The Lady Is A Tramp

With apologies to Frank....

She gets too worried about China's state
She likes easy money and never hikes rates
She never bothers with data that's great
That's why the lady is a tramp

Doesn't like crap games with credit or bonds
Won't diss the market unless you are long
Won't dish the easing unless it goes wrong
That's why the lady is a tramp

She likes the cash free rate of zero
Feels like a hero
Shorts broke, and that's OK
Hates the strong dollar, its strength she would damp
That's why the lady is a tramp

She gets too worried about China's state
She likes easy money and never hikes rates
She never bothers with data that's great
That's why the lady is a tramp

She supports crap games for sharpies and frauds
So they can drive Bentleys, not Chevys or Fords
Gets contradicted by others' sharp words
That's why the lady is a tramp

It will be interesting to see if Yellen sings from the same hymn sheet this afternoon as she did last Wednesday, particularly in light of some of the comments from her colleagues over the weekend.  Equities haven't exactly reacted with unbridled joy since the dovish Fed last Wednesday, though regular readers will know Macro Man's view that the flip-flopping and continued uncertainty do way more harm than good.

That having been said, despite the apparent value gap, Spooz have done rather better than European equities.  Although the VW fiasco certainly hasn't helped, the DAX was underperforming well before...and it doesn't seem to be a simple case of  higher European beta.


One could credibly argue the case that the dip that punters are waiting for in the SPX has already materialized in Europe, aided of course by the disaster in Wolfsburg.  No, not that one.  While Draghi certainly didn't sound yesterday like he was fishing around in his pocket for the keys to the monetary helicopter, he did give the impression of a man who knows where they are should he need them in a hurry.

No, QE hasn't worked miracles, though the data hasn't been bad.  We get the ifo early this morning, where five of the last six readings have surprised to the upside.  Should we get a sixth....well, it probably won't mean too much in the short run, though it would provide another brick in foundation of the argument in favor of taking a stab at European stocks sooner or later.  If you manage to get in at the right time....well, then you'll be able to look back and say it was a very good year.
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LongOnlyEquityGuy
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September 24, 2015 at 9:12 AM ×

I keep on banging the drum for oversold european stocks.
IFO just released the september figures. Very solid and the beat is driven by the expectation component.
I just cannot see the global meltdown ..

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Anonymous
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September 24, 2015 at 10:28 AM ×

IFO was taken before VW.

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CV
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September 24, 2015 at 10:46 AM ×

Yep, reasonable to assume VW will hurt auto sentiment, but production expectations for autos were already falling in Q3. I agree with "long only". The key is the firm expectations component. Also construction nudged higher ... makes up 47% of GFC in Germany.

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Celeriac1972
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September 24, 2015 at 11:07 AM ×

I agree with LOEG's observation on solid data outside of EM's.

The gap between the markets emergent central narrative and the hard domestic data is starting to interest me. China slowdown fears may have been overdramatised, fuelled by mainstream media disaster-porn tourists watching the headline indices melt down. Similarly, VW's woes (whilst representing a serious one-off hit) aren't necessarily structural; they are still going to be making good cars with effective pricing and distribution. Perhaps the global black swan hunt is overextending its supply lines...?

Maybe the "...dip that punters are waiting for..." is a telling phrase, and NOW is the time to be brave.

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Polemic
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September 24, 2015 at 11:35 AM ×

http://macro-man.blogspot.co.uk/2011/10/thats-why-lady-is.html rings a bell re another Merkel version 2011

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Anonymous
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September 24, 2015 at 12:19 PM ×

The mistake you guys are making is isolating VW. You are not looking at theo overall picture of the consistently negative newsflow. It is damaging the psychology of the market. Name me some positive events out there? ECB QE and Divies!. Is that it?

You can name a long list of negatives over the last 24 months. The pressure has built up and broken to the downside.

In no particular order and off the top of my head:
Russia
China
MENA & Refugeee crisis.
Brazil
Autos
Greece
Commodities
FED flip flop
UK Retail scandal and market share.

The cumulative weight of all these are bearing fruit.

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LongOnlyEquityGuy
admin
September 24, 2015 at 12:36 PM ×

@anon1: when surveys like IFO were solid in august, I was told that they were answered before the china currency announcement happened.

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Anonymous
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September 24, 2015 at 1:23 PM ×

FT@ Anon 12:19

I believe that their is a market psychology cycle which of course is intertwined with the business cycle, the financial cycle, the political cycle and the war cycle....
Since the geopolitical shift which started in 2001 with the Neocons assault on humanity, I would say that most cycles have been pointing down but not always in unison.
We are now (within the next 2 years at most) going to witness the harmonic phase where all cycles enter in resonance.
It will be quite destructive.

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Booger
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September 24, 2015 at 1:27 PM ×

Spoos due for a reversal, but I just wonder whether the fed was pre-empting some weakness in durable goods & GDP. GDP could be very disappointing if it tracks the Atlanta feds model as this is pointing to 1.5%, considerably below consenus. On that basis I am leaving a short position over the next few days.

Brazil, very interesting. Something has to give at some stage considering the near parabolic move in the real, rising unemployment, 15% interest rates, 2 failed government bond auctions in the last month. My guess is the government will blow up, petrobas will blow up or something major there will give.

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Anonymous
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September 24, 2015 at 1:28 PM ×

lower prices and good news dont go hand in hand...decision to be made is whether this shakeout offers good risk reward and i definitely think europe is the way to go....bought some a couple of days back and adding , have short spy but book now going net long as compared to spreading us /eu
eu growth picking up( lot of eu earrings from there), valuations attractive, bobl yields low( discount factor), qe to be expanded( insane but will take it) and euro still weak even after this 10 big figure pop


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Anonymous
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September 24, 2015 at 1:32 PM ×

FT re the VW snafu:

Governments are scared as their fiscal position is precarious, hence their destructive fiscal war against the citizenry.
They employ the same tactics with multinationals imposing ridiculous fines (cf BNP 9Bln and soon VW)

From a libertarian perspective, auto emissions and polution in general is self corrective.
If we go to far, climatic and various other calamities will reduce the number of humans to an acceptable level for the planet.

Ransoming the economy with norms is a power play; they don't care about the environment; the carbon footprint of Al Gore is an interesting study.

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Macro Man
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September 24, 2015 at 1:45 PM ×

What I find interesting is that on a forward PE basis, Germany has roughly the same multiple (12) as Brazil (11.7) despite the massive difference in nominal and real rates. (This is using the MSCI indices btw.) Yes, VW's a mess....but it looks like snow white compared to Petrobras, which is to companies what PBR is to beer.

I know which market I'd rather be buying....

(As an aside, US equivalent forward PE is nearly 17. Pass.)

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Anonymous
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September 24, 2015 at 1:57 PM ×

FT@MM: I guess the same PE is warranted since Brazil is already crashing;
when the business cycle turns around growth there should be a multiple of Germany's hence there is some optionality priced in relative PEs
The Bovespa and the BRL will rebound at some point in Q4 or Q1 but it will be just worth a short punt (6to 9 months)
The ECB will enhance its QE and my preference is to get long the CAC and a touch of southern Europe as I believe the indexes will make a new recovery high there in Q2 or Q3 next year

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Macro Man
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September 24, 2015 at 2:01 PM ×

@FT Vehemently disagree. In no way shape or form should a country with 14.25% nominal rates and inflation set to push double digits have a PE identical to one with -ve real rates and modest inflation. Ten years ago Brazilian trailing PE's were in the single digits. They're going there again.

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Anonymous
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September 24, 2015 at 2:15 PM ×

Anon from 12:19. Oops CAT

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Anonymous
admin
September 24, 2015 at 2:24 PM ×

So are we supposed to buy VW today? Leftback pointed out a couple of days ago that it is never a good idea to buy the worst stock in the index on a down day which sounded most sensible. Today it is the only stock in the dax in the green.

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Anonymous
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September 24, 2015 at 2:31 PM ×

FT MM is right as usual considering his analytical framework;
however I would like to point out that these are not normal times; some of my Brazilian friends have noted what happenened to equities in Buenos Aeres and Caracas even in times of crisis and are keen to put a portion of their cash in the Bovespa even if the situation looks dire...call it a hedge against government ineptitude

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Booger
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September 24, 2015 at 2:57 PM ×

I could not resist buying German 30. Hope the bottom does not fall out of that further.

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washedup
admin
September 24, 2015 at 4:01 PM ×

Going long spoos and fez for a short term punt here - got to take advantage of nico's absence from the market while I have the chance!!
If oil holds 43 (I'm 50/50 on that) things could get interesting.

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Macro Man
admin
September 24, 2015 at 4:05 PM ×

The chart at the bottom of this (short but informative) article summarizes in a nutshell why I am relatively sanguine on China but very bearish on Brazil, even with the recent move. Bacen needs to start wheeling in the nukes...and when they do, it won't be pretty for equity multiples.

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washedup
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September 24, 2015 at 4:13 PM ×

MM - all that chart tells me (thanks for the link btw) is that Brazil is a here and now, crash and burn problem and China is a slow fuse stagnation story - obviously very different implications for how you trade these themes, but just because China's debt is local doesn't exactly change the story.

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Anonymous
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September 24, 2015 at 4:15 PM ×

Donning the gloves...

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Macro Man
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September 24, 2015 at 4:30 PM ×

@ washed, Oh, I don;t think there's any debate that China has its own problems. But insofar as fears of a disorderly RMB meltdown started the current bout of volatility, and is still getting plenty of airtime, I think it's useful to remember that FX blow ups usually happen because you need to pay back foreign currency that you cannot afford...and that's clearly NOT the case with China.

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washedup
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September 24, 2015 at 4:33 PM ×

MM - agreed 100% - completely different playbook. I do think RMB will eventually over to 8, but thats because I remain a dollar bull, and I think it will take 2 years to get there, not 2 months. .

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Anonymous
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September 24, 2015 at 4:34 PM ×

(China crisis) The U.S. managed a crisis with nothing but local debt and capital inflows during that crisis. I find it ridiculous to presume that an emerging market with more total debt than the U.S. cannot have a crisis. It may not be the most likely outcome, but there are more ways to cause problems than to borrow in a foreign currency.

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Macro Man
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September 24, 2015 at 4:43 PM ×

Again, I am not suggesting that China cannot have "a crisis"....simply that it is unlikely to have a classic EM currency crisis. And a 60 bio/month inflow from the trade account is a very nice cushion that no other crisis country has ever had, including Japan.

Moreover, it is also possible that China can muddle through, which seems to be an outcome that doesn't get much airtime.

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Adrem
admin
September 24, 2015 at 4:44 PM ×

Who really caresa a damn about the VW emission busines. VW supplies good cars and plenty of secure jobs. What do these bureaucrat emission vagrants provide apart from added costs and aggro. VW should play hard ball and shut down th US operation and leave them to sue a husk. VW owners can get their spares on eBay and boutiques will start up to service their cars. Its a big world out there. There are plenty of other markets for VW.
Of course it wont happen but if it did it would put steam into the Dax. Someone taking decisive action for once.

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washedup
admin
September 24, 2015 at 5:30 PM ×

Yes Adrem - while its at it, it should demand to see Obama's birth certificate and promise free nazi souvenirs with the purchase of every VW vehicle.
Dude - no one takes this sh@t personally - everyone is just doing their jobs - Winterkorn just got paid $40 MM precisely so they could have a villain to blame - this 'crisis' will get resolved just like every other one we've seen previously - with a wink, a nod, some fines, and an extensive PR campaign. Nothing will change, and VW knows that - so does everyone else.

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Corey
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September 24, 2015 at 5:42 PM ×

Over the years I've observed you gentlemen are amazingly even keeled and your analysis generally seems to prove accurate, esp over the longer term. But, but, but, I cant help (perhaps wrongheadedly)thinking the psychological component has turned. On 9/24 I witnessed the Fed (again) capitulate to the market, yet this time the market's response was a big "up yours". Seemed like a completely different reaction than what I was expecting. What's worse is the reaction of our CBer's is only going to exacerbate the problem. Yellen's pause for vols is only going to create more vol - which should lead to more pausing and more vol. The ECB stands ready to act further, but will only do so at lower levels. But, when they do, it will only serve to tighten dollar conditions further which will along with ticking points from US earnings growth, increase the rational behind the great pause. I cant help but think we may eventually conclude there is a great difference between QE when you're the global reserve currency and when you are not.

Of course this doesn't preclude donning the Kevlar here except that I go back to where all this mess started - China. I'm almost certain that their market has another leg down before the equity bubble is deflated. While we have decoupled from their price action somewhat I think that another decent decline over there will bring back some hand wringing over here. The only good news I see so far is that oil hasn't checked out yet, but it's bottom isn't a certainty either. And then there are bonds, which while behaving as one would expect today, cant be ruled out that they don't do something unexpected if certain large players decide they need to play some defense on their FX.

Even though this is all anecdotal, I cant shake the feeling that patience will be rewarded here the setup just looks ugly.

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Leftback
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September 24, 2015 at 6:14 PM ×

Over the years LB has been anything but a "Long Only Equity Guy", and for some of the last few years has been to all intents and purposes a "Fixed Income Only Guy". However, that has all changed in recent weeks, and right now LB is in synch with LOEG in being constructive on European equities and by extension the rest of the world to some degree as well. The reasons are manifold: 1) European conditions are improving (seen it with my own eyes) 2) Yields are low and they are going to STAY LOW FOR A LONG TIME, and 3) Inflation is going to remain low, while 4) Profits and revenue will be stable at worst.

LOOK here, (as Polemic would say on his best days), we are now very likely to see more monetary EASING in China and India. ECB is already embarked on a huge program of monetary easing. The Fed is out of synch. All the Fed has to do here is DO A CARNEY. Hum a few tunes, make noises, hop from one leg to another, but above all DO NOTHING, especially NOTHING TO MAKE BUCKY STRONGER. Bucky is the enemy of growth here, not only in the US but elsewhere. A coherent Fed tightening policy would export deflation to the world and then reimport it to the US via lower commodity prices.

This morning David Goldman was on Bloomberg espousing just such a course of action. The main reason, as he explained and I have outlined here many times is this, in the ABSENCE OF CREDIBLE LEADERSHIP ON FISCAL STIMULUS, it makes no sense for any country lacking coherent government policy to tighten monetary policy while the Output Gap remains large and the true unemployment rate is high.

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shoeless
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September 24, 2015 at 6:23 PM ×

LB,

As I stated a few days ago, the problem with a weak $ is that $/Yen has become the de facto proxy for risk assets. If Bucky goes down hard, risk assets go bidless.

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Anonymous
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September 24, 2015 at 6:46 PM ×

FT @shoeless 6:23

You don't remember the time when spooz was positively correlated with EUR/USD tick for tick.....
It wasn't so long ago

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washedup
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September 24, 2015 at 7:12 PM ×

Shoeless - if the dollar is getting stronger because of ECB easing/dovishness I think it will be risk +ve - so the key is EUR/JPY and not the index as a whole. The ideal situation from a currency weakening standpoint would be euro > jpy > usd, but it will only work in an environment where US grows stays at 1.5% plus, and we don't start getting funding issues for EM. In any case step one would be dollar swap lines for everybody, so we are a long away from sovereign stress anywhere.

The cracks are out there and frankly hardly a mystery anymore, just re-iterating that this will be a drama with many acts, and the possibility that u could make money being long or short - just depends on your PnL management skills. Conviction may well be a punters worst enemy in the next few months.

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abee crombie
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September 24, 2015 at 7:27 PM ×

Europe has been leading the market lower, thank banks and autos for that. Can they break, sure , but your risk reward here is at least decent. put in a 1-2% stop, watch the open and see what happens tom. If Europe can manage a rally I think US isnt going to drop on its own.

Lots of US sectors for sale. Biotech and MLP come to mind. I am donning some kevlar for some MLP's. Yes I know many a yield hog has been slaughtered when buying just on yield, but frankly when conservative mgmt is giving you 7-10%, and rates are low, well I think its attractive given my other options (cash). Not taking a full clip but starting to avg in

Yes brazilian equities are not cheap, and no I am not buying any, but FYI, Itau is still earning 20% ROE. WTF. Brazil and its historically high rates is the opposite of Japan. Dont try to analyze either without forgetting everything you know about US/EU markets.

In terms of FX / EM Crisis, seriously how much more can we go? BRL, MYR are not going to zero..i find talk of China doing a serious devaluation funny. They are still running a 2.75% CA Surplus and importing ever cheaper commodities. They can afford to export some capital. Look at Japan.

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Leftback
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September 24, 2015 at 8:22 PM ×

Easy Janet is going to give a speech tonight. Watch out, Mr Shorty, she loves nothing more than to poke you in the bum first thing in the morning. Indeed I see some of you are already bending over in advance of the event.

At times like this I do like to resort to mindlessly simple analysis like Yield Watch: as of today, we are looking at mREITs about 9-12%, MLPs 7-8%, REIT preferreds 7-8%, BP 8%, VWO emerging markets ETF 5.4%, US10y 2.1%. There are a lot of places to put money to work where you can get paid to wait for higher asset prices.

Fwiw, we bought the preferreds of NBG a while back during the Grexit crisis, and they have almost doubled in price. Better to be lucky than good.

We are agnostic about overall market direction medium-term but the feeling is growing here that we are overdue for a face-ripper led by vol sellers and then sustained by hedgers dumping volatility into the October expiration. If Dame Janet indicates that it's not going to be a spooky Halloween and December is now the earliest hike date, then all those hedges will be lifted. Don't be surprised to see Spoos rip 50-100 points here and VIX decline below 15 once more. We've seen it happen....

Yen buying is similar to front month put buying here. Sure, you can rent it, but you're not going to own it for long b/c at the end of the day you know it's worthless.

USDJPY correlation with Spoos? So 2014 and 1H 2015, really. Beware of getting too attached to FX correlations, they appear suddenly, then they stick around for a few months, hanging out with you every day just like college girlfriends, and then just as quickly there is a bit of turbulence, and off they go, and the next time you see them, they are attached to someone else.

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Anonymous
admin
September 24, 2015 at 8:51 PM ×

@LB,

She might sound hawkish given Fed was blamed to be spineless after the last FOMC. Honestly I do not know what she is going to say and how market will interpret it. So taking some chips off the table seems to be a safe thing to do now.

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Leftback
admin
September 24, 2015 at 8:56 PM ×

She should do nothing and go all Greenspan on them. Be completely unintelligible for a few meetings. Or just go Carney and be all [inflation] data-dependent, which is where she seems to be headed.

I don't love this market but choppy trading epochs like this do usually end with vol selling and can often produce sharp rallies of 5-7% in a few days. You have been warned.

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Leftback
admin
September 24, 2015 at 9:05 PM ×

In fact, we are knocking on the door of an EM currency crisis or three, so she'd better be dovish. She's not stupid.

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abee crombie
admin
September 24, 2015 at 9:29 PM ×

MXN and BRL, BIG reversals. of course its CB intervention, but then I heard the same thing at 666 Spoos, "its just a short covering rally" ... how many NYC HF's that have correctly ridden the EM FX wave are now locking in profits? If MYR and IDR open up strong as well, look for a big covering rally and Nikkei to rip

US equities have been rallying in the afternoons while Europe has been selling in the morning...who is your money with?

HY did sell off a bit into the close but I think its following at this point.

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Anonymous
admin
September 24, 2015 at 10:54 PM ×

They're throwing even more confusion when you add this to last weeks statement and q&a. It's as if they want to see how hard market can fall....

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Anonymous
admin
September 24, 2015 at 11:07 PM ×

In other news,in case you missed it:-)

"After a few awkward laughs, Myrie clarified, “So you can only have a female Dalai Lama if they are attractive... you’re joking, I’m assuming?”

The Dalai Lama’s response?

“No, it’s true.” He clarified: “If female Dalai Lama come, then that female must be very, very attractive, otherwise not much use.

http://www.marketwatch.com/story/dalai-lama-says-his-successor-could-be-female-but-she-must-be-attractive-2015-09-23?dist=beforebell

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river
admin
September 24, 2015 at 11:25 PM ×

$gold,bigger picture:

https://www.tradingview.com/chart/XAUUSD/HXAiTXBv-gold-weekly-chart/

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Anonymous
admin
September 24, 2015 at 11:56 PM ×

Big hitter, the Lama.

- Whammer

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Anonymous
admin
September 25, 2015 at 2:45 AM ×

Well, traditionally female Lama was the sex slave of the high rank male Lama. So he could just state the obvious.

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