Stress

Two up days in a row!   Way-hey!  If risky assets keep this up, soon punters will be humming "Happy days are here again" on their way to work each morning.  Well, perhaps that depends on the punter.  While equity longs and dip-buyers are no doubt relieved at this week's stabilization, oil's dip below $30/bbl suggests that all is still not quite rosy in paradise.  However, where there is market stress, there is also potential opportunity.  Here are three areas Macro Man's looking at:

* Oil.  It's been discussed ad nauseum here, in the comments, and elsewhere, but it's sort of the elephant in the room these days, so the discussion is merited.  There has been some suggestion that oil is a long-term buy, largely because the number (i.e. price) is low.   Macro Man admits to having some sympathy for this view, and it's always good to be wary when analysts are falling over themselves to downgrade price forecasts.

That being said, and with the caveat that your author makes no pretensions of oil expertise other than that of a generally-informed macro observer, there remain some concerns about the prospects for a bounce.   To be sure, a one- or two-week pop has little to do with fundamentals, so if that's all you're playing for it's easy to disregard them.   That being said, as Macro Man pointed out last month, net supply/demand dynamics stink, and as far as he can make out there's little prospect for near-term improvement.

Macro Man often likes to look at one-year trailing Sharpe ratios for asset prices to get a sense for when trend momentum has reached an extreme.  (You can of course do this with shorter time horizons, though the signals are obviously quite noisy.)  Looking at crude, it's hard to make the argument that the trend momentum is overcooked even with the latest decline; the fall was much more monolithic a year ago.


Looking at a similar chart for the "equity crack" trade mentioned yesterday, we get a somewhat similar story:  momentum remains against energy. of course, but the Sharpe is off of its highs.   That being said, those highs handily outstrip any prior reading in the history of the indicator, which usually makes Macro Man a tad nervous.


One clear winner from the whole oil debacle has been the consumer, who has benefited from the collapse in gasoline prices- the average price per gallon across the country is now below $2.  That being said, the consumption numbers have been somewhat disappointing in light of this; one of the big issues for the first half of this year is whether the beneficent impact of lower energy prices begins to be felt more acutely across the economy.   If so, then there's ample room for positive surprises.  If not....then, to quote Ricky Ricardo, the Fed may have some 'splainin' to do.






* Eurostoxx dividend swaps.   Macro Man has written about these periodically over the years, as they occasionally offer very interesting set-ups, and they are a fascinating product intellectually.   Although they are ostensibly a bet on the level of dividend payouts of the SX5E in a given calendar year, in reality they are much more of a bet on the market's willingness to provide liquidity.   This is because there is one natural seller of this instrument- structured product desks in Europe- and no natural buyers.  As such, the premium demanded by buyers offers an interesting insight into risk appetite- or lack thereof.   What makes the product so interesting is that it settles into the actual dividends paid by the companies in the index; while there is obviously some forecasting that goes into that, over the last several years the payouts have been remarkably stable, particularly given the sovereign crisis and pressure upon various banks (large payers in the index.)


The consensus forecast is for payouts to gradually rise over the next five years, though in fairness five years ago there was a similar forecast profile that failed to materialize.   What is clearly not forecast, however, is payouts declining to levels below those observed in the immediate aftermath of the financial crisis.   And yet that's what priced into the curve these days- the orange line in the chart below.



What's particularly notable is just how much the curve has ratcheted lower over the last 3, 6, and 12 months, despite the improvement in both fundamentals and the degree of ECB policy accommodation.   This is clearly indicative of a market unwilling to furnish liquidity to the structured product guys, either through risk aversion or because specs are already long and wrong.  However, in a world where 5 year German govvies yield -0.11%, being able to generate a CAGR of nearly 6% over the next 5 years (assuming an unchanged index dividend payout) looks pretty decent.   Of course, there are risks to the payout level, even if you own these on a hold-to-maturity basis.....but then again, those risks are two-way.   Indeed, Macro Man would suggest at this juncture that after five years of largely unchanged payouts, they are quite possibly tilted to the upside.

* China.   It still seems kind of crazy to those of us who were playing China a decade ago, when 1 year NDFs would price a deep discount to spot, but China is now officially a carry trade.   Thanks to the heavy intervention and lack of sterilization in money markets, there has been a nasty liquidity squeeze.    On Tuesday, overnight CNH HIBOR fixed up at 65%, with cash rates having traded in triple digits.


FX forwards have unsurprisingly blown out as well, with tenors out to 1 month pricing CNH yields in double digits.  The HKMA did eventually inject some liquidity yesterday; while today's fixes have not been announced at the time of writing, Macro Man would expect a further easing if we assume that the authorities have decided that enough's enough in the short run.  While you can see the decline in the 3 month forward points, there's still way above any previous level other than the ding-dong highs of the August crisis.

For the time being, it's difficult to think of CNH as anything but a low-Sharpe ratio trade.    The carry makes it difficult to be short, as does  the apparent line drawn by the authorities.   That being said, it feels like you're only one lousy day in the equity market to put the boot into CNH, and even the 3 month points only cover you to the apparent line in the sand at 6.69 if you are short dollars.  Sometimes it's best to head for the sidelines and await a bit more clarity; now looks like one of those times.  Although its anathema in many quarters, Macro Man would probably prefer the AUD in some guise to play a China stabilization.   China's trade data today is certainly suggestive that a relief rally would not be amiss.
 
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Hoboworldwide
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January 13, 2016 at 7:43 AM ×

SX5E dividends look cheap but the make or break will be if Total cuts dividends. That's quite a lot of stock specific risk.

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Nico G
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January 13, 2016 at 8:52 AM ×

well said Hobo hence why so many structured sellers would love to lock Total generous div of bygone $100+ days

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CV
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January 13, 2016 at 9:23 AM ×

The peanut gallery on Twitter was whispering about negative oil prices yesterday. Something about cost of carry, etc etc I think, but I didn't listen. Looking at my own portfolio and the pain endured in EM and EM linked names recently, this is a good bet for a bounce.

Whether you're a SELLER of this bounce on a 12-18m timeframe is really the key question I think!

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Inflection
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January 13, 2016 at 9:47 AM ×

Totals cut is likely a near term phenomenon tho
So there is a curve trade to be had if you think this is an issue
I think therefore It is a more technical issue

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Anonymous
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January 13, 2016 at 11:25 AM ×

Oil hasonly bounced a dollar off major lows.Partly because of 1500 lot bid on the low into close. Partly because of bottom pickers. I can see a small short squeeze into DOE but if the figures are anything like API's, it's back down we go. As has been the trade every week for an age now.

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Polemic
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January 13, 2016 at 11:34 AM ×

Ool doesnt stop falling until supply is cut or demand increases. Demand is pretty unresponsive to price on the down side due to green issues though i have just calculated it is now cheaper to heat your house in the UK with oil rather than gas. Which is pretty stunning.

So supply needs to fall. The straightjacket to keep pumping more as prices fall to pay for fixed financing costs is a cruel twist to supply and demand curve. But the problem with financing is not only a twist to supply curve but also to effects of bankruptcy.

If we are waiting for companies to fold to reduce supply then we may be disappointed. The co will fold wiping out the investor but the asset will be sold on.. probably at a song and the new buyer will be running at lower marginal production costs due to lack of debt finanancing or infrastructure set up costs.

The prinary effect is on leverage to oil rather than supply.

Just a thought as I am waiting to hear what Premier oil are suspended from trading to announce..

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Polemic
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January 13, 2016 at 11:35 AM ×

And appols typos.. no reading glasses.. too small a phone keyboard and a bouncy train..

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Leftback
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January 13, 2016 at 12:31 PM ×

We joked about negative oil prices yesterday. Now the media are at it.... surely this is a contrarian indicator?

Oil at $10, Maybe Even Under $0?

We will look back at this and laugh. The conditions are ripe for a face ripper. Sooner or later. A whisper of production cuts, a bit of weakness in USD, and this could get interesting, there sure are a lot of greedy shorts out there.

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Leftback
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January 13, 2016 at 12:36 PM ×

LB would be happy to take delivery of some free heating oil right now for the boiler here in NYC as the building seems to have no heat. LB is going to be freezing his tootsies off at Hammock Capital...

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Polemic
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January 13, 2016 at 12:38 PM ×

Why the heck would you pull oil from free storage (underground) and then pay someone to take it off you to stick it in expensive storage? May happen v v v short term before you can fully turn the tap off ..but really??

This idea of storage or placement is so complex I don't think its worth trying to unravel. I pay far too much for water to be supplied to my house, I then pay for someone to take it away. In Cumbria this winter the price of water was monstrously negative with folks willing to pay very large amounts to get it out of their houses.

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Polemic
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January 13, 2016 at 12:39 PM ×

OK this captcha picture test is getting absurd 'please identify the indoor swimming pools' And yes there were a couple of outdoor ones there to confuse too

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washedup
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January 13, 2016 at 12:42 PM ×

Here is my question - If I finance oil inventory with negative oil prices and negative interest rates, do I still end up paying carry?
MM I have a friend/ex colleague who was also banging the drum on those dividend swaps - I am not sure what it would take to get european stocks going frankly (I think divvies are just caught up in the general malaise), but I am beginning to wonder if it has the AAPL value trap problem. In the meantime, Europe remains the fastest growing global prefecture per my read, for the 2nd quarter running.

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Anonymous
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January 13, 2016 at 2:22 PM ×

Just a quick question on yet another day when Edwards the Bear roars yet again. Did he ever call anything in a way which was subsequently seen to be reasonably on the money? I don't know his history other than he seems perpetually pessimistic so I wondered if anyone knowing more might answer that question.

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Anonymous
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January 13, 2016 at 2:28 PM ×

Total has started scripping... That allowed SAN SM the last bastion of the SX5E DIVs to pay > 100% EPS every year for 4 years I think (DPS was 260% EPS in 2012). That only stopped when Botin died (RIP) and the regulation went from BoS to ECB. If there is will in the board room at Total and a sufficient number of idle shareholders, they can go for a while. Big if naturally.

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Leftback
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January 13, 2016 at 2:33 PM ×

Pol, ready for a spot of mean reversion and vol selling? China A-shares down in o/n trading but the Hang Seng and Nikkei were OK and USDCNY is fairly stable. FX instability is the main danger in terms of Asian contagion, not the Shanghai index.

We like what we have on the book this morning. What price a neck snapper in oil to $35-36 and a concomitant screamer in XLE? Nobody expects it.... it would cause max pain for a lot of newbies who entered a crowded trade. Fun.

Edwards has called 100 of the last three equity market meltdowns. He has Gartman-like status in terms of market timing. Talk about a one trick pony. Another permabear, Marc Faber, makes much more varied and insightful calls, and can even turn bullish. Al is a lot like Gary Shilling. He has his shtick and he sticks to his permabear knitting, not a lot of nuance to the calls.

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Anonymous
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January 13, 2016 at 3:03 PM ×

Huge selling of equities on the US open...

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Leftback
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January 13, 2016 at 3:11 PM ×

In late August, after the initial Chi-pocalypse was over, crude traded up through the 50 day, and went quickly from $41 to $55 or so, about a 30% move. I bet that was painful for Mr Shorty. Here after tagging a sub $30 price, the 50 day sits up around $40, which would be a 30% move. Not saying it will happen but you have to respect the bad things that Mr Market can do to you.

Let's imagine a change in the narrative from "global commerce is ending" to "China is a big economy that is still buying stuff, keeping power stations running to heat the cities, making stuff and putting it on boats to other places". Once that sinks in, the psychology of the market can change quite a bit, and not just in crude but in other commodities like copper.

Longer term supply issues remain, but we may see more of a focus on the demand side of the equation here for a short while. Of course there is also scope for a bit of macroeconomic mischief here, isn't there? If I was Putin, or a very naughty OPEC minister, I might decide to incinerate the shorts by tossing out a few comments about reduced production. Just for the FUN.

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Leftback
admin
January 13, 2016 at 3:20 PM ×

Anon @ 3:03. That you, Mr Gundlach? Love these differences of opinion here on the blog, that's what makes a market.

I can see today being a bit of a battle between bulls and bears. Tomorrow is going to be a screamer, we think, and possibly even a gap open as op ex looms. Vol selling institutions will be keen to help out their brethren on the options desk who are looking at a dismal January so far. Gunning the Spoos overnight would help to bail out the underwater options desk and discomfort the shorts by taking out a large raft of SPY puts overnight, for example, forcing a lot of punters to cover and triggering what might develop into one of the more memorable and unexpected face rippers in recent years.

The energy supply data will be interesting. Not so much the data, but the reaction to the data will be revealing. Everyone is expecting another monster build etc.. but perhaps it will come in not quite so monstrous and sellers may get nervous.

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Anonymous
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January 13, 2016 at 3:47 PM ×

Anon from 11:25 here.

Go DOE GO! picking bottoms = smelly fingers.

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Thud and Blunder
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January 13, 2016 at 4:18 PM ×

I agree on SX5E dividends; I think this is a case of enthusiastic structured product issuance meets Dodd-Frank meets burned buyers, mixed with the general reticence of risk capital and general apathy. There are a number of technical factors at play, but there's a price for everything, and this seems a generously fair one.

If we were looking at imminent divi cut pressure, we'd be looking at a curve more like the 2011 or 2012 scenario. Steep drop in the near dates, and then flattish. This 5% per year dripfeed over the medium term is not a credible scenario (bearing in mind index reconstitution is your friend).

European divis received a healthy stress test during the Eurozone crisis and its austerian aftermath. Dividends muddled through. If I buy the back end of the divi curve 30% below spot, put it this way: if I'm going to lose money on this, there's probably not a lot else in equity space I'd rather own anyway.

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Leftback
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January 13, 2016 at 4:33 PM ×

Agree 1000% with the analysis of European divis today. Things are nowhere near as bad in Europe here as in 2008/9 or 2011/2 yet expectations are incredibly low.

Price is News department reports sightings of higher lows in a variety of instruments. First Mr Shorty stops making any money, then he starts losing the money he has been making. Pretty soon he is off like a prom dress.

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Anonymous
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January 13, 2016 at 4:52 PM ×

Message to the longs: https://www.youtube.com/watch?v=meOCdyS7ORE

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CV
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January 13, 2016 at 5:17 PM ×

He he he @ that Anon 4:52. Sure does look squeaky bum time here. If it doesn't hold convincingly here, Spoos are headed very low, very fast. I don't see it, but my name is not Albert Edwards, and I am not an Austrian economist, and as a result, my opinion counts for nothing it seems in this environment ;). Looking forward to getting paid for both sleeping and driving re -ve mortgage rates and oil prices.

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Bruce in Tennessee
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January 13, 2016 at 5:43 PM ×


BinT, beware the rip-snorting face-ripper. The usual remarks about Mr Shorty and Cold Steel might be in effect soon.

...Thanks Lefty. You know, I almost started not to post that yesterday, because, even though this chat room is head and shoulders above most, it still often gets down to defending the way we think. I really couldn't care about that...I've explained the logic to my latest trades, somehow I got caught up in reading the various punters here and decided to add 3 cents. But I am not looking for the trend this week. I've been following the markets most of my adult life, and this just looks like the time for the treatment option the CB's took for the credit crisis to be reexamined. Could I be wrong? Certainly. I am trying as much as I can to sort through the jetsam and flotsam from the 2008 disaster of the credit ship of state. My thoughts are that this comes to and end this year. Maybe some make money this week, maybe next week. I'm hoping to make money this year.

...Put a hamburger on it?

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Anonymous
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January 13, 2016 at 6:47 PM ×

Relentless selling since open. Similar to Flash Crash?

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Anonymous
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January 13, 2016 at 6:51 PM ×

To those who JBTFD, did you perchance have your charts upside down?

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Anonymous
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January 13, 2016 at 7:35 PM ×

THERE IT IS ! +116bps on 2-10yr is the flattest curve since January 2008 ..... Yellen should be impeached (or sent to Gitmo)

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Anonymous
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January 13, 2016 at 7:37 PM ×

The Russell 2000 has just erased 2 YEARS WORTH OF GAINS. These are its lowest levels since 2013

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Nico G
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January 13, 2016 at 7:43 PM ×

Europe is trading like a real market as always (and trying to just about print a higher low for the week) but spoos have definetely changed from a rigged market, to a normal one. Shame i didn't have time to short above 1950. The third day of opex week had good odds to bring a higher short entry.

to the mocking Anons out there, have you been bullied when you were little boys? what satisfaction do you take from mocking others from the safe realm of anonimity. Have you asked yourself what good you could bring to this discussion? I know a few good porn sites if you need to relax, and a good krav mage camp if you ever wanted to become men

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Skyguy
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January 13, 2016 at 7:43 PM ×

BnT,

Good job on that SDS call. I haven't traded the ultra-shorts in quite a while, but from what I remember, I was ok with 5%+ on a broad based index (spy, nas) and 10%+ on something more sector targeted. Don't hold them for too long, they do erode over time and can do some unpredictable stuff under stress.

Good luck,

Skyguy

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Leftback
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January 13, 2016 at 7:49 PM ×

Ugliness.... here is that sub-1900 level that everyone was waiting for, we were not sure that we would see it this time around, but hey, Price is News... still, the week isn't over yet. But it's ugly.

Retest of the September and possibly August lows dead ahead. Good call by those who saw that one, we certainly considered it but it seemed too obvious. We were wrong. Nice work, B in T. Not the first time...

Keep smiling CV, and share the pain.

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Anonymous
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January 13, 2016 at 7:49 PM ×

Strong whiff of capitulation from my vantage point:
- front page news: check
- prominent bears roaring: check
- gloating comments: check
- competition for boldest worst-case forecasts: check

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CV
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January 13, 2016 at 7:52 PM ×

Ha, thanks Nico, the day that I should look towards you for support ;). Don't worry, though ... we're more thick skinned than we appear. Indeed, I have pretty much done nothing with my portfolio this month, and a 40% cash cushion, some gold and ags, have done wonders for RELATIVE performance. But being down 2.7% and 5.7% MTD and on a six-month basis respectively (cash diluted!) isn't really my definition of good performance either way. Of course, many punters would take these numbers today, but we're not playing with leverage up here in Retail r Us LLP, so keep that in mind!

Interesting that FANGs are getting hammered today while some of the more defensive names are not being killed as much. Still, Mr. two-shoe POMO punter faces his toughest time yet. The problem is really that if it goes here, it could be a flash crash, no support whatsoever on Spoos until way below.

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Anonymous
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January 13, 2016 at 8:08 PM ×

CL options tomorrow and Equities Friday.

Also, China closed weak last night. It still hasn't bounced.

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Leftback
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January 13, 2016 at 8:12 PM ×

The action in mREITs is telling, they should be benefitting from lower rates today but it is a babies and bathwater job out there. Wonder how long before Bullard comes out and reminds us they can do QE4 or someone on the Fed decides that four hikes are unlikely in 2016?

Scenario A and B have always involved a bounce just above or below SPX 1900, but Scenario C as painted by CV involves a deep dive down to the 1575 area (2007 top). That's not going to be much fun if it happens.

At this point the Liverpool v Arsenal game seems more tempting to watch than Spoos. Sometimes you just have to take your lumps and this is one of those days.

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Anonymous
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January 13, 2016 at 8:13 PM ×

Americans liquidating equities to buy PowerBall tickets...

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Anonymous
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January 13, 2016 at 8:14 PM ×

None of your gay porn for us please Nico, thx.

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Macro Man
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January 13, 2016 at 8:16 PM ×

Leave the 6th grade insults in the schoolyard, please. Anon @ 8.13...it's funny 'cause it's true!

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Anonymous
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January 13, 2016 at 8:19 PM ×

Day is not over yet - Spx might still close above 1900s.

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Anonymous
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January 13, 2016 at 8:26 PM ×

Funny, equity and powerball! Just read somewhere that if you buy all the combinations of Wednesday's powerball, you only need to spend less than $600 million. Then if only you get the powerball ticket correctly, then there is a 300% of pre-tax profit.

So maybe someone is selling equity to buy powerball tickets. Consider the probability of second person getting that combination being close to zero.

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Celeriac1972
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January 13, 2016 at 8:27 PM ×

Anon 8:19 - rip snorting face ripper now underway....

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January 13, 2016 at 8:31 PM ×

@MM - Assuming we don't have collision risk (probably do, but can't tell how many tickets have been bought) and one takes the annuity for the full jackpot amount, a $2 powerball ticket has a positive expected return! Maybe it's a few fund managers trying to beat benchmark by buying a few tickets?

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Anonymous
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January 13, 2016 at 8:34 PM ×

One ticket takes the full amount is a monster assumption...

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Anonymous
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January 13, 2016 at 8:34 PM ×

V muted 'bounce' so far in spoos... think we close negative.

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MrBeach
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January 13, 2016 at 8:36 PM ×

@LB: With rate spreads declining, it is not surprising that mReits are taking a hit.

I am surprised at the delayed reaction in long term rates since the start of the year. I expected bond prices to rise much faster a few days ago. Perhaps the Chinese were sellers and have recently slowed and/or stopped?

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January 13, 2016 at 8:39 PM ×

@Left - I apologize for asking so many questions lately, but I like to learn from others. So if you don't mind may I ask another? From a retail perspective when I find a contrarian concept I like to invest in I typically find a vehicle that has a decent options chain on it and sell a put vertical spread. Do you or anyone else do this? The downside risk is known and I'm usually always a bit early to the party. I find it's a good way of starting a position with kevlar re-enforced kevlar (so to speak).

p.s. - I've also got a lot of time to ask questions as the US oil patch is just about dead at this point.

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January 13, 2016 at 8:41 PM ×

Anon @ 8:34 - Of course it was tongue in cheek. But still $2 is daydream fodder for exactly how I'd quit my day job. It'd be epic let me tell you...

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abee crombie
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January 13, 2016 at 8:42 PM ×

LB, mREITs look to be reacting to a negative FHLB ruling, where they were getting cheaper financing. You know the direction of the trend when even those players who dont rely on FHLB are getting killed. As for the laggards holding in, I would disagree, IWM clearly below Oct 14 lows and no stop ahead. For those with a Bloomy, DJTSMO is also leading to the downside, its an index of momentum laggards.

I have tried to be bullish. I am buying some stocks I have real conviction in, but it looks pretty clear that the markets want to go down. I am dumping/hedging a good portion

Bank earnings start tom. I dunno, I cant see them blowing things out. Risk looks clearly to the downside. As for oil, lets see a really large front month spread which means ppl are taking expensive storage. Until then the seasonals are bearish with the current supply overhang and E&P equities are still implying $50 oil

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Leftback
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January 13, 2016 at 8:52 PM ×

Marshall, we have been playing small for some time in selected names and options and only added more risk very recently. So although painful, today is not yet an unmitigated disaster. But there is always tomorrow...

We are always always always early at market turns and everyone here knows this, although we have made some good calls over the years. So it's nothing new to be right about market direction but wrong about the timing (also known here as Wrong).

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Nico G
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January 13, 2016 at 8:55 PM ×

so the billion people told to sell the rally sold the rally - before we could go short. Amen for now

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Bruce in Tennessee
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January 13, 2016 at 9:20 PM ×

Thanks for the pat, Skyguy, and I think I will go back to staying silent about stock picks and what I'm buying or selling. Thank goodness I'm not managing money for other people....I have found in my travels that most people do what they're going to do no matter what your good faith efforts to change their minds...

I will say, just as a fellow who has learned the way most do, that is by losing money in the market and figuring out what I was doing wrong...that in volatile markets like these, I would never play without stops...however you have to also make allowances that the stops have to be set a little more realistically now, or you'll get stopped out too often...this of course, is not for Skyguy, but it seems there are quite a few unseasoned peeps that visit here...

Best of luck trading...

BinT

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Anonymous
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January 13, 2016 at 9:47 PM ×

BUD just sold $46B of debt in 7 tranches on $110B of bids

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Anonymous
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January 13, 2016 at 9:56 PM ×

Nice work B in T. I was in SDS when the bottom briefly fell out of the s & p back in August. I sold half immediately but lost the rest. The market laughs at our or at least my best laid plans. Definitely, I have done worse and hope you do better!

Rossmorguy

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Leftback
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January 13, 2016 at 10:05 PM ×

Good day for you B in T, and to your first, but it is just one day. Enjoy the spoils.

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Bruce in Tennessee
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January 13, 2016 at 10:08 PM ×

Lefty, Thanks. And you know I am a fan....

Tomorrow I hike all day at the Big South Fork...so I'll miss whatever happens...

Good luck with your trades.

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MrBeach
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January 13, 2016 at 10:31 PM ×

Apropos of nothing - is this market for the next few months about earnings or about jawboning and/or real central bank intervention. I can't imagine the Fed/ECB/BOJ/PBoC are going to let their hard earned work pop in a matter of weeks.

To that end - I distinctly remember the BoJ announcement of Oct 31-2014 on the dot as QE3 ended. That was a little too cute and for the conspiracy theory minded suggested a coordinated baton-like handoff.

The Fed seems to be painted into an ideological corner. Unlike Bernanke, who seemed a little trigger happy with asymmetric emergency rate cuts of 0.75 a shot, perhaps Madame Yellen may be made of stiffer stuff?

Seems a bit early for BoJ & ECB to intervene. Perhaps when yen breaches 110, euro at 1.15?

So that leaves the PBoC - what can they politically pull off? I know nothing about the decision making there. Is there a round of QE in their near future?

I wonder what this week's calls between Central Banks are about?

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Leftback
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January 13, 2016 at 10:33 PM ×

Bad day for us but it's only a flesh wound, and we could be this guy:

Pershing Square Down 11.4% YTD

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Anonymous
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January 13, 2016 at 10:46 PM ×

MrBeach - You raise valid questions regarding Central Bank 'puts', but I'm reminded of Draghi's recent failure with EURUSD late in 2015 and starting to wonder if the market might be calling the Central Banks' bluff... Regarding BoJ and PBoC, both will try to play games, but they are also fighting against each other to some extent. The other wild card is the rise of populist politicians/parties many of whom are aggressively "anti-central bank" (seeing them as a key cause of the problem, rather than the solution). Interesting times ahead...

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negative volatility
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January 13, 2016 at 10:52 PM ×

Long time lurker, thought I'd join the discussion... Appreciate all the the great stuff from the posters here and of course Macro Man.

So many conflicting signals here but to me it feels like a local bottom. usdjpy unch, oil barely moved, and rates basically unch. Momo names in equities got bundled on no news which is an indication of margin calls to me. The part that worries me is that the put/call ratio hasn't spiked to where I like to see it before we rebound and the VIX is still only 25ish. So while the selloff in spuz felt pretty messy over the 2nd half of the day, I expected more of a follow through in the vol world. It could be that there are far fewer systematic vol sellers since August, and thus a lot fewer people that need to cover. Maybe we get another day of dramatic selling, but it's hard for me to see us pierce the intraday August low of 1825ish this month. Earnings expectations have been so beaten down that companies should be able to beat.

I sold some put spreads on SPX today expiring next week and obviously feel terrible about it, but for the aforementioned reasons, I do thin this is a local low in equities. One caveat to the above is that hy and IG both widened a decent amount today (25 and 6 bp respectively), although the AB deal honeybadgered the market

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Anonymous
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January 13, 2016 at 11:03 PM ×

Did a Commod fund blow up (speculation below)

http://m.benzinga.com/article/6140714?utm_referrer=https%3A%2F%2Ft.co%2Fy3CmgPv5Ij

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negative volatility
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January 14, 2016 at 2:42 AM ×

adding to what i wrote above... regarding there being margin calls... could this effectively be a global margin call for petrodollar economies? eg, the saudis have a 100bn dollar deficit to plug this year and im sure selling equities at 6 yr highs doesn't sound so terrible. it would explain why the selling is orderly (no vix rip, arms index-on bbg- not spiking, realized correlations in spx sub 70%, and not yet seeing a very high ratio of etfs and futures to cash volumes)

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Leftback
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January 14, 2016 at 4:43 AM ×

@neg vol: It was kind of a bizarre day, there was very little movement in USDJPY, the consensus carry monkey, so the selling wasn't part of a macro unwind, and volatility was relatively restrained. Perhaps it was just all the little guys getting margin calls on their IBB and FANGs and having to sell anything not nailed down. Usually we perform least well on days that are somewhat uncorrelated with FX and highly irrational and this seemed to be just such a day, and Lord knows we did not perform well......

Overnight we see more selling in Tokyo, little if any FX movement and Shanghai for once is not too panicky at all. Crude is still stable in the $30-31 range. Perhaps it's not as desperate as it seemed late this afternoon when they were definitely throwing babies out with the bathwater. What will it take to start a squeeze? Something is going to be the trigger.

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MrBeach
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January 14, 2016 at 5:51 AM ×

Useful thoughts by Tim Duy about whether an imminent recession can be seen in the data:

http://economistsview.typepad.com/timduy/2016/01/so-you-think-a-recession-is-imminent-employment-edition.html

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Nico G
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January 14, 2016 at 6:38 AM ×

commentometer is exploding

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Nico G
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January 14, 2016 at 8:12 AM ×

Europe still painting a constructive picture

translated as 'please rip higher so we can short the devil out of DM'

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Booger
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January 14, 2016 at 9:59 AM ×

CNH Hibor to 65% to me indicates the Chinese peg is in serious trouble. One should not be surprised if it breaks in the next year. This is the highest interbank rate since the 1998 Asian currency era. Russia's interbank rate peaked last year around 30%, even Brazil currency crisis in 1999 did not approach that level. You have to go back to the Asian financial crisis and Mecixan Peso crisis to get to this level historically. The Russians and Brazillians have some experience with currency crisis though with previous campaigns. The Russians have a float and last year they hiked interest rates as well. I doubt the Chinese are considering hiking rates.

The Chinese response is pretty ham-fisted. It hurts the short sellers in the short term but indicates to everyone they had to buy in HK market a massive amount, which in fact has achieved very little. The short sellers will see blood in the water and will be encouraged to go in again after a bit of stabilization.

The problem with the Yuan is that there is no natural marginal buyer currently. The logical thing for the Chinese to do would be to devalue by a considerable period and guarantee there will be no further devaluation for a credible period. Or float the currency. Or tighten capital controls much more.

Salman's musings about the possibility of privatizing Aramaco at this point in the oil price is pretty zany and makes one wonder whether the Riyal is that stable in the long term either.

Yellen appears to have support of everyone in liftoff. If the Fed hikes again though one wonders whether commodities would fall into a serious rabbit hole.

USD.CAD, 1.43, fast move in the last 2 weeks. I still like short AUD.CAD.

Welcome to the year of the Monkey everyone !

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Theta
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January 14, 2016 at 6:12 PM ×

The div trade is a good one, has been this way for years, you just need to occasionally carry it through some ugly mark to market.
However, there's a counter argument. With rates this low and spot levels where they are, the dividend yield of above 3% is kinda high. So arguably the better buy is the index itself.

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Theta
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January 14, 2016 at 6:37 PM ×

The div trade is a good one, has been this way for years, you just need to occasionally carry it through some ugly mark to market.
However, there's a counter argument. With rates this low and spot levels where they are, the dividend yield of above 3% is kinda high. So arguably the better buy is the index itself.

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