I Should Coco

Just imagine the scenario.   It's early-mid 2014, and while standard credit indices are doing just fine, there's a hot new asset in town that's blowing the doors down. 

These contingent convertibles have been around for a few years, but with banks keen to shore up Tier 1 capital ahead of the release of the ECB's  Asset Quality Review, they've been issuing like hot cakes.  Sure, they're converts, not traditional bonds, and there are some quirky aspects to them that make them difficult to price, but the yield is pretty tasty.

Fast forward a year, and high yield is looking ropy.   Investment grade's hanging in there, but the returns aren't fantastic.  Meanwhile, over the last year and a half the contingent coverts have generated a total return of more than 10%.   Is it any wonder that both banks (given the official imprimatur of the regulators) and investors (keen to clip juicy coupons in a low return world) said "I Should Coco"?

Now, of course, both sides are rather looking like Gaz in the Supergrass album cover above.   Having generated total returns of more than 13% over 2014-15, Cocos have given it all back and more so far this year.  All of a sudden that boring IG index isn't looking too shabby....


One of the main issues with Cocos is the heterogeneity of the product.  All have some sort of trigger, but some convert to stock and others wipe out a portion of the principal.   Some, like the infamous DB 6 percents, suspend coupon payments if the issuer doesn't have enough spare change.  Many have triggers based not only on book or market value, but also on the discretionary judgment of a regulator.  Oh, and they all seem to have prospectuses of 130 pages, which Macro Man would be willing to wager were not exactly diligently studied before many of these deals were bought.

Much like the world of exotic options, introducing barriers and triggers generates a great deal of non-linearity into pricing.  Part of this non-linearity gives the owner of many Cocos an embedded short gamma position to the downside; i.e., they own the bonds and they're essentially short puts against it.  Surprise, surprise, that free yield wasn't so free after all, and when stock prices fall Coco holders are forced to sell as a hedge.  Thanks to the ECB and their own endeavours, that seems to be exactly what's happened to DB.



Now one of the features of short gamma is that it can produce nasty overshoots that lead to reversals that are just as nasty.  Perhaps that will be the outcome here.  However, even a gamma-led bounce does little to assuage the impact of negative rates, and one would have to think that the current episode has certainly raised an appreciation for the embedded risks in Cocos as an instrument, tempering enthusiasm for them moving forwards.  It's a timely reminder of the lesson that enthusiastic diners on AAA rated ABS turdburgers learned in 2007; if something seems too good to be true, it generally is.

That being said, the malaise affecting the global banking sector looks to be about a lot more than Cocos, or even negative rates in certain jurisdictions.  Worryingly, the global sell-off has been unusually synchronous, even in places like the US where Cocos did not get the blessing of the regulators and the Fed has yet to pursue NIRP.


It's a holiday in Japan today; lord knows they need it.  The Topix bank index is down 23% in the less than two weeks since Kuroda made what now looks to have been a horrible mistake, closing at 133 on Wednesday.   To get an idea of how painful that is, Macro Man had a friend run a VWAP on the Daiwa Topix banks ETF for the last year.   The closing price on Wednesday was 138; the 1 year VWAP was just under 204.   Gulp.



As for USD/JPY, the warnings presented in this space over the last few weeks have come to pass, with necklines and clouds broken with alarming ease.  Macro Man would caution to account for the Japanese holiday in your assessment of recent price action, as well as the possibility that the GPIF or Kampo might magically decide to bid on some dollars when they get back to their desks.   That being said, the chart is pretty clear, and Macro Man reckons that "goodnight Irene" implies ~105 eventually.


In a way, it would by a fitting symmetry a la the FANG/GDX chart presented a few days ago.  After all, that was the low during that crazy period in mid-October 2014 before Kuroda-bomb #2 shocked markets and sent USD/JPY on a rocket ship ride.  The only thing that could make it worse is if we found out that Mrs. Watanabe has been stocking up on Cocos...

Previous
Next Post »

86 comments

Click here for comments
Nico G
admin
February 11, 2016 at 7:28 AM ×

Total is maintaining its dividend and you can elect to be paid in shares at an extra 10% discount. Unless some dude can make cold fusion work those oil Cos are the bargain of the decade

Reply
avatar
Rossco
admin
February 11, 2016 at 7:39 AM ×

At 105 I dare say that Kuroda-San will be falling on his sword after ably demonstrating that one institution is never bigger than the market.

Reply
avatar
Anonymous
admin
February 11, 2016 at 8:21 AM ×

"maintaining its dividend" ...sounds like the marriage vows "until death do us part" then the divorce statistics tell you that ALL vows are only good until they aren't. Guess what you'll never be the first to find out "they aren't"

Reply
avatar
Anonymous
admin
February 11, 2016 at 9:19 AM ×

I get a feeling that monetary authorities are much more in the dark than in 2008-2009. Real economy was in free fall, but Bernanke & co knew what to do...because we had precedent in 30's.

Now there is no precedent. CBs are forging into unknown territory seemingly without any long term plan. I mean we're now at a situation where Riksbank eases into 4% real growth to combat deflation...to prevent loss of confidence...

If 10 years ago somebody had said that Sweden's economy was growing at 4%, inflation @ 1%, and there was a full panic mode in riksbank and running -0.5% rates looking to ease further, would you have believed? Would anyone have?

F-ing Krugman really did a number on them. Total psychological breakdown. Alert suicide watch when in a year or two they start hiking and it all comes down. If it was just the Swedes, it wouldn't be such a problem, but CBs are more or less all losing their sh*t.

And now markets know that there is NOTHING guiding them. And suddenly those historically high PEs look bad enough to panic sell into improving economic fundamentals.

It's even worse. We lack the most basic science backed macroeconomic models to figure out what the eff is going on. Well, we'll get those models alright, empirically straight up our collective butts.

Reply
avatar
February 11, 2016 at 9:25 AM ×

@anon 9:19: you're right, but it's even worse... CBs will ever learn nothing?? they are out of control

Reply
avatar
Anonymous
admin
February 11, 2016 at 9:29 AM ×

Look on the bright side - we will now become "that" precedent which will enlighten future generations... forward for the knowledge of mankind !

Reply
avatar
Nico G
admin
February 11, 2016 at 9:36 AM ×

well said 9:19

last year i wrote that CBers will be hung for what they have done - the total confusion in markets is palpable (especially today..) and CBs have lost credibility

planning ahead this could be the capitulation i was waiting for - all hell is breaking loose, we need big volumes to exhaust selling for the weeks to come

Reply
avatar
February 11, 2016 at 9:37 AM ×

Do not want to go down the ZH route but it is utter nonsense that these unelected CBs are allowed to wreak havoc all around. Unfortunately we entered the final lap in this experiment as most on this board know/feel. When most of our models point to negative rates in most G10, there is something really wrong out there...Quite frankly as painful as it will be we need that f*ing reset!

Reply
avatar
Anonymous
admin
February 11, 2016 at 9:40 AM ×

Now Draghi banning 500€ HA let me laugh

Next the Swedes burn all the mattresses at Ikea

The only price inflation we'll get from this is at the dunce hat store. wonder if those are in their cpi basket

Reply
avatar
Nico G
admin
February 11, 2016 at 9:54 AM ×

the 500€ banknote soon to be endangered species was bound to happen - super wily move

... if they tag anyone showing up at a bank branch for change... there was a piece last year on the staggering growth in 500€ note printing - the all time favourite for any mafia and tax evader, will you now please stand up. When all hell breaks loose, chasing tax fraud becomes numero uno

111....
closed USDJPY too early had no idea it would precipitate so fast

Abe is shitting his kimono, Kuroda probably seppuku by this evening

Reply
avatar
Eddie
admin
February 11, 2016 at 9:58 AM ×

planning ahead this could be the capitulation i was waiting for - all hell is breaking loose, we need big volumes to exhaust selling for the weeks to come

Nico,

would you dare to give medium and long term targets?

Reply
avatar
Nico G
admin
February 11, 2016 at 10:14 AM ×

it all depends on the depth reached

European indices are already in no man's land, Italian banks are trading like failed biotech - breaking 1800 on spoos later today could force sidelined portfolios to be liquidated

If we stop here 1950 spoos would be the number to beat until May.

If we see 1580 in the coming weeks you really have a different story

Reply
avatar
Anonymous
admin
February 11, 2016 at 10:26 AM ×

1800 is key on US open. It was Bullards low area and, he came out again in Jan around the same level. Not launching conspiracies but seeing it as a big psychological barrier.

It "should" get smashed based on other markets price action and Spoos always lagging but following.

Reply
avatar
Booger
admin
February 11, 2016 at 10:41 AM ×

wow, I feel I cannot resist a punt on long USD.JPY here. Yeah, it is ugly, but overdone in the short term. And I suspect the BOJ will be intervening soon. One of the more legitimate CB FX activities is to smooth out FX moves and 10% move in 2 weeks is a bit disorderly.

Reply
avatar
Nico G
admin
February 11, 2016 at 10:51 AM ×

Booger good thinking in those days you want to jump in on mega stretched liquidatio-capitulationesque moves :D

short term stuff though, the world and their mother might still need to cover their short JPY

Europe is recovering a little - now it is up to the far West cowboys to save their 1800 and put a floor on the market. I won't be awake for the first 90mn on NYSE shame it's gonna be rock n roll

Reply
avatar
Booger
admin
February 11, 2016 at 11:19 AM ×

Nico: very short term bounce I suspect.

Interesting that oil is breaking new lows and the commodity currencies have not broken with it. With the yen pairs getting liquidated I would have thought there would be more liquidation of carry currencies.

That is pretty amazing, wti at 26.09, AUD.USD at .7036 and USD.JPY at 111.51. AUD.USD seems a tad high considering the other 2. I wonder if AUD.USD will be still above 0.70 if wti slips to 25's.

Reply
avatar
Nico G
admin
February 11, 2016 at 11:24 AM ×

commodity currencies have bottomed - CAD is my favourite play (talking my book)

NOK follows... then BRL despite the political risk (probably priced in)

Reply
avatar
Anonymous
admin
February 11, 2016 at 11:43 AM ×

MM that is the ugliest album cover ever. Nico I think you're right but early.

Reply
avatar
Leftback
admin
February 11, 2016 at 12:07 PM ×

Great great piece, MM, you are really at your best in these moments when everyone else is losing their sanity. Someone else pointed out that these are great days for looking at long-term charts.

CB intervention is starting to look like a total disaster, and you know they always decide to double down... God only knows what they are going to do next. More QQE? It appears that the Usdjpy correlation is back in force.

With rates as low as they are now globally, a 2008-style crunch seems impossible, but Japan-style asset deflation in global markets is clearly knocking on the door. I am waiting for an Albert Edwards Permabear Financial Winter forecast again.

Usually this is time to buy, an oversold bounce is way overdue. But the longer-term prognosis isn't good, is it? As in 2007-8, the perception that "they" are losing control is taking hold, and I fear the mass psyche of elephants running in one direction.

Reply
avatar
Greyleaf
admin
February 11, 2016 at 12:24 PM ×

These coco reminded me of the Japanese bank convertible preference shares fiasco from 20 years ago. At least the Japanese has the good taste of writing a simple and clear prospectus in how the conversion terms work -- the owner one preference shares gets its principal back in common shares, up to a limit of about twice as many shares as determined at the issuance, when the conversion value within a few points of par. The pref's dividends were quite a bit higher than the yield on the underlying common stocks, of course. Just about a year after these hot new issues came to the market, the average Japanese bank stocks dropped more than 50%, thus subordinating the calculation of the "return on principal" to that of "return of principal".

Plus ├ža change.

Reply
avatar
Bruce in Tennessee
admin
February 11, 2016 at 12:27 PM ×

The mass psyche of elephants, Lefty, means the easy money is to be made in the here and now. It would not surprise me if in a couple of months it becomes much harder to have the trend be your friend...

Reply
avatar
Leftback
admin
February 11, 2016 at 12:33 PM ×

We are fast approaching the 1.50% level on US10y, which is pretty amazing; we are not surprised at the event, but the timing is always more difficult. We simply had not anticipated that these extremes would be reached so early in the year, as is the case for the USDJPY reversal, but here we are.

Presumably the members of the Hikers and Hawks club and the rest of the rate hike steepener tools are being rear-ended in the most delightful way. The particular manifestation of fear seen in long bonds is always a great fade when the time comes. We are not bending over in front of the steamroller here but we are watching the TLT mini-bubble with tremendous interest.

Once this subsides, there should be an almighty rally in mREITs. Longer and lower and f*cking possibly NIRP is set in stone. The Hikers and Hawks were always out of their tiny little birdbrain minds.

Reply
avatar
Leftback
admin
February 11, 2016 at 12:45 PM ×

Btw, just asking this: with Japan 10y breaching the Zero Bound and German 10y fast approaching, have we finally reached the point where QE not only isn't working but can in effect no longer be extended? In other words, since our politicians are asleep at the wheel again with respect to fiscal policy, is it time for the alternative approach of the Helicopter Drop? How would a central bank Helicopter Drop (b/c the politicians will not do it, they are still fighting the last war from the 1970s) actually be enacted in the different countries that manifestly need it? Just something to think about.

Reply
avatar
Anonymous
admin
February 11, 2016 at 12:56 PM ×

Are we allowed to say the BOJ were just in the market? Because, you know... they were just in the market... ;)

Reply
avatar
Macro Man
admin
February 11, 2016 at 12:59 PM ×

If they were, you could say it, but they weren't, so you can't.

Reply
avatar
abee crombie
admin
February 11, 2016 at 12:59 PM ×

Great post again MM, very key points on the heterogeneity of CoCo's. I've gone through a few prospectus and never felt fully comfortable buying them besides the fact that all bonds are akin to writing a put on the corporate structure, CoCo's make it official and easy to execute.
I cant remember where I heard it but someone said that the equity markets can shake off one or two bad narratives, but when you bombard them with lots of uncertainty its too much

Lets recap what’s worrying the markets this year

1) China devaluation - Currently its pretty stable but you still have talking heads like Bass thinking it will implode and to be frank the capital outflows are still a problem
2) Oil and commodities. While Nico is right that a lot of commodity currencies have bottomed, WTI is pressing new lows and everyones favorite EM currency, the MXN is getting thrown out as well
3) Banking Stress – See MM above. Add in a little SocGen miss for a good stir
4) CB losing the plot – The Yen, Gold and Government bond markets are sure doing a good job of trying to convince me.
5) US political uncertainty

Now with Spoo’s right on the edge of the 1800 cliff heading into the weekend, it seems like we are setting up for a crash. FWIW, I see this as a great buying opportunity (when the dust settles) but you have to play here an now, like BiT said. Or like in Trading Places, Sell Mortimer, Sell!

Reply
avatar
Anonymous
admin
February 11, 2016 at 1:01 PM ×

MM - Do you not think that 180 pip move in USDJPY back there was BOJ? Curious as you likely have experience of prior FX interventions...

Reply
avatar
Bruce in Tennessee
admin
February 11, 2016 at 1:02 PM ×

Here's the problem as I see it. There are bright people here who can outcogitate this market. When I bought SDS in early January and commented on it, some thought this was a "5 sigma event". And proceeded in Hussman-like fashion to rail against a possible inflection point in the investment cycle. 5 sigma? Oh, puleasseeeee. This is just the result of watching what has happened and thinking about it.

Markets change. They have many times in my lifetime. They will again. I happen to think that this is a logical playing out of 2007. There we had a major crisis that was not allowed to resolve itself. So governments stepped in, and markets were supported by various means and a type of solution was declared that we've accepted for years. But the solution required investors to believe credit risks were managed and would be managed as time went on. At present day, cracks are appearing in the facade. Credit by governments has been called into question.

You can do a Hussman and rail against what you see happening in front of your face, or you can make money.

Reply
avatar
Macro Man
admin
February 11, 2016 at 1:09 PM ×

@ Anon, it wasn't, though of course when people see it start to spike that's the natural conclusion. The way it normally works is you see it spike, you say WTF, then you hear 'BOJ in' or 'BOJ checking rates' immediately thereafter. When it spikes and retraces, and people say WTF? BOJ? and there is no relative immediate confirmation, it just means the market is afraid of iuntervention, and it ramped amongst terrible liquidity. I think that factor cannot be overstated enough...liquidity sucks, and the market is very very skittish.

Reply
avatar
Macro Man
admin
February 11, 2016 at 1:10 PM ×

@BinT, you have it spot on: do you want to be right, or do you want to make money?

Reply
avatar
Anonymous
admin
February 11, 2016 at 1:12 PM ×

MM - Thanks for the input re: BOJ interventions, appreciated.

Reply
avatar
Anonymous
admin
February 11, 2016 at 1:31 PM ×

Possible the buying opportunities come Monday morning in Europe after China opens and flushes out. Into opex.

Reply
avatar
Anonymous
admin
February 11, 2016 at 1:41 PM ×

Any reason why people are talking a big move down and not a bounce ? Seems quite uncertain atm

Reply
avatar
abee crombie
admin
February 11, 2016 at 1:53 PM ×

Knowing my luck, Treasuries probably do a big reversal today ;-) .... last time Spoo's were down here, equities sold off into lunch time and then rallied hard in the afternoon.

Reply
avatar
Anonymous
admin
February 11, 2016 at 2:02 PM ×

Are those returns unhedged?

Reply
avatar
Anonymous
admin
February 11, 2016 at 2:07 PM ×

Well yen seems to be holding, oils seems to have turned the corner, but who knows...

Reply
avatar
Anonymous
admin
February 11, 2016 at 2:26 PM ×

FI could be exhaustion gap here...have nibbled at some bund put targeting .6-.8 yield....
US FI LOOKING FOR RATE CUTS..FIVE ME A BREAK!!

Reply
avatar
Mr. T
admin
February 11, 2016 at 2:27 PM ×

Bass getting so much airtime with credibility as "the guy who made a bunch of money shorting subprime", but how is that more recent "shorting jgb's" trade working out with the 10yr sub zero! Just ''sayin, not all these guys are right all the time.

Reply
avatar
washedup
admin
February 11, 2016 at 2:50 PM ×

Bass is now heading to 10 years of purgatory with a china short like his yen bet of the 90's - what else is new. Seen plenty of these golden boys come and go. In his defense, he bets a very small portion of the firms capital on these 'bets' - the media exposure to risk capital ratio is fairly high for this cat.
Buying some TBT here in cash - I am willing to make the bold and scary bet that the US will be able to achieve a 1.6% plus nominal GDP growth for the next 20 years with a growing population alone, debt or no debt - BinT I know you disagree, but on this one my trade horizon may just be different than yours.

Reply
avatar
CV
admin
February 11, 2016 at 3:20 PM ×

Jeez, things move quickly here on panic day! ;)

Great post MM! I agree with this too ...

"You can do a Hussman and rail against what you see happening in front of your face, or you can make money."

Nimbleness and cynicism are important at the moment. The spike down in bonds as U.S. traders waded into the office was telling I think, and I wonder whether the bond bulls are better off cashing their chips here. I just does fell like it in the short run.

Looking at TBT too Washed. Gap is getting filled ... I think it could be a winner!

Reply
avatar
TraderJim
admin
February 11, 2016 at 3:28 PM ×

Actually amongst the action, am looking at GBP/NZD which was range trading 1.9 to 2.1 in 2014 through early 2015 then spiked to 2.5 when markets thought BOE would follow Yellen's lead on raising rates. Now that's off the table (likely back to QE even for Yellen and BOE will do nothing at best) then see GBP/NZD drift back to 2.0

fundamentals of NZD still quite strong versus GBP, also Brexit hangs in the air plus their current acct deficit

Reply
avatar
Adrem
admin
February 11, 2016 at 4:40 PM ×

Einstein's 1916 prediction of the existence of gravitational waves was confirmed today by the clash of two Black Holes - Deutsche Bank CDS and the Fed's Yellen.

Reply
avatar
Nico G
admin
February 11, 2016 at 4:46 PM ×

What do you call a fat prostitute flying through space?

A meaty-whore!

here is some comic relief in that make-or-break instant on the tape

i've been following the Evil speculator since he was mentioned by an anon here in the forum last year, like he was some kind of god and from what is said on the site he ha(d) a good track record

it is dumbfounding to watch him struggle that much with the tape this year. I only get 'public' feed on his dip attempts but there are all stopped. His initial brilliant 1950 short got stopped too. It goes to show that his risk/reward was probably calibrated for a tape a la 2011-2015. And clearly not fit for 2016

last August i said that 2008 price action was here. People opposed that view and expected yet another V shape bounce into new highs. The fact that we never got any new high on Spoos (Europe was already abysmal) should have been the warning to all, that someone had dramatically changed, especially after the brutality of August (VVIX record)

i do not understand why that Evil speculator and other folks with 20+ year experience struggle so much to acknowledge that 2016 is different. I am feeling terribly uneasy because i know how cruel market is. It now seems intent to punish those who either started with, or perverted their trading analysis to accomodate the QE mantra.

Nw they are all crying like babies because Yellen does not seem to care about equities anymore. As mentioned how i was kicked out of 'Trading The Charts' excellent community in 2007, for being too bearish. As crap hit the fan real hard in 2008 its founder emailed me saying it was ok to register again.

We became friends, his American dream was shattered and albeit excellent Elliot analysis showing everything down, he went on for his last 'belief' trade, far from his technical conviction, and died of a heat attack in October. I think of him all time, as a reminder to never let your emotions go in the way of price action.

I want this market to bounce because i do not want the world to suffer. But sentiment wise, there are still too many guys playing the long side and as you know market extrema are only reached when everyone is thinking the same way. It takes years for everyone to all become bullish.... it takes much less, in a bear market, for everyone to become hopelessly pessimistic but we don't seem to be there yet.

Good luck everyone

Reply
avatar
Nico G
admin
February 11, 2016 at 4:55 PM ×

is it me or

"BMW sales rise 7.5 percent in January on demand in Europe, China"

is stuck high up in Finviz news feed since this morning? seems like they are desperate for good news to 'stay'

Reply
avatar
Anonymous
admin
February 11, 2016 at 5:01 PM ×

"not all these guys are right all the time"

No one is right all of the time (them guys or anyone). Dare I say it not many are even right MOST of the time and that definitely includes everyone on here including me. It isn't even necessary has a prerequisite to making positive long run returns. I won't even go into the what is required because those of you who know don't need telling and those still think being right most of the time is what it is all about probably won't want to listen because for them it's about ego not numbers.

Reply
avatar
Anonymous
admin
February 11, 2016 at 5:01 PM ×

Nico, any other trading forums u think has value?

Reply
avatar
abee crombie
admin
February 11, 2016 at 5:03 PM ×

Nico who is this evil speculator? FunnyMoney?

Here is some commentary from Horseman Funds..up 20% last year, 8% in Jan...

I spend most of my time, while looking at current prices, thinking about
and trying to live six months to one year in the future. Thinking about
what will be the reaction to what is happening now, and then thinking
about what that means future prices might look like. Generally that has
worked well for me.

What I can see now is that US growth is slowing, and that the market is
likely to price in reduced monetary tightening. This should lead to a weaker
dollar. This makes shorting Europe and Japan very appealing.
Theoretically, this should make commodities and emerging markets (‘EM’)
attractive, particularly if you are of the view that US dollar strength is the
reason emerging markets and commodities have been so weak. However, I
think we have chronic oversupply of commodities, and real financial issues
in China that cannot be resolved easily. This makes commodity related
areas very unattractive, despite the prospect of renewed monetary easing
by the Federal Reserve. Furthermore, the reaction to reduced tightening by
the Federal Reserve, would almost certainly be more easing by every other
central bank in the world. But as we have seen recently with both the ECB
and BOJ, monetary activism is not always effective. I also worry about the
prospects of a trade war, as populism becomes the new normal in politics
globally. The future for me is now more uncertain than at any time I can
remember. Or to fully quote the Chairman of the Board from Margin Call,
“I'm here to guess what the music might do a week, a month, a year from
now. That's it. Nothing more. And standing here tonight, I'm afraid that I
don't hear - a - thing. Just... silence.”

Your fund remains long bonds, short equities.

Reply
avatar
checkmate
admin
February 11, 2016 at 5:03 PM ×

Apologies I note yet again I simply confirming what MM has already said above. Quicker on the read and slower on the typing should now be my motto.

Reply
avatar
Anonymous
admin
February 11, 2016 at 5:37 PM ×

Rather than fearing I love market periods like this. It's as if all the heuristic and behavioral biases of market participants are particle accelerated to light speed; hitherto fools becomes geniuses, geniuses fools; the quantum traders who are both.

Behold the flawed wonder of humans and our huge but tiny minds, simultaneously detecting gravitational waves while howling at the moon.

Reply
avatar
Mr. T
admin
February 11, 2016 at 5:48 PM ×

I dunno, the yield spread between FI and select equities should provide a bit of a floor. If you are USD based investor is KO @3.2% really 150bp of credit risk vs US10yr? This is a business that in theory should benefit from lower input costs etc, and there are plenty of examples out there. One of the reasons I don't understand the mounting pessimism against stocks in particular.

KO div vs 10yr

Reply
avatar
Anonymous
admin
February 11, 2016 at 6:11 PM ×

Abee

google the evil speculator, thats the name of the blog run by that trader

Reply
avatar
Ghost Of FunnyMoney
admin
February 11, 2016 at 6:28 PM ×

abee - No, Evil Speculator isn't FunnyMoney. FM doesn't have any blog or suchlike, and although Nico doesn't like FM, actually they both have v similar views markets in 2016. Anyway enough of my boring you all on that... (I work with FM, hence opining on the subject).

Reply
avatar
washedup
admin
February 11, 2016 at 7:05 PM ×

Wow - FM did so well executing BTFD he has hired new, um, associates - bravo. What is his 2016 view? STFR? I don't think he was ever known for his nuanced approach.
T - good to see you back and adding commentary - y I agree on consumer staples.
Nico, you called it - I don't have any convicted view other than the risk reward on long bonds isn't great at 2.5% when SWF will have to eventually monetize it, and the downside on crude is now limited to $26.50, half of the previous time we were at this level on ratesl

Reply
avatar
Anonymous
admin
February 11, 2016 at 7:52 PM ×

Nice price action.

Reply
avatar
thegreyman
admin
February 11, 2016 at 7:59 PM ×

US Auto Debt funding "record sales" Fed data

2016: $1.2T
2006: $700B
2001: $420B



$SHV @ 7yr highs ..... basically a TBills equivalent ETF . Stuff breaking / people scared . Paid a real dividend back in 2009

Reply
avatar
Macro Man
admin
February 11, 2016 at 8:09 PM ×

Another day, another BS rumour, this time about potential OPEC cuts

Reply
avatar
washedup
admin
February 11, 2016 at 8:13 PM ×

of course its BS, but this reaction does shed a light on positioning vis a vis commodities.
Funnily, opec cuts have historically had the exact same impact historically as rate cuts in terms of shoring up the markets - zero.

Reply
avatar
Macro Man
admin
February 11, 2016 at 8:15 PM ×

I am not sure what it says TBH...I categorize it as the same ilk as the DB bond rally a couple days ago.

Reply
avatar
Anonymous
admin
February 11, 2016 at 8:18 PM ×

Surely half the market saw that the opec rumor was just a feeble attempt to protect 1800 on the spoos?

Reply
avatar
Anonymous
admin
February 11, 2016 at 8:20 PM ×

UAE just buying itself and their petrobuddies a couple more days to dump its equities while it can...

Reply
avatar
Leftback
admin
February 11, 2016 at 8:28 PM ×

Taking cues form price action alone, the long bond has weakened today since about 8am, and the demand at auction was actually kind of weak. Fear is fading a little bit, in that market at least.

Reply
avatar
DownWithTheBeanCounters
admin
February 11, 2016 at 9:00 PM ×

Last time crude set an "x year low!!" was last month expiration right? Remind me around time in March to fade the crude close please. Plebiscite on demand expectations indeed.

Reply
avatar
Anonymous
admin
February 11, 2016 at 9:11 PM ×

Day 31 of Jeff Saut's 'selling stampede': “A few stampedes have lasted 25 – 30 sessions, but it is very rare to see one go for more than 30 days.”

Due a pause here, at a minimum. With sentiment largely one way now, 'more than a pause' would be no surprise.

Reply
avatar
Celeriac1972
admin
February 11, 2016 at 9:21 PM ×

When all news is interpreted as bad is it time to wonder whether the fear has been overdone?

Reasonable arguments might be made for the following:

1. Oil prices are depressed for known and non-enduring reasons. In any case there are many positives to cheap oil.
2. European banks are far less bust than they have been for the last decade. They will muddle through.
3. China slowdown was inevitable and necessary, but China will still be a massive contributor to global growth for the foreseeable future
4. CB's were never as omnipotent as they and (many) financial market participants have perhaps believed. In the long run this won't matter - other than to financial market participants.
5. 1,2,3&4 are not systemically connected other than by ZeroHedge subscribers

Will we look back on this period as one of irrational despondency?

Reply
avatar
Nico G
admin
February 11, 2016 at 9:22 PM ×

Evil Speculator uses a little bit more proprietary science than say, our beloved Funny Monies. This does not mean he is faring better.

anon501

in all fairness i don't. You ought to focus on one group at best. The variety of views and conflicting timeframes expressed in the excellent MacRo Team is rich and hard enough to follow to add even more opinions.

imho financial information is a poison - you have to calibrate the feed to your very timeframe and be extremely selective there are too many 'experts' out there so as time goes, you will handpick the ones who contribute to your trading, not confuse it. If anything 2016 is a perfect environment to test various blogs. A couple of folks are in full deer in headlight mode proving there were nothing but QE aficionados and offer no added value other than quantitative cheering.

Perhaps MM can launch a separate topic on 'your 5 preferred websites' where we all can give our 4 favorite websites after MM muhaha

Reply
avatar
Anonymous
admin
February 11, 2016 at 9:44 PM ×

Anon @ 9:11 he also says that they rarely end on a Friday, so if you would like to trade his proverbs, the proverbial turnaround should be here about... Tuesday :)

Reply
avatar
abee crombie
admin
February 11, 2016 at 9:45 PM ×

Was just reading over the CS call (well part of it, its damn long). Seems to me the end game is for CS (and likely all the other big banks) is to split off the wealth management and banking group and run down the iBanking unit to a slimmer one that is focused on supporting WM, not being an evil empire and a profit center on its own.

Seems like the markets today want simplicity, and if you look at a lot of successful companies (in tech especially) this is what is rewarded. CS and too many other banks are still holding too many iliquid assets, which is where the bulk of this quarters losses came from

I think it would do the market good if all iBanking was privately owned. Let the banks do commercial and treasury services, but get them out of the capital markets. If you want to be an investment bank, put up your own capital and keep it away from public markets. I think this would solve a lot of problems and the way markets are throwing out financials today, I think its what the market demands (though in fairness, Regional banks are in the gutter as well)

FWIW, the traditional Swiss bank inside CS did rather well, even with negative interest rates. It was the iBank that has ppl worried.

Reply
avatar
Nico G
admin
February 11, 2016 at 9:59 PM ×

well said abee

the years 2016-2020 will see a financial revolution - besides a long need split within existing traditional behemoths it is so likely the Bay area is thinking of revolutionizing banking the same way airbnb and uber shook their respective industries

Reply
avatar
Leftback
admin
February 11, 2016 at 10:07 PM ×

The calls for the Fed to go to NIRP seem misguided, and at the very least quite premature. Punters buying a 1.50% 10y and a 2.40% 30y might live to rue those purchases before long, unless they plan to hold to maturity.

Mild recession / slowdown in the cards for the US - as we have been saying for a long time - but nothing more serious than that. Not with energy prices this low. The US consumer and broad economy by and large thrives on such conditions, despite its recent change of status from oil consumer to producer.

This is a panic, like all panics it will pass and yield to more complacency. It has been interesting, but it is not 2008. We will take our cue from the Treasury market, but it is possible that the top may be in for now in the long bond.

Reply
avatar
Nico G
admin
February 11, 2016 at 10:08 PM ×

100% in tune with Jared Dilian and lazy so his words are copied here:

"...We could see inflation of 3-4% in a couple of years. Now, even the most novice investor can understand that owning a bond with a negative yield in a high inflation environment is the most nonsensical thing ever.

Since 2011, Amazon (and all that stuff) has been going higher.

Since 2011, metals and commodities and EM have been going lower.

Suddenly, three weeks ago… these trends abruptly reversed.

My thesis is that the deflation trade is over. The inflation trade has just begun.

Which means: don’t buy AMZN, and don’t short gold. This is the first inning.

..As usual, the market is doing what nobody expected to happen. Nobody is positioned for an inflation trade. Some well-known market pundits and economists have been talking down emerging markets for years. They haven’t stopped. The thing about most people is, they always miss the turn because the bearish thesis is most compelling on the lows. And they are blind to evidence that contradicts their thesis.

.. I have always believed that the inflation trade from 2000 to 2011 was the motive wave, and the correction from 2011 to 2016 was the corrective wave, and now we are back on the primary trend, in an inflation bull market lasting 25 years or more."

Reply
avatar
Anonymous
admin
February 11, 2016 at 10:34 PM ×

So we rule out DB having a lehman brothers style crash?

Seems to me if DB is 10% as bad as discussed on this blog, DB needs either recapitalization by issuing more equities or nationalization by ECB/German taxpayers.

How can one be sure that DB won't explode in the near future?

Reply
avatar
Anonymous
admin
February 11, 2016 at 11:05 PM ×

@Nico,
Tony Plummer chart from May 2008: http://postimg.org/image/3lk5x6kux/

I, for one, welcome our inflationary overlords.

Reply
avatar
February 11, 2016 at 11:22 PM ×

@Nico - I've been on about inflation here for a while too. I tend to be a bit academic though. In fact I've stated that 5-6% is easily achievable. Heck, we're at 2.5% right now and that's with commodities in the bog. What happens when oil is back to $50?

Reply
avatar
washedup
admin
February 11, 2016 at 11:32 PM ×

Nico - my brother - my friend - if I agreed any more with that Jared Dilian article I'd be slobbering and drooling on my desk.
Very well put - just think about it - inflation is a change, not a level - whats crude more likely to do long term from $15-30? contribute to deflation or inflation? What are wages going to do with negative productivity trends, political trends and 4.9% matched skill employment - go up or down? Is the next move of DM governments likely to be to buy bonds yielding negative, or instead finance a round of carte blanche social and infrastructure spend?
Maybe the US will stall, maybe it won't - but if you can have jobless recoveries, you can also have jobby stagnation - there, a new phrase heard first on Macro Man's porch - expect to hear much more of this from the media in the coming years!

Reply
avatar
Anonymous
admin
February 12, 2016 at 12:16 AM ×

Capitulation flush on the Nikkei - ripe for some 'intervention'.

Reply
avatar
MrBeach
admin
February 12, 2016 at 12:36 AM ×

@nico & @washed:

I respectfully disagree. Contrary to textbook macroeconomics, I think the Fed Funds rate actually sets the inflation rate. So in a low rate environment like now, inflation will stay low. To be more forceful, I don't think we'll get meaningful inflation with a low funds rate.

One empirical proof of this is Japan.

I think of it this way: the Fed funds rate approaches the marginal rate of return on any investment (assuming that the funds rate stays constant). An oil producer just needs to cover capital costs to remain in business. At the limit, this is the fed funds rate in a telegraphed low rate environment. This will also become the rate of inflation.

Try another thought experiment. Lets pretend that the Fed Funds rate is a stable 4%. The Fed has telegraphed that this rate will stay constant for 10 years. At the limit, your business has to grow at this rate for you to remain profitable.

So I don't think we'll see a burst of inflation at all. Not going to happen with the long bond where it is trading now. Certainly won't happen in Japan.

If the Fed wanted inflation, they should sell off their balance sheet and drive long term yields up. That is not going to happen either.

I think we're stuck in disinflation until the next round of QE.

@mm: I'm still in my long DB trade. Net flat.

Reply
avatar
Anonymous
admin
February 12, 2016 at 1:06 AM ×

Nikkei down 4% - relentless so far

Reply
avatar
washedup
admin
February 12, 2016 at 1:11 AM ×

MrBeach - seems like a pretty self serving argument - rates are low because inflation is low therefore….

I give you that idea is consistent with expectations theory and I think there is some literature that supports this, but I question the current equilibrium is all, plus inflation has building blocks as opposed to being just an expectations variable - the rule of thumb I have used always is that the 10 Yr tends to mean revert to the trend growth in nominal, not real GDP - once the current level of commodities is factored in - core CPI should settle in a 1-1.5% range (consistent with a low potential for the economy) and real GDP growth should grow in 1-1.5% range also - the 10 Yr should therefore eventually be in a 1.5%-3% range, and its at the bottom end of that range currently because we are going through a growth scare (actually, depression terror is more like it) and there has been some treasury buying for capital ratio purposes and agency gamma hedging, not to mention spoo pukers buying it, all at a time when China has been on holiday so there haven't been any countervailing liquidity - we are here because of flows and not fundamentals - the US in not yet in decline like Japan and Europe - population growth alone adds 0.75% every year in this country, and the other major drivers like OER and wage trends are hooking up not down - hope that explains my position somewhat.
Being long here makes about as much sense as being short treasuries did back in May 2008 when oil was $140 and everyone thought this was a one way street.

Reply
avatar
Basho
admin
February 12, 2016 at 1:46 AM ×


"Which means: don’t buy AMZN, and don’t short gold. This is the first inning."

Agreed, Nico, in anything but the shortest term at least. Also agree that 2000-2011 was probably just the first leg, for gold anyway.

Not so sure how easy it'll be to generate meaningful sustained inflation, however. Isn't the productive capacity created during the credit driven boom years likely to overpower demand handicapped by all that excessive indebtedness for quite some time to come?

If TPTB are determined to battle on, it seems to me they only have two options. One, embark on a sustained heavy duty fiscal/monetisation combo; or, two, hit the afterburners with QE aimed at something other than government bonds and mortgage securities (like FX and/or private sector assets). Or both.

Given they're already struggling with credibility, either of these might easily turn into a "bust or bust through" effort. Japan, as usual, is showing the way (including monetising its deficits) and I can't imagine Kuroda is done, despite this embarrassing failure.

The more interesting question is perhaps how the markets would react to any such new efforts, and what sort of feedback loop would unfold as CBs and governments in their turn react. Could get very messy, with hitherto unimaginable average vol levels.

P.S. Anon @ 5:37PM. Lovely.

Reply
avatar
washedup
admin
February 12, 2016 at 2:05 AM ×

Basho - two points I would like to make:

1. As long as we stay in a fiat currency world, there will be a tremendous pressure on all governments and banks to generate inflation - the only debate will be about transmission channels
2. The first phase of the 'lets go get us some inflation' project by CB's resulted in low prices in because zero rates in DM dovetailed into fiscal stimulus and heavy infrastructure demand in China, thereby spiking crude, prompting a supply response and turning the exercise self-defeating - this was mostly coincidence - I don't think this means all future approaches are bound to fail as well - my gut tells me that given the socio-economic climate, tax breaks for lower income, infrastructure bills, and other ways of dissing the 1% but trying to get the money directly into the hands of the other 99% will be tried - this won't be friendly for either equities or treasuries

All very very slow motion stuff of course - enjoyed this debate - thanks for your thoughts.

Reply
avatar
thegreyman
admin
February 12, 2016 at 2:15 AM ×

When your margins go negative... refiners dump crude

"...three traders confirmed at least two deals traded at negative $2.50 and $2.75 a barrel. Two sources said a second refiner was also looking to offload barrels but transactions were not confirmed."
If Phillips 66 does cut refinery runs, it would be the third refiner to capitulate amid record gasoline inventories and negative margins.

"Earlier on Wednesday, sources said Delta Air Lines' Monroe Energy refinery near Philadelphia had decided to cut output by 10 percent at its 185,000 barrels per day (bpd) refinery due to economic reasons."

"On Tuesday, sources said that Valero Energy Corp was planning to cut gasoline production at its 180,000 bpd Memphis, Tennessee, refinery by about 25 percent."

http://mobile.reuters.com/article/idUSKCN0VK02Y

Reply
avatar
peter smith
admin
February 12, 2016 at 4:48 AM ×

What are the bailout crew going to do?

https://www.youtube.com/watch?v=pl12A2CkcUo&feature=youtu.be

Fond memories of hank and ben....

Reply
avatar
Basho
admin
February 12, 2016 at 7:12 AM ×


Washed, yeah, me too. I'm gradually getting quite fond of this site . . .

- On your first point, for sure. With debt ratios so high, deflation is unhappiness incarnate for way too many players.

- I suspect you're also right that some radical fiscal measures lie in our near future. Presumably monetised fiscal policy if taken far enough will produce inflation, if only by eventually triggering systemic doubts. As would the sort of QE on steroids I mentioned above.

In both cases, however, whatever apparently favourable effects result, they're hothouse flowers and likely to need constant fresh monetary and fiscal infusions. Self-sustaining, organic growth seems to me unattainable until current debt ratios are slashed and overcapacity junked. The deflationary undertow is just too powerful.

By refusing to allow debtors to suffer last time around, the present slowly unfolding collapse was baked in. A depression, in my view, is unavoidable; it's just a question of whether we'll get the deflationary or inflationary version.

Reply
avatar
February 13, 2016 at 7:33 PM ×

The CoCo meaning in portuguese is "Shit".

Reply
avatar
Macro Man
admin
February 13, 2016 at 7:55 PM ×

I means that in English, too, as it turns out...

Reply
avatar