Takeaways from Yellen and EM

Here are three takeaways from Yellen's speech:

* Somehow, the Fed's estimate of the long run trend in inflation has not budged from 2% since the mid-90's, despite a straight-line decline in durable goods prices, globalization, and the decline in...err.....the long term trend in actual reported inflation.

*  The reason for this is that the Fed's estimate of the long-term trend in inflation is based on the output of a macro model (y'know, the kind that failed to see the crisis and has completely misjudged the shape of the recovery) rather than on the actual trend of inflation in the US and globally.   During her speech, which focused on inflation dynamics, Yellen used the word "model" 13 times; she used the words "globalization", "China", "trade", "outsourcing", and "non-tradeables" a grand total of zero times.

*   Take whatever you want from her comment that she anticipates raising rates by the end of the year.  Unfortunately, when the inputs to your decision-making process are garbage, the output is likely to be garbage as well.

Switching gears, Macro Man would like to make a few observations about emerging markets, generally and specifically.  Chances are that unless you are over 50, most of your career has been spent with EM in a secular bull market (albeit with the occasional hiccup.)  If one believes that price ultimately dictates trend, then a pretty good argument can be made that the halcyon days are gone for the foreseeable future.   Over the last couple of weeks, the ADXY (i.e., the Asian currency index) has broken its long term support dating back to the beginning of the millennium.


What's particularly telling is that Chinese slowdown notwithstanding, Asia has been an oasis of relative calm in comparison with the debacles in Brazil, Turkey, etc.  A primary reason for that is a legacy of the Asian crisis- namely, that most Asian countries have not taken on the type of external debt that was their undoing in the 1990's.   (While HK and Singapore score poorly on the chart below, recall that they are international financial centers and the chart only shows liabilities, not assets.)  Brazil and Turkey, uncoincidentally, score very poorly indeed.



What's notable is that even cyclically, there are relatively few changes in trend for the ADXY; as we know with EM, serial correlation is very high, and downdrafts tend to be very steep (and overshoot.)  Macro Man crafted a very simple model to test the hypothesis using monthly data and the 2 year moving average.   Simply put, if the ADXY is above the MA, the model's long, and if it's below it, the model is short.


Note that this model is really just trying to gauge the efficacy of the 24 month moving average as a predictor of future price action.  The results above do not account for transaction costs or carry, both of which would detract from actual performance.  What the model does suggest, however, is that when the ADXY drops below that moving average, as it did last September, it tends to keep going.   To would-be buyers of EMFX: caveat emptor!

Finally, a bit more on Brazil.   USD/BRL cratered today on central bank selling, providing some hope that the worst is over.  Perhaps it is, and Bacen's magic beans will work.   Color Macro Man skeptical- does anyone else remember the 2014 emergency rate hike that "saved" the TRY 70 figures ago?

One of the unfortunate unintended consequences of ZIRP-world has been a tendency to focus on nominal rather than real rates.   However, as veteran EM watchers will attest, when it really hits the fan and inflation becomes an issue, real rates matter.  A lot.   With the help of a mate, Macro Man was able to get pricing for the Brazilian DI curve, which provides insight to what's priced for Bacen over the next several years.

Simply put, to Macro Man's jaundiced eye, it doesn't look like enough.  Observe the reaction function not only during the early 2000's currency/inflation scare, but also the mini-inflation scare a decade ago.   Unlike the US, Brazil is (more than) capable of having a domestically-generated inflation scare, and Macro Man wouldn't be surprised to see inflation tick another 3%-5% higher given currency pass-through and a negative feedback loop.


History (in Brazil and elsewhere) suggests that high inflation countries with large current account deficits and external funding problems need to jack up real rates to put a muzzle on currency crises.   Right now, the curve isn't pricing much in the way of higher real rates given the inflation outlook; understandable, perhaps, given the negative carry of being paid at 17% (while receiving a DI rate currently in the low 14's), but nevertheless wrong.

Macro Man would expect real rates to approach 10% before it's all said and done, with Bovespa P/E's in single digits (as they were a decade ago.)  As it is now, the forecast PE for Brazilian equities (per Bloomberg) is roughly the same as that for Germany.  Sure, Germany's got VW, but if you've seen a chart of Petrobras CDS recently you'll know that Brazil would love to have that kind of "first world" problem.

As it is, it's dealing with emerging world problems- and Macro Man cannot help but think that things will need to get a lot worse and overshoot before they get better.
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Anonymous
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September 25, 2015 at 9:45 AM ×

Quality.

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Booger
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September 25, 2015 at 10:06 AM ×

Yes, I am eying those 100 year petrobas bonds, not! Actually petrobas bonds do not seem to be pricing in enough risk either.

Spoos looking to be very shortable here so I'll bite.

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Adrem
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September 25, 2015 at 10:09 AM ×

Must say you show a high dedication to duty to even bother to read what Yellen has to say leave alone analyse it. But we are all grateful for your valiant efforts. Once heard one of the Governers in an interview saying how much they used stochastics now in their aasessments of policy moves and I thought "What absolute drivel". Having been through a time when a famed chairman simply said he took away the punchbowl when the party got too rowdy.

Quite apart from today's commentary, I am no chart technician but there is something very striking about the major indices, ignoring Latam.

The DAX, Stoxx 600, HSI, ASX, over 2 years, and the FT 100 over 3 yrs, all of them have got a big hump.

But not so the Spooz and Dow. Are these two about to play catch-up?

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washedup
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September 25, 2015 at 11:58 AM ×

MM - you would find the continued belief in the taylor rule quaint and funny if it weren't so dangerous - that said, to invoke wayne gretsky's focus on where the puck is going to be, one implication from your EM graph is a 'capital going home' theme for the next decade, which would imply a reversion to mean in those inflation trends - I think its possible the taylor rule misses the other way for the next 20 years (i.e. negative labor productivity, with inflation surprising to the upside due to skills issues) to make the model quite the statistical champ over say 50 years - put differently, if they continue their adherence to this model, then some day in our future, a fed chieftain will be criticized for keep rates too high while the economy is in a recession!

She had to be given medical attention (wish her well on that front) - made me wonder how much stress these guys must be under these days.

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Booger
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September 25, 2015 at 12:42 PM ×

MM, I think we have to read beyond what the fed says to how that coheres with their previous and current behavior.

I read this comment from Mike Ashton recently which I found very illuminating:
"I suspect they will talk about tightening until a short time before they decide to ease. For some reason this Fed believes that TALKING about tightening gives them credibility, so they'll keep that up, even though right now it's not in serious discussion... the "negative dots" are interesting in this way: there are plenty of reserves so there is no reason to do QE. Instead if the Fed wishes to stimulate then they ought to lower IOER to a penalty rate..."

Why do they not lower IOER, and why did they not do this before QE2 or QE3 ?

Anyway that is the main thing that worries me about shorting spoos, but I figure they will wait for some real damage before doing any easing.

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Macro Man
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September 25, 2015 at 1:08 PM ×

Why not move to a penalty rate? Simple. 1) It would be an unmitigated disaster for the money fund industry and savers if they were to get charged for keeping money on deposit

2) Banks aren't going to lend the money anyways because of regulatory incentives.

Sorry, but the comment that you quote looks like the worst kind of wishcasting to me.

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Leftback
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September 25, 2015 at 1:32 PM ×

Hope Dame Janet gets a thorough medical exam, including a neurologist. Brief little absence seizures are surprisingly common and are quite apparent during public speaking exercises. Not 100% sure that's what happened but certainly worth asking.

Good morning to all Shorties! LB offers a high five to CV on this morning's performance in Stoxx, see you in the [virtual] pub at lunchtime, mate. Nico, hope you enjoy a taste of the Cold Steel.

Oooh, US data surprised to the upside. What a shocker. Poor old Mr Shorty. Look away!!! The screens, nurse, the screens...

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CV
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September 25, 2015 at 1:35 PM ×

High five right back at you ... yep, the economic data in Europe has been solid as a rock this week. If the world is not ending, the equity price action is wrong.

Claus

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washedup
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September 25, 2015 at 1:44 PM ×

Out of curiosity, in the unfortunate event of a Fed chief having to step down due to medical reasons, what procedure is followed? Is it a new nomination? Is there a no. 2 (the reference to Dr Evil is purely a coincidence) who takes over?

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September 25, 2015 at 1:54 PM ×

C'mon, guys; high fives are for pikers. Act like you've been here before.

On Europe, the bull case is so glaringly obvious, it seems barely worth elucidating. Maybe that's the problem; too many tourists who were seduced by the slam-dunk narrative now swearing never again to be lured by the Old Continent's siren songs. Seems only polite to help them out of their misery here.

My favourite quirky little market, the Eurostoxx divi strip, is pricing dividend cuts more congruent with a large-scale crisis in Europe. I'll happily take the other side of that one.

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Booger
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September 25, 2015 at 1:59 PM ×

But MM, before 2008, the Fed paid no interest on IOER, then increased it to 0.25%. So the IOER is above the 1 month T-Bill rate now, and actually a contractionary effect on the economy. I was wondering if things were to slow down further, would they a) do further QE, b) go for negative interest rates c) cut IOER... or all of the above ? I am not convinced the Fed cares all that much for savers and an extra less 0.15% interest on their cash deposits.

It is something they have not tried and something the ECB, Denmark and Sweden have enacted without disaster so one supposes it is something they could use before going back to the QE well if things were to get worrisome. They could reduce IOER to zero again without looking too silly and that might be perceived as a stimulatory effect by the stock/risk market

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Macro Man
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September 25, 2015 at 2:06 PM ×

Booger- that UST can auction bills at zero suggests that banks would do anything rather than lend, so I don't think you can say IOER is contractionary. Moreover, obviously prior to IOER the Fed could manage the target (nonzero) funds rate, interbank lending was actually a thing, etc.

If they were to go to -ve rates, particularly with positive nominal GDP growth, the hue and cry from the money fund industry, AARP, and anyone else who has the temerity to hold cash would be so great that the Yahoos in Congress would have a serious look at the Federal Reserve Act imho.

And you say it was enacted without disaster in Europe....but when they imposed -ve rates in Denmark, bank lending rates actually went up. Not really what the Fed's looking for, is it?

ANyhow, I can't believe I am having this conversation. They are so far away from easing it beggars belief, and I have to say that the dalios and Gundlachs who are talking that way are simply talking their books.

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washedup
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September 25, 2015 at 2:07 PM ×

vandals - how do u trade those divi strips? any ETFs on that? thx
Blog the next time we get disaster it will be what is commonly known as an 'unmitigated' disaster - meaning the ability of the fed to mitigate it will be quite low. I do think that as long as its after 2016, congress will panic and finally do something on the fiscal side to help AD, which as we all know has been the missing component for the last couple of years - I suspect a payroll tax holiday will find some adherants.
LB/CV right there with u on the trade, but we're up 20 points on spoos - bit early to be popping corks no?

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Booger
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September 25, 2015 at 2:10 PM ×

Also, how else to make sense of Fedspeak, except that perhaps they actually do think it increases their credibility by talking like they are going to hike, but never doing it.

I mean, fair enough if they do it once or twice but this many times. I don't think they will hike in December either, but they are still taking that it is likely there will be a hike this year! And what to make of the dot plots that there will be 3 or 4 hikes next year. There is only one rational reason I can see for this and it is the one offered above that they really do think it increases their credibility to talk that they are going to hike then not doing it!

CV, LB, nice rally on DAX, congrats. But, you could have made as much going the other way, and it may yet reverse before 10,000!

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Macro Man
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September 25, 2015 at 2:17 PM ×

The reason they flip flop is alluded to in the post- they are operating under a very flawed worldview which they legitimately believe will come good, and are then forced to react and backtrack with surprise when it does not.

I believe their flawed communications strategy is the product of ineptitude rather than malice, which is generally a good bet in most spheres of life.

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September 25, 2015 at 2:22 PM ×

Maybe the China transition is working. Nike posted stunningly good results out of China. The business is mature and the acceleration clear.

A wake up call for China bears...

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Anonymous
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September 25, 2015 at 2:28 PM ×

FT: ineptitude rather than malice....probably
However I believe there is an element of trying to talk up the economy in the face of contradictory data (GDP and service ISM holding up vs FED regional surveys and weakish retail sales...)
So, maybe no malice but a touch of dishonesty; but who would expect anything else? they are half closet politicians after all!

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Macro Man
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September 25, 2015 at 2:37 PM ×

I am bemused that someone who has consistently moaned about the labor market is being accused of trying to talk up the economy. I would reiterate point 2 of the post: she used the word 'model' 13 times. These are academics trying to make policy from the pages of a textbook.

@CJF, thanks for pointing that out.

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Macro Man
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September 25, 2015 at 2:43 PM ×

Without wishing to delve into politics, I will say that the departure of the Speaker of the House does little to sway my preference for euro equities over US.

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abee crombie
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September 25, 2015 at 3:00 PM ×

MM, on Brazil, I think you have it wrong. Brazil is not a wide open asian economy heavily dependent on exports/imports. Its mostly insular. Exports and Imports are as important to brazil as they are to the US at 10% of GDP. And if you've ever played football with Da Silva, you will know they are probably worse than Mr and Mrs Smith when its comes to spending money on junk( sorry consumption). This is a political crisis. Sure the build up in Dollar debt is large an not to be dismissed but its not going to collapse... (famous last words)

http://wdi.worldbank.org/table/4.8

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abee crombie
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September 25, 2015 at 3:04 PM ×

Also on the ADXY, HKD and CNY account for 50% of the index. While they have been steady to appreciating the past 3 years, IDR, MYR, SGD, TWD etc have been going up for the past 3 years

weights of ADXY

http://imgur.com/ovmGQVa

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CV
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September 25, 2015 at 3:10 PM ×

"C'mon, guys; high fives are for pikers. Act like you've been here before."

You're right of course ... I fear we might have jinxed it now ;). Catalonian elections as a banana skin?

Still early days indeed, but the point in Europe is really that you need to tell a story of absolute calamity (from VW, EM etc) for equities not to firm into year-end. I think it is difficult to tell that story, hence the trade. FTSE should ok too actually.

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Macro Man
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September 25, 2015 at 3:10 PM ×

The CDS of PBR, Vale, etc suggest a hard currency funding crisis (as well as corruption in the case of PBR) on a corporate level, which there is ample precedent for.

If you don't call what's already happened to the BRL a collapse, then what qualifies? 5? 10?

5 years ago in the currency wars days when real rates were absurdly low, Brazil had two options: retool to get more productive, or borrow and spend like drunken sailors. They chose the latter option, and the hangover (and bill) is now being presented. Even if the economy is relatively closed, which it is, the C/A deficit as a % of GDP is sufficiently large that external liabilities are important, and need to be addressed. A dozen years ago they hoped it would sort itself out, then had to drop the hammer. Looks to me like history is rhyming if not repeating.

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CV
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September 25, 2015 at 3:19 PM ×

Having been in the "long and wrong" camp for a while in Brazil, I have to say that MM's thesis make a little sense (belatedly!). Or more specifically ... I am tempted to buy a couple of options there (because this is really what many of these names are), I have to contemplate the fact that this won't end until we get one or more big-ticket energy defaults to really shake the foundation. Surely, the government can let one of these whales go and then just buy back the assets at 10 cents, and start again?

I still think Brazil's rate differential will offer the mother of all carry trades since the EZ periphery at some point soon.

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September 25, 2015 at 3:20 PM ×

WashedUp, Eurostoxx 50 dividends trade on Eurex. Front years are liquid, longer dates fall away progressively.

http://www.eurexchange.com/exchange-en/products/did/exd/36892!quotesSingleViewFuture?maturityDate=

If you short Europe, you're shorting a market already pricing earnings and dividend declines, with rates on the floor for the foreseeable future, a domestic recovery and an incipient turn in the earnings cycle off a very low base looking increasingly plausible. What if the world doesn't end?

If you compare Europe to a year ago: the EUR has collapsed, commodities have collapsed, rates have collapsed, especially in the periphery, fiscal policy is no longer a drag, monetary policy is stimulative, and bank lending is turning up after a long retrenchment. And we're priced for earnings and dividend declines - off a low earnings base. All the factors that prevented European earnings from following US earnings trends have systematically fallen away, but some people want to short this market? Sure, anything's possible, but that doesn't seem to me like the way to bet.

Now a year ago is when the tourists were starting to get interested in the European story, and QE gave the tourist trade another shot in the arm. Now all that stock is being puked, but beyond that, I don't see anything to get too concerned about. A solid domestic recovery will trump anything that's happening in China.

However, it must be acknowledged that European stocks never get invited to the weddings, but always to the funerals, so the life of a Eurostoxx bull is never an easy one...

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September 25, 2015 at 3:49 PM ×

MM: of course. And great forum here.
I'm surprised that Nike isn't helping US stox more

I added a table with Nike's China trends over a few years if it is helpful.

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JohnL
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September 25, 2015 at 4:34 PM ×

Here is a chart roll that touchs on much of the discussion today, plus some additional interested stuff.....at least I thought so.

http://goo.gl/5XPMJP

Cheers
Have a great weekend everyone.

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Anonymous
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September 25, 2015 at 5:22 PM ×

@VSMH

How can you say with such certainty that we are priced for EZ EPS declines...

the dividstrip is also a very technical/illiquid instrument so not too much can be inferred

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abee crombie
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September 25, 2015 at 5:58 PM ×

MM, lets look at the case of Russia. They have been locked out of the corp bond market for over a year. Massive devaluation yet no default. or maybe look at PDVSA, which hasnt defaulted yet either (even though they should, IMO). I dont think Tombini is going the route of doing a massive rate shock just to appease some fast money HF.

Brazil inflation is stubbornly high bc of services, which IMO with skyrocketing unemployment will finally be the last straw

http://imgur.com/cJVWztR

As for Vale and Petrobras CDS, well here is your chance. Since vale kicked out eike, they have done a great job. Ore is still in the dumps and has a horrible outlook, I wouldnt buy the stock. But to assume it will default is a stretch. They are going to be the lowest cost producer (though a bit higher than Rio or BHP when you add in shipping to china)

The currency is in crisis for sure. Can it go more, for sure to that as well. I just dont think we are 1998 here and at these prices you are getting paid for the risk

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September 25, 2015 at 6:07 PM ×

@Anon 17: 22

I'm not saying that it can be inferred, but it can be traded. That's where the rubber meets the road. Analysts may have pencilled in handsome earnings growth, but the markets's not there.

Re divi liquidity, 2017 divis, just to take one contract, have over EUR 2bn in open interest, so while we're not talking Eurodollars here, we're not talking about something completely abstruse either.

My main point, however, is about the earnings cycle, and the very low bar to clear. I think shorting into this is a perilous endeavour.

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Anonymous
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September 25, 2015 at 6:30 PM ×

What is the good EU ETF that has upside of EU earnings but not the downside from VW?

Thanks.

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Anonymous
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September 25, 2015 at 6:37 PM ×

@VSMH

still don't get how you are inferring it is a low bar...
I actually like EZ equities, but not because I think others have priced for absolute declines in EPS...
perhaps consensus is expected to fall, but not into -ve growth territory
we are currently at about 5% YoY growth in the SXXP (admittedly this will fall as dgs filter in - perhaps to 3-4%)

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Mr. T
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September 25, 2015 at 6:51 PM ×

As usual I must be missing something. Financials get a bid because "this time the feds gonna raise", and borrowing demand view bolstered by higher eco revisions. Fine. So why are ff futures calling the bluff? Dec. WIRP stands around 44% now.

I've recently found myself in one of those lovely times when pretty much every position is losing money. Good times! It's bizarre to see the haves and have-notes diverge further than I ever thought possible. NKE gets a 10% bump to trade at 30x cashflow...based largely on China outlook? UA gets a 55x multiple based on their projections for China? Yet for what looks like the rest of the world having any exposure at all to China is a multiple-deflating feature?



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Leftback
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September 25, 2015 at 7:12 PM ×

I suspect the NKE earnings are telling us something extremely important. It is this: that most of the sneaker-buying Chinese population doesn't give a monkey's about official government growth statistics, or the Shanghai composite, but they do want to buy a pair of sneakers. This same segment of the population also wants to eat chicken, pork, rice and heat their homes in the winter, and to do so they are going to need a job, most likely making plastic thingumajigs that are sold in the West.

In other words, the Chinese economy will keep on rolling and consuming, irrespective of the capital markets hangover created and experienced largely by speculators, b/c market participation is very low. There are obviously messages here for the earnings of many US and EU-based multinationals that sell goods in China [although see CAT for a counter-example in construction].

So if Chinese consumer is not ending (CHICONE), surely this infers that The World Is Not Ending (TWINE), crude oil demand is not ending (CODEINE), and vol selling is not ending (VOSINE). As for the US and EU, we have just been through a predictable nano-recession that happens every year. It is called August, and is usually referred to herein as a Period of Seasonal Demand Weakness, or Soft Patch, as MM would have it.

Given the above, a 7-10 day slow and painful face ripper into the opening of the Q3 earnings season would seem to be indicated here, based on the yawning disconnect between data and sentiment. You read it here first, in the ramblings of LB, PermaBull. [We've been called many things, but not that]. We are, though, in fact we are about 80% long equities at the moment, our most extreme position in many a year.



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Anonymous
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September 25, 2015 at 7:28 PM ×

@Mr. T,

The natural conclusion is that the transition from investment-led economy to consumption-led economy works, for now.

And you read headlines from FT.com like "New York music school to open China branch" and "China factories struggle to find workers".

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abee crombie
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September 25, 2015 at 7:56 PM ×

@Mr T. Those multiples for NKE and UA are absurd. UA is almost certainly going to be a bad INVESTMENT for ppl here, as it will be really hard to outgrow expectations, IMO..but like you said this market doesnt care

I thought the US might take the battalion from EU this morning but I guess not. HY still in the dumps. Not a good sign.

Maybe I am missing the impending recession and global default pickup but I can't help to want to nibble at HY here. I'm seeing too many 8-10% paper that are not horrible businesses. Sallie Mae paper at 9%. Yes sell the stock but the paper is backed by student loans that the govt guarantees.

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washedup
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September 25, 2015 at 9:11 PM ×

Left - told u and CV not to pop corks and jinx things - shorty slipped through the cracks today

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Piker
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September 25, 2015 at 11:03 PM ×

Mkt will call her bluff. Either 5 yard penalty for offsides or pause for more vols. I'm holding my fire.

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Anonymous
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September 25, 2015 at 11:04 PM ×

For NIKE: "ALL(!) geographies (i.e., not just China) enjoyed double-digit growth in future orders ... except the "emerging market" segment, which clocked in at 6%. For perspective, that segment notably includes Brazil, where revenue was flat during the quarter amid macro-economic challenges and a tough year-over-year comparison given a boost in sales following the 2014 FIFA World Cup."

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Booger
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September 26, 2015 at 4:02 AM ×

abee: with PMI's falling, it does look like growth worldwide is rolling over. China-->Japan and EM--->Europe. The only place holding up appears to be the U.S and whether that starts to roll over will be interesting.

With EM, I think it is way too early to be buying. The worm has turned there and I think the danger is buying too early. As MM says, valuations are not compelling.

I think there is a not an insignificant chance of a blow-up. Brazil I think is reaching a point of negative spiral. China turnaround nowhere in sight, their growth rate to increase consumption share will be 3-4% in the next decade and may undershoot. If EM is in this much difficulty with a miniscule Yuan devaluation, I imagine that things could be worse with a more significant Yuan devaluation, which also seems likely.

That being said, I wouldn't look to be shorting EM at these levels. But I am going to be extra, extra slow to bite on going long. I think one should wait for at least "the double poo" before buying EM. That is the blow up of some domino, then the secondary domino/poo from that. Given the history of EM crisis, there could well be a triple or quadruple poo. Or a delayed after poo like LTCM after the Asian financial crisis.

Something of possible systemic significance is Glencore in a death spiral and their derivative book. That seems possible, although it seems it seems to have only had airtime on ZH and other whacky fringe permabear sites.

Hard to estimate, but another possible area of explosion is the Chinese banking system's exposure to commodities.

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abee crombie
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September 26, 2015 at 10:09 PM ×

Booger, I agree with everything u said. Hence why I am just getting my feet wet. I think you want to have liquidity here. I guess it all depends on your style and objectives. If you are FM or a swing trader, being long here could easily get ugly. However I am more real money oriented. Gotta put some to work here as we've been holding a high cash amount for a while. My only concern is how ugly this can get. My base case is that Spoos find support around 1700 or so. 1650 I think would be a gift. However if a meltdown gets disorderly who knows. That is what I worry about. It seems to me economists always miss the turn in the cycle. I don't see it either but I don't have my head in the sand here. The crappy thing about this job is that 8/10 times when it seems too easy there is something wrong, which i feel like now. But the other 2 times you kick yourself for not going bigger.

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Booger
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September 27, 2015 at 1:00 PM ×

Abee, yes, risk management is the key, whatever the time frame, so you don't ever end up very badly positioned. I guess if you are unlevered, getting started in EM positions here or even oil is not a bad option. I still would stay in cash personally, but then I tend to have all or nothing gambling tendencies.

I am not sure where the support will be with spoos. I think I will keep a short bias for the time being. It should be interesting with EM next week. It looks like there could be a 2-5% rally which I think I will use to get short aud.usd around 0.725 which I missed last week. I think the topside there would be 0.74-0.75. Also I think I will reload short aud.cad. Hopefully there will be a serious drop in cad before the election. I think the reaction of spoos to a minor EM rally will be interesting. If it cannot regain 1950, that is quite bearish in the short term.

I think gold is looking interesting as a potential short, particularly if you have the view that the fed will hike at the end of the year. Personally I don't think the fed will hike at year end, but I think I will take a small short on gold at these levels anyway.

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Leftback
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September 28, 2015 at 1:11 AM ×

LB just listened to some of those very nice "Sunday night in Asia" Bloombird Econobabes, one of whom who fancied the yen as a safe haven, but as they seemed a bit confused about which way USDJPY went that corresponded to yen strength, we think it's a contrary indicator!

It's all very bearish out there sentiment-wise at the moment, yet the economic data that are coming out are soft but hardly apocalyptic. Eurozone gradually improving, with a few hiccups, China perhaps in the mildest of recessions [COUGH 6.5% growth COUGH], and the US pumping along at a 2-2.5% clip, perhaps. If we look at a few of the more important FX risk proxies, both AUDJPY and EURJPY are off the lows and those charts look quite constructive for some 2-4% moves to the upside. USDJPY, the risk Carry du jour, can ramble to 124-125. All of that spells pain for Bears.

Conditions are quite good for one of those Wall of Worry slow-but-steady rallies that can go 4% or so before the bears wake up to a silent-but-deadly exsanguination of their positions, and then as Q3 earnings trickle in and they are better than expected, there is an almighty face-ripper starting two weeks pre-expiration into the October FOMC.

We agree with the short gold [and Treasuries] call here, on a firm USD and reduced demand for safe havens.

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Leftback
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September 28, 2015 at 1:36 AM ×

Another indicator, there are a lot of "cash is out-performing" stories like this one in the mainstream financial media:

http://www.marketwatch.com/story/in-a-quarter-century-cash-had-never-beaten-stocks-bondsuntil-now-2015-09-25

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Anonymous
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September 28, 2015 at 5:29 AM ×

LB,
The 'cash is outperforming' people are so provencial that they don't even mention dollar appreciation vs other currencies.
Appreciated your eyes on the ground in Spain. In the U.S. from Atlanta to Southern Califorina, New York to Charleston I've seen more construction activity lately than in years. If interest rates go up it in the U.S it will be because the economy is growing faster. If the economy is not growing faster, interest rates will not go up. If Boehner is a statesman, not only will he avoid a shutdown, there is a chance that the infrastructure bill will finally be passed. If that passes before he leaves it will be very good for the U.S. economy, and not so for market bears.

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September 28, 2015 at 6:35 AM ×

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Adrem
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September 28, 2015 at 10:44 AM ×

When i looked at the ecllipse through a reflector the moon was clear close up but a soft grey. Then use normal vision to get the whole picture and you get that blood-red image. Predictor of the trading floor?

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Adrem
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September 28, 2015 at 10:54 AM ×

The Catalan vote is further proof that European politics are fissiparous and this is not going to change. Yes, no reason to expect Catalan to go independent but it is certainly going to change Spanish politics just as Scotland has changed the UK. And this tendency is working its way through the rest of Europe. Consequence? Who knows. One would be a fool to try and predict, but it must spell uncertainty big time.

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