3 quick points

Macro Man's a bit pressed for time, so today's post is confined to three quick observations:

* Going for the W?  The SPX has now put in a couple of solid sessions in a row, shrugging off developments elsewhere that you could best categorize as "lukewarm."  It looks like history is trying to at least rhyme; in the aftermath of August's China-related sell-off, over the next couple of months the SPX sketched out a W-shaped recovery to approach the all-time high.   After this January's sell-off that was at least partially kindled by China, the SPX has traced out the first 3/4 of a W shaped formation once again.  Granted, the last 25% is likely to be the trickiest, but you clearly cannot say that it hasn't happened before.


On the flipside, yesterday wasn't an unalloyed positive for risk.  A number of EM currencies took it on the chin, and the DAX put in a bearish engulfing candle.  Ordinarily that would be quite a negative development, but of course the cash DAX chart doesn't "know" about yesterday's late session rally in the SPX.   Still, the relative divergence with the SPX is notable, as indeed it was last autumn.  It will be hard to believe in a durable recovery for risky assets unless Eurozone equities go along for the ride.

* The market's taking the fear of  Brexit seriously.  If you had any doubts on that score, look no further.   Macro Man looked at the 3/6/12 month implied vol butterfly in GBP/USD, given that the referendum is widely expected for June, a little over four months from now.   Simply put, the butterfly is more negative (i.e., pricing the average of 3 and 12 month vol under 6 month vol) than it has been in the 20 year history of the Bloomberg dataset.   (Actually, there was a lower print on 9/11/01 , but Macro Man's taking it as read that ensuring valid closes for the cable vol curve wasn't a priority that day, so smoothed it out.)  The only period that remotely comes close was, funny enough, just over a year ago, when Britain was looking at the possible prospect of a hung Parliament.   One could easily argue that an existential issue such as Britain's membership of the EU should command a larger vol premium than a hung parliament.  Stay tuned.

Macro Man is away for the next couple of days and posting may be sporadic or nonexistent.
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Anonymous
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February 17, 2016 at 8:34 AM ×

MM away ? Uh oh...

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Nico G
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February 17, 2016 at 10:36 AM ×

solid follow up performance in Europe - i ll be disciplined and get out of longs here. Benchtime until 2900 stoxx / 1900 spx / 9300 dax (wink wink abee) decide for us

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knizoz
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February 17, 2016 at 11:07 AM ×

Hi again friends. Northshore if you're reading this thank you kindly for your response to my question on yesterday's post.

Another question: could someone please give me a simple explanation of the 3-6-12 month butterfly? Is this the spread between implied vol at 3 months and implied vol at 12 months?

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Field
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February 17, 2016 at 11:43 AM ×

(3m + 12m) / 2) - 6m

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Anonymous
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February 17, 2016 at 12:19 PM ×

re nico 10:36
agree mostly, have squared up futures but still running with some upside calls...we could get a proper chase on if we crack some levels here - especially as sentiment seems to be to sell rips...i think for next leg up need FI to retreat bit...i am short some bunds and EDs..
internals had a huge divergence and so far paying out as expected- with ECB aware that -ive depo might not be enough

one more thing- vix futures front month back in contango for first time this year, after one of the longest stretches on record

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Anonymous
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February 17, 2016 at 12:32 PM ×

Equities are being forced up by massive program buying today. We will re-trace the entire Jan/Feb fall over coming weeks.

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Corey
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February 17, 2016 at 12:54 PM ×

MM & friends - Given the Fed has now had the luxury of witnessing first hand the destructive powers of NIRP, do you think it is still viewed by them as a viable tool in their toolbox (i.e. wouldn't it make sense if they came out and said we don't view NIRP as a potential option and what would prevent them from doing this)?

Also, are market fears surrounding Brexit fears justified or overdone? This is something that as a Yank I admittedly little grasp of?

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Anonymous
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February 17, 2016 at 1:01 PM ×

@knizoz - Not trying to be a d here, but I've found google to be a good tool to have handy when reading this blog. And in all seriousness it tends to stick better if you have to take the time to look it up.

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washedup
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February 17, 2016 at 1:22 PM ×

@Corey - MM is the ultimate authority on this, but in my opinion Yellen would rather lay down on I-95 in rush hour than go for NIRP - two reasons:

1. Whether or not they are morons for thinking so, they actually do believe the US economy is on a solid footing, can shrug off China and EM pressures, and will eventually find traction and grow at a 4% plus nominal GDP once the crude baseline stabilizes
2. they made it quite clear in various testimonies that they studied NIRP in 2010, and see the institutional framework in the US (i.e. the money markets) as very different from Europe and Japan and that NIRP would be undesirable from that perspective. As far as I know nothing has changed since then, so why would there conclusion?

I think they won't do QE or NIRP, and we are likely to get what the so called 'smart money' expects the least - a very boring and slow , stop and go normalization consistent with a US economy that muddles along on average, but threatens to slash its wrists overtime it heads to the bathroom. Its OK to expect fireworks and we will see plenty of those, but the children of 2008 seem to forget everyday is not July 4th.

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Anonymous
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February 17, 2016 at 1:39 PM ×

BOJ is selling Yen heavily today. There is a huge bid in equities. Dax & Dow up +200 with no pull-backs. Algo's are pushing this much higher.

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Polemic
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February 17, 2016 at 1:40 PM ×

I rather like long AUD/JPY

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Corey
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February 17, 2016 at 1:56 PM ×

@ Washed - thanks. On #1 I'm thinking in terms of hypothetically *if the US does not maintain positive growth, or realistically the next time there is slowdown. #2 Read it last night and their conclusion was that there wasnt much use in going -ive vs. 0. However, it was performed prior non-IOER participants having access to those funding channels, which I believe they do now. Also at the time of the study I believe the Danes were the only ones to have tried -ive rates and the upper corridor for policy rt was positive.

So, a lot has come to light since the study was done. Also, who decides when to release these sorts of communique? It seems noteworthy that it was authorized for release on 1/29/16, is this coincidence that a seemingly mundane study would only be released some 6 yrs after it was performed (or is this normal like the transcripts) on the same day as..

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thegreyman
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February 17, 2016 at 1:59 PM ×

Tip of the iceberg...

FT: China Bank of Liuzhouhit by $4.9bn loan fraud

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washedup
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February 17, 2016 at 2:13 PM ×

corey - the reason the communique was released is because the senate was specifically expected to ask questions regarding negative rates given actions in Japan and elsewhere - I see it as standard.
On the event of a recession in the US economy (or as ZH would call it, Wednesday!) I think the response would be to first bring dot plots down and guide the market to ZIRP forever - in any case the next big thing to be tried in the US probably won't be monetary policy but if the politics permit it, something in the fiscal realm - I half expect this in the 2017-18 timeframe.
Europe is more interesting - there may be a play to own IG credit by ECB at some point if things get bad enough - it was specifically discussed their 1-1.5 years ago as a plan B given the paucity of sovereign bonds.

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jbtfd
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February 17, 2016 at 2:16 PM ×

jbtfd said...
This has been the best 2-day gain in US equities since Aug 2015.
We now have a major double-bottom at the 2015/2016 lows - this support line will not be allowed to fail (if it does, central banks etc will step in). I now expect a rally back up to 2015 highs in US equities. From there, we will see new all-time highs.
February 16, 2016 at 10:56 PM


Well here we are another 2% higher... this market will be manipulated straight back to all-time-highs.

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Polemic
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February 17, 2016 at 2:25 PM ×

Jbtdf.. Nah,, CBs taking profit here in equities on the fib level and looking to get back in on a Gann line retracement.
BoJ on the bid as he heard that Mickey has a couple of yards for a 'good name'.
ECB trying to defend a barrier in Spoos at 1920 and have unwound their DB gamma hedge through BARC equities.
Fed just in and to for a point like usual, leaning on the bros for name switches to keep it quiet.
BoE been down the pub and come back offering FTSE. Think Fingers gave them the whisper..

COs it's like that with CBs innit

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washedup
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February 17, 2016 at 2:47 PM ×

Haha Pol that was priceless

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jbtfd
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February 17, 2016 at 3:05 PM ×

As I type equities have once again surged higher on massive algo buying. Sorry Pol... you lose (again).

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Anonymous
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February 17, 2016 at 3:09 PM ×

SPX up 4.6% the past three days. Best three day bounce since late Aug '15.

I guess jbtfd is the one laughing now...

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Polemic
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February 17, 2016 at 3:14 PM ×

DOn't get me wrong I am delighted that thing save creamed higher.. I just don't buy the CBollox re them being the buyers.

And considering how there has been a prices down doom sell sell sell or prices rally its a short squeeze sell sell sell. I think we need more commentary from folks thinking we make new highs ( actually long) before any down leg can start again.
Record cash balances at funds is a sign of benchmark chasing to ensue.

As for losing jbtfd, I didn't know I was competing.

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abee crombie
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February 17, 2016 at 3:15 PM ×

http://ftalphaville.ft.com/2016/02/17/2153452/some-analysts-appear-to-be-approaching-breaking-point/

interesting comment on the internals of the market. If that was a sustainable bottom, it will have been accompanied with a big shift away from MoMo and into Value, as I have been talking about for a while. While markets have room to run to 1950 or another ~5% in XLF, ideally youd want to see some PMI's and other ECO figures surprising. US ECO surprise index looks to have bottomed but hardly a sustainable move yet.

In EU, CoCo bonds have a put in a nice bottom but lets see if they can get back to prior lows before getting too excited. They probably trade with HYG.

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Anonymous
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February 17, 2016 at 3:24 PM ×

My bet, fomc mins have been leaked to market.

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Anonymous
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February 17, 2016 at 3:32 PM ×

jbtfd - Yes equities are MASSIVELY bid here. There is huge order-flow behind this. This is the biggest 3-day move in most US equity indexes in 20 years. Anyone who thinks this is just short-covering is a f*ckwit. Sorry, but I have to say it like it is.

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NonAnon
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February 17, 2016 at 4:01 PM ×

@Polemic, re hugh cash levels, I assume you're referring to this from BAML:
https://pbs.twimg.com/media/CbbU07jVIAEqBCJ.jpg:large

So many are on the wrong side of a rip that a rip is probable.

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Polemic
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February 17, 2016 at 4:02 PM ×

Yes I was Nonanon . thanks

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CV
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February 17, 2016 at 4:06 PM ×

Yep, the BAML study has been discussed a lot, and I agree that if this is true, a lot of chasing will have to be done to get back to benchmark. The burden of evidence is still firmly on the bulls here. But they are so far turning up.

I also have a lot of sympathy for another of JPM's recent points on "changing leadership" ... PG, WMT and MCD all up year to date. Defensive value ... who would have thought it!? The binary ping-pong between the POMOs and SPX@666 crowd leaves a lot of very juicy middle ground to do work in.

1800 appears to be the Maginot Line, and the bulls are taking their final stand on that one. Anything below that and I fear for them in earnest. It could go anywhere ... it's a dark deep void below that! The bears' main threat in the short run, on the other hand, is also/really a ripper in oil, and what that does to sectors etc with high short interest. Today's action is a good example I guess. Some serious pain for FCX shorts today just to take an example.

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Anonymous
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February 17, 2016 at 4:12 PM ×

MaCarthyism in India:

A student union leader at the premier Delhi university and journalists assaulted by lawyers loyal to the ruling bjp party in a court complex. The students had uttered a few slogans in favour of a muslim leader hanged few years ago and has sedition charged slapped against him

http://indianexpress.com/article/india/india-news-india/patiala-court-lawyers-jno-kanhaiya-kumar/

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bullish
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February 17, 2016 at 4:15 PM ×

Dow +210 points, on for 3 straight days of 200+ pts gains. It's never done that before.

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NonAnon
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February 17, 2016 at 4:42 PM ×

Let's see if/how the fibs - and the confluence of a bunch of possible resistance levels - are tackled in the days & weeks ahead:
https://pbs.twimg.com/media/CbbcDy5UAAEv7wj.jpg:large
NB Chris Ciovacco chart @CiovaccoCapital

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February 17, 2016 at 4:43 PM ×

mhh... long dated US corporates punished hard...
no bull mkts everywhere..

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jbtfd
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February 17, 2016 at 5:27 PM ×

Easy money in equities. Average moves are 2% a day. While the clowns were preparing for the end of the world, spoos buy programs are gradually reversing the entire 2016 down move.

Central Banks will have their way people. Any dip in equities is just that - a dip.

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abee crombie
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February 17, 2016 at 6:15 PM ×

Did someone have the MXN surprise rate hike.. me thinks so. Eitherway it has some catching up to do while the bulls run with equities.

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Nico G
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February 17, 2016 at 7:50 PM ×

if you are cheering because you are long, cheer some more and prepare for exit. Plan ahead and ask yourself what you would do at spoos 1950. So far the bounce only feels like a typical bear market rally it's more reasonable to conceive 1800-1950 as a wild volatility trading range only.

If 1950/1980 gives with high volume and oil breaks out we'll know something has changed in risk global perception/appetite. There are many juvenile posters here who get sick worried around 1800, and loud cheerleaders above 1920 - it does not work like this folks so far we are taking your money.

Abee i am loaded with MXN !! i thought current extraordinary MXN weakness could not be forever - if anything US companies are starting to transfer their manufacturing over the big Donald Trump Wall, which counts as arbitrage

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Anonymous
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February 17, 2016 at 8:32 PM ×

FRACKING CAUSES CANCER:

http://www.zerohedge.com/news/2016-02-17/heres-new-study-fracking-industry-doesnt-want-you-see

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Leftback
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February 17, 2016 at 8:57 PM ×

It will be interesting to see whether today's high volume decoupling between USDJPY and Spoos persists. A new FX regime would be enjoyable, we have had a lousy time with this one in general. Still, if it does recouple, there is room above to USDJPY 116-117 before we have to think about profit taking in Spoos. The October rally in Spoos that followed the Aug-Sept twin lows actually touched the upper Bolly band twice before it halted, that was one powerful bounce and we might well see a repeat here.

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Anonymous
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February 17, 2016 at 8:57 PM ×

https://www.thefelderreport.com/2016/01/07/the-greatest-money-manager-alive-attributes-the-majority-his-success-to-just-this-one-thing/

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Swiftie
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February 17, 2016 at 9:52 PM ×

So - the thing that would hurt me most right now is for the market to stabilize here with plummeting vol. A run back to 2000 or better yet 2050 would be fine. But you could go above 2050 easily and still be consistent with an overarching bearish view. (Especially if you assume that s&p is continuing to outperform the rest of the world like it does.)

What's most on my mind is how well vix has been doing. Just look at vxx - or xiv, down 60% since August! 2050 or even 2100 would not get that back to the highs, it will take a multi-year bull market to get that back to the highs (or, in a hurry, for the vix spot to drop to approximately 4.) The m2-m1 spread has managed to visit the vicinity of -2 in the runups to four of the last six expiries, this is a serious and IMO disturbing fact. Of course that's the heart of it and the reason why xiv has done so badly: persistent curve inversion. And I know that intraday vol felt much higher than daily from Jan 1 until the current rally, which can't have been nice for most flavors of delta-hedged vol selling (not my thing so if anyone who does that has been printing recently plz correct me.)

So here we are: Mr Shorty's great tormentor, the vol seller, is looking really unwell, should we be concerned and is he going to get better?

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Anonymous
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February 17, 2016 at 10:00 PM ×

Shorts have been massacred since last Thursday and the pain will only get worse. Oil is up $1 in the last 30 mins. Anyone who can;t see that we're gonna re-test all time highs in equities is a retard.

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Macro Man
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February 17, 2016 at 10:04 PM ×

@ JBTFD Just because one does not subscribe to bullshit conspiracy theories does not makes one a "loser". Quite the contrary; absolving ones self of any responsibility to figure things out by calling on some higher power to explain something is the losing move in the long run. If you bought this dip (though not the ca 200 point dump before it), bully for you. I have asked that people can the conspiracy theories, and I expect that request to be respected.

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Anonymous
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February 17, 2016 at 10:49 PM ×

I had bought the dip and still am bearish toward the market this year. I almost am certain that some black swan will happen this year and 1800 is sure to be broken.

But it did not mean that you could not buy this rebound last Friday. There is likely to be at least one attempt at 2000 based on my rookie chart reading. But bragging about the wisdom of BTFD is worthless. The big prize should be to catch the next black swan and that reward is much, much better than earning 150 points from a local bottom. That black swan is out there lurking in the shadows. She is closer and closer. But can you see her before she arrives?

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Anonymous
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February 17, 2016 at 11:00 PM ×

anonymous: There is no black swan... you are reading too much zerohedge.

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Anonymous
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February 17, 2016 at 11:13 PM ×

For 7 years every stockmarket dip has been bought by algos and program buying. Every time we have a 10% correction the same bears come out of the woodwork talking about "greece, china, bad banks etc". And every time, central banks print money, reduce rates, and the algos rip the markets back to their highs.

Why do you think it's different this time?

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Anonymous
admin
February 18, 2016 at 12:23 AM ×

Why do you think shorts never cover?

E.g. you have Nico who has been bearish for such a stretched period punting on the long side.

Every bear knows about bear market rallies and their ferocity. While Nikkei 8%er on Friday was the initial major move, China holding up Monday was the key to get long or cover into opex.

Yes, there is a pattern of sell offs and bounces into opex. A pattern of rallies during or just after holiday periods. Doesn't always happen. Crude defended the massive $30 strike on opex today, same thing as last month. Post opex, DOE and opec price action the real indicator there.

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Anonymous
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February 18, 2016 at 12:31 AM ×

In addition; I don't see all time highs for US equities. The higher & faster we rally, the increased the odds of FED rate rise. The FED have boxed theselves in and out a ceiling on equities effectively.

Oh, and as for PBOC man coming out and saying no major devaluation and all is alright, see SNB & BOJ for previous.

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bertgrozhen
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February 18, 2016 at 1:04 AM ×

As a long time reader I am infact quite annoyed by the recent spam and volume of low quality posts.. Please don't simply post a link as that does not constitute discussion.

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abee crombie
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February 18, 2016 at 4:18 AM ×

Every trader I know is bearish on the market and the few fundi guys I know were hunting around for deals the past few weeks but they are NOT super bullish overall, just buying bc of stock specific fundis. All the momo traders and fast money equity guys gotta be thinking twice about buying FB / AMZN and anything else here, at least until the market stabilizes ABOVE the 200 day, IMO. Though Biotech could be a nice tell bc it did weed out a lot of the excess recently, yet the LT trend is UP, IMO.

So yes, bounce plays like FCX, BHP and oil stocks have gone up a lot (after being bludgenoned) but I dont see US equities going vertical into the 200day. Maybe if something else took the baton (cough cough European equities/banks) but i really doubt that is going to happen. So I am more in the boat with Nico, looking to unload some of the stuff I was cherry picking the past few weeks and then build up a short with a stop around Unchanged for the year. If we go positive for the year, I'd get out as its will be a big statement. But its still very far from here and many charts are still broken LT

All that said, we do have a big THRUST of sold green candles which likely means this equity rally can last a few weeks longer, IMO. I have pretty clears lines in the sand at 1810 and 200day/Unchanged.

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Nico G
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February 18, 2016 at 8:57 AM ×

anon1223

i am not sure whether your question was rhetorical or else, i am bored benched, sidelined so happy to comment on your post

1) i do 'soft cover' short with swing trades.

long term convictions/positions are the most boring stuff in the world if you do not have another active job. I honestly do not know how all those macro mega long term hedgies can live, by picking a few darlings and sitting on their flannel ass for months at end (sure they invented racquet ball, golf, a combination of fine lunch and hookers plus luxury travel to pass the time). They have the most boring job on the planet AND clearly the most overpaid: getting $$$$$ to sit on winners when it goes well and $$ management fees that still pay for your bills when you suck. Which translates in heavy guilt for most, and low morale.

I digress

I need swing and even scalp trading to keep me active on the screen. By scalping you are marrying the tape and longer timeframe punts come to life. This is bona fide personal experience, never read a book on trading, no idea if others think and operate alike.

In current 2016 high volatility environment buying -5% (nuclear European) dips is a sure way to make money. Those are probably the easiest trades around, if trading was ever easy. Experience will teach you how to detect exuberant fear. Just know your timeframe, use a time stop and you can perfectly punt swings in opposition to your very long term view. When you do detect foolish complacency you may ADD to your long term view.

Those swings end up 'feeding' your long term entry to the point where you end up currently being short Spoos at 4000. I kid you not, some professional websites out there claim to capture 3 points per day (on eminis) no matter the weather and i believe them, you just have to apply yourself to the factory job of watching the tape.


2) i do hard cover shorts using a mix of time and price. When markets have suffered long enough and/or valuations have sunk to ridiculous level. Market always overshoot up or down. In 2008 i considered 1000 a respectable and round number to cover shorts (spoos). Sure, it went much lower but that is when things got interesting, one of the proudest moment was to buy 700 in February 2009 after months of market agony and total abysmal horrible liquidation all around.

Roubini called for a 400 bottom. The world was going to end until... Citigroup posted a not-so-horrible quarter in March and market took it as an excuse to explode up. That is all that it took, there was not one seller left. I was diving in the Caribbeans and watched market renaissance.


3) Looking forward only 1580 spoos would kill my bearish view. It ain't much in the great scheme of things, long term picture would still be bullish. But let's say 1580 would flush all the funnymonish jbtfd nonsensical jejune fuckery currently present on the markets into oblivion so we can start on a clean plate and MM look like one fine restaurant.

See you there.

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jbtfd
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February 18, 2016 at 11:25 AM ×

Again this morning we're seeing relentless buying of equities (especially in EU indexes). Price charts are near vertical. You are all sure that there is no manipulation of markets so there must be extremely strong fundamentals driving this. As such I re-iterate my call for equities to breach all-time highs in the near future.

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Booger
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February 18, 2016 at 11:57 AM ×

Interesting data releases from Australia recently, weak retail sales and now a weak employment report. I jumped a gun a it by taking a full position short AUD.USD at 0.71, it is an even better place to short now at 0.716 and I might add another half clip if it gets to 0.725. Another reason for AUD.USD short here is some evidence of residential real estate markets peaking in major capitals (namely Sydney and Melbourne). I think the market is way too relaxed about the possibility of commodity currencies reducing rates in the next 6 months. AUD.USD looks better priced than USD.CAD, although the Canadians may cut earlier.

There might be some further upside if there is a further bounce in risk markets or if oil bounces further. However, I suspect Spoos may have upside capped around 1950-2000. With the OPEC oil mini-meet out of the way, one suspects there is no more of the rumour for at least a month. So all there is keeping oil from further lows is a few bad inventory reports.

Oil: interesting they did the pre-meet meeting. One wonders though whether they should take a page from the fed playbook and leave the market hanging in anticipation for longer. Perhaps they should talk up an upcoming output cut meeting for months or even years before meeting, the anticipation would be better value than the reality and might drive up the price of oil as much as it has driven up the USD in the last 2 years.

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Polemic
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February 18, 2016 at 12:05 PM ×

think the Aus is a game of timing. the bounces in China hope and commodities is a future lift but have only just occurred, whilst the data is coming from the mass crap out period of the last month.
If this meteoric bounce fades then yes down , but if it continues new hope should swamp old data

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Booger
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February 18, 2016 at 12:17 PM ×

Brexit: that is getting priced in. I guess when you have a big event like that and especially if it approaches anywhere near 1.36, a lot of people will be watching cable. And when everyone is watching this one piece of juicy fruit, well it ends up a mess usually. So it probably will not occur as expected.

Politically, it doesn't sound like either major party would want it to actually occur. What does a referendum mean anyway, or what are the terms, can they weasel their way out of it to a committee process over a few years (for the people's own good) if the people do actually vote for Brexit, and string it out to going nowhere ? Perhaps someone from the U.K have some insights.

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Polemic
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February 18, 2016 at 1:44 PM ×

re Brexit - the world's noticing something that we've known of a while here in the UK. It's looking more likely than a Grexit.
This is beyond the control of the major parties and whether they support it or not is becoming irrelevant as individuals are voting on individual preferences and not along party lines and are across social/class and intellectual levels.

I, for one, am undecided. The overwhelming feeling I get from EU is that they are doing nothing to entice the UK to stay, instead relying on threats as to how bad it will be if we leave with promises of retribution, which just reinforces the exitters concern that the EU is a controlling big brother rather than a warm and fuzzy caring community.

I haven't checked who is allowed to vote but imagine there are rafts of expats in Spain and Eu that will be voting to stay but I don't know if they are picked up in the polls.

I'm watching FTSE underperform which may indicate a transition into general assets rather than just through weak GBP.

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Polemic
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February 18, 2016 at 1:46 PM ×

And to add to that .. beating up UK markets before the event may well sharpen the minds of the voters as to what could happen.

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NonAnon
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February 18, 2016 at 2:03 PM ×

In response to the Anon looking for the 'big prize' black swan, the probabilities are of course dead set against you. Why bother look for low probability prizes when there are far higher-probability prizes available?

Taking a step back, my playbook for SPY (& US equities generally) remains the same as it has for several years:
- Mar '09 marked the start of a secular bull market;
- in Elliott Wave terms, Wave 1 was the April '11 highs;
- Wave 2 was the Aug/Sep '11 lows;
- Wave 3 was the subsequent rally to the July '15 highs (incidentally, wave iii of 3's relentlessness & total lack of pullbacks to afford entries was highly characteristic of a iii of 3; iv of 3 was of course the Oct' 14 V-shaped correction that reversed in days as it was the first pullback allowing in all those who'd missed out);
- Wave 4 is the current correction, possibly (but not certainly) all now done;
- Wave 5 will be new highs (>2250) peaking sometime around or beyond late Spring '17;
- that Wave 5 peak to be followed by a garden variety cyclical bear market triggered by the Fed's behind-the-curve tightening response to 'unexpectedly' strong inflation;
- that garden variety cyclical bear to be followed by another strong cyclical bull market (itself being the 3rd wave of the secular bull, and 3rd waves rip...) during which we're seen to reap the benefits of the many positive developments now occurring but which are being widely overlooked because so many rear-view mirror folk remain anchored to the '08 GFC;
- my expectation is the global consumer (esp. Asian consumption) will be the primary theme of this cyclical bull and it will through the 2nd half of the 2020s.

I have been and will remain (with the bulk of my non-trading capital) tilted heavily towards this global consumer theme, & will increasingly tilt the tilt towards Asian consumption, for as long as it takes for bubble valuations to materialise or for a better thesis to eventually present itself. No need to hunt rare black swans when there are whole gaggles of regular white ones to pluck.

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the greyman
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February 18, 2016 at 2:09 PM ×

Ray Dalio: What Will Monetary Policy 3 Look Like?

"While negative interest rates will make cash a bit less attractive (but not much), it won’t drive investors/savers to buy the sort of assets that will finance spending. And while QE will push asset prices somewhat higher, investors/savers will still want to save, lenders will still be cautious lenders, and cautious borrowers will remain cautious, so we will still have “pushing on a string.” As a result, Monetary Policy 3 will have to be directed at spenders more than at investors/savers. In other words, it will provide money to spenders and incentives for them to spend it. How exactly that will work has to be determined. However, we can say that the range will extend from classic fiscal/monetary policy coordination (in which debt to finance government spending will be monetized) to sending people cash directly (i.e., helicopter money), and will likely fall somewhere between these two (i.e., sending people money tied to spending incentives)."
http://www.valuewalk.com/2016/02/monetary-policy-3-ray-dalio/2/

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abee crombie
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February 18, 2016 at 2:14 PM ×

Pol, what happens if there is a Brexit, beside I guess the pound depreciating (which I what I see from the market) is it really that bad for the UK economy?

Booger, I think we need some time to re-initiate shorts on AUD/ CAD etc. Commodities are bouncing.

Nico thanks for the thoughts but what LT macro hf's do you know. Most of the ones I follow all have the same 2week - 3month time frame with tight stops. And almost all macro discretionary HF suck nowadays, trying to get thier 1.5 sharpe but producing 5-7% returns. For 2/20 you'd better hit double digits IMO

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washedup
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February 18, 2016 at 2:30 PM ×

Non anon - thx very much for your detailed thoughts - I am a elliott wave novice - have these things worked well for equities in the past? I have always been sceptical because they have an annoying blend of just enough specificity to pique interest (this wave takes us to 2250) but large enough wiggle room (sorry blokes, changed the wave count) to CYA. That said, I couldn't agree more with the asian consumption theme and the secular deflation theme being on its last legs.

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Polemic
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February 18, 2016 at 3:16 PM ×

abee.
this was doing the rounds today https://woodfordfunds.com/insight/brexit-economic-implications/
may be of help re Brexit

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Anonymous
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February 18, 2016 at 4:29 PM ×

For the person who doesn't think this a short squeeze. Stop trading and go somewhere quiet for a couple of years until you can recognise the action. You don't get this kind of % move in big companies and specifically when they are also sector wide without someone is covering their position or do you seriously think buy only ordinary markets regularly buy 5 to 10% up on the day across a sector? Illiquidity and over positioning pal. I'm not always in agreement with Nico ,but for sure he recognises the action.

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Anonymous
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February 18, 2016 at 4:40 PM ×

@non anon,

Black swan anon here. Thank you for the Elliott wave forecast. Elliott wave theory always looks amazingly perfect afterward. But I could never get it right.

Anyway, I am using a simple timing tool to look at the beginning and the end of a business cycle/stock market cycle. To me the watershed moment is the 2000 recession. Before 2000, the bull market is mainly a monetary policy driven one as long term yield dropped steadily from 1980s, assisted by the globalization.

Now, things changed after the 2000 recession as I can see since then cutting interest rates has close to zero effect to boost the real economy, but only to create asset bubbles.

Fast forward to today. I originally thought that the market was going to rally for 6-12 months after the first rate raise based on previous cycles. But this time is different, because of 3 QEs. Now I saw that the end of the last QE was equivalent of the first rate raise in the old cycles. That means that those assets bubbles supported by over-leveraged funds (encouraged by the ultra-low interest rates) are now much closer to the tipping point. ROI of those over-leveraged funds are so thin that they do not have much appetite to continue buying. I wonder if we are close to the point that no new buyer is coming, using the analog from Nico's post.

All it takes is a catalyst which makes January's leading event a kid's play. I am not sure that the bear can wait that long to the spring in 2017.

I do not know what could be the black swan. But on the top of my list, political risks in China and the US are the most likely candidates. Maybe a coup in Beijing, or a Sanders or a Trump win in November? Or something I totally am unaware of. I do not know.

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NonAnon
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February 18, 2016 at 5:02 PM ×

@washedup, I think Elliott Wave is largely hindsight voodoo or even hocus focus. Any 3 wave pattern can morph into 5 waves etc so forecasting is limited/impossible. I only know one successful short timeframe trader for whom EW is their primary tool, but they could probably junk it as in reality they're highly disciplined, cutting losses running winners etc, and are a shrewd judge of crowd behavior helping them navigate the twists and turns - I suspect the EW just gives them a framework within which to apply their methods and maintain discipline. I just use EW to help frame a big picture view, monitor the crowd's psychology and to consider possibilities I might not otherwise be open to - but am not dogmatic and similarly could merrily junk it.

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daytrader
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February 18, 2016 at 6:05 PM ×

Nico G 8:57 AM. You wrote, "some professional websites out there claim to capture 3 points per day (on eminis) no matter the weather and i believe them, you just have to apply yourself to the factory job of watching the tape"

Can I ask what you consider a sensible/achievable average daily return (in ticks/points) for someone day-trading the e-minis? Have heard so many different views on this so would be interested in your opinion. Thanks in advance.

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Nico G
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February 19, 2016 at 8:02 AM ×

well 3 points a day sounds achievable on eminis but for such tiny segments you'd have to learn how to operate without stops

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Anonymous
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February 19, 2016 at 9:42 AM ×

does anyone know a way to pull up hy cdx index spread without bloomberg? generic on the run 5y. tried google...

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Anonymous
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February 19, 2016 at 9:44 AM ×

^sorry i meant a chart specifically

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Nico G
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February 19, 2016 at 10:14 AM ×

Sothebys price action can be used as excellent proxy for 'easy money worldwide' and oh boy it is telling us something - 2003 and 2009 crisis double bottom wants to be revisited

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Eddie
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February 19, 2016 at 10:32 AM ×

Anon 9:42:

Nope... this is MarkIt's baby and you have to pay the license fee in one way or the other.

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Bruce in Tennessee
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February 19, 2016 at 2:12 PM ×

http://www.bloomberg.com/markets/economic-calendar

Consumer Price Index

Highlights
Consumer prices are on the rise and the Fed's December rate hike doesn't look misplaced at all. Core price jumped 0.3 percent in January which beats Econoday's top-end estimate with the year-on-year rate up 1 tenth to plus 2.2 percent. The Bureau of Labor Statistics notes a "lack of declines" across core readings.

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cowboy
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February 19, 2016 at 4:04 PM ×

@non anon @washed. I find e-wave very useful. It just doesn't work for all markets all the time. It's just an observation of herd behavior, so works best in markets where price is a result of multitudes of smaller participants. A recent textbook example was shcomp from Aug 13 to may last year. Price count confirmed by volume.
I think it will continue to be useful precisely because it's ambiguous and subjective and doesn't give a black/white answer. The beauty of it is there are always alternate counts, a bit like real life. If it was so straight fwd everyone would have programmed their algos.
@non anon nice count on spx, and I hope you're right.
Can't say for sure about SPX but I get the feel that a lot of ugly birds are coming home to roost, don't need to look for black swans.
The clearest looking wave counts to me at this point are the Nky and dlryn. Looks like they're done...
Let's see how it goes.

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washedup
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February 19, 2016 at 4:47 PM ×

@cowboy - thx for that - the idea that it would work best for the least institutionally populated markets makes intuitive sense.
There seems to be a lot of technical damage on NKY for sure - MM thought it was an inferior inverse proxy for JPY, so you know, stick a fork in it and all that - BUT, its also a 12 P/E and stands to gain from a lot of emerging trends like commodities lower for longer, robotics, AI, and productivity enhancement cycles, and profitability is improving - I have no idea what to do with it - maybe just wait for a technical washout.

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cowboy
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February 19, 2016 at 5:36 PM ×

On the topic of USDJPY, @MM, you mentioned that you understand well the relationship bet USDJPY and risk assets. Could you elaborate a bit please. I just know risk off => sell USDJPY but nvr really understood why. Carry trade unwinds / Japanese investors exiting foreign assets and repatriating? Seems to work both ways also USDJPY breakdown => risk off

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Polemic
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February 19, 2016 at 6:02 PM ×

cowboy, I ll have a crack at that.

JPY has been such a low yield currency fro so long and a land full of such savers that there is a huge demand from the savers for yield and that has always attracted them offshore. AUD has always been a favourite. So when things are OK jpy heads offshore ( JPY down) but when things are flying around or risk is increasing for the yielding currency it starts to come home . JPY up.

That yield risk function also appears through the great JGB UST 2 yr yield diff which USDJPY has always tracked. Stress times - race to USTs ( JGBS so managed they don't move as much relatively) and so US/JP yield spread moves in JPY favour.

Basically JPY is a nation of savers with little external investment coming into the country relative to that flowing out. So unlike say Greece where everyone withdraws their money from in signs of trouble.. Japan withdraws their money from everywhere else when there are signs of trouble and brings it home in time of trouble
. Just look at USDJPY in 2011 after the earthquake/Tsunami.

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abee crombie
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February 20, 2016 at 12:39 AM ×

Interesting factoid I just read from ms' equity head. Parker.

Historically, bottom-up numbers (spx earnings ) start the year too high, averaging 14% growth in January of a given year, only to finish at 6%. In 34 of 40 years, bottom-up earnings estimates proved to be too high, and all six years they were too low were recession recoveries or the year after. Estimates seem pretty achievable near-term, and 2016 numbers have less than the normal optimism

the rotation out of quality and momentum and into value has been written a lot on the blog that shall not be named. Apparently killing a lot of market neutral guys including citadel and bridge water. Feels kinda like 07.

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cowboy
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February 20, 2016 at 1:34 AM ×

@pol thanks mate. Is there any way to quantify/estimate those Japanese flows?

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Whammer
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February 20, 2016 at 3:43 AM ×

@abee, I would thing the Blog That Shall Not Be Named would be ZH. But what you're saying sounds a bit too sane for ZH.

Is there another "BTSNBN"?

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Booger
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February 20, 2016 at 8:16 AM ×

Pol: on Brexit, to an outsider, it seems like David Cameron trying to extract a better deal from the EU. Perhaps ROW is not pricing in how much risk there is, but perhaps we are all underestimating the strategizing behind the scenes. If Brexit fears do come to full fruition, it could be an interesting trade opportunity in cable.

AUD.JPY: it does seem due for a correction/rally, but I think the upside for AUD.USD is limited so one might be better off playing straight USD.JPY for a rally. Although USD.JPY is looking pretty weak the last few days.

The retail sales from Canada on Friday were shockingly bad (-2.2%), so the optimism from December (+1%) is pretty neutered. This may well push the BOC's hand in cutting Canadian rates. That is the next obvious move I see: sustained commodity weakness pushing commodity economies into recession. With rates at 2% Australia and NZ 2.5%, the currencies still have potential to move down. Probably more so than Canada, although the Canadians appear to be leading the pack.

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Booger
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February 20, 2016 at 10:59 AM ×

On USD.JPY: very mysteriously, during the liquidation from 120 to 111, there was barely any effect on carry (high interest rate) pairs. The only thing that moved much at the time was the Nikkei. But if the Japanese were selling the Nikkei, they wouldn't have to liquidate USD.JPY. The only thing that makes sense to me is if the USD.JPY move was mainly unwinding of overseas investors who were long Nikkei and hedging currency exposure.

I read a story that the yen strength might be related to Chinese USD denominated debt being repaid in Yen, but this didn't make much sense to me.

On China, the trade figures this week, which may have actually been dolled up, were quite ugly (imports -18.8% yoy, exports -11.2% yoy). This seems to be corroborated by the Japanese figures this week (exports -12.9% yoy). The Chinese loan figures, it is hard to understand where the loans are going (? do you really need more loans to shut down production) or what they mean. As Michael Pettis points out repeatedly, marginal growth from Chinese lending is falling precipitously and short of a direct transfer to households, growth does not look like it is going to turn around soon. I think this is the master trend with commodities.

Chinese rate cuts, RRR cuts and new loans has not done anything to arrest growth decline in the last 3 years, so I can't see how the recent loans boost will do much (800B Vs. 4T in 2009). That is assuming the 800T is actually going to actual lending rather than rolling over bad debt or something else. A big increase in Infrastructure spending would juice growth, but this was not announced and has been done in 2009, and there is a magnitude more overcapacity now.

I think if they announced a transfer to households that would be a game changer. But that appears politically unacceptable to the PBOC. If they devalued the exchange rate significantly, that could also be a game changer, but it could have a bad effect on their USD denominated debt and would involve a loss of face with their current currency position.

The other problem with new loans being a source of significant growth is that due to the current exchange rate, excess liquidity or money supply growth locally gets exported out via capital outflow. With the Chinese economy slowing, everyone knows the last time there was a NPL banking problem they spanked the household sector via financial repression to make the banks whole. The likely solution this time is unlikely to be a positive thing for capital tied up in China. The capital outflow from China is one of the few positives for the commodity currencies (CAD, AUD, NZD).

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Anonymous
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February 20, 2016 at 6:42 PM ×

We are screwed ?

http://www.barrons.com/articles/what-recession-gdp-set-to-grow-3-1455943664?ref=/this-week#

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washedup
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February 20, 2016 at 7:09 PM ×

I actually thought the barrons article was quite good, and I am equally sure it will be dismissed by recessionistas using phrases like 'EM ticking time bombs', 'credit contagion', and 'CB's out of bullets'.
Frankly both the pessimists and optimists have some pretty good points, and sometimes you get to the point in macro where the best course of action is to just wait, and know that one way or another, the world is about to get more interesting than it currently is, so save your powder.

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Cityhunter
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February 20, 2016 at 11:50 PM ×

@Booger

Chinese new loan is not going to boost any growth. The massive increase in new loans is probably due to Chinese companies taking RMB to refinance the USD loan foreseeing the coming weakness of RMB

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Anonymous
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February 21, 2016 at 5:04 AM ×

Hi, I read a comment somewhere that the negative policy rates of the ecb n boj effectively sets the lower bound on the negative yielding govt bonds that the central banks can purchase, that by lowering the policy rate to say -0.3, they can then buy govt bonds yielding as low as that and not below.

I don't quite understand the links through which the above relationship is effected. Can someone please explain to me how it works? Thanks

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Anonymous
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February 21, 2016 at 8:02 AM ×

Washed, that was just a joke on the cover indicator. That being said the view that the msm is all doom and gloom is not true I think.

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thegreyman
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February 21, 2016 at 3:33 PM ×

Time for another reverse split in UGAZ: Quite a tumble...

http://imgur.com/jLgyAcl

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NonAnon
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February 21, 2016 at 3:35 PM ×

@cowbow, for sure my SPX preferred count of Oct '14 marking the start of wave v of 3 could be wrong and it may instead have marked the start of wave 5 - in which case we're already in the cyclical bear (consensus view?) with lower lows nearer term, not a wave 4 correction and then one last hurrah 5th wave higher highs to come (still my preferred count & non-consensus). All will be clear in retrospect! I've higher confidence in the global (& asian) consumption themes than the voodoo wave counts and act (allocate) accordingly. Back to lurking.

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