Gushing

All of a sudden, the world looks pretty good, doesn't it?  Spooz are up on the week (raise your hand if you saw that one coming 48 hours ago), Q2 GDP was revised waaaaay up, and even crude oil broke its steep downtrend with its best day in about 6 years.   The good news is positively gushing!

The GDP figures will no doubt come as a comfort to the Fed, and take some of the edge off of the recent worries about a corrosive deflationary episode.   Not only did the quarterly real growth figure come in at a handsome 3.7%, but the deflator also spiked above 2%.  As it is now, the Q2 figure is shaping up as one of the better ones of the post-crisis era.


Of course, we'll still have the usual hand-wringing about underused labour, a remaining output gap, etc.   To get a sense of what the models are saying about this, Macro Man plotted the CBO's estimate of potential nominal GDP with the actual readings from the BEA.  Sure enough, you can see the wide gap emerge over the crisis and slowly close in the ensuing years.


But how useful are these estimates of potential GDP, anyways?   Common sense would suggest that the trajectory of growth before the crisis was unsustainable with most inputs at equilibrium- otherwise we wouldn't have had a crisis.  Macro Man plotted the historical difference between the level of nominal GDP and the CBO estimate of potential to get a sense of the historical trends of this implicit output gap.


As you can see, since the mid-70's the CBO's estimate of potential GDP has generally outstripped the actual level of GDP, in many cases by a sizable margin.  While there is no guarantee that the Fed employs similar estimates of potential growth, such a systematic error would appear to cast a few doubts on the whole output gap framework.  At the very least, the overoptimistic GDP assumptions explain the generally execrable state of US public finances for most of the last 40 years.

In any event, some combination of the number, the rally in equities, and oversold technical conditions have finally breathed a spot of life into the oil market.   The trajectory of the crude price since midyear has resembled nothing so much as a cliff diver in Acapulco (like you used to get on weekend TV thirty-some odd years ago); yesterday, however, saw a decisive rejection of the last-gasp move below 40.


There's been some quality discussion of the fundamental dynamics of crude in the comments section over the last couple of days, and Macro Man doesn't have a whole lot of fresh insight to add to that particular debate.  From a technical perspective, however, the downmove looked a little tired earlier this week, so it didn't come as a complete shock to see the reversal.  Although CTAs are nowhere near being challenged on their positions, it would still be reasonable to expect a further correction higher.  Even a 38% correction would take October crude (pictured above) to $47 or so; a 50% retracement would have the price pushing $50.

What about energy equities?  Obviously there is a lot of idiosyncratic risk based on debt profile, cost of production, etc., so for any specific stock it is probably unwise to generalize.  To get a sense of the "beta" for energy stocks, however, Macro Man decided to have a little fun with ExxonMobil (XOM.) He plotted the ratio of that stock price to the SPX going back to the early 80s; unsurprisingly, the last few years have been pretty darned rough on XOM, taking it back close to its average relative price in the 1990's.


Obviously, this is a simple measure that does not capture the total return of the two series.  Nevertheless, as a simple proxy for what the market is willing to pay for non-idiosyncratic energy exposure (XOM is about as non-idiosyncatic as it gets!) relative to the index as a whole, it has some utility.

"But surely," Macro Man can hear you saying, "this ratio simply reflects the oil price?"   Well, yes and no.   In broad strokes, yes, of course it does, but there can certainly be periods when XOM can out- or under-perform crude on a relative basis.   In late 2008, for example, XOM handily outperformed the SPX even as crude was taking another swan dive, as it was first part of the "equity market crack" trade, and then seen as a safe haven with a nice dividend cushion when it was all going to hell in a handbasket.



What's interesting about this chart is that XOM led the weakness in crude over the past few years, rather than vice versa, and if anything still looks a little "cheap" by this measure.  With a dividend yield nearly twice that of the 10y Treasury, it pays OK, as well!  Obviously this is a pretty shallow analysis, but it does lead Macro Man to wonder when it would make sense to don the Kevlar gloves and have a look at equities in the energy sector.  It's been a long, hard road for them...but at some point they'll be priced where a gusher of their own looks close to inevitable.

(As an aside, Macro Man had to laugh at the advert that popped up when he looked at a dividnd yield history of XOM.  Talk about quick on the draw- one upday in crude and it's already pimping 'The oil boom'!  Somehow, the cowboy hat/goatee/cheesy half smile is what makes it click.)

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amplitudeinthehouse
admin
August 28, 2015 at 7:42 AM ×

Macro Son, all I have say about this market action is this...when we all retire from macro I'll always be at peace of mind, like I have all the through this bull run..why? b/c my shares come from a f**cking legend!..i hear you out there saying "off you go asshole"...yeah off you go asshole..onto drivel circuit.

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Anonymous
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August 28, 2015 at 8:26 AM ×

MM can I ask what software package you are using to do you longer term analysis / charts etc ?

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Nico G
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August 28, 2015 at 9:38 AM ×

they used my selfie without permission

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Nico G
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August 28, 2015 at 9:40 AM ×

on the oil equipment side note that Schlumberger just bought Cameron at a 60% premium to market value. Nudge nudge

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Dr Finans
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August 28, 2015 at 10:13 AM ×

I agree all the way. Exxon yield rougly 3.9% , 0.104 correlation to Brent, Cheap compared to SPX. The question is future divident vs low oil price.

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Anonymous
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August 28, 2015 at 11:27 AM ×

Potential GDP is hard to predict but what you cant argue with is the recovery so far to date, since the recovery started in 2010 annual growth in the US has averaged 1.95%. Over this period unemployment has fallen from 9.8% to 5.3%, which suggests that even at 1.95% we have been closing the output gap at a strong pace. Therefore potential growth must be significantly below 1.95%. this should worry everyone no matter what market you look at.... Even when the fed do hike Spetember/December/March it doesnt really matter, as Yellen says its more about the profile of the increases and how far they will go. With potential growth so low all the current evidence suggests that the hiking cycle will not get very far at all. The fed long run estimate of over 3% looks like a long long way off... any sell off in bonds is worth fading.....

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Anonymous
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August 28, 2015 at 12:17 PM ×

Elon Musk says.....

I feel that the future lies away from oil, dont buy Exxon.... buy Tesla instead

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Anonymous
admin
August 28, 2015 at 12:59 PM ×

Sorry, Macro Man, typo correction...

Off ya go asshole, onto the drivel circuit...leave a mug alone.



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Unknown
admin
August 28, 2015 at 1:01 PM ×

Speaking of drivel....

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Unknown
admin
August 28, 2015 at 1:02 PM ×

@Anon 8.26....for economic data I am using FRED; for market data, I have a friend send me stuff from Bloomberg.

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Anonymous
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August 28, 2015 at 1:50 PM ×

It's apparent the market cannot handle a bear trend. If the drop went on for 5 more days, we would be at 800 on SP500. Thank you Dodd Frank.

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river
admin
August 28, 2015 at 1:52 PM ×

For Crude, this chart is still valid:

$42.

http://www.dailyfx.com/forex/technical/elliott_wave/oil/2015/08/25/eliottWaves_oil.html

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Anonymous
admin
August 28, 2015 at 1:55 PM ×

Mark Mewton CMT Greywolf in a note to clients:

"The extent of the drop in SPX over the last couple weeks has been staggering and it's very difficult to analyze near-term price action successfully given so much volatility and variance. However, given the extreme number of stocks hitting new 52-week lows having spiked to over 1100 and climactic readings in the TRIN, downside might be initially limited even on further declines, to near last October's lows near 1820. Greater downside targets lie near 1680, but might not materialize until September/October, and aren't likely achievable in the next couple weeks."

http://archive.constantcontact.com/fs170/1108936408464/archive/1122058375477.html

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winginit
admin
August 28, 2015 at 2:07 PM ×

Yes it all seems pretty comfortable again but I remain hesitant. Since 2009 there has been quite a few years of upwards shifting stock markets. There has historically been rare that these periods have lasted more than five or six years. (I am aware that I am not bringing any revolutionary news to the crowd on this board..)

So there is the argument that cheap oil and energy will help keep this going now that rates are close to zero in many places of the world. There is probably something I am misunderstanding here, but looking at TI and the US, although prices have gone up the last few days, gas is cheap to the US end consumer. So far so good. The Gasoline crack is going down, from high levels though. However in terms of Brent and the international market the lower price of crude doesn’t necessarily filter down the same way to end users due to high taxes and the dollar. Bummer.

Also I wonder, is the cheaper oil making Apple or Google any happier? Intel any sharper? The environmental focus is growing stronger and today you can look equally cool in an electric car as in a Corvette. Chicks probably dig you better too.

IMHO when it comes to markets I think it is ‘wait and see’ time again. I would be surprised If there isn’t another attack sending this lower again pretty soon.

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Macro Man
admin
August 28, 2015 at 2:18 PM ×

Yes, well it wouldn't be surprising if this were a wave 'B'...actually, it would be kind of surprising if it weren't (ie is this were another V shaped correction that went onward and upward to new highs.)

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Anonymous
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August 28, 2015 at 2:50 PM ×

KOCHERLAKOTA SAYS FED HAS ASSET-PURCHASE TOOLS

Sure and they have been using them. Monday seems so long ago. Their arrogance is insufferable.

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Anonymous
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August 28, 2015 at 3:02 PM ×

Smith & Wesson is up 11% today

Maybe people are smarter than we think.

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Carry trader
admin
August 28, 2015 at 3:51 PM ×

Just a point. Cheaper oil may not affect aapl of goog directly but it does help their customers disposable income.

Even if income is saved, it is positive for consumer balance sheet.

But point taken on the length of this bill market.

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CV
admin
August 28, 2015 at 4:16 PM ×

Very astute comments there MM, and I largely agree. I do think, though, that patience is still a virtue as already expressed by some of the other commenters above. A crash like this rarely resolves itself in a v-shaped surge to new highs (or at least, so I like to tell myself!) ... My yardstick here is the FTSE and I think it could rally to 6500 before rolling over and seeing new lows. The upshot, of course, is that while the general market might have a new low in store before starting to look for new highs, SOME sectors (*cough* EM and energy) might have put the worst behind them ... time will tell, but for now I am biting my tongue and looking instead of acting!

As for oil, well a bounce was coming, but the real key here (from a macro perspective) is core inflation. I cannot stress this enough ... look for upside surprises in coming quarters. In other words, "buying inflation" might not be such a bad idea, which takes us back to XOM of course ;).

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Mr. T
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August 28, 2015 at 4:42 PM ×

Bullard, in off-camera remarks to reporters following his televised interview, said that if market turmoil persists, that could affect the timing of the first rate increase.
“The committee does not like to move when there’s volatility,” he said. “If we had the meeting this week, people would probably say let’s wait.”

Yeah, that seems like a great way to disclose market-relevant information.


I think they will do it in Sept, but only because they were able to strongarm the market with all this fed-put talk. I'm not an anti-fed guy but it just boils my blood the way the fed has operated post 2008. I can't help but think that they are letting personal ego and the power of the position take over. They just love the celebrity and the fawning over them for information, but in the process the institution as a whole is much less effective.

Noone asked me to run the fed, but I would think one of my top administrative priorities would be to dramatically scale back the interviews, the speeches, the trips and the general leakage of sentiment and information. The "transparent fed" is bogus because in the end it does not matter what Bullard or Dudley thinks, its what the group as a whole thinks and how they vote.

Regarding oil, at these prices ~$45, the banks price decks look a lot more reasonable and I think you could make the case that redeterminations become less of an issue. Dec. 2016 oil is around $53 bucks, thats not a horrible price for a lot of the shale guys to hedge at.



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CJ
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August 28, 2015 at 4:55 PM ×

Best inflation trade right now is long US 30y BE and short UK 30y BE. The spread between the two is at crisis wides and as a small open economy the UK is much more likely to import Europe's disinflation. It's very unlikely RPI will realize 150bps over US CPI over the balance of time.

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Winginit
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August 28, 2015 at 6:13 PM ×

@MM 2:18

Yes something like that. Although I'm no chartist and I don't do any technical analysing myself. Just read others rarely. Only when it comes to FX I try to listen up.

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Winginit
admin
August 28, 2015 at 6:18 PM ×

@ Carey trader
Yes I know. Winginit was just trying to amuse and the same time make somekind of point that we live in a pretty high tech service society. Cheers

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Winginit
admin
August 28, 2015 at 6:32 PM ×

I meant carry trader. Damn you auto correct

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Anonymous
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August 29, 2015 at 12:00 AM ×

thanks for the Mark Mewton CMT Greywolf link

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Anonymous
admin
August 29, 2015 at 4:57 AM ×

During October 2014 drop, M1-M2 $VIX futures were backwards for just 8 days. This drop is already on day 6. We are going well past 8 days.

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Anonymous
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August 29, 2015 at 4:57 AM ×

Last time September $VIX was at this level - over 26 - $ES_F was 80 handles lower. Ponder that.

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Anonymous
admin
August 29, 2015 at 6:08 AM ×

http://www.bloomberg.com/news/articles/2015-08-28/bofaml-s-woo-explains-how-china-was-behind-one-of-this-week-s-most-extraordinary-market-developments


Woo calling free floating Renimbi by late sept.... get you short AUD on

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Booger
admin
August 29, 2015 at 12:41 PM ×

Repy to Anon August 29, 2015 at 6:08 AM
"Woo calling free floating Renimbi by late sept.... get you short AUD on"

Anon, I think highly unlikely unless this is the end for China. I think it is still a bit early for a currency run on China and I expect in any case they will adopt more capital controls instead of floating. I am instead getting out of my short AU currency position as this oil move has me worried. I agree with Macro anus and reckons there is a good chance we will have a strong counter-trend rally in commodities with oil rallying to $50+ in Sept before further resumption of the downus trendus.

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August 29, 2015 at 7:20 PM ×

Some astute points. It's pretty shocking that a dated statistic, such as 2Q15 GDP, could lead to such a "risk-on" appetite. It's the 3Q/4Q GDP statistics to be worried about.

Agreed that the recovery is unlikely to be 'v-shaped' this time. The world changed/is changing with the deterioration of economic performance out of china, the collapse of the China stock market, and the yuan devaluation. And no, the Chinese government buying stocks, clearly doesn't fix things.

EM isn't out of the woods by any means. Touched on the variety of reasons in my last post.

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Anonymous
admin
August 30, 2015 at 12:05 AM ×

Off topic - Is anyone following QDII2 from China?

According to Reuters "China to launch QDII2 overseas investment scheme soon in six cities -paper", QDII2 will allow Chinese to convert their wealth directly purchases in foreign equity and bond markets.

Will QDII2 provide the next big bump in DM equity markets?

I'm not quite sure where to go read more about this. Anyone else following along?

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Anonymous
admin
August 30, 2015 at 3:51 PM ×

The masters of the universe score another coup and get their get of jail card entitlement:

http://www.securitiesarbitration.com/news/2015/08/28/s-e-c-settlement-with-citigroup-holds-no-one-responsible/

A big screw you to American citizens.

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Nico G
admin
August 30, 2015 at 7:04 PM ×

meanwhile Bill Clinton delivered 215 speeches totaling over $48 million in the four years Hillary Clinton was Secretary of State. Er 'speeches' have become a way to get paid back all the money you missed while in office

those cunts have made it SO hard to love American those days. having to read about (financial) corruption every day is the one curse of the trading job

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Macro Man
admin
August 30, 2015 at 7:53 PM ×

Nico, while I agree with the sentiment, can you please restrict that level of unparliamentary language please?

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Nico G
admin
August 30, 2015 at 10:58 PM ×

sorry it's my Australian nanny she uses the word all the time

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Carry Trader
admin
August 31, 2015 at 12:56 AM ×

sure it's always the aussies fault.

btw nothing like sunday night futures dump that will get erased by monday morning.

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washedup
admin
August 31, 2015 at 12:59 AM ×

Well the next time the market rallies and she has to change your diaper use the opportunity to tell her to watch her mouth!
Sorry Nico u walked right into that one - good luck this week. Looking good for shorts right now with Fischer's mealy mouth and China's equity buying moonwalk.

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Anonymous
admin
August 31, 2015 at 1:14 AM ×

Nico G

When Jeb Bush left his Florida governors job, he earned millions for no show jobs at Lehman and Barclays. When asked, he could not state what he did for either of them. While at Barclays, the bank was charged with gold price fixing, ISDAfix manipulation, foreign exchange market rigging, dark pool fraud, on and on. Since he left office, he made about 29 million, half from Lehman's and Barclays, the other half from various corporate boards he was appointed to. Sorry to say, just another dirt bag. They are all the same.

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Anonymous
admin
August 31, 2015 at 1:20 AM ×

Long $ES_F 1966 as hedge for long $VIX positions. Will probably cover with calls sometime this week (same as last). Premium still large.

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Anonymous
admin
August 31, 2015 at 1:35 AM ×

Retribution is an art.

FT:"China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilizing the market”, according to senior officials.

"...authorities are planning to sharpen their focus on investigating and punishing individuals and institutions they believe have taken advantage of the state bailout to make profits or have obstructed the government’s attempts to shore up the market.
Late last week, the country’s securities regulator summoned senior officials from 19 brokerages, equity exchanges, futures exchanges and government-controlled industry associations, and ordered them to step up oversight of the markets.
The regulator said 22 cases of insider trading, market manipulation and “spreading market rumours” had been handed over to the police.
Last Tuesday, following a 22 per cent fall in China’s stock market over four trading days — the worst drop for almost 20 years — police detained 11 people suspected of “illegal market activities”."

When you are detained in China, you are dead.

“You must pay for everything in this world one way and another. There is nothing free except the Grace of God. You cannot earn that or deserve it.”
― Charles Portis, True Grit

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Anonymous
admin
August 31, 2015 at 5:18 AM ×

"hey buy more shares"
"I got enuf shares....."
"Tony says you need more kapesh...."


China’s securities regulator asked brokerages to step up their support for share prices by contributing 100 billion yuan ($15.7 billion) to the nation’s market rescue fund and increasing stock buybacks, according to people familiar with the matter.

http://www.bloomberg.com/news/articles/2015-08-31/china-said-to-ask-brokerages-to-boost-market-and-buy-back-shares

Like a Sopranos episode

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Anonymous
admin
August 31, 2015 at 4:42 PM ×

It was the dang press, of course....
https://www.washingtonpost.com/news/worldviews/wp/2015/08/31/china-pins-market-plunge-on-financial-journalist-airs-confession/

-Whammer

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Hwa Jurong
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September 8, 2015 at 2:57 PM × This comment has been removed by a blog administrator.
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