It's flamingo hunting season and Clubber Lang looks set to win the coveted "forecaster of the month" award. A flamingo, for relative newcomers, is a popular position that comes under pressure due to liquidation amongst general risk aversion.
It's no secret what the catalyst has been; the repercussions of last week's ECB shocker is still percolating throughout markets, with a healthy dose of help from oil and China. The ECB's insistence on blaming markets speaks of a tone deafness that's been largely absent this year, and hearkens back to the dark days of the Trichet regime.
While Macro Man had the foresight to cut most of his short euro position in advance of the ECB meeting, it seems as if he was a little too early in getting back in. The last few days have demonstrated that there are few if any marginal sellers; the key question in the near term is whether there will be more marginal buyers. Once source of heavy positioning that has yet to substantially liquidate has been the CTAs; a simple proxy for CTA models (a 40 day max/min window) suggests that while we are quite some ways from the models flipping long, risk controls (the confluence of the 200d MA and the midpoint of the max/min window) likely started taking back some short euros yesterday.
Another doozy in FX space is the NZD, which also enjoys a large short base. Yesterday's RBNZ meeting produced a rate cut (yay!), more commentary that the exchange rate needs to decline (yay!), and a note that the inflation target will probably be met with policy at its new setting (booooo!) You'd hate to be the guy that sold below 0.66, only to see it rip 2% in the span of a couple of minutes.
So the obvious question is where are some of the other flamingos that have yet to receive "the treatment"? One clear candidate is technology stocks, which have largely shrugged off the weakness is credit, small caps, the economic data, etc. That being said, the NDX is displaying clear negative divergences in momentum and is perched on support. As set-ups for shorts go, it's a pretty good one, particularly if the market yo-yos higher again at some point tomorrow.
One possible flamingo that has yet to punish anybody is short oil, though of course there was a a strong fundamental catalyst last week to propel it lower. That being said, flamingo hunters laugh in the face of fundamentals; in many cases, the best fundamental set ups are the biggest flamingo trophies. While it's hard to advocate catching the falling chainsaw in crude, at the very least it's probably worth keeping an eye on oil as a bellwether for mass liquidation across assets (most likely from CTAs.)
All this being said, it's turkey hunting season as well...and not just because Thanksgiving is over. Nowhere did we see a better example of this than South Africa, where the rand got absolutely eviscerated when it hit the tape that the credible finance minister was sacked by the non- (or is that in-?) credible president, Jacob Zuma. When the announcement hit the tape after the local markets closed, well....the result wasn't too surprising.
Although South Africa shares suspect political leadership with Brazil, other macro fundamentals are generally not quite as bad. That's hasn't stopped the ZAR from weakening steadily, even defying what used to be been a strong year-end seasonal for the rand.
On the face of it, the carry on offer and real yield would make receiving South African rates attractive if it weren't for the currency. Of course, that's a bit like saying Macro Man's weight (currently below that of Chris Froome 8 years ago) would make him a potential Tour de France champion if it weren't for his age and natural ability. As it is, therefore, South Africa's just a turkey.
So the question is: which other markets are flamingos...and which are simply turkeys? Oil is particularly interesting in this regard. For those not constrained by micro-managing P/L into year end, markets where flamingo-hunting incurs temporary adverse price action could offer nice entry points for 2016.
It's no secret what the catalyst has been; the repercussions of last week's ECB shocker is still percolating throughout markets, with a healthy dose of help from oil and China. The ECB's insistence on blaming markets speaks of a tone deafness that's been largely absent this year, and hearkens back to the dark days of the Trichet regime.
While Macro Man had the foresight to cut most of his short euro position in advance of the ECB meeting, it seems as if he was a little too early in getting back in. The last few days have demonstrated that there are few if any marginal sellers; the key question in the near term is whether there will be more marginal buyers. Once source of heavy positioning that has yet to substantially liquidate has been the CTAs; a simple proxy for CTA models (a 40 day max/min window) suggests that while we are quite some ways from the models flipping long, risk controls (the confluence of the 200d MA and the midpoint of the max/min window) likely started taking back some short euros yesterday.
Another doozy in FX space is the NZD, which also enjoys a large short base. Yesterday's RBNZ meeting produced a rate cut (yay!), more commentary that the exchange rate needs to decline (yay!), and a note that the inflation target will probably be met with policy at its new setting (booooo!) You'd hate to be the guy that sold below 0.66, only to see it rip 2% in the span of a couple of minutes.
So the obvious question is where are some of the other flamingos that have yet to receive "the treatment"? One clear candidate is technology stocks, which have largely shrugged off the weakness is credit, small caps, the economic data, etc. That being said, the NDX is displaying clear negative divergences in momentum and is perched on support. As set-ups for shorts go, it's a pretty good one, particularly if the market yo-yos higher again at some point tomorrow.
All this being said, it's turkey hunting season as well...and not just because Thanksgiving is over. Nowhere did we see a better example of this than South Africa, where the rand got absolutely eviscerated when it hit the tape that the credible finance minister was sacked by the non- (or is that in-?) credible president, Jacob Zuma. When the announcement hit the tape after the local markets closed, well....the result wasn't too surprising.
So the question is: which other markets are flamingos...and which are simply turkeys? Oil is particularly interesting in this regard. For those not constrained by micro-managing P/L into year end, markets where flamingo-hunting incurs temporary adverse price action could offer nice entry points for 2016.
28 comments
Click here for commentsThe Apex Of Market Stupidity
ReplyBy Charles Gave
December 8, 2015
In some 40 years of watching financial markets, my dominant emotion has been a mixture of curiosity, amusement and despair. It seems the stock market must have been invented to make the maximum number of people miserable for the greatest possible amount of time. The bond market, meanwhile, has just one goal in life: to make economists’ forecasts for interest rates look even more silly than their other predictions.
Over the years I have often observed how most market participants are able to concentrate on only one set of information at a time. For example, in the 1970s, the only data release that mattered was the consumer price index. In the days leading up to the CPI’s publication, everybody dropped all other considerations to speculate feverishly about what the number might be. And then following the release, they would spend the next week or two commenting sagely on what the number actually had been. Eventually Milton Friedman convinced the Federal Reserve (and from there the markets) that there was some kind of relationship between the money supply and the CPI. So everyone stopped looking at the CPI, and instead started to focus on the publication every Thursday evening of M1 (or was it M2?). Inevitably each week would see an immediate rash of commentary on these arcane matters from the leading specialists at the time, Dr. Doom and Dr. Gloom.
This gave way to a period in which the US dollar went through the roof on the covering of short positions established during the era of the minister of silly walks in the 1970s. For a few years, the only thing that mattered was the spread between the three-month T-bill yield and the three-month rate on dollar deposits in London (an indication of the shortage of dollars outside the US). The beauty of this one was that the scribblers on Wall Street could comment on it twice a day or more, which of course had no discernible impact on reality, except for the destruction of the forests needed to print so much waffle.
That era came to an end in 1985 with the Plaza Accord. At that point the Fed, under the wise guidance of Paul Volcker—my favorite central banker of all time, probably because he was the only one without a PhD in economics, which may well explain his success—decided it was going to follow a type of Wicksellian rule-based policy under which short rates were kept closely in line with the rate of GDP growth. Of course, this meant the Fed paid little attention to the vagaries of the financial markets, so there was very little to comment on. The result of policymakers’ lack of interest in financial markets was that from 1985 to 2000 the US enjoyed a long period of rising economic growth, low inflation, low unemployment and high productivity; a period dubbed “the great moderation”. The trouble was that no one was able to make any money trading on inside information provided by the politicians and central bankers. As an advertisement for Sm ith Barney put it at the time: “We are making money the old way. We earn it.”
Naturally, that wouldn’t do at all. After nearly 20 years of economic success, the US budget was in surplus, the pension funds were over-funded, and the “consultants” in Washington were on the verge of bankruptcy, having nothing to say. Clearly something had to be done, and it was: policy shifted to accommodate Wall Street, with forward guidance, negative real rates, the privatization of money, and a lack of regulation. This allowed Wall Street to make money, but it created nightmares elsewhere through the ever-successful euthanasia of the dreadful rentier.
Still, the shift to an economy driven by the decisions of central bankers meant the market commentators were back in business in a big way. For the last 12 years, the only thing that has mattered has been to know whether or not the chairman of the Federal Reserve has had a good night’s sleep. Similarly in Europe, the dysfunctional euro, created by a bunch of incompetent politicians and Eurocrats, bred drama after drama. Since nobody wanted to admit it was a failure, the most important man in Europe became the president of the European Central Bank.
ReplyIn the last week, we have reached what is surely the apex of this stupidity. A bunch of algo traders programmed their computers expecting “Derivative Draghi” to be extremely dovish, as any proper Italian central banker should be. I am not sure I understand why, but some traders obviously decided that he had not been dovish enough. European stock markets plunged by -4%, while the euro went up by roughly the same amount in the space of a few minutes. What that means is simple: value in the financial markets is no longer a function of the discounted cash flow of future income, but instead is determined by the amount of money the central bank is printing, and especially by how much it intends to print in the coming months. So we are in a world where I can postulate the following economic and financial law: variations in the value of assets are a function of the expected changes in the quantity of money printed by the central bank. To put it in a format that today’s economists understand:
Δ (VA) = x * Δ (M),
where VA is the value of assets and M is the monetary increase.
What we are seeing is in fact in one of the stupidest possible applications of the Cantillon effect, whereby those who are closest to the money-printing, i.e. the financial markets, are the biggest beneficiaries of that printing. This is exactly what happened in 1720 in France during the Mississippi Bubble inflated by John Law. The end results were not pretty (see “Of Central Bankers, Monkeys And John Law” [above]).
What I find most hilarious is that some serious commentators have been pontificating at considerable length about what the market’s participants think. These days, some 70% of market orders are generated by computers, and many of the rest by indexers. And computers do not think. They simply calculate at light speed, which allows them to react to short term movements in market prices as they were programmed to do. And since they are all programmed the same way, the result is some big short term market moves. In essence, these computers act as machines that allow market participants to stop thinking. As a result, I cannot remember a time when less thinking has ever been done in the financial markets, which is why I find today’s financial markets infinitely boring.
We are swimming in an ocean of ignorance, just like France in 1720. It seems all the painful economics lessons learned over the last 300 years have been forgotten. I suppose that means we will just have to wait for another Adam Smith to appear. La vie est un éternel recommencement...
"in many cases, the best fundamental set ups are the biggest flamingo trophies"
Replypoetry ...
MM, the nzd was a blowback from blowout aud employment data. Either the Australian economy is smoking and ready for a rate rise (hard to believe) or it is just a freaky but temporary period of strong employment growth. Also a bit of sell the news after the recent ECB experience I suspect.
ReplySomething I watch, aud.cad is reaching excellent levels to sell, 0.99 today. Either the Australian economy is decoupling from resources or this is a temporary aberration. In the next 2 years the outlook for oil is probably a lot better than iron ore in terms of relative pricing. The oils are taking it in the guts now but I suspect it will bounce sooner than ore, where the supply issues are arguably worse.
Great post, Nico, I would mostly agree but not with the conclusion: "As a result, I cannot remember a time when less thinking has ever been done in the financial markets, which is why I find today’s financial markets infinitely boring."
ReplyAll these non-thinking trend followers, indexers and Fed second-guessers make a great market for value-style fundamental stock picking - over the long term, which hardly anyone is still able to bear.
MM nice post - would much appreciate it if you post a link to the year end trade survey you had conducted earlier at your convenience - I tried searching the brute force way but clearly don't have the right keywords.
ReplyI agree on the NDX being an interesting one into year end, in that banks have peddled it coke-like to momo chasing clients for the last two months. An out of the blue 2 std deviation selloff in apple, google, and Facebook would create quite the bee-swarm one suspects.
Nico thanks for sharing that article - re-inforces my belief that if/when algos stop acting bullishly and go the other way they will basically be outright banned - people who think technology only marches forward clearly never read history.
Hi MMCom(munity)
ReplyCan we talk about the Yen? Lots of headlines about oil but Yen strength is something too
The old flamingo trade. Fundamentals and valuation will ultimately drive stock returns in the long-run, but heading into 2016, it’s crucial to acknowledge the likelihood for severe moves based on:
Replypolicy,
policy expectations,
sentiment,
positioning
Policy Driven Markets are Treacherous
@ Booger, the NZD move had zero to do with Aussie employment, as it was several hours before the AUD number. Speaking of which, while the monthly print may not be believable when taken at face value, they dynamic has clearly changed, as the more or less straight up "price action" in unemployment has been replaced by rounded top + reversal.
ReplyEasy policy kicking in? Probably. A more credible government improving sentiment? Possibly. A switch from mining to services? Evidently. Either way, this is not your very-slightly-older-brother's labour market.
@ Anon 12.13 IN times of turmoil, I always love having low delta USD/JPY puts in the book just in case, particularly when USD/JPY is near its highs. This week's meltdown was pretty unsurprising, and the break of the 50 + 200 days would argue a retest of the old range. Not as flamingo-y as euro IMO, put still ripe for the hunt.
ReplyBiotech looks broken, as the health care sector in general seems to have rolled over with the anniversary of Obamacare pressuring the insurers and hospitals, and a rotation out of defensive growth HealthCare sector. I like it longer term, but when the trend is down, watch out
ReplyAlso maybe not immediately but my pehaps sometime in 2016 US 5 year breaks above 1.8%, (a great range trading level, look at the chart) and if its accompanied by wage pressure, that will hurt IG the most
MM- in terms of flamingo hunting these are what i have put on over the past few days:
Reply1. Short NDX- puts spreads
2. Short FANG- mainly buying mar 20d puts on FB AMZN and nflx( this has had incredible momemtum but if it turns will go a long way) not NFlX failed breakout this week
3. short xly(10% weight in amzn) but vol and skew looking incredibly cheap
4.spx short call spreads long puts ...
5. I am back in the long estx short spy camp post draghi flush...not sure going to work straight away but has come off a good way and yes ecb disappointed but is still in very easy mode( so yes implicitly short euro i guess which is counter to your hunt for stops)
6.long some gdx which looks like bottoming - will add on break higher.
7. long small crude
book is long weekly upside spy calls as stops
Wow Anon, I agree with just about all of that. Love the GDX chart btw
ReplyIn regards to Mr. Gave's article the quote should be,"We make money the old-fashioned way...We earn it" Old-fashioned does have a bit more cachet, doesn't it?
ReplyIn regards to the stupidity or not of today's market, there is now just a bit too much highfallutin' looking down of one's superior investing nose at the now suddenly unwashed mass of less brainy investors who are now exhibiting lemming behaviour. Oh, really? There weren't lemmings in the ZIRP-era?
It is much more simple than that...peeps rightly recongized that ZIRP would push money out of traditional sites and relatively more into equities. It is perfectly rational behavior to take some risk off the table now. Why are you an oaf if you do?
As I understand it markets used to be forward looking...and that didn't mean looking for the next day's CNBC headlines.
nice call on XLY Anon 1:00pm. I think the move in AMZN can easily give back some, only up 140% YTD while the rest of retail is getting sloshed.
ReplyShort FANG!? Brave lot the MM commentariat! I have no skin in this game, but I hope you nail it to be honest!
ReplyGold is interesting because it is just about the only uncorrelated asset in a world where CBs have pushed up stocks and bonds in unison. If we get another a Taper Tantrum redux (yields up, stocks down), I expect gold to do quite well. Other than that ... success can also be determined what you do NOT own.
1) No FANGs, biotech and healthcare ... check.
2) No corporate debt, all stock holdings 0% debt to equity (almost!) ... check
3) No energy exposure ... check
Now, I will of course admit a little bit of EM exposure which kind means 2) and 3) are wrong, but it is all very minor.
I generally sympathise a little bit more with the shorts here ... not sure, it will work in Q1 though.
Is a US yield curve flattener a Flamingo?
Reply@Booger,
ReplyBe careful of CAD here, if it goes like the past 3 years, you are in major trouble.
Regarding FANG, I am not comfortable shorting these high-flyers, too much risk and there could be some shocking positive news to screw the shorts. I only heard some rumors so I am not going to repeat here because it is not credible.
However, I like the idea of long oil and GDX. Also, I wonder if somenone knew how to predict or monitor CHK's bankrupcy risk. I believe that it could cause some major risk events in the market.
Nice post MM and very nice comments, as usual.
MM, I stand corrected ! Yes, puzzling the ozzie employment strength. Still I think the risk:reward for short aud:cad is good here, it could go to 1.02 at a maximum by my estimation (although I could prove to be wrong) and the profit target is to 0.8 in the next 18 months.
ReplyMM that has to be one of my favourite ever posts of yours
ReplyFlamingo hunters laugh in the face of fundamentals - too true
Smash the rallies, sell the closes.
ReplyAcrossthecurve, on of my other fave blogs from 2008:
http://acrossthecurve.com/?p=24157
Acrossthecurve is a classic of simple blogging. Short and to the point. No frills. Little verbal flatulence. Lots of insight.
ReplyJohn Jansen is a Prince among bloggers, like our own MM. LB has learned a lot from that blog over the years.
Tax loss selling and liquidation are going to be important themes in the next three weeks. All the most hated stuff of 2015 is about to become even less popular as the portfolio purges begin. Of course, one man's trash is another man's treasure.
Dumpster divers, bargain shoppers and Knife Catchers, start your engines and prepare to don The Kevlar....
LB: How can tax loss selling and liquidation in the next three weeks give us our Santa rally? Or will it be referred to as the Yellen rally this year?
Replya few thoughts on my fav topic copied from internet
ReplyShare buybacks by U.S. non-financial companies reached a record $520 billion in the most recent reporting year. A Reuters analysis of 3,300 non-financial companies found that together, buybacks and dividends have surpassed total capital expenditures and are more than double research and development spending.
There’s been an over-focus on buybacks and raising EPS to hit share option targets, and we know that those are concentrated in the hands of the few, and that the few is in the top 1 percent,” said James Montier, a member of the asset allocation team at global investment firm GMO in London, which manages more than $100 billion in assets.
The introduction of performance targets has been a driver of surging executive pay, helping to widen the gap between the richest in America and the rest of the country. Median CEO pay among companies in the S&P 500 increased to a record $10.3 million last year, up from $8.6 million in 2010, according to data firm Equilar.
At those levels, CEOs last year were paid 303 times what workers in their industries earned, compared with a ratio of 59 times in 1989, according to the Economic Policy Institute, a Washington-based nonprofit.
WEALTH EXTRACTION by a happy few - is all that American society has to offer today. The rest can smoke their legalized doobie for ignorance is bliss
MM, can you do a post on the actual mechanics of the Fed hiking and what the hell is actually going to happen? It seems like the assumption that is all going to go smoothly is the biggest flamingo of all
ReplyWow @ that Acrossthecurve piece on Third Avenue ... this is exactly how I imagined it would go from bad to worse! Hmm ... BNP 2007 moment indeed, or what?
ReplyCV - yes indeed the dominoes seem to be lining up - as usual equities will be the last ones to get the memo, with yellen a close second. That said, probably a good time to remind oneself of the rhymes, not repeats, wisdom. I'm not sure the contagion this time carries the quality described by Jules in Pulp Fiction as 'super fried TNT' - for one, no one is actively short that stuff, so its primarily a liquidation event with carryover effects into ending the M&A and buyback game.
ReplyEndgame? I think US taxpayers are about to become proud owners of junk bonds whether they like it or not!
"I think US taxpayers are about to become proud owners of junk bonds whether they like it or not!"
ReplyAmen ... QE4 has corporate bonds written all over it. :)