5 pre-payroll bullet points

There's too much to talk about to write in free form prose, so today's post is confined to bullet points:


*  If you're reading this, you don't need Macro Man to tell you that it's been a bad start to the year for equities.   You might, however, be interested when he tells you just how bad it's been.  He analyzed US data going back to 1930 (using the Bloomberg synthetic SPX calculation)....and this is the worst percentage return for the first four trading days of the year over that entire span.



It's also been the worst 4-day start of the history of the DAX.....


.....and (barely) the Nikkei....


.....however, Macro Man must apologize to Mark Carney, who's finally demonstrated why he's paid so much as governor of the Bank of England.  It's only the second worst start of the year for the FTSE!


Now obviously, a four day performance window is about as arbitrary a sample size as you could wish for, even if it does carry substantial psychological weight via coming at the beginning of the year.  It does not necessarily follow that Armageddon is about to come knocking, though by the same token it feels rather more likely than if the signs on all the year-to-date returns were reversed.   Macro Man ran correlations for each index on the returns for the first four days of the year and those for the remainder of the year (i.e. from day 4 until the end of December.)  For each index, the correlation was positive, but not massively so- the coefficients ranged from 0.09 to 0.35.   Perhaps tellingly, the low reading was on the SPX, which had the biggest sample size.

So while it isn't time to panic, it is worth considering the technical and psychological damage that's been done to the market already.

* Curiously, however, not every manner of risk asset is getting chucked out with the bathwater.   Perhaps it's short-covering, perhaps it's merely a dead-cat bounce off of a previously over-sold condition.  However, Macro Man finds it very interesting that high yield has actually traded pretty well since the December Fed meeting, particularly in light of what both stocks and oil have done this week.


At the same time, gold has traded very well this week and the miners have breached the 50- and 100-day moving averages as well.  Macro Man bought some on the open yesterday, and it was interesting to observe how it traded with a negative correlation to Spooz all day.  As a value proposition, GDX looks pretty good to your author....and if it's a diversifier against the rest of an equity portfolio....well, there's a lot to like there.


* Well what do you know, USD/CNY is going to the moon in a straight line after all.   Last night's USD/CNY fix was virtually unchanged, which the market has taken as an unalloyed positive at the time of writing.  The irony, of course, is that that was actually quite a 'weak' fixing for the CNY given what the USD did yesterday against other currencies; the EUR/CNY fix, for example, was up by 115 bps.  By Macro Man's calculation, the CFETS basket has just breached the 100 level.


The implication is that if you thought Chinese currency weakness was a good reason to panic yesterday, any relief you see today is an opportunity to hit the exits.  From Macro Man's perspective, not a lot has changed; if anything, the decline in the basket to lows below last year's indicate a more serious intent to weaken the RMB a bit further.  If you think that is Armageddon-worthy (and Macro Man doesn't necessarily, at this juncture), then consider yourself forewarned/forearmed.

Perhaps the real irony of the whole thing is that for years, China's FX regime was a major driver of the EUR/USD exchange rate via PBOC/SAFE reserve rebalancing/recycling.  These days, however, price action in EUR/USD helps dictate the level of the CNY basket via the EUR/CNY axis....which then influences where PBOC fixes USD/CNY and how many dollars they have to sell to intervene!  (As an aside, the answer in December was 'a record amount', and there are some stories circulating that just on Weds/Thurs the amount of USD sales were equivalent to nearly an entire month's worth of trade surplus.)

* Although there has been some commentary to the effect of "ooh the Fed cannot go with stocks down and the market pricing so little for March", the reality is that it's much too early to make any determinations of the sort, regardless of the inflation commentary in the minutes.   In fact, current Fed pricing for March is at levels the market ascribed for December's meeting at the absolute height of the crisis last September.  Moreover, pricing for March has never been much more than a 50/50 proposition over the last couple of months.  Although the minutes did highlight inflation, recall that in the December press conference Yellen was quite clear that employment still matters a lot, too.  One also wonders how quickly the committee will forget how the equity market made chumps of them last September....





*  As for today's number, Macro Man's model is quite bullish, looking for 246k, well above the consensus.  In fact, this is a higher forecast than for any month last year.   Macro Man has the feeling that the initial market reaction will be good news = good news and bad news = bad news, insofar as Chinageddon represents some sort of hideous unknown deflationary depressionary force in the eyes of John Q. Punter.

Good luck!


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Corey
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January 8, 2016 at 3:03 AM ×

So if it's still not time to panic and you've rightly been very prescient in being patient so far, what would cause you to change your view? I suppose the thought is that they will let it slide a little further before stabilizing and then see if that does the trick. Perhaps, I just hope equities are as patient as you are in assessing the situation.

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Macro Man
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January 8, 2016 at 3:16 AM ×

I suppose I see it like this: Most of what's happened over the last year has actually been pretty good for the Western consumer, and even in China retail sales have held up relatively well compared to IP/investment data.

If the consumer rolls over for whatever reason (inflation looks like a non starter, and it's not like this has been a credit filled spending boom, so I don;t see moderately higher borrowing rates doing it, either), then it's time to panic. Until then, muddle through is probably a good base case IMHO.

It's been a while, so sometimes it's easy to forget that equities do occasionally go sideways or a little down sometimes even when the economy does OK, especially when there are shocks and/or tightening financial conditions. Those are usually times to- dare I say it?- JBTFD, though not on the micro scales that have been advocated by the 'CB infallibility' crowd here and elsewhere. I'm old enough to remember when 10-15% was a dip, not 1-1.5%....

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Nico G
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January 8, 2016 at 5:27 AM ×

you really sound like Mr Mackey mmkay

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Nico G
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January 8, 2016 at 5:50 AM ×

Corey

there is NEVER a good time to panic under duress - you need to have an exit plan before any shit hits the fan. The only panic one should feel is about one's own greed, when things are getting too good for too long and you still want more.

Why is anyone surprised of a massive correction looming after seven years, 666-2100+ straight up? 'hope' is not a concept in investing, and there is no financial doctor Phil, there is only ill timing.

December warning

After the long awaited December FOMC and a surprised announcement of FOUR hikes to come in 2016, market still squeezed higher to 2070. A moment of peak market idiocy as described by some, where the CB funny moners cheered and whose following shard retracement was the warning that all was not well in Santa house. You still had a second attempt at 2070 where again, the funny idiots cheered calling for a new high into year end

Anyone who has perverted their thinking nay worse, stopped thinking and blindly followed the CB/QE mantra is just not fit to trade the markets to come. The worst consequence of the Fed action is that it has bred a generation of absolute market lemmings unable to think for themselves.

My advice; If you are still long equities today, you either sit on them for 20 years, or step back and sell that 1900-2000 level which is still by any measure extraordinarily high from the 666 low.

Once you sit on the side you may watch fear unfold later this quarter and try to assess whether you are cut for a 2008-type of volatility.

hope this helps

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Corey
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January 8, 2016 at 6:56 AM ×

Ha c'mon dude I'm not panicking. I've had the same feeling u have over the past few weeks..cool as a cucumber as the market turns your way and you know for sure what it's going to do next because you've been waiting for it for yrs and the train is coming off the tracks just as you had imagined. Which is precisely why I'm playing devils advocate! But is it really the end? Perhaps for China...perhaps for the world? Maybe - maybe not. Uncharted waters? Yes, but that doesn't mean you can keep pyramiding for a while longer. Rome wasn't built in a day and it wasn't destroyed in one either. And I don't think this stops until every CB has gone all in blown it up and then gone all in again simultaneously.

But that's all a bit hyperbolic don't you think? It's a little more rational to expect a correction to the 200dma or the 08' top or preferably a re-rotation of internals as passive investing gets dumped for managers that can read a 10k, as unicorns and fangs both go extinct and the market catches up to the economy and the economy the market and we all end the yr just like last w nothing but a divvy for returns. That's it. I know it's not sexy mmkay. We will all pay way too much attention to the Fed as gradually the market comes to realize they aren't in control, fundamentals are and that they are not all bad. Either way I'm sure we'll both be fine and in all seriousness I pay careful attention when you post and thank you for and the others for all the pure gold that is consistent on this board daily. But while you were (mostly) alone in your calls last yr you've got a lot more company to start the year off which i think at least in the short term is a good sign.

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Nico G
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January 8, 2016 at 7:36 AM ×

That is great writing thank you for putting so much into it. There is one misperception on this mostly US markets oriented forum regarding my calls those last years. I would never short spoos (until October 2015) because i did not understand that market. So what seemed lonely to the American audience was actually quite fruitful (€€€) in Europe which is still in a bear market and only doubled on that 2009-2015 bounce when the US more than tripled. Such difference in price action is staggering, Now if you check both ESTX50 and S&P on a say, 5 year chart the April 15 top in Europe is striking while the US tried to fool everyone for as long as they could into believing a new high was always coming. Folks now acknowledge that the US topped in April too. As written before we returnted to normal market action last August after 6 years of Mickey fantasy tape.

I am mentally long (shorts are covered) as we speak following that idea of 'gap and go' bounce in the US which will frustate more than one dip digger. I do not believe in a V bounce and would be thrilled to see one to finally load the desired size at the desired price both in US and Europe. As everyone would agree there is no need to call or expect 30% moves in either direction but the urgency to (resume) thinking true market logic, free range, away from central banks which were to financial markets what Monsanto is to food engineering. Artificial, harmful stuff.

Imho the Fed has already lost credibility, together with Abe and the pending Japanese disaster to come, the Chinese game is rigged and forever will be, lastly Draghi like any Italian playboy out of punch lines and arguments, is already naked.

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Anonymous
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January 8, 2016 at 7:48 AM ×

Nico - some of the lemmings will have the attitude that if they buy and hold for the year, they outperform the indices. That's probably where we see a bid from if it comes today.

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Leftback
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January 8, 2016 at 7:51 AM ×

O/n action in a variety of instruments. CNY is flat, but at least not falling. USDJPY is firmer and Spoos are up 25 handles. AUDUSD ripped 1% higher. Gap open higher in Stoxx and Spoos as predicted by Nico.

We are going to go out on a limb here. Regulars here know that we are often among the first to "don the Kevlar gloves", "go Dumpster Diving" and "catch a falling knife" toward the end of selling episodes when we perceive a cessation of selling pressure. Not here. Not yet. This feels more "weak bounce", "weekly options positions closing", "take some profit off the table" so far than "massive face ripper", "rip snorting vicious bear market squeeze" or "concerted rally in global risk assets".

Just my 2¥, for the time being.

Commentary on this week's NFP number is fair enough, I think. ADP suggests that this number will be fairly good and since the market is ready for mild relief, good news will surely be good news here. Rates are already making a prediction by rising o/n. Looking ahead to next month, there are probably some weak employment numbers out there in the future. Markets have a funny way of getting there ahead of the numbers, so we may see additional equity weakness (and especially lower US rates?) reflected in the price action long before those numbers hit the screens in early February, which just might end up being a profitable time to put money to work against a more attractive macro backdrop and with a much more favorable risk/return ratio. In fact, we believe our friend Polemic has already painted such a scenario.

We suggest that the selling will probably resume next week b/c China issues remain unresolved, CNY devaluation is incomplete, and neither sentiment (which isn't extreme yet) or technicals (the most likely support level to hold is 1890-1900) seem to be ripe to drive a really good rally in SPX from here. This move today looks like being a dead cat bounce to SPX 1970-1980?, USDJPY 119? Crude oil $34-36? AUDUSD 0.71? At the moment we'd be tempted to sell all of this and stay patient. Asian FX looks like being an especially strong market driver at the moment, so we'll be glued to movements in CNY and JPY, and we are therefore going to continue to lose an awful lot of sleep for a few more weeks.

Fans of US fixed income may have to show intestinal fortitude for a week or so, as markets absorb the NFP number and then we have the usual mini-steepener ahead of the long bond auctions next W and Th. Hedging might be a decent idea here.

After that lot of commentary/insight/drivel (as you prefer) we are going back to bed here at the Hammock.


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Nico G
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January 8, 2016 at 8:03 AM ×

LB

i am offering 1979 spoos

Anon

buying here and hold for the year is too soon and likely to get unpleasant you are much better off waiting for a real panic seen in huge volume selling across the board cf. LB global repricing has hardly begun, can't be finished

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Anonymous
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January 8, 2016 at 8:34 AM ×

Agree Nico - thinking more of the bigger players and their performance marking against indices. What might attract them in.

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Anonymous
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January 8, 2016 at 8:50 AM ×

today's NFP only tells us how good the times were when the Fed was at 0-25.

It should be used as a baseline reference for the future... not much else.

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CV
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January 8, 2016 at 9:35 AM ×

Hmm, find myself agreeing with Nico and LB's downbeat assessment, which is not really normal ;). I don't think this is over yet. Vix at 25ish is bad, but far from panic. My portfolio could use a nice counter move, but I am afraid it won't get it just yet.

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fencer
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January 8, 2016 at 10:20 AM ×

1840 on SPX ? sort of index eq of the lows of SP futures in August . 1.6 time the width of nasdaq triple top.

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Leftback
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January 8, 2016 at 12:48 PM ×

Looks as though enthusiasm has been curbed a little globally since the Asian session. Europe fairly muted, presumably now waiting on US employment data. The media will focus on the number and the US market reaction today, but it's a sideshow.

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Booger
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January 8, 2016 at 12:54 PM ×

AUD.USD looks like it could do a serious drop koala bear at some stage next week.

LB: Weak NFP and rally to 0.71 might be a good place to short. The Asian market retrace has pretty much been erased pre-NFP. So I wonder whether punters are just waiting for NFP to be over to reload shorts.

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Booger
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January 8, 2016 at 1:07 PM ×

China: the first option which they can employ without too much blowback to boost the economy is to devalue CNY so I would expect them to keep doing that.

The second option which is more nasty is tighten capital controls.

the third option to stimulate is to transfer state assets to the consumer sector.

I just wonder whether China will turn out to be like Thailand which was thought to have large FX reserves then found to have very little because they had forward sold it all to support the Baht before it cracked.

The Chinese peg and even the Saudi peg may not be so solid after all.

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Macro Man
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January 8, 2016 at 1:17 PM ×

@Booger, No one thought the BOT had big reserves in 1997, which is why every macro fund was long USD/THB out the wazoo.

I must say, I find the apparently universal "world is ending" pessimism to be bemusing, given the modesty of the pullback in the US in particular. Point taken Nico re EZ equities, which is kind of why I hopped off that bandwagon in early December.

Have people been so hoodwinked by 7 years of QE methadone that they've forgotten what normal markets are like?

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Anonymous
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January 8, 2016 at 1:27 PM ×

I think it's the divergence from the seasonal norm that has given this pullback a nastiness that's hard to get rid of absent spearmint polos.

QE markets punished rational thought, JBTFD ruled. After all, if you were coming round to the idea of JBTFD, what better D to JFB than the Dec-Jan rally? Kerrrsplat!!!

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Anonymous
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January 8, 2016 at 1:32 PM ×

mm1:17
bearish as i am and trading tactically i also find it strange that calls are for end of world -2008 type self off- or btd!i think we are muddling along and yes can got to 1750 spoos but then so what!

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Anonymous
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January 8, 2016 at 1:46 PM ×

This inability to sell off in EDs, not to mention the rally in Euribors and Sht Stg is notable here? Think market is crowded paid rates here? This has been a recurring theme over past few sessions in EM as well: the rallying of EM rates in tandem with sell of in EMFX. Either market is underpricing long-end inflation or simply doesn't buy any uptick inflation at all. Either way, long TIPS and/or curve steepeners the move?

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Leftback
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January 8, 2016 at 1:51 PM ×

Ladies and Gentlemen, behold the last truly magnificent NFP number we will see in quite some time.... 292k with upward revisions to October and November!! A shame it is such a backward-looking and notoriously lagging economic indicator.

Hourly wages stubbornly flat. Hours worked, flat (in the pre-holiday rush?). Hmm...

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washedup
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January 8, 2016 at 1:55 PM ×

@Corey 'So if it's still not time to panic and you've rightly been very prescient in being patient so far, what would cause you to change your view?"

Strike 1 was commodities and China rolling over, which has been accomplished - strike 2 would be the demise of the bond bull market during normal expansions, which I am starting to see some signs of recently, and strike 3 would be a rollover of big tech earnings. Obviously the extent of the 2) above would govern multiples, and 3) addresses MM's idea of the global consumer strength being the leading indicator.

So yeah muddle through would be my vote for now as well - same 300 point trading range I had suggested on these pages back in August, but maybe 75-100 points lower (1750-2050) because commodities/China have taken another leg down.

The 2008 style disaster is possible, but right now I don't see any signs.

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Macro Man
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January 8, 2016 at 1:59 PM ×

@LB, I thought this one was going to suck? Or was it the previous one? The one before that, perhaps?

@ Anon 1.46....I am guessing that short end is assuming 'guilty until proven innocent' when it comes to equities, perhaps with some justification. Moreover, the weak wage fig does give the Evans cohort something to moan about and pretend they can impact by sitting on their hands.

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Booger
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January 8, 2016 at 2:19 PM ×

MM: 1997 was before my time, and I am happy to be corrected on it, but my reading of it was that people had thought Thai reserves were much higher than they actually were. When they got a sniff that a significant proportion of the estimated reserves had been forward swapped or whatever they did back then, it became a target and then the downward spiral.


NFP an impressive number but the unemployment rate didn't go down. You need both to surprise to have a real "surprise" which this isn't so I'm using this to reduce my AUD.USD position.

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Leftback
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January 8, 2016 at 2:24 PM ×

LOL, MM and fair comment. Done me like a kipper, guv'nor, good an proper.
But look, in all seriousness, these numbers are all essentially 0 ± ∂ in an economy as large as the US. No?

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Bruce in Tennessee
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January 8, 2016 at 2:29 PM ×

https://www.highbeam.com/doc/1G1-10822691.html

...This article from the Economist in 1991 featured a review of the best opportunities to be long the market. The conclusion was it was best to be invested long about 50% of the time. The time, this group concluded, to be absent the market was in times of declining liquidity.

2 cents..

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fencer
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January 8, 2016 at 2:33 PM ×

China: They were holding the market under 3000 and before under 2000. if i was chinese, i will run away. so i imagine it will test under 3000. US rates anticipation: It will depend of the GDP and stock markets and Dollar : It should weaken. NFP has been too high. It will compensate now. i will bet stock markets will go on correcting. at the end of the correction, you will have a good short covering of the exisiting Open Interest (meaning Euro) . (like they began to do yesterday). i bet today is a bull trap. not even sure it will last more than some hours.

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Eddie
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January 8, 2016 at 2:35 PM ×

WSJ: A $500 Car Repair Bill Would Send Most Americans Scrambling

Only 37% of adults have the necessary savings to cover a $500 car repair or a $1,000 emergency room bill, according to a survey Bankrate.com released Wednesday. The finding is little changed from last year, when 38% said they didn’t have the cash on hand, despite a year of steady job creation and the unemployment rate falling to 5%.

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Leftback
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January 8, 2016 at 2:52 PM ×

Markets peak on Good News, as Polemic used to say here. In this case the market instrument I have in mind is the dollar. The Dollar Rally may be over for now, or will end soon after this employment number has worked its way through the python.

USDJPY is showing some signs of rolling over and we think has more potential downside to explore, and that would cause a significant amount of intestinal discomfort to many punters. We like to return cyclically to those investment themes that are working for us, and long JPY has certainly delivered for many this week. JPY is still hated, which means this trade could grow some legs and run for a while.

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fencer
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January 8, 2016 at 2:53 PM ×

I dont feel that this year market/situation compare to 2008. I think its more a year like 2000 on the SPX . Too high/expensive, classic stocks struggling and all the speculation on a limited number of name. SPX struggling, go nowhere or a little down and the volatility increases quite erratically.
Also Sovereign funds are net sellers and no more net buyers.

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Anonymous
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January 8, 2016 at 2:56 PM ×

Every Single VIX ETP (Long and Short) Lost Money in 2015

http://vixandmore.blogspot.com/2016/01/every-single-vix-etp-long-and-short.html

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Corey
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January 8, 2016 at 3:09 PM ×

@washed - commodities are at GFC lows. They may and probably will go down more before bottoming, but haven't they already signaled the round of vol that we are experiencing in China and related mkts? Now we are seeing their policymakers react and we'll have to see how their economy responds to a weaker yuan. Not sure what you mean on the bond mkt. Lt bull seems intact and I don't expect rates to break out of their multi-decade channel until something changes with the amt of debt. The curve is acting up bc we are experiencing a low growth, no inflation scenario w/ a CB raising the front end (not to mention other CB's selling the backend), so its message is muddled but I think it's not out of line. Their is likely to be enough vol that the Fed will probably forego 4x. My money is on the market doing a much better job at forecasting then them so I think twice is the scenario with the highest likelihood.

NFPs - I would expect a slight deterioration, as temp workers and warm weather dissipates, but that seems more muddle than dire straights.

@Nico - yes bravo on Dax. Europe is different than the US. After all GOOGL, FB, AAPL, NFLX, AMZN and Mickey Mouse were all invented stateside. S&P certainly looks like a rolling top and I'm treating it as one until disproven, but sentiment is now bearish. Anddd if you really want to play devils advocate one could even argue the strength of the S&P in the face of such negative newsflow is demonstratively bullish, however unlikely it seems.

Fwiw, I think the weak bounce scenario seems most likely and their is certainly no need to take much risk with all gathering clouds. That being said by the time this gets posted markets will have moved more information will be available and any good trader knows that you have to be able to drop your views and go with what the market's telling you at a moments notice. So in that sense I'm agnostic on the market and don't care what it does.

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Anonymous
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January 8, 2016 at 3:10 PM ×

Flows tracking up to Jan. 6 show $8.8 billion has drained out of global equity funds, with U.S. stock funds bearing the brunt of that, while there have been no “panic redemptions” from the Europe/Japan/emerging market equity funds.

“The best reason to be bullish right now is there are so few reasons to be bullish." -- Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch

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washedup
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January 8, 2016 at 3:49 PM ×

@Corey - re: your point on commodities yes, the view that energy will stay in the toilet is now more or less consensus, and thats what I meant - I think on bonds smart money clearly thinks that either the curve will flatten further or stay here, but its all in a bullish backdrop with deflation continuing to price in incrementally - I think if there is a nasty surprise lurking anywhere its in this arena - by definition its not the base-case.
While it certainly wouldn't be shocking to see spoos drop further here, but didn't we drop 4-5% off the gates last year as well? I am a bit puzzled by the handwringing. Since the Jan 2015 episode. energy is 25% lower and big tech is 10-15% higher - which is why I think the direction of the latter will largely determine spoos - if AMZN disappoints bit in the first week of feb there will be more legitimate reason to go balls short.
interestingly, high yield, that wrist slashing drama queen of Q4 2015, is off the lows last few days.
I am kind of on the same page as Nico - its a traders market - I wouldn't too wedded to publicly known technical levels either, this market is likely to break down or out and suck money in before punishing punters the other way.

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Anonymous
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January 8, 2016 at 4:32 PM ×

Starting to panic yet?

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Macro Man
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January 8, 2016 at 4:36 PM ×

No, but the bond market might be. 10's trading bid for the first time in this whole collapsening

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Leftback
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January 8, 2016 at 4:42 PM ×

Crude and 10s holding hands down the escalator once again, part of our case to stay long US F/I. Cashed in my TLT calls too early.... the fun for Dip Buyers and especially long-suffering Long-Only equity managers just keeps on coming, doesn't it?

I do think a lot of machines are going to be twitching when SPX dips below 1900, and I may join them if we see a big spike in VIX on Monday.

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Anonymous
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January 8, 2016 at 4:58 PM ×

I don't think it'll happen, but I'm gonna laugh so hard if we see another 100 handle fall in the spoos early next week.

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Anonymous
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January 8, 2016 at 5:31 PM ×

How's that for a perfect V recovery during the last hour and a half? Something magical about 1933 on the S&P?

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Bruce in Tennessee
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January 8, 2016 at 6:24 PM ×

https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1


The Atlanta Fed forecast for 4th quarter gdp has declined from 2.8 to roughly .8% in 8 weeks...that is ummmmm, 71%....is there any doubt as to why the markets may be in for correction?

...and then there's this:

http://finance.yahoo.com/news/feds-williams-sees-balance-sheet-163000509.html
It will take the U.S. central bank at least six years to reduce its bloated balance sheet back to more a normal size, San Francisco Federal Reserve Bank President John Williams said, as officials take a gradual approach to withdrawing crisis-level stimulus.



“Our plan is to shrink the balance sheet ‘organically,’ if you will, through the maturation of the assets,” Williams said in the text of remarks Friday in Santa Barbara, California.

...I think many already opined this would be their roadmap. Wonder if this is really the way it will go, or will he be blindsided as Greenie (wasn't!) with the earlier crisis....

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adamantic
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January 8, 2016 at 6:59 PM ×

Niko G 666 to 2010 is the wrong way to look at it.

The companies are different - many years of NPAT sitting on the balance sheet - and they are larger.

The valuation expansion is more troublesome. A 15-20% contraction in various multiples (PE/PB) would only bring things in line with long term averages.

One thing's for sure - the easy part (multiple expansion x cyclical earnings recovery) is over. So noone has any business punting long

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Anonymous
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January 8, 2016 at 8:14 PM ×

I am trying to figure out what can calm the market right now, even temporarily. CNY is still a long way toward its fair value. But a rapid depreciation probably will not work, it more likely will cause a panic.

Free float CNY probably will do but then it is not likely to happen. Or Chinses SEC chairman can resign, which may calm Chinese stock markets for now but won't solve the fear of CNY depreciation. PBOC could cut interest rate and reserve rate again. We all know it is going to cut both rates this year, probably multiple times. So it seems to me that nothing Chinese can do to assure markets over their fear. There has to be a point that the market decouples Chinese financial markets with the rest of the world. The question is just when?

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AL
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January 8, 2016 at 9:41 PM ×

Ouch, price action is officially ugly as ugly can be and monday is setting up to be like August 24th, 2015. I indeed moved to benchmark in equities today by spreading the purchases over the day, but well it looks like timing was wrong.
Chinese authorities have clearly a big credibility issue in their hand now and are showing a goofy-like ability to deal with markets' mechanisms. The problem here is that whatever they do now (should they do anything) risks to ignite the opposite reaction to the one intended.
Global growth scare is clearly upon us, but at the same time unless something systemic emerges (which I don't see at the moment) I am a better buyer of this market rather than a distressed seller: we might have entered a bear market already in the spring last year, but bear markets are usually "tradeable" (right? ... ) and we should be able to unload gently at better levels in coming weeks/months. The world did probably change already in the second half of 2015, but it did not turn upside down from December 31st to January 1st.
Time to keep heads cool and hands firm.

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Anonymous
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January 8, 2016 at 10:12 PM ×

I mentioned prevuously, oil went in a straight line last year as a precursor. No reason equities can't. Possibly more panic in equities though if ETF's need to unwind.

Some are a bit too calm given it is the worst start to a year ever.


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Anonymous
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January 8, 2016 at 10:15 PM ×

AL,

Whistling past the graveyard? It looks like the sellers' heads are pretty cool going into the weekend. What part of global weakness doesn't seem systemic to you?

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AL
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January 8, 2016 at 11:19 PM ×

Relax anons 10:12 & 10:15, you are probably the smartest investors on the planet, while I am the dumbest.
If you are frequent readers of this space, you should know that I share most of the concerns expressed here on the state of the global economy and fragility of financial markets and I cannot certainly be classified as a permabull or a JBTFDer. What I was saying is purely tactical: fear/panic phases are certainly scary but also create opportunities and it is exactly in these moments that you can make the difference. Be nimble when everyone is euphoric, be aggressive when everyone is scared .... It worked for me in the past 15 years. Another thing that worked was to listen everybody's opinion with respect .... Opinions, not hindsight trading.
Anyhow .... I think I'll still manage to bring my kids on the slopes during the weekend and start to worry only on Sunday evening.

MM: hope you are feeling better. Question: ever thought about developing a fear/greed indicator based on the blog and back test it? If memory serves me well, I think there was a discussion about it some time ago.

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washedup
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January 9, 2016 at 12:00 AM ×

AL - enjoy the slopes - to anon's point, this selloff seems to have been characterized by a rather methodical desire to liquidate (i.e. a grind down) as opposed to a bout of panic unlike august. Two points I will make:

1. Bull markets exhibit grind ups interrupted by massive liquidations - bear markets are the opposite - if we are now in one, I would like to see a face ripping 4-5% up day in the next couple of weeks to prove the new nature of this market.
2. Bull market tops a.k.a the last rally in a bull market is indistinguishable from the first massive short squeeze at the beginning of the bear market - march 2000 nasdaq, july 2008 oil, and oct 2011 spx come to mind. Was the move up to 2092 in December on Draghis comments basically that, and just failed to set a numerical high? Its possible, Im open minded but it bothers me a bit that it differs from the other episodes in that it fell short of making all time highs.

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Eddie
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January 9, 2016 at 10:11 AM ×

Might be interesting for some people here:

BIS: Oil and debt

The total debt of the oil and gas sector globally stands at roughly $2.5 trillion, two and a half times what it was at the end of 2006. The recent fall in the oil price represents a significant decline in the value of assets backing this debt, introducing a new element to price developments. In common with other episodes of retrenchment induced by rapid declines in asset values, greater leverage may have amplified the dynamics of the oil price decline. The high debt burden of the oil sector also complicates the assessment of the macroeconomic effects of the oil price decline because of its impact on capital expenditure and government budgets, and due to the interaction with a stronger dollar.

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Anonymous
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January 9, 2016 at 11:06 AM ×

Washed, I don't understand why a bear market has to exhibit a standard technical pattern.

Oil went in a straight line from July 2014 to March 2015 dropping more than 50% before a decent rally on a Monthly. And then that was hammered.

All commodity linked equity markets are in technical bear, Ftse, Tsx etc. Dax in it a long time many others at -15%.

See Socgen chart: http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/01/20150108_EOD3_0.png

The influence of non FED Central Banks to the upside is deteriorating. And we have the unknown impacts of HFT and ETF's in this equation.

The start to the year is a clear signal of the continued, snowballing slowdown.

So many are waiting on the sidelines for value. It's when these enter and get stopped out we'll get the real action.

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fencer
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January 9, 2016 at 12:01 PM ×

Stocks: Again: Sovereign funds are no more buyers. And at this time of the year, companies are soft on Buybacks. So you can , in a distributive/rounding top pattern have straight line falls. The target being the low of October 2014 , before there will be some bargain hunting.
Nobody seem very interested by the Euro: But i am quite sure that when people needs to cover their positions, Euro will be in the first line. 1.15 very soon is a big risk.

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Bruce in Tennessee
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January 9, 2016 at 1:44 PM ×

http://www.bloomberg.com/news/articles/2016-01-08/the-end-of-the-monetary-illusion-magnifies-shocks-for-markets

Monetary-policy makers, market saviors the past decade through the promise of interest-rate reductions or asset purchases, now lack the space to cut further -- if at all -- or buy more. Even those willing to intensify their efforts increasingly doubt the potency of such policies.

“The monetary illusion is drawing to a close,” said Didier Saint Georges, a member of the investment committee at Carmignac Gestion SA, an asset-management company. “With central banks becoming increasingly restricted in their stimulus policies, 2016 is likely to be the year when the markets awaken to economic reality.”

...Looking at the above posts, this may be the "something systemic" AL was looking for. SDS didn't blow up in my hand the first week,so I plan to add to this position next week.

...as far as the article is concerned, this wasn't a "monetary illusion". What we did was fight a credit problem with more credit. So it was a monetary reality. But it appears this is ending. If the Fed is right, that they plan to take 6 years to repair their balance sheet, I would guess that would make them hesitate to add to the problem over the next few years..

2 cents..

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washedup
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January 9, 2016 at 1:52 PM ×

anon 11:06 - of course you could be absolutely correct - it would be a lot more dangerous for longs/bulls if this selloff proceeded in a mind-numbingly steady, low volatility (15-20 points/day) fashion, inviting diving catches of the falling knife.

Look, if its a bear market, and the evidence is certainly growing, there are certain ways to make good money (contrary to popular assumption, owning puts and walking away is not one of them!), but I am not 100% sure nasdaq has joined the party yet - if the market laughs and sells off some more on tech earnings in a few weeks I will be right with you. If we are down to 1600 in spoos before that happens, so be it, I would have missed a good opportunity and it would't be the first time.

BTW you are wrong on the selloff in oil from july to march 2014 - it looks like that steady selloff on the monthly charts but there were massive intraday and daily short squeezes along the way, they just tended to fade over 7-8 day horizons. I know because I was trading it at a fund back then!

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washedup
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January 9, 2016 at 1:54 PM ×

correction - meant july 08 to march 09 in the comment on oil above.

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amplitudeinthehouse
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January 9, 2016 at 3:23 PM ×

Washedup there's is no doubt , the synthetic consolidated swap spreads are lurking beneath this market trying to maneuver their way in on the next move. Too bad their daily book of tranche trades was found in the toilet of the BDC late Sunday afternoon and was soon upon traded within ebay to the highest bidder. No it wasn't me, I'm to busy watching the football around the corner betting shop these days to be concern with that desk, if you could call it that. The people that have made their money in this market are covered like you wouldn't believe, and for the rest of us , we're just mugs in this market , and to their thinking , we're chasing money, fame and status..in otherwords, bullshit! So you just do your best mate, and I'll go back to doing what I do best , doing my own bullshit, bullshit that I know that will keep me at peace of mind.

"What was that line again!"

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Bruce in Tennessee
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January 9, 2016 at 3:40 PM ×

http://www.nytimes.com/2010/04/04/opinion/04burry.html?_r=0


...I suppose it was because he didn't close his mind to it.

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Gus
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January 9, 2016 at 4:47 PM ×

http://apps.npr.org/commencement/speech/michael-j-burry-university-of-california-los-angeles-2012/

Bruce ... this might be worth another listen to.

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Corey
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January 10, 2016 at 5:39 AM ×

Wait, did amps just make sense?! Well now I know somethings really wrong;)

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hipper
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January 10, 2016 at 8:44 AM ×

Kind of thinking simple here. A decent base case could be somewhere between the apolalyptic prophecies and possible euphoria of "China will recover past 7% and US resume to previous decade +3.5% growth". What I think could be plausible is that instead of still waiting for higher growth and the recovery picking up, is that actually we've already run through the major course of the recovery. It's just that the new normal growth is lower than it was last time. So the cycle might already be ending within 1.5 - 2 years of time, and monetary policy might or might not have added some length the average or median cycle this time.

It could be plausible to expect CBs losing control and becoming more or less irrelevant than they have been in the past many years (kudos Nico for the mindless lemming reference). The Fed and whether the tale of four hikes comes into fruition might become irrelevant too, considering the ability to affect rates or FX, in a case where the market sees growth slowing down and a policy mistake (like wise I expect Draghi would need to go in way deeper than his lunch buddies would allow him in order to squash the Euro efficiently and long lastingly). And then factor in the current account balances between the two areas. In the case that the market sees a policy error the yield curve would probably only flatten out and not be that big of a deal in terms of rate differentials or driving FX. So I'll fit that into my base case that DXY might've already seen its top some while ago, although still hovering close. The market seemed curiously uninterested in the blowout NFP this week and we're bound to get some NFP mean reversion later any way. Meanwhile the EZ PMIs have been surprisingly good and the monetary aggregate and private credit growth were still picking up last month.

Applying into the base case I like the idea of the gold (miner) hedge which has done well so far during this weeks renewed August stresses from China FX and growth scare and if DXY has peaked, it would fit in that as well.

Oil is falling into interesting territory. First if it's true that we'll soon start seeing many shale oil company price hedges dropping off, then we could start seeing some long awaited supply cuts as profits still take a turn to the worse and company liquidity will go under the magnifying glass. There have also been some heavy integrated oil CO capex cuts and some smaller ones here and there . Also I think oil is in territory where it's now continously creating geopolitical tensions between some oil supplying nations and also social issues within some nations whose social benefits rely on oil revenue. While not trying to make any predictions, just rather suggesting that a lot of interesting small issues are piling up for oil which should continously increase the likelyhood of something unexpected happening at some point, so it seems more like a waiting game for the patient ones. Long term fundamentals are bad of course because the oil is still there in the ground with the advancing tech and lower costs to dig it up.

So yes I think the gold hedge is a good idea in case the US starts to gradually slow down - if nothing else - because cycle maturity, and EZ is still expanding so equities might do nicely. The annual dividend orgy festivities coming up soon too. I still think EZ equities atleast can do OK: just buy companies with a clean B/S, low P/B, proven earnings which have rebounded from past recessions and where management isn't screwing the shareholders over through dilution. If the slow down does gradually materialize then something like "distressed" HY/EM debt might not perform that awfully either and would certainly become a buy if there were to be some high profile blow ups. The biggest risk for equities could be unexpectedly rising inflation, as low inflation has been one of the main contributors in the past allowing such low risk premiums and multiple expansion.

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Leftback
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January 10, 2016 at 12:28 PM ×

Great summary there, hipper. Amps, Stop Making Sense... freaked me out! Here are a few weekend thoughts from the Hammock as we review the first week in the rear-view mirror.

We are thinking we may take a trip down to the sub-1900 level in SPX, before the first of many vicious squeezes of 2016 begins. It's been an amazing start to the year, I could never have imagined such strong selling in the face of the New Year Q1 fund flows, but there really was no value anywhere in stocks.

Looking around, Europe is very oversold and probably represents the best value, but then one has to worry about possible currency issues, and I think we know they are all going to go up together, so for punting purposes it might be time to just do a global equity ETF or good ol' Spoos, or even bet on beta for the next bounce. Still pondering that one.

Readers will be amused to know that YTD performance is 0.00% at the Hammock. We are not actually 100% in cash and we do actually have positions, no we have not merged with Madoff Investments. Our boring benchmark is 0.5[AGG + SPY], so clearly we are ahead of the game there! We are going to be making incremental progress this year as we decided to make the capital preservation and management rules a little tighter. This really could be a year when 5% ends up looking fantastic.

In 2015, we ended up doing +4.2%, obviously beating the benchmark by several points, although the high water mark was +5.6% and if we had managed the strong dollar a little more wisely we could have done much better. MM was happy to point out at various points through the year how we were c*cking things up and we thank him for his input. He likes being right.

We should be doing better than 0% YTD, but held a little more EM and European energy exposure than we should have going into the year, and didn't really get our act together in terms of hedging that risk. In addition, when we punted options although we cleverly decided to be long of JPY, we were simply not sufficiently aggressive in buying downside risk.

That 0.0% first week looks impressive if you are a Long Only Small Cap guy down 6% already, and it is going to look awfully good when we can slap on a 2-3% gain on top of it after we finally ride the first rip-snorting face-ripper of the year.

It is going to be a doozy, 2016. I think you can see that already. Rates and bonds will be a tricky and often contrarian trade. I think REITs and utilities etc. will have a big stealth rally this year. Equities, commodities, the volatility will make you money if you are good, but you better be nimble.

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amplitudeinthehouse
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January 10, 2016 at 1:51 PM ×

I'm not writing here , Leftback for your entertainment, and I wasn't writing here asking for more grief. You only have to peruse today's financial paper to see that people have their own problems to worry about in this market. But I won't be taken for mug on mechanisms which I personally am surrounded by and unfortunately seemed to be a cog in. Everything works cycles , even markets, and this one has bottomed out or top out depending on your fabrication bias, your selection bias or confirmation bias. Everyone has a bias in this absurdity market, even me. But at the end of the day no one is going to give me on a silver platter an absolute EV that's guaranteed after each season of punting but myself. So where does this blog , that blog or Joe blog stand in the scheme of things. Last I saw, no, you just don't throw money at the computer and expect it to earn for you. Sorry, doesn't work that way. Oh , have you noticed I'm a mad punter and that's all I really give a f##ck about.

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Leftback
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January 10, 2016 at 11:40 PM ×

No worries, Amps. We like your stuff. In fact we liked your 3:23, and always enjoy your perspectives. Cheers, mate.

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Polemic
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January 10, 2016 at 11:54 PM ×

NZ open FX stop fest. USD ZAR spiked up 7% and has given most of that back.

Panic on the open but China being awaited. I can't believe they will let it go.

I am watching the psychology of a general melt down but it seems far too popular to actually work.
Add there is one biggy missing. This is a financial melt not an economic one. It is different from 2008, not least because we have had a 2008 and been partially immunised by it. An Economic crisis only stems from a financial crisis if the money stops flowing. Which is what happened in 2008. This IS different- liquidity can be turned back on again in a flash and balance sheets are in a better position now than they were then. Yes there is cart loads of debt but most of it is owned by the CBs and CBs don't go bankrupt they just print to replace.

The idea that there is going to be an economic crisis caused by a financial crisis that is in itself caused by fright of rate rises that are due to there NOT being an economic crisis seems bizarre.

We are 7 days into the year. Take a chill pill Will.
EM ( EX Southern Africa) is almost a buy.

In Liquidity we trust.
Friday's post on more than that here..
http://polemics-pains.blogspot.co.uk/2016/01/weak-week-waiting.html

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