3 charts, 3 stories

The chart:  German harmonized inflation

                               source: inflation.eu

The story:  The flash estimate of German HICP surprised to the downside yesterday, dipping into negative territory once again.   The risks to today's Eurozone figure therefore look comfortably skewed to the downside of the consensus expectation of flat y/y.  Now, a lot of this reading still captures the base effects of oil; it's easy to forget that Brent (in dollar terms, at least) is down 50% from its levels of a year ago.  Come the beginning of next year, the bulk of that base effect will drop out and German/European inflation will gradually trend higher (excepting a further 50% collapse in oil, of course.)

That having been said, it does look increasingly likely that Draghi will have another go at the tide of disinflation, ordering it to recede.  Perhaps we'll need to wait for December's forecast round or even early next year, but more easing (be it a further depo rate cut or more QE) looks to be in the pipeline at sometime, even if its difficult to have any confidence whatsoever that it will work.

In any event, the euribor market is willing to buy into the story, even if Eurozone equities are not.  (Though it may be the case that the latter has been suborned by too much length and more stories of automotive malfeasance.)  Yesterday saw a roaring trade in upside euribor option strategies; even though ERM6 has just a 17 tick range over the last six months, a large number of call flies went through yesterday requiring a further 17 tick move to hit max payout (and a 7 tick move to hit the at expiry breakeven.)  OK, at 2 ticks these structures aren't going to break the bank, but Macro Man does find it interesting to see the sudden uptick in volume in a market that he's kind of had on auto-ignore for some time now.

The chart:  USD/CNH


The story:  Remember that time 6-7 weeks ago when USD/CNH was going straight to the moon and taking USD/CNY with it, etc.?   Well, a funny thing happened on the way to the meltdown....it didn't happen, at least not yet.   While Macro Man has had a more constructive (or at least, less destructive) view on the RMB in its various guises than most commentators, he doesn't think the resilience of the CNH represents any sort of vindication other than a very short term one.

Much of the price action on the way down in USD/CNH over recent weeks has been characteristic of official selling; as a general rule of thumb, it's not very surprising that something goes down when a seller with a $3.5 trillion war chest lets a few go.  Then again, recent scuttlebutt is that the last few days' weakness is due to month-end flows rather than PBOC selling.  That, of course, serves as a timely reminder that China manages to generate a hell of a lot of foreign exchange revenues through international trade; this is a prime example of how it can offset capital account outflows. 

All this having been said, now that the CNH and CNY have come together (CNH is actually trading slightly stronger than CNY for the first time in a while), things could get interesting.  There has been a school of thought that the Chinese authorities wanted to harmonize the market pricing of on- and off-shore RMB before unleashing the full fury of the market mechanism (what with its 2% daily trading band.)  Well, now they've done it, so if the RMB were going to become more of a float than a peg, it could and should happen soon.   Stay tuned.

The chart:  The S&P 500 in 2003-2004


The story:  Observe how in the run-up to the first rate hike of the previous cycle (marked by the black arrow for you under-30's), the SPX whipped around in a range for 6 months after the Fed first hinted that something was rumbling.  Granted, that range was a lot tighter than the one we've been mapping out over the past few weeks...but then again, it wasn't as tight as the one the SPX had traced out for the six months prior to the August swoon.

In any event, equities actually rallied towards their highs in the run-up to the first rate hike...only to sell off to fresh lows immediately afterwards.   At the time, there was plenty of commentary that the Fed would only be able to manage a few hikes before having to pause and possibly reverse.  In any event, once it became apparent that the US economy was not, in fact, going to collapse, Spooz recovered...before going on a rip-snorting rally into year end.

Now obviously, the analogue is not perfect.   There is no housing bubble to spur (unsustainable) consumption growth, and today's credit cycle is much more mature, as holders of Glencore and other commodity-based paper can ruefully attest.  Nonetheless, from a market psychology point of view, the precedent of the last cycle may prove to be a useful one.  After all, history may not repeat, but it often rhymes. As such, from current levels Macro Man finds prognostications of an imminent meltdown  or melt-up equally unconvincing.   Once the rate hike happens (if it does) and a month or two pass without the data rolling over....it will be a lot easier to argue a bull case for reasons other than short-term mean reversion.
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Anonymous
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September 30, 2015 at 7:40 AM ×

agree with eu analyses , I'm still eyeing us/eu spread which has done ok last few days after getting smoked earlier - feels positioning in eu equities might have got trimmed now into quarter end and like a long bias for the book, so running 2long eu vs 1 short us, with some otm calls long on spx...

High yield has been a concern for me all year but think that any dead can bounce there might lead to a rip in equities- which i will look to sell in the spx

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Nico G
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September 30, 2015 at 8:24 AM ×

we're in the middle of lalaland in terms of investment. it is time to trade on a much smaller timeframe than usual - days, weeks. i am long into that obvious end of quarter ramp up, and will short the quarter close tonight Europe is not out of harm's way just yet so beware

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Nico G
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September 30, 2015 at 8:26 AM ×

1900 spooz at end of quarter would be a very nice swing short

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Anonymous
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September 30, 2015 at 8:51 AM ×

Russia approves use of force in Syria (airforce).

Saudi FM says Assad must be removed, with military option if necessary.

What could go wrong?

Been a decent rally in EU/US alright. with elements of Europe in a bear market, that spread is best to play the swings as Nico said.

The old adage, it's a bear market don't you know appears to be ignored. Divies will eventually have to be cut. How will yields look then?

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Anonymous
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September 30, 2015 at 10:57 AM ×

FT: having sold a lot of "stuff" (EMs, Tech, all things commodity related , HY...), and not having bought much of anything except some govies, institutional money managers are clearly underweight their equity benchmarks in particular and risk in general;
A strong rally today would position them for underperformance into quarter end.
Moreover, I predict a face ripping rally into year end (rate rise or no rate rise) with institutionals running after the market.

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Anonymous
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September 30, 2015 at 10:58 AM ×

RE AN 851...divies in europe are trading with a big inversion already...estx div curve is pricing in aggresive divs cuts already...agree trading around a core position but I'm buying more and selling less in europe....dont want to get too cute...happy to give it a stab on the long side in eu

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washedup
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September 30, 2015 at 11:28 AM ×

MM - thx for that post - the differences from 03-04 on spoos are too numerous to have it even appear in the cohort, let alone be a close analogy - I would argue that its the marginal change in liquidity conditions that counts, and that the fed started tightening when they stopped expanding their balance sheet last Q4, so in that sense we have already gone 12 months into a 'tightening' phase, and thats not even counting the effect of the dollar - in 2003-04 the dollar was about to go pear shaped for multiple years which de facto eased as the fed tightened - you mentioned housing of course.
There are, of course, similarities to 1998 in that fed badly wanted to tighten further but, ahem, was repeatedly forced by market conditions not to! The other similarities have been discussed at length by this community.
I like ur euribor idea a LOT - must confess I've never traded it but will investigate how to.

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Anonymous
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September 30, 2015 at 11:49 AM ×

"Once the rate hike happens (if it does) and a month or two pass without the data rolling over....it will be a lot easier to argue a bull case for reasons other than short-term mean reversion."

The data won't roll over. Not on a 1/4 point rise. Does anybody seriously think it will? Unlike past cycles, the Fed isn't hiking to slow the economy.

As far a rip-snorting rallies, well yes, anything is possible. But after tax US corporate profits are currently running around 10% of GDP. Historically, a very high ratio. Hard to see how they'll get much higher - companies have refinanced and labor costs can be contained for only so long. And the dollar won't be helping exports. So profits may grow a few points faster than GDP. Dividend growth has already slowed sharply. It seems the only thing holding this up is TINA.

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Anonymous
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September 30, 2015 at 1:05 PM ×

non 11:49

You are right about corporate profit but there is another variable i.e. PER.
I'm not saying we'll see profits go through the roof but based on positioning and money flows , I think we will see some PER expansion.
After all, all that money which is leaving EMs will have to go somewhere when the dust settles.
It so happens that I think the long end of the treasury curve is going to start to misbehave which will leave few other choices outside equities; I would further add that the flows out of equities from risk parity funds would have to reverse if we get a bit of treasury volatility;
The consumer seems take all those "end of the emerging world" stories in stride and the FED wants to be behind the curve.
A nice bullish cocktail I would say once those trouble times are behind us....

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Anonymous
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September 30, 2015 at 1:35 PM ×

I mentioned Russia earlier. They have since demanded US leave Syria and begun air strikes.

If they did shoot down that passenger plane in Ukraine....

Anyone long equities or did other side of an event would do well to reasses that risk now.

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Booger
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September 30, 2015 at 2:24 PM ×

It's a bit of a battle of the bulls and bears at this point. I cast my chips on the bear side this time. Reloaded shorts on Spoos at 2000, which I reckon is good value.

DAX is a nice long scalp when the selling gets overdone. Very impressive volatility in the DAX this week. It will be interesting to see if 9300 holds next week.

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Nico G
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September 30, 2015 at 3:14 PM ×

today's close is probably as good a short entry as last FOMC. They are taking end of quarter window dressing to the next level i did not expect my second moronic long to stretch that far and i am out

what a game of idiots, what a world of crooks the only thing that helps keeping sanity is the good old Jesse's Café Américain

btw corporate buyback came under scrutiny in August... that is not to say that such (legal white collar crime) activity would be reduced in the future but i doubt it will keep 2013/2014 intensity. Another headwind for US equities

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Anonymous
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September 30, 2015 at 3:17 PM ×

FT: it's possible that we go back up even quicker than last October; underweighting in equities has rarely been so pronouced

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Nico G
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September 30, 2015 at 3:34 PM ×

the underweighting is due to smart money having exited this snakepit early in the summer, Sir. It does not mean that they will come back at all until there is enough fear and great value in the market

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Anonymous
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September 30, 2015 at 3:51 PM ×

FT@Nico
True, but if the market starts to go up, they won't be able to take the pain for long.
Fundamentally I agree with your view that there will be a collapse (50 to 80%) but I think we're in a 98 like config with one more up leg over the next 12 to 18 months. We need some sort of final mania and we didn't get that. This has been the most hated bull ever and the participation rate is still low.
Congrats on your shorts, I didn't make much on the downside as all the false starts worn me down before august.

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washedup
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September 30, 2015 at 3:55 PM ×

Nico - I think FT is referring primarily to mutual funds and passive allocators - 99% of the financial community gets paid simply to buy stocks no matter what - I do know how u feel about that. Anecdotally, hedge funds have been trending increasingly bearish through the summer, and I suppose I am OK with them being characterized as 'smart money', but just remember big selloffs and bear markets are characterized first and foremost by some game changing liquidation by passive and mutual fund length and not the so called smart money pressing shorts, who represent a tiny proportion of capital - in some sense hedge funds just get ahead of the aforementioned liquidation, which tends to occur glacially with a broad panic for a 6-9 month period somewhere in the end.

I am open to the idea that one may be beginning, but my gut still tells me its a few months/quarters away - we will see.

I did go back and look at previous 5 years price action at 3rd quarter ends - they were all small selloffs. Take it FWIW.

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Nico G
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September 30, 2015 at 3:57 PM ×

5/5 wash i stand corrected and yes the pain/liquidation has not started yet. It will start under 2014 low and press down to silly levels

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Anonymous
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September 30, 2015 at 4:34 PM ×

nice where do you see that buybacks are 'under scrutiny'
if anything i think the market is still looking for these plays

also i think crude is at critical levels here... it could push the market into another leg higher/lower

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rp
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September 30, 2015 at 4:41 PM ×

I would dearly love to follow the 98 script, but i can't for the life of me figure out what will drive that rally. Maybe in the space of the next 12 months we see positive EM recovery/bottoming out of this inflection point/growth recession (and in the grand scheme of things it is). A lot of these US stocks are priced to perfection, even with a more robust labour stats there's not that much scope for getting realistic valuations esp in the technology space.


I've picked up a few European single names but only about 25% of what I want to do, waiting for October surprises to get out of the way.

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Macro Man
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September 30, 2015 at 4:45 PM ×

That crude chart looks like a continuation pattern to me, which would argue for higher prices. Kind of goes against conventional wisdom of dollar uber alles.

FWIW, my reading is that the traditional fundamental warning signs that herald proper equity bear markets remain largely absent, so would suggest that all this is tactical shuffling with nice tradeable moves. With all due respect, a lot of the uber-bearish comments /price targets here and elsewhere seem to boil down to "I don't like the price", which doesn't strike me as a particularly compelling argument.

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Polemic
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September 30, 2015 at 4:50 PM ×

I can't believe that anyone who was thinking of shorting or hedging longs in equities wouldn't have done so by now. The risk comes from general valuations falling and those that only respond once data is released acting - i.e. divi announcements, rate comparables moving etc. Yes that is to come in many cases but as pointed out above divi curves have a lot priced in.

I also don't think we should start adding to shorts ( if you have room considering you are already short) because you think world war 3 is about to erupt in Syria with the Ruskies and US taking pops at each other. Tbh I am glad the Russians are in on the act and its a bit arrogant for the US/west to think they should be the only ones running the intervention show. I'd be shittting myself if I thought russians were coming. A bit like knowing you're facing the Ghurkas rather than a load of spotty 18yr olds from Aldershot. I would imagine the russians don't go through the same handwringing when it comes to shooting a few prisoners either whereas the UK would check they weren't Brits and if they were send them home on benefits.

the word 'just' is being used a lot today. the rally is 'just' month end, 'just' positional adjustment and 'just' you wait and see it will all fall over again. 'Just' is a magically dismissive word, in the car of my wife she uses it to freeze time, applying it when we are late and she just has to go and do something that tales a long time. I 'just' think that its application today is a huge betrayer of positioning.

Now is the time to test things. Europe closed, fixes booked and if this is 'just month end then the futures can now start falling hard. If they haven't by gin and tonic time then maybe we'll have to revisit that 'just' month end theory.

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Nico G
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September 30, 2015 at 5:26 PM ×

yep stoxx futures petered out after cash close

i don't get the 98 analogy. China was nowhere that important as it is today. Same for Brazil etc losing 'clients' like Russia and Brazil today, let alone CHINA is much more important than Thailand &co in 98

look at USD debt of Brazilian companies... the whole B of BRIC is going bankrupt, between a rock (Fed about to tighten) and a hard place (corrupted society at large)

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washedup
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September 30, 2015 at 5:47 PM ×

Nico - I don't have an easy answer unfortunately for that 1998 debate, but the heavily increased influence of EM is somewhat balanced by sustained lowered rates in DM (just for reference the 30 Yr was 5% after LTCM and the greenspan cuts - now its 2.9%) - IG credit is roughly the same, but global GDP is 80% higher - so are corporate earnings and equities of course.

If I could find an analog that had the 1998-2000 idea minus the dot com mania, I would probably end up with a long dated trading range in equities of say 1600-2300, with very weak returns for long dated investors and next year could be a meh year. If you insist that for some reason we are likely to test the bottom of this range in the next 5 minutes, I can't argue but would not join that bet.

Like I have said repeatedly, if wage inflation picks up, crude stops contributing deflation, and the 30 Yr goes to 4%+ with the Fed under pressure to reduce their balance sheet that is a complete debacle and could send equities much, much, lower - we will see.

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Anonymous
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September 30, 2015 at 5:48 PM ×

And out the lows the dax goes... one way since cash close.

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washedup
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September 30, 2015 at 5:56 PM ×

and Pol - I'm 'just' happy to see u back on the board - I thought u had retired in disgust and moved to Croatia!

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Anonymous
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September 30, 2015 at 6:00 PM ×

The Dax spent virtually all last year in a range between 9000 and 10000. Hardly a surprise that it hits the sweet spot and wants to play.

The Vix says nothing about market direction for me ,but settling here with long term averages having switched around it's accurately reflecting the increase in short term volatility and that switch suggests it's here for some time.

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washedup
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September 30, 2015 at 6:14 PM ×

On a complete change of subject, does anyone have a plausible theory for why carl icahn is on TV everyday warning about how the world is about to end, while simultaneously owning such apples of everyone's eyes as, well, AAPL, LNG, and FCX, not to mention billions worth of credit exposure?
And I understand how Trump is his best pal from the 80's predators's balls, but seriously, Carl, the guy whose stock answer to every question is classy-huge-u'll see is the answer to our prayers?

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Nico G
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September 30, 2015 at 6:19 PM ×

for you wash

http://thereformedbroker.com/2015/09/29/review-house-of-carls-season-one/

lol

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Polemic
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September 30, 2015 at 6:25 PM ×

Thanks Washed up .. perhaps I should have stayed in Croatia but they are busy trying to ship out immigrants at the moment.
I'm around and posting on my blog since the Croatia trip. You can catch the long form version of my thought there. mostly bollocks of course. TBH I hog it wrong and thought HCina slowdown story too obvious and discounted much of it so have been caught out by the recent commodity and stock meltage.

Like MM I am loath to call this a traditional melt down and feel that the play book from here may well be an attempt to take things lower over the next coupe of day that fizzle and then things rally back to norms ( 1950 2000 spx ) and then ... who knows..

EM isnt digging things out of the ground for the chinese as much I understand but they are still economies that have a way to go to catch up the west and so latent demand for lifestyle improvement won't go away .. even if we in the west have enough 'stuff' to sink a battle ship in our garages and lofts. Africa is of interest still. ( Largely forgotten in today' meme. )

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Anonymous
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September 30, 2015 at 7:24 PM ×

FT@wash 6:14 As he said quite a few times, he is on average market neutral (short futures vs single names) but plays around with the future position....

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Leftback
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September 30, 2015 at 9:15 PM ×

LB repeating his call here for a good old-fashioned face-ripper [UK translation: ripsnorter] of at least 5-10%, that might actually roll on for a couple of months if the vol sellers really gain control again and start crushing ursine testicles in the Q4 juicing machine as the 2015 Performance Steeplechase nears its climax and each nag turns into the home stretch.

Among sundry other Contrarian Indicators we had Criminal Carl calling for apocalyptic selling yesterday, which is what the nasty disgusting old toad always does when he wants a good EoQ dump by tiny punters so he can gorge himself on cheap stocks.

TV tossers all bearish to a man (or woman), Cramericans taking cover under their office desks, and here is our very own Nico swing shorting every ten points on the Spoos. Nico, mate, look, I might well stand corrected tomorrow morning or afternoon, but do you know what happens on the average to blokes who short into the quarterly flow of funds? MuFu managers have a load of new ammo and they are going to go to work Thursday and Friday. So obviously, being nice guys here at Falling Knife/Lazy Hammock Capital, we do really wish you well at all times, but we'd rather be long calls than puts this evening, and in fact... we are, b/c we're not sure you are thinking straight.

It seems almost superfluous to mention the following factoids: the ADP number was solid, the US economy is clearly just chugging along at its usual pace [hint: Goldilocks number ahead on Friday], there now seems little likelihood of a Fed rate hike until December, and a look at the chart for US10s and 30s reveals that fixed income isn't looking very constructive, whereas crude has been looking firmer for a while now, and China isn't going in the dumpster every night like August. This is all a recipe for a decent bounce in equities, b/c well, TINA. Europe and EMs likely to outperform Spoos, if only b/c they are the global equivalent of "beta" and "most shorted" respectively.

Please send abuse to the usual mailbox...

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abee crombie
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September 30, 2015 at 9:31 PM ×

Nice day in MLP space. Uber volume. Lets get a follow through.

Ichan is funny. I didnt listen to his rant but if you look at his holdings its full of HY turds. FCX, CHK, NUAN, CHK, RIG. He should be hedged with high yield indexes bc he is buying the bottom of the barrel with those ones.

ISM under 50 tomorrow wont be good though. And there is a good chance we get that

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Anonymous
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September 30, 2015 at 10:20 PM ×

anybody out there NOT expecting an Ism sub 50 tomorrow???

i've never seen ism get so much attention in my 18 years of trading- yes moves are ascribed to it post release but not so much airtime before

anyway, i think us economy is more serivices ism now than manufacturing....trading around core long book and think next 10% is up...., vix and skew is high so best way to play for me is long calls financed by put sales....you can get 3/1 depending on strikes/maturity

good luck all

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Nico G
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October 1, 2015 at 7:33 AM ×

anon 10:20

long call short put you intend to let that expire? or the round trip will cost you $$$ in fees considering your risk profile you are better off buying Eminis

LB

you just have too much attitude mate, so pontificating, so patronising, for meagre results for you have been wrong more times than i have yet saved by all the jargon you like to show off online where everyone must think you're an Ace. i wish Hammock capital a fraction of my profits this year. Luckily you can sit on your ass and trade fuck all for a period of time, avoiding high volatility like a good boy and mocking more active trading styles. Shame on you you were nowhere to be found during August storm.

I remember a good anecdote. How you were once buying Russian shares totally blind. Your poncy financial analysis patois still made you sound like the Specialist except there was no analysis to be made on Russia (there was simply no accounting like i warned you over and over) I can imagine how many times you'd confuse your investors (if you have any) with a thorough, encyclopaedic list of pedant parameters on why your trade went wrong. Anyway enough of that we have different timeframes and do not help, rather irritate each other most times.

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Anonymous
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October 1, 2015 at 8:37 AM ×

FT: sometimes I wonder if caustic comments (if not outright personal attacks) are correlated to position stress....
The former gentlemanly nature of debates is getting lost...not good

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Anonymous
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October 1, 2015 at 10:17 AM ×

with all due respect, easy on the blow nico... leftback is making an honest use of fake-cockiness, irony and self deprecation... btw commodities tremendously lacking in your recent posts.... nobody incinerated you when you had the wrong position and time frame last year, (and the year before, though i guess those were still profitable ones with your effective money management skills)... you words are so insightful when you leave the emotions at sea... pls come back nico, your angry bitter bear of a ghost is borderline bullying... pretty please.....

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Macro Man
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October 1, 2015 at 1:25 PM ×

Nico,

As noted the other week, please do not lower yourself to personal attacks. You're better than that, and it lowers the tone of the room. Thanks MM

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Nico G
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October 1, 2015 at 1:42 PM ×

MM

everyone is under pressure here unless they are paper trading. I am not playing with others' money i punt futures for a living and some do not seem to have any knowledge of the mental tension involved, let alone respect. I am not lowering myself at all by responding to mockery, this is my personality, i box in real life here we just have words to use. Apologies.

while we're at it FT,

you mentioned the lack of gentlemanly nature but there is no gentlemanly nature in future trading. On your next trip to Chicago check one of the last pit at CME. A realm of beasts. In a way it is very sad that all turned electronic - both trading, and those forums where abuse can be safely thrown at you behind an anonymous screen. Over and out!

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Anonymous
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October 1, 2015 at 2:11 PM ×

Nico, sorry for not signing earlier, i'm anon 10.17 aka JD... the beasts you are refering to are first and foremost a bunch of bullies...i got trained by them when i started options trading 15 years ago...i respectfully disagree with you, there isn't an aspect of this floor trading that is to miss... MM can delete any abuse from this forum, whereas the abusive idiots you are refering to do real damage, for let's be honest a lesser job, except for their bank account... and for disclosure i had very decent prop trading career thereafter still... my point is i really don't see much point in the angry upset variations of your intervention..my two cents...above you as MM said much more eloquently...
alternatively, you replied to anon 10.20 about the danger of not trading risk reversal ratio... why not offering insights... buying back your short put with one call when they're worth the same, then selling a bit of future againt the remaining one or two calls to create a free gamma position...
that said, after years of following this blog without commenting, an appreciative and respectful massive 'thank you' for the authors, MM and its predecessors, is in order, as well to you nico, and lb and polemic, cpm ppi, etc, for sharing your insights for so long with such swagger!!
JD

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