The end of another emotional week

It's funny, isn't?   We've had a solid bounce from the lows in developed market equities, but nothing spectacular, and suddenly all sorts of smart people are coming out of the woodwork banging the drum for long risky asset positions.  Indeed, given the momentum displayed into the US close on Wednesday, Macro Man frankly thought yesterday's follow-through was disappointing.   Then again,  vicious bounces are more characteristic of bear markets than bulls...unless they come off the ding-dong lows!

Oil also generated a great deal of commentary after bouncing despite another large build in reported inventories.  Insofar as markets tend to bottom on bad news, this could well be a classic reversal signal.  Then again, the news isn't actually all that bad; Venezuela is apparently begging for an emergency OPEC meeting, while the latest Storm of the Century is forecast to dump more than two feet of snow on parts of the Eastern seaboard of the US.   Strangely, despite a forecast of some 8" for New York City, Macro Man's town is only expected to receive a couple of inches.

In any event, at least some of the bullish chart profile on crude is thanks to the contract expiry and roll; looking at a chart of the March contract (the current front month), we obviously still see yesterday's up candle, but the overall formation is less unambiguously bullish in Macro Man's opinion.  Similar set-ups over the last could of months have led to sideways consolidation and nothing more.   Still, he will concede that that opinion and $2.10 will get you a large black coffee at Starbucks, but little else.


Yesterday Macro Man wrote that it would be interesting to see if Draghi would be defiant or resigned.   From Macro Man's perch he was clearly the former, talking up the economy in a way that was sorely missing from much of the Fed's rhetoric over the past several years.  While he clearly opened the door to a further policy adjustment, he stopped short of promising or even "promising" one; perhaps a lesson learned after December's fiasco?

What might a fresh easing look like?  While Draghi wouldn't rule anything out, Macro Man suspects it would simply involve adding on the extra monthly bond purchases that went "missing" in December.  Sure, they could cut the deposit rate again, but what would that accomplish?  If you'd been told 15 years ago that banks were being charged to hold money at the central bank, and that the price of the charge had just gone up, what would you have expected the share prices to do?   Probably something not dissimilar from what we've seen over the last six weeks.

Perhaps Macro Man's favoruite line from the whole presser was when Draghi acknowledged the possibility that central banks could contribute to financial instability through over-stimulation of the economy and/or financial assets.  This, of course, is a) something that the academics at the Fed have blithely dismissed with the wave of a hand for years, and b) been standard operating procedure at the Fed for the better part of two decades.

So what of the market? Spurred partially by this month's equity weakness, Bobl yields have reached and breached previous lows last seen just before the December ECB.  It's hard to go or stay long (especially if you're a cash strapped SWF of an oil producing nation!); while it's tempting to try a short, that seems rather brave given ongoing equity instability and the six weeks of dreaming and wish-casting that the market can do before the March ECB meeting.


A similar and correlated trade that Macro Man likes better is a reds/greens steepener in Euribor, where you go long the March 17 contract (i.e., when the current bout of QE is slated to expire) and short the March 18 contract.  Unlike Bobl yields, which can kind of go as low as they want depending on what depo rate assumptions people make, the ERH7/H8 curve should retain a positive slope.   It's not quite at its lows, but it's not far off.  Even during Fed QE, the equivalent US spread didn't really trade below 10, giving this one an excellent risk/reward.  (Disclosure:  Macro Man is long from slightly higher levels.)


It's been another emotional week, but a fun one.  Although they haven''t all worked, Macro Man's found himself doing more trades than he has in quite some time.   It's good to see assets react to macro stimuli across the world.  Moreover, the lack of consensus on the state of play, both economically and market wise, increases the rewards for getting things right.  What else could a macro man ask for?  

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Anonymous
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January 22, 2016 at 11:03 AM ×

"It's good to see assets react to macro stimuli across the world. Moreover, the lack of consensus on the state of play, both economically and market wise, increases the rewards for getting things right."

This is nicely backed by the fact that the share of neutral responses in the Bull/Bear survey is at an multi-year high. Francois Trahan from Cornerstone has been showing this chart quite a bit.

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Nico G
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January 22, 2016 at 11:04 AM ×

gap and go in Europe - gap and go in the US? not so sure i've gone full BSTS flat mode

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abee crombie
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January 22, 2016 at 11:12 AM ×

Agreed that yesterday's rally was weak. Here is similar thoughts.

Pisani: Why I'm not enthusiastic about this rally
http://www.cnbc.com/id/103324019

Price action looks shitty and when you have soros talking up a crisis, we'll that can't make you feel smart if you are on the other side.

But after listening to him I wasn't really convinced. Maybe I'm dense and stuck to my own views but I don't see China collapsing. Yes China is exporting some deflation but that is in steel or aluminum. Oil is about a middle east market share game, nothing to do with China.

I don't disagree with his conclusion that deflation is a worry now, but with QE firmly established all asset prices have a valuation floor. 9% for high yield.....hmmm

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abee crombie
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January 22, 2016 at 11:12 AM ×

Agreed that yesterday's rally was weak. Here is similar thoughts.

Pisani: Why I'm not enthusiastic about this rally
http://www.cnbc.com/id/103324019

Price action looks shitty and when you have soros talking up a crisis, we'll that can't make you feel smart if you are on the other side.

But after listening to him I wasn't really convinced. Maybe I'm dense and stuck to my own views but I don't see China collapsing. Yes China is exporting some deflation but that is in steel or aluminum. Oil is about a middle east market share game, nothing to do with China.

I don't disagree with his conclusion that deflation is a worry now, but with QE firmly established all asset prices have a valuation floor. 9% for high yield.....hmmm

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Anonymous
admin
January 22, 2016 at 11:24 AM ×

Nico what is BSTS ?

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Nico G
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January 22, 2016 at 11:29 AM ×

better safe than sorry

it's been a pretty hard week

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Rossco
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January 22, 2016 at 11:37 AM ×

I feel like Cougar after he went head to head with the MIG 28.

Another work day this week and I feel like I'd be turning in my wings.

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Macro Man
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January 22, 2016 at 11:44 AM ×

Scary thought of the week: People under 30 weren't even born when Top Gun came out. I'm glad I'm not the only one who's been wrung out this week.

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Nico G
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January 22, 2016 at 11:57 AM ×

clearly there is assimmetry in contrarian swings - you can short euphoria anyday and switch off machine but to buy what feels like capitulation (a feeling indeed, you can never be sure) is just draining

Europe has bounced 200 points in less than 48 hours - out of the nearly 500 point decline since end of year top. You can trail all you want but you should never get too greedy.

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jbtfd
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January 22, 2016 at 12:09 PM ×

From Bloomberg:
- Stocks Rebound on Stimulus Speculation (Nikkei up +6% lol)
- Oil Rallies in Biggest 2-Day Surge Since August on Stimulus Bets
- Yen Investors Homeward Bound as BOJ Stimulus Seen Boosting Bonds

Will be amusing if the stimulus fails.

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Booger
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January 22, 2016 at 12:12 PM ×

EUR.USD : If I had to punt on this (which I don't), it would be sideways and up. With Draghi's emission out of the way, there is a long gap until March until any downward pressure from a possible further QE expansion.

USD.CAD: Should have kept the short position another day. After saying it was faring up well, it has really fallen out of bed. From 1.46, we are back to 1.42. I actually fancy a long between here and 1.40.

Oil: not convinced the rally will last beyond a few days.

Chinese exchange rate policy: I am still puzzled by their policy. They seem to either not be aware or don't care that the current policy is quite ineffective because it has contradictory effects. Supporting the exchange rate is contractionary, but they want economic growth to turn around. So they keep buying Yuan and running down reserves which puts more pressure on the peg. And they don't want to clamp down on capital controls but they want to reduce capital flight. You can have one of these things at most but not both. With the current policy they will probably get neither.

Spoos: the logical conclusion would be that QE and the CB put increases valuations most of the time. Except when there is a crisis in which case valuations would fall much more than they otherwise would. So I don't agree that this is not 2008. Because there seems to be a 2008 every 8 or so years. In 2000 - tech, 2008 - housing finance, 2016 - ? energy.

In fact it appears like the fed are serial bubble blowers and there is this surprise when there is a crisis, which should not be surprising at all based on the history since 1998. What is surprising is that they can get away with claiming they did not see it coming. One supposes that even more extraordinary measures will be required for the next crisis but I would guess that we will reach some much lower valuations before QE4 or whatever it will be called is pulled out.

How can QE not increase the fragility of the system though, which begets a larger QE the next crisis etc. One could imagine a slippery slope. What is that saying 'the road to hell is paved with good intentions'. Japan seems further down that road.

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Nico G
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January 22, 2016 at 12:30 PM ×

jbtfd Abe plan has already failed. Horrible exports for Japan, and lackluster domestic consumption. Same goes for Europe.

Amid such slowdown in global growth the two big economies that could survive on domestic strength only must be India... and the US. But surviving economies does not mean surviving Mickey equity valuations. Dalio reminded everyone how much asymmetry is plaguing the market right now. You cannot discount flows with nearly zi forever.

Meanwhile if i read well China has already burned $1.4tn out of 4tn or so of her foreign reserves since last year! i say burn because as Booger just recalled their policy is a formidable, colossal ineffective mistake. And a reminder to never mix politics and nationalistic pride with (free) financial markets.

I feel uneasy because markets should work out their fair value on their own. Markets bouncing on the nth promise of monetary accomodation makes those markets look even more vulnerable and the CBs a little less credible.

The lessons of 2008 have not been learned. There is too much leverage on the market, from 2015 i only want to remember the new record seen on NYSE margin... 2016 will have to dive much lower to clean up the gamblers hence why this bounce will be sold.

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Eddie
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January 22, 2016 at 1:05 PM ×

Regarding those Chinese 4tn... exact figures are hard to get, of course (this is China after all) but I saw some guesstimates that roughly 1tn or so is African investments. Which are not exactly liquid and can't be sold overnight. Another 1tn or so seems to be earmarked for Xi's new silk road, a project of huge national pride (which in itself makes it a dangerous proposition). Substract that and all of a sudden there is way less firepower than it seems... especially since the reserve drain has been accelerating lately (DB estimated that the FX stunts during early Jan alone cost them another 100bn or so). Mr Xi might be closer to the end than he thinks.

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Bruce in Tennessee
admin
January 22, 2016 at 1:11 PM ×

If I were a rich man,
Ya ha deedle deedle, bubba bubba deedle deedle dum.
All day long I'd biddy biddy bum.
If I were a wealthy man.
I wouldn't have to work hard.
Ya ha deedle deedle, bubba bubba deedle deedle dum.
If I were a biddy biddy rich,
Yidle-diddle-didle-didle man.

I'd build a big tall house with rooms by the dozen,
Right in the middle of the town.
A fine tin roof with real wooden floors below.
There would be one long staircase just going up,
And one even longer coming down,
And one more leading nowhere, just for show.

...Morning. Could be we're on that third staircase as we progress in these wonderful markets?

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Corey
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January 22, 2016 at 1:21 PM ×

Well said. I keep trying to keep a level head but am fearful that 08' was just a precursor. If I had deep pockets I would short this market and walk away w/o even thinking about covering. Of course this doesn't mean you can't play around the edges but my advantage isn't timing short term swings so much. For someone like me I think it's time to do what tgose in the east coast are already doing; namely batten down the hatches and make sure you're well stocked for the storm to come.

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abee crombie
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January 22, 2016 at 1:35 PM ×

Nico, the Japan story is all about corporate earnings (and renewed focus on SH returns). Topix earnings still above 2007 peak, while TOPIX is 28% off that level. Not saying Japan isnt effected by global cycles, but keep the secular story in mind, IMO. Also, for Abe/ Kuroda to give up now would be silly. They are going to keep monetizing. I dont see what other options they have. But understanding Japan is always very tough, them and Brazil are like the blackholes of deflation/inflation.

For Bruce and Bears ;-)

Yellen Skywalker inched down the corridor. There was barely any
light, but the force guided her steps. Soon she felt the presence of her
father, Deflation Vader. His voice rasped out a greeting.
“I have been expecting you. I can feel that the force is strong with
you. Good. The Emperor has foreseen that your powers would grow,
and that you would become our ally. It is time for you to join me and
restore order to the universe!”
“You are wrong Vader – I would never go to dark side!”
“Ha ha ha – dark side – what dark side? Did Obi-Wan Ben Bernanke
never tell you the true nature of the force?”
“What true nature?” asks a troubled Yellen.
“The force is all around us, and seeks harmony and balance. It is
neither light nor dark, but cyclical. Mountains must have valleys.
Light must create shadow. Action and reaction, this is all that life is.
Your belief in the light side of the force, and the need for you to
strenuously push it on all things, to create inflation in all things, is
touching, but quite misguided.”
Vader continued “Low interest rates and debt creation in particular is
an object that is neither inherently inflationary nor deflationary, but
only becomes a tool of the light or the dark side if it moves out of
balance, or harmony. You see my jedi, debt accumulation is
inflationary when taken on and deflationary when paid back. The
longer you push your light side of the force, the stronger the dark
side becomes! You have in fact been my greatest ally!” Vader let out a
bellowing laugh.
“Search your feelings Yellen, you know that I speak the truth”. Yellen
knew the words Vader spoke were true. Despite monumental efforts,
the light side had only generated minor inflation, even with
previously unheard interest rates and even with their new monetary
techniques. She thought back to the day her mentor Obi-Wan Ben
Bernanke disappeared off to some far flung colony – his parting
words as he passed responsibility for the light side to Yellen were
cryptic – “Whatever you do, do not do anything sensible”. But Yellen
knew she faced a dilemma, if she continued to fight the dark side she
only made it stronger, and the ultimate move to harmony more
difficult. Or should she succumb now, and hope that dark side
influence would not destroy too much. In her heart, she made her
decision.
“You are right father, I can see that. What must I do?”
“Why my child, you must do nothing, just cease to fight the dark side,
and it shall restore harmony to the universe as surely as a rising tide
destroys footprints in the sand. Come, let us watch”
Vader and Yellen moved over to an observation window. From the view
she could see the dancing constellations that made up the financial
universe. Many shone as brightly as they could. Record employment,
record car sales, all-time highs in the stock market. Yellen let go of the
light side of the force. Almost instantaneously, the Transport star
system began to darken and disappear. The high yield nebula went into
super nova and slowly began to darken. And then nothing. But as
Yellen watched all the bright constellations began to darken ever so
slightly. And Yellen could feel a tremor from a billion traders’ hearts, as
fear began to replace greed in their hearts. She wondered what she had
done, as she stood next to Vader, and watched the lights go out

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Macro Man
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January 22, 2016 at 1:40 PM ×

Nico, I wouldn't say Japanese exports are "horrible", Not great, yes, at -2% y/y, but better than many competitors (eg SK at -14%.)

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Leftback
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January 22, 2016 at 1:46 PM ×

Global face-ripper. A long day ahead for those of the ursine persuasion?

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Leftback
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January 22, 2016 at 2:07 PM ×

It's Funny Money time again. There seems to be a widespread anticipation of further central bank easing (Japan, China, ECB) which makes the recent Fed hike seem curiously out of step. The Fed is likely to indicate that they are on the sidelines, for the time being at least, and that will do nothing to dissuade bulls who see the beginnings of yet another Funny Money rally. We can surely expect to see the prevailing sentiment shift and look forward to yet more re-runs of this popular exchange:

JBTFD

I wonder if we are going to see yet another painful re-run of the movie where Vol Sellers have their way with Mr Shorty at a series of critical technical levels. While there has clearly been substantial technical damage done to this market, and this is especially true if you look at the Russell, there are few things that are more difficult to fight than the perception that one can make money by front running central bank asset purchases. Be cautious by all means, but short at your peril, we suggest.

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washedup
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January 22, 2016 at 2:22 PM ×

Left had this entertaining observation a few days ago:

"First the bears stop making money hand over fist, then they lose some of the money they made last week, and then before you know it they start to feel the Cold Steel and soon they are out of the garbage cans and back into the woods just in time before the Park Rangers show up with the tranquilizer darts."

Now, I am no one to argue (and pretty sure LB would agree) that the above is a forecast of the immediate future - it does highlight that given the nature of this selloff, the levels or more accurately VWAPs where people actively shorted this market (I would say heaviest between 1870-1900) are the ones to watch. I think Nico made the same point a different way.

Tactical market - proceed accordingly.

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Anonymous
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January 22, 2016 at 2:36 PM ×

It seems to me Leftback has lost so much money since the year started that it will be August before he has enough money to redeem his Cold Steel pajamas that he had to pawn last week.

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Anonymous
admin
January 22, 2016 at 2:37 PM ×

http://ibankcoin.com/flyblog/2016/01/22/markets-poised-for-a-face-ripping-rally/

I wonder if The Fly has been reading LB's posts here at MacroMan. "Face Ripping Rally" is starting to go viral. LOL

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January 22, 2016 at 2:43 PM ×

Cheers MM, thank you kindly for the link. Not sure how smart I am, but I do know the markets have a habit of making us all look like idiots.
Thanks for your commentary the past few months. Very thoughtful.

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Anonymous
admin
January 22, 2016 at 2:51 PM ×

Note from Greece: Brother-in-law leaving Greece with his wife and children Decision made when he found out that there were no longer teachers at his child's school and they were being watched over by the cleaning lady who let them watch TV all day.

The government has now turned against the people
http://www.nationalreview.com/article/429964/greek-lefts-idea-austerity

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washedup
admin
January 22, 2016 at 3:20 PM ×

@MM - Even during Fed QE, the equivalent US spread didn't really trade below 10, giving this one an excellent risk/reward.

I am a bit puzzled by the statement MM, since I have generally associated Fed QE with lowered risk aversion and steepening anyway. Maybe I misunderstood.
Quibbles aside, I got out of all my flatteners recently and do like the idea of a snap back, with the 7/10 being my preferred US instrument. Overall I think we are in an environment where slope will be a bollinger band trade for some time to come - I think the CBs would fight both excessive flattening and steepening given their current reaction functions.

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Corey
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January 22, 2016 at 4:10 PM ×

Perhaps not macro enough for this board but NFLX exhibiting some relative weakness - I always take note mkt leaders begin to underperform.

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Macro Man
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January 22, 2016 at 4:13 PM ×

FWIW, I finally signed up to NFLX last week...they are scraping the bottom of the barrel if they've managed to hook me.

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Corey
admin
January 22, 2016 at 4:22 PM ×

Ha. You could have said something I would have given you my login info..lol. If youre looking for something to watch this wknd while youre snowed in, I recommend Narcos - its fascinating from a purely macro view that the USG got involved bc of the sheer size of the money flows - of course I watched it just bc I like gangster flicks!

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Anonymous
admin
January 22, 2016 at 4:43 PM ×

@Eddie,

Xi's new silk road is really not about national pride, it is sold like it but actually it is all about exporting the extra production capacity of heavy industries in China.

As for India, what is the next catalyst? Modi seemed to be disappointing. Rajan is good but he is powerless to solve fiscal and structural problems. What could be the signal to watch for?

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washedup
admin
January 22, 2016 at 5:25 PM ×

India continues to be an iffy short to medium term, and amazing long term investment opportunity - just like it has for the last 30 years.
Jokes aside,I think small cap consumer cyclicals are cheap over there - stay away from financials and blue chip names that are exposed to capital flows from foreign investors.

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Anonymous
admin
January 22, 2016 at 5:54 PM ×

More market rigging by the banks...

http://www.zerohedge.com/news/2016-01-22/barclays-rigged-its-oil-etn-limiting-new-creation-units

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abee crombie
admin
January 22, 2016 at 6:48 PM ×

For india, I think the key is capital spending and the state banks. You want to see companies spend some money and the state owned banks clean up their books (sound familiar, right Nico).

There are a few etf/closed end fund that do a good job actively managing. FWIW Indian IT, I think has big tailwinds and the main indexes are not loaded with State owned banks, moreso the private ones which are well managed. Problem is that indian equities are hardly ever cheap. and earnings havent been rising ... look for earnings to start improving, then buy. see here

http://imgur.com/YOMrsQq

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Anonymous
admin
January 22, 2016 at 8:22 PM ×

re india- I'm from there ( resident in the uk at the moment though wouldn't consider myself an expert) , equities are not cheap especially compared to bond yields- if i can make close to 10% i will take that and wait for better levels( and that trade has done great last 2 years esp risk adjusted- for now stay with that

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Nico G
admin
January 22, 2016 at 8:51 PM ×

haha washed "amazing long term investment opportunity - just like it has for the last 30 years" reminded of when i lived in Brazil. "The country with the best potential since 1950" they used to joke about. Ironically just when they at last seemed to realise their potential in the early 2010s well well patented south American sambanomics made sure to regress it back to stale coconut

1900 spoos is here folks - i consider it a line in the sand, 1960 above, much lower below. I only kept long crude and taking a week end off equities thank you for the entertaining forum as always.

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Pmj24
admin
January 22, 2016 at 9:35 PM ×

Hi Macro Man,
Why would reds/greens euribors steepen ? It rolls a bit against you, and if (when?) Draghi extends QE again, it might flatten even more..

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