettle - by executing in September what may prove to be the only hike for quite a while.

MM, are we "Happy" yet? Or are we waiting for another silly rally in Spoos?

Back to the Lord's Test, and the hammock!

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Mr. T
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July 16, 2015 at 1:46 PM ×

The Canada cut was indeed a bit of a surprise. Consider the west coast (Vancouver) housing market - it's totally bonkers and pricing out pretty much everyone but Chinese trying to hide money. I suppose you could say that a rate cut helps even the playing field between cash buyers and mortgage buyers, but either way its adding fuel to a fire. The real issue here for Canada is the same as Aus etc - the precipitous drop in commodity prices. Might I suggest that "QE in Canada" might be better implemented by the CB just sitting at the end of an oil pipeline and burning the stuff right up? Demand creation. And why stop there - Draghi could just drive a constant stream of Audis into the ocean while Jinping continues to level and rebuild empty highrises.

MM - I agree wholeheartedly with your sentiments about the efficacy of QE. I tend to think QE, like traditional rate cuts, works best as a sort of AED on an economy that has temporarily lost its heartbeat. Constant QE and ZIRP seems akin to sticking your fingers into the electric socket for an afternoon in hopes of achieving better health. But look - we are in a connected world and even if the fed sees religion and wants to tighten, without a coordinated policy response you can't just shove the genie back into the bottle. You have Europe going full-out, Japan bonkers, China contemplating whatever crazy-ass shit comes next. If the level-headed fur trappers up in Canada are doing QE its pretty much the new global norm.

One of the side effects of QE is people get nervous about inflation. If the situation in 2016 is US tightening while the rest of the world embarks on various forms of QE, it seems like a recipe for continued massive capital flows into USD denominated assets. The short end, as the lowest risk (outside of biotech of course), seems the likely parking place for these capital flows. So even if Yellen actually tightens, she might find the transmission mechanism into market rates to be broken. Indeed tightening by US, with dollar strength, might create a steeper yield curve. Then what - reverse QE by the fed to try to flatten?

Bottom line - I'm not worried about the short end. USD* seem like winners. Financials via NIM's have big tailwinds. The fed has likely lost a lot of control.

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washedup
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July 16, 2015 at 2:59 PM ×

T - agree with almost everything you said - REITs/financials should do well next few moons - I am obviously a dollar bull, but my optimism is a bit guarded right now simply because the fundamental divergence we were seeing in Q1 US vs RoW has abated quite a bit, really more in the direction of overall slower growth but with the biggest negative surprise relative to expectations being the US - in my experience, betting on policy divergence (as opposed to real data) is a bit of a sucker's game because the outcome can be quite binary - ideally I would like to see the 2's and 5's sell off a bit on good inflation prints so we can sense that the market is agreeing with, if not forcing yellen's decision, and then we could see new highs on the dollar - seems a range trade 94-98 for now for the index.
I like CV's 2/5 idea a lot - can easily see 15-20 bps of flattening there, which really would not impact reits and financials which I see as levered much more to say 5/20.

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Corey
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July 16, 2015 at 4:02 PM ×

@ washed and T - in the old days the curve steepend when the fed hiked not bc rates are rising but bc inf/grwth was rising simultaneously. Nowadays deflation reigns supreme as you all have pointed out, so I wouldn't be surprised to see the long end stay put, if not drift lower on verification that dame Janet is not completely one sided in her execution of monetary policy, no?

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Anonymous
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July 16, 2015 at 4:04 PM ×

MM ... your random austerity generator provided me with: "Varoufakis needs to dance and sing 'My Anaconda' 11 times in front of Merkel." LOL!

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Anonymous
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July 16, 2015 at 5:08 PM ×

Bad news discounted, central banks printing, equity indexes reaching new all time highs... FunnyMoney had this nailed months ago.

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Anonymous
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July 16, 2015 at 7:43 PM ×

Let me just say that any post featuring Foghat deserves some hearty applause!

That is right in the heart of adolescence for me, and LB is a "man of a certain age" also, I believe ;-)

Air pollution here I come!

- Whammer

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Anonymous
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July 16, 2015 at 7:45 PM ×

Short NZD, the gift that keeps on giving...

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abee crombie
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July 16, 2015 at 9:42 PM ×

$CAD is in no mans land. Lowering rates wont really do much except depreciate the currency, which I guess is the BoC's plan. Banks wont likely pass through all the cut to mortgage rates. Eitherway the longest term Canadians have a mortgage is for 5 years (amortizing over 30) so all BoC is doing is just putting themselves in a tighter bind when eventually they have to raise rates and mortgages will re-set as well. But that is far off from now

Auzzie hasnt had a recession in something like 30 years.

Alberta voted for NDP (socialist party).

I'll get interested when they are 60 cents to the dollar. ;-) SGD is another that is gonna keep going down as well

Nasser loves it but I am skeptical of MoMo stocks here.

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Anonymous
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July 16, 2015 at 10:10 PM ×

@Nico - How much did you lose on your recent short Spoos trade?

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Anonymous
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July 16, 2015 at 10:26 PM ×

Here's a nice article for all you schmuck posters who think markets are gonna crash, and who keep calling it wrong: http://fundreference.com/articles/2015/1000555/the-clowns-of-wall-street/


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Mr. T
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July 16, 2015 at 10:38 PM ×

NFLX,GOOGL - good grief. GOOGL has added $95B in cap in the last 5 days, with 5 minutes on the call talking about a picture-organizing app. This is nuts. There is simply way too much cash sloshing about.

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Leftback
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July 16, 2015 at 11:14 PM ×

Margin trading giveth... and taketh away..... enjoy the sky-high multiples, liquidity-driven orgies in small caps, and M&A arb.
Gather ye nuts while ye may...... I'll be in the hammock until we see more bond market capitulation.

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hipper
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July 16, 2015 at 11:35 PM ×

The unholy, paradoxical trio of bonds, equities and bucky all climbing up in tandem is back again. It's kind of like a jet fighter flying with it's afterburner all the time, just can't keep up for too long. Or boy then the rest of the world must really suck.

The collective industrial production and CPI in the Eurozone were really terrible this week, but it's not like the US is doing much better. The retail purchases are almost in a recessionary like environment and have been for some time now: http://bit.ly/1RCkH2b

Guess all the difference is up to Yellen sounding hawkish and the Eurozone unable to get rid of its weekest link, Greece then.... but like washedup it's honestly really hard to see a too of a wide moat for bucky here. But it's all relative and only that much is needed to make the difference I guess.

Looking at gold with interest, I suspect as other commodities, being spanked by aforementioned reasons. Let the steamroller run it's course but it might be another thing to add on the buy list closer to September.

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Anonymous
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July 17, 2015 at 12:24 AM ×

Where is all the cash coming from?

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Anonymous
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July 17, 2015 at 11:15 AM ×

http://www.bloomberg.com/news/articles/2015-07-17/chinese-bazooka-xi-readies-483-billion-to-end-stock-selloff

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abee crombie
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July 17, 2015 at 2:22 PM ×

So last week we were sitting in the edge. Now earnings have come better (yeah they had lower expectations anyways) and can kicking in EU appears to have satisfied markets. China fudges a GDP and Mr Market moves on.

What has been working is the Nasdaq. I'm skeptical of it here, especially if we get anything close to a Fed related scare but I will respect the breakout for now. Mr T yes NFLX's PE is crazy and GOOG isnt cheap either. but can you imagine what will happen if AAPL, perhaps one of the optically cheapest stocks in the market here (based on brand, quality, cash, FCF, PE etc) started to RUN. I wouldnt want to short that stock unless it had a >25x PE, so that alone could drag the index higher. IBB similarly in LA LA land with CELG acquisition good for both buyer and seller (is there any loser in biotech ever even though its a competitive market?).

Rates are more interesting to me here than stocks.

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Mr. T
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July 17, 2015 at 5:04 PM ×

is there any loser in biotech ever even though its a competitive market?

Yes - all the schmucks who pay taxes for medicare and insurance premiums. I'm at (a fairly typical I think) $680/mo for a family of 3 - up 100% from 2012.

Required reading for todays equity investors: Profit Margins In A Winner-Take-All Economiy.

The 1%ers are not just people but corps.

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Anonymous
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July 17, 2015 at 5:38 PM ×

anyone buy miners today?

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washedup
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July 17, 2015 at 6:05 PM ×

T - great article - definitely got me thinking.
This is certainly not the first time that new technologies have combined with high barriers to entry to create a seemingly never ending secular profit margin drift higher for certain companies - the only difference is that whats masquerading as 'permanently higher margins', thereby making it look more sustainable and reasonable, used to be called other things in previous cycles.

The author seems to think there is something 'special' about the distributive power of the internet, bolstered by social network technologies, that fends off competition - I would humbly submit that the reason why thats the case is because investors haven't yet observed the bad side of social networks - we are one major all encompassing cyberterrorism event away from people saying things like 'I am not sure I want to be on Facebook anymore' - those fortresses may seem impregnable, but they are ultimately made of glass just like the ones before them.

Cycles - they come and go - of course I am fully aware I will not be able to convince anyone to sell AAPL or GOOG and buy coal stocks - just like I would not have been able to do you know what in 1999 - we will see if this time is indeed different, but I doubt it.

As a practical matter, running a small hedge call book in apple, fb, and good has worked well for me when I have occasionally shorted in the last few months - as abee said, there is these guys, and then there is the rest of the market - in that sense I agree with the author - I just don't believe for a second that even the strength in these names is a permanent change, because nothing ever is.

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Leftback
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July 17, 2015 at 8:02 PM ×

The miners? just watching them go past the 12th floor window for now, will wait until this Bucky surge really starts to catch fire and make headlines again, then we'll have articles on the death of metals, bonds, miners, emerging market debt, etc... for now, we are not knife catching, it's perhaps a waste of good Kevlar.

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abee crombie
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July 17, 2015 at 8:59 PM ×

bah, here is to keeping a bit of gold insurance policy in your portfolio... down 70% from where I got out of most of it. sometimes i think slow and steady is the way to go and then when I see stocks like my NEM in my account I start to wonder..

Oil and MLP names also taking in the chin as well.

washedup, I have a problem comparing this tech bubble to 1999. These guys are cash machines. back then it was all a multiple game. I dont know how it plays out but the one good thing in your favor is the MBA signal. What ever industry MBA's are flocking to, you can probably bet there is some sort of bubble. Nowadays it seems everyone wants a startup

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abee crombie
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July 17, 2015 at 9:07 PM ×

Mr T, for you. https://www.scribd.com/doc/271863034/Biotech

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washedup
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July 17, 2015 at 9:21 PM ×

abee - I wasn't being that specific - just pointing out that when you think about it, the argument 'the internet is transforming the world therefore buy everything with a dot com in the name' vs 'these guys have ridiculously high margins that are never going away' are ultimately both the same, i.e. relying on status quo - the latter merely holds special appeal to smart people in our age range whose image of a bubble is shaped by the specifics of what happened in the late 90's, and the fact that the opposite condition now (seemingly) prevails is supposed to be comforting - in my experience, the specifics are not important, what matters is risk appetite - if or when that turns it won't mater whether someone has a bunch of cash or not. I also assure you that the presence or absence of low P/E or P/Cash multiples does not in and of by itself influence risk aversion.
Till then, BTFD! And don't ask me how to measure a turn in risk appetite coz I don't have a f@3ng clue - everyone have a good weekend.

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FunnyMoney
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July 19, 2015 at 6:33 PM ×

May 17, 2015 at 4:06 PM FunnyMoney said...
No doubt many of you will blindly sell in May and go away, to watch in bewilderment as stocks get driven higher...


http://www.finviz.com/futures_charts.ashx?t=NQ&p=d1

Boom !

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Nico G
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July 19, 2015 at 6:58 PM ×

Anon July 16, 2015 at 10:10 PM

i made one truckload of dollars thank you for asking

flat everywhere like a flat hammock

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Anonymous
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July 20, 2015 at 4:04 AM ×

A little flash-crash in gold?

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Anonymous
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July 20, 2015 at 1:36 PM ×

PBoC dump massive paper gold position & buy equities.
BoJ continues massive equity purchase program.
Fed and ECB also buying equities.

Anyone still short equities? Bwahahaha

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hipper
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July 20, 2015 at 2:15 PM ×

The banana-lever-monkey, which dominated 2014 and 2013 is seemingly back in business, although with notably zombie-like volumes. Today is a poor day data-wise, but Mr. Bund isn't for some reason looking quite that optimistic here, even though everything was supposed to be fixed now. Friday will be the real deal with the slew of PMI's and being preliminary July might be expected to have some help from FX.

The slow-mo sinking M/S Extend & Pretend just had a new top deck added onto her. Merkel said to be ready to grant debt relief in exchange of some kind of nominal reforms. This way her electorate won't have a chance to say that no conditions were attached and the bystanders waiting in line for their turn won't prematurely get too upset (re. Spanish and Portuguese election later this year). Meanwhile the carve-up begins:

http://news.xinhuanet.com/english/2015-07/19/c_134426104.htm

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July 22, 2015 at 5:29 AM ×

http://b2bad.in/Packers-and-Movers-in-Delhi/

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WellRedd
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July 30, 2015 at 11:14 PM ×

There were certainly hints, but I think the BoC will be pretty reluctant to pull out QE any time soon. I am sure Harper will be leaning hard on Poloz to pull out all the stops ahead of the Canadian election, and after all, Poloz was appointed because he has not power base in Ottawa to resist good ol' Paul. However, I think there will be fairly stiff pushback from the staff, especially with housing where it is at right now...

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