Just say no to equity market drugs

Given the choice between scratching out a quick post or listening to Coldplay caterwauling at halftime of the Super Bowl, Macro Man didn't really face much of a choice at all.  There is plenty of interest to discuss in financial markets, certainly more than the the ouevre of the Super Bowl halftime act can muster.

Let's start with China, where the PBOC announced over the weekend that FX reserves had fallen another $99 billion in January.   This not-insubstantial sum was met with a quelle horreur! reaction from the mainstream press, though in fact it was substantially less than that implied by the intervention estimates that have been bandied about around the street.   Not that they are mutually exclusive; there is a chance that the PBOC conducted some intervention via the forward market, which would make sense given the blowout in domestic rates last month.   Lending RMB onshore for, say, 3 months in addition to injecting liquidity might explain how quickly the rates market returned to relative normalcy after the blowout.  Perhaps we'll know in a few months.

In any event, the chart below offers a simple schematic of China's FX flows, decomposed into bank FX purchases (PBOC plus private sector), FX deposits, FDI, trade, and portfolio flows.   You can clearly see the blowout in the latter over the past year, though it is instructive to observe how it is largely offsetting prior capital inflows (which is not what one would expect from a country running a large C/A surplus.)  As noted earlier, to some degree the drawdown in FX reserves simpy represents a healthy reallocation of China's NIIP from the public to the private sectors.   In any event, nothing's gonna happen this week thanks to the lunar New Year celebrations.


Switching gears to the US, Friday's post-payroll price action was telling, insofar as it was all about the equity pain trade.  This is certainly one of those environments where what's going on under the hood is more interesting than top-level beta analysis.  Macro Man highlighted the new "equity market crack" trade of long NDX/short XLE last month; while that wasn't quite the ding-dong high it was close enough, as the spread has rolled over nicely.   An orthodox 38.2% retracement would suggest another 10-12% downside from here.

If the spread above is equity crack, then the real junkies probably go for the really hard stuff: equity market smack.  Long FANG and short GDX was a prodigious trade over the past several years, with that spread rising  more than 10-fold from Facebook's IPO in May 2012 to Thanksgiving of last year.   The high was great while it lasted, but coming down has proven to be unpleasant to say the least.  If you wanted one chart to illustrate the pain in equity space, this would be the one.   As Macro Man noted last week, GDX looks like breaking out, potentially inflicting more pain.

 Remember kids:  just because your friends do it doesn't make it right.  Just say not to drugs!
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algomoron
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February 8, 2016 at 5:12 AM ×

Central banks are buying stocks and the market isn't even open

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Nico G
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February 8, 2016 at 6:02 AM ×

your new blog maquette is much much nicer than Superbowl 50 half time stomach upset

did you notice they didn't call it 'Superbowl L'

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Whammer
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February 8, 2016 at 7:33 AM ×

I guess the good news is that GDX I bought at $22 is looking somewhat less stupid than it did....

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Anonymous
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February 8, 2016 at 7:47 AM ×

dude, I understand that Jack Lambert wasn't on the pitch but 11 sacks? DEs running the 40s in 4.7 just like a CB make that game still entertaining...

Question of the day: will Mario line up a shotgun offense in March? he may be forced to play a Hail Mary pass... but I wonder who the receivers are going to be...

ciao for now
ff

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Anonymous
admin
February 8, 2016 at 8:25 AM ×

Holiday week.Big dax level. Could get 6-800 point rally this week if holds up. Same as last Chinese week off and THanksgiving.

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Anonymous
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February 8, 2016 at 9:19 AM ×

Anon 8:25here - thankthe Lord for risk tight stops!

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algomoron is a moron
admin
February 8, 2016 at 12:07 PM ×

Hey moron, how about you go long dax, blow your account and stop boring us? Run along now...

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abee crombie
admin
February 8, 2016 at 12:48 PM ×

I thought the half time show was pretty good!

MM & Co, what are your thoughts here on the 5yr? its been in a range of 1.2-1.8 since the fed telegraphing the end of QE in 2013....at the lower range now.. worth a punt with tight stops?

Interest rates are non stop this whole year so far. Very strong intermediate trend. I think this is really spooking a lot of equity guys, that along with Yen threatening to break 116 and EZ equities collapsing (and oil and China ;-)

I guess EZ equities arent delivering earnings? Just a cursory glance, Intesa Sanpaolo, now yielding 5-6%. I would think at some point pension funds might find that attractive vs the 0.26 on bunds

But momentum is to the downside, so not for me just yet

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Leftback
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February 8, 2016 at 1:16 PM ×

Ugly morning ahead. Another rendition of the 1812 overture this week? Retest of the lows in crude, or new depths?

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AL
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February 8, 2016 at 1:34 PM ×

Indeed it looks ugly, with USDJPY on the cliff.
Nevertheless, it is probably worth mentionning that the Eurostoxx50 is touching, as we speak, the 50% fibo of the whole move from the lows in 2009 to the highs in April 2015 @ 2'800.
Abee, there are several names that are attractive at these valuations with, bear in mind, estimates already slashed substantially for 2016. Take Daimler, 7x ntm P/E, 5% DY and 30% of the market cap in cash .... nobody wants it. It's a buyer's strike and clearly expectations for a full blown recession in the coming quarters is getting baked into the market.

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abee crombie
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February 8, 2016 at 2:34 PM ×

While I thought EZ earnings might be the culprit, since its less than half way through EZ season (which starts later) I doubt that is the real source. Seems more likely just the Financials sector (DB, CS, HSBC etc) dragging down the index. When banks outperform its been a pretty good risk on signal for EZ.

http://imgur.com/GhdVX4K

Eurostoxx in yellow vs Bank Index/Eurostoxx.

HSBC below 2011 lows
UBS 57% above 2011 lows
BNP 60% above 2011 lows
Barclays 32% above 2011 lows
CS at 2011 lows
Llyods 175% above 2011 lows
Santander below 2011 lows
DB below 2011 lows and near 2009 levels
SocGen 100% above 2011 lows
Intesa Sanpaolo - 160% above 2011 lows


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CV
admin
February 8, 2016 at 2:38 PM ×

Indeed, ugly as the day is long. Financial markets are basically saying that we're in recession in the Eurozone. Message couldn't be clearer. I don't buy it, and hence I have to assume you can buy this dip. But it does feel like a step into a dark void at the moment!

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Bruce in Tennessee
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February 8, 2016 at 2:41 PM ×

I can remember the old definition of expert in my business...In the old days, an expert was a bubba who gave a lecture more than 60 miles from home and had his own set of slides..

...I notice there are still lots of experts in the powerpoint generation running around...and CNBC does a nice job with graphs...


...How's their investing history in bear markets? A little tougher to ascertain...

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February 8, 2016 at 2:57 PM ×

Time to close long bund/ short BTPS for me. Lost my call spread on SX5e but HAPPY to be in cash. Really happy...

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Macro Man
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February 8, 2016 at 2:59 PM ×

?!? It's just starting to work!

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February 8, 2016 at 3:04 PM ×

Probably but i've done 35 bps since beginning.. it has covered all my losses around and i'm sensing that we're ready for a bounce of risky assets... maybe...

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Anonymous
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February 8, 2016 at 3:08 PM ×

So according to ZH, MM lives in infamy these days?

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Anonymous
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February 8, 2016 at 3:09 PM ×

I thought we were feeling gravity after the bounce!

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February 8, 2016 at 3:20 PM ×

@MM... oopss...you we're right...wtf

ok, IT'S A COLLAPSE AROUND

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abee crombie
admin
February 8, 2016 at 3:43 PM ×

Chesapeak restructures, and MLP's are getting killed. Smells of bottom !!

The market is really questioning MLP business model here. Suddenly we dont need piplines

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Anonymous
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February 8, 2016 at 4:14 PM ×

I heard the CDS of DB is spiking, along with CHK collapsing, this looks like a perfect storm.

I guess that I am dreaming that anons here are right about CBs buying....

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Macro Man
admin
February 8, 2016 at 4:26 PM ×

Font euribors trading lower as SX7E makes new lows provides a faint whiff of sulphur with respect to systemic/contagion risks....

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February 8, 2016 at 4:33 PM ×

Yes, this is my last hedge... honestly not so sure that we'll be pleased by this trade working...

CB talking heads now totally absent by any comment..really stupid, they've talked a lot wrongly in november and now stay silent.

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Anonymous
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February 8, 2016 at 4:42 PM ×

But they spoke all last week and we still sold off. The gig is up on CB talk. They need strong action, if that works at all.

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Anonymous
admin
February 8, 2016 at 4:43 PM ×

Fed- 4-hike dot plot
ECB- "whatever it takes"
BoE- "sharper relief"
BOJ- negative rate shock

Markets may be losing faith in central banks

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Anonymous
admin
February 8, 2016 at 4:46 PM ×

Information density of Comments now very low.

NB comment on the new layout not on posters... :)

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February 8, 2016 at 4:48 PM ×

Infact, no more NIRP please.... they're missing a huge hike in sistemic risks.. if they don't act in a wise way (revision of bail in, a G20 agreement on no more devaluation, etc), only a European TARP will stop this bloodbath.

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February 8, 2016 at 4:55 PM ×

This below is something in the right direction, but nothing related to today's action


Bank of Canada Says Fiscal Policy Can Help Financial Stability
By Theophilos Argitis
(Bloomberg) -- Financial stability risks may be one more reason for the federal government to consider ramping up fiscal stimulus.
In a speech today in Montreal, Bank of Canada Deputy Governor Tim Lane laid out the challenges of central banks grappling with the impact of historically low borrowing costs on financial stability, including record household indebtedness.
The Bank of Canada’s ability to control financial stability risks are limited given its inflation-fighting mandate, and “macroprudential” policies such as housing regulation and even fiscal policy have scope to tackle the problem, Lane said.
Lane said recent Bank of Canada research suggests that using monetary policy to reduce vulnerabilities in the financial system are costly and better handled by regulations to rein in housing debt.
“One thing is clear,” Bank of Canada Deputy Governor Tim Lane said. “Monetary policy cannot take primary responsibility for maintaining financial stability.”
“Other, prudential, tools are required to build a resilient financial system and, where needed, to address increasing vulnerabilities,” Lane said.
There may also be cases where policy makers should refrain from using macroprudential regulations, said Lane.
“Thus, it is possible that, in a situation of sustained weak aggregate demand, relying primarily on monetary policy to provide stimulus may lead to financial vulnerabilities that macroprudential policy cannot, or should not, offset,” Lane said.
“In such circumstances, fiscal policy may be called upon to provide stimulus, particularly since it is likely to be more effective at low interest rates.

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Anonymous
admin
February 8, 2016 at 4:57 PM ×

wow EZ equities smoked for a week bonds explode and my calls have halved...hmph..
now that every equity punter i know is showing me DB cds and has become an expert in COCOs me thinks turn is near , along with barrons $20 oil call
guess time will tell but have "averaged" into some sx5e calls( i know , don't add to losers an all that)

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Anonymous
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February 8, 2016 at 4:59 PM ×

". . . only a European TARP will stop this bloodbath."

Perhaps. But a bloodbath, unmitigated by CBs, is desperately needed to fix the system.

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were all gonna die
admin
February 8, 2016 at 5:08 PM ×

http://www.zerohedge.com/news/2016-02-08/europe-closes-lows-deutsche-bank-plunges-11-7-year-lows

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Anonymous
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February 8, 2016 at 5:11 PM ×

Folks, we have to bear in mind that Central Banks NIRP has CAUSED this collapse in banks, and the associated knock-on effect in financial markets. This message needs to be made very clear. Central Banks are the CAUSE of the problem, not the solution. It's time they were held to account and faced punishment.

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hipper
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February 8, 2016 at 5:11 PM ×

Maybe I'm biased toward a sector too narrow but generally gonna agree with this article:

http://acrossthecurve.com/?p=24667

Even though CL1/SPX correlation may have lost some grip recently still think generally going to the same direction. When oil bottoms due to supply problems, equities will bottom as well, so that's the thing to watch for me. I think close to $20, it'll still take a little bit time to get there, meanwhile finances across the sector continue to deteriorate faster from lower revenues. What does that equate in SPX though, not sure. The final stage should need to involve a much bigger puke in majors who keep the gravity defying divvies, especially EU companies. Even CVX/XOM aren't as safe as you think, from their own relative point of view they experience balance sheet deterioration too and the question is how far management will let it. This is an essential purge of CB policy excesses that needs to happen at some poine (why not now), but the unfortunate thing is that the sector apparently accounted so much of US growth that it turned into a bigger drag than most participants currently think.

Meanwhile GDX and TLT continue having field days and all mREITs do ok relative to the rest of the market.

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February 8, 2016 at 5:20 PM ×

@anon 5:11

we agree, my hope (really feeble...) is that they will realize that... or at least that they will push hardly on fiscal side..

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Anonymous
admin
February 8, 2016 at 5:32 PM ×

We're gonna have a perfect storm. An EU banking crisis is re-surfacing, we're gonna have sovereign defaults in Europe... the ECB will panic and go NIRP and moar QE. This will further pressure the USD, hurting China and the US who will respond forcibly. The inept BOJ will further aggravate the situation for everyone.

The central bank end-game is approaching. Let's face it, all CB monetary policy was just a ponzi. You can't solve a debt crisis with more debt. We will learn this lesson in the next 2-3 months.

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Anonymous
admin
February 8, 2016 at 6:09 PM ×

Easy - have the CBs cancel as much of the Government debt stock as is needed to support expansionary fiscal policy. Cancel the whole lot of it (and more) until morale improves.

[should it ever be needed - which I sorely doubt - but to emphasise the extent to which policy could be extended *if* required]

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Anonymous
admin
February 8, 2016 at 6:19 PM ×

@anon 6:09

Spot on. Central Banks and governments, when viewed as a single entity, have done nothing but print money and promise (cross their hearts!) to collect it in taxes someday.

Gee I wonder how this movie ends

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Eddie
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February 8, 2016 at 6:25 PM ×

Let's see whether 1800 holds over the next few days. If it is taken out I smell a bit of fresh ait between here and 1600.

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Anonymous
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February 8, 2016 at 7:03 PM ×

Yellon is going to testify on Wed, it would be interesting to see if she treated last week's NFP wage data as a signal of higher inflation or a lagging indicator of the economy. So there maight be some mini-rebound later this week.

On another note, http://latino.foxnews.com/latino/news/2016/02/05/almost-every-top-official-in-texas-city-arrested-in-federal-corruption-case/

"Almost every top official in a remote South Texas city was arrested Thursday under a detailed federal indictment that accuses them of taking bribes from contractors and sending city workers to help an illegal gambling operator nicknamed "Mr. T.""

I wonder why I have not seen Mr. T's comment on the market for a while on this blog and now there may be a clue.

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Leftback
admin
February 8, 2016 at 7:42 PM ×

LB is in a remote South Texas city this week but hasn't seen Mr T.

We are loving us some Hammock Time this week and happy to hold a large amount of the asset du jour. Cash. The Kevlar gloves remained in the drawer Friday and they are still there. No need to lose an important appendage, eh CV?

Brutal YTD for leveraged longs, small cap long-only and general FANG funds. Just brutal. One's main worry now is what starts to happen when those investors liquidate, request redemptions and generally shit their pants in every conceivable way. Dame Janet will be aware that somewhere below SPX 1800 lurks a void, and within that void be Despair.

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Leftback
admin
February 8, 2016 at 8:05 PM ×

Usdjpy should find support somewhere between here and 114, which would likely herald SPX 1800-1812. Until that happens, and in view of the Slough of Despond lies beyond those levels (Usdjpy 110 and SPX ????), we are proceeding with extreme caution for the time being. The action in US10y is amazing, that was really all unleashed by the BoJ NIRP announcement, which we hadn't anticipated. We had a very small rates trade that has now gone to the home for very small rates trades in the sky...

Crude oil can easily take another two days of beatings, so can Usdjpy and EU financials. No need to be a hero....

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Mr. T
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February 8, 2016 at 8:11 PM ×

@anon 7:03, that made me chuckle. I've been quiet, don't have much to say. I've got some basket plays going but in general have put this market into the "too hard" category for now. Flat is the new killing it and all..

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thegreyman
admin
February 8, 2016 at 8:21 PM ×

NYFedResearch cues up 10 blog posts on fixed income liquidity (including 3rd Ave collapse in Dec)

http://libertystreeteconomics.newyorkfed.org/2016/02/continuing-the-conversation-on-liquidity.html#.Vrj4FrkrJGG

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Anonymous
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February 8, 2016 at 8:36 PM ×

Equities rallying sharply towards the US close. Central Banks on the bid.

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Nico G
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February 8, 2016 at 8:42 PM ×

". . . only a European TARP will stop this bloodbath."

it is so annoying to have to read this some of you you guys need to step up the level (of thinking) and stop acting like children

1) you do not seem to know Europe
2) you do not seem to know how to deal with bear markets
3) you have no idea, or forgot how much pain they inflict before (or in order to) turn around

those last years i said many times that the morons (FM and his anonymous clique) who started trading from 2009 onwards or worse, the older traders who CHANGED their way of thinking because of 6 years of continuous QE/CBs spa treatment will lose all their money when the bear hits.

Your brain has been totally taken over by POMO. If you are still long this market because you did not actively trail your profits from the 6 year ramp up you can only blame yourself when the market swallows it all back, you may even lose more if you do not plan your exit and freeze.

Just use a multi year chart - you can trade 1700 on spoos, or 1600 (my favorite) or even 1400 and still keep a bullish multi year picture.

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Anonymous
admin
February 8, 2016 at 8:42 PM ×

Reuters:
More than 40 percent of the 7 trillion euro-denominated government bond market in Europe has yields below zero

2.9 trillion euros ($3.2 trillion) worth of sovereign bonds have a negative yield

48 billion euros worth of investment grade corporate bonds in Europe carry negative yields

And the credit cycle is rolling over ( at least according to Gundlach )

Can someone explain why the Central Banks have decided to throw their domestic banks under the bus. Is the end game to nationalize?

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Anonymous
admin
February 8, 2016 at 8:45 PM ×

MM, how come some names of posters are in white and some dark? Is there a code or is there a test we must pass :)

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Anonymous
admin
February 8, 2016 at 8:45 PM ×

LOL @ nico. I bet FM made more money in 3 mths than nico made in his life.

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Nico G
admin
February 8, 2016 at 8:45 PM ×

"Equities rallying sharply towards the US close. Central Banks on the bid."

shut up it has nothing to do with central banks. Some traders are just TRADING and making money while you are watching.

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Anonymous
admin
February 8, 2016 at 8:48 PM ×

Gee. JP Morgan just gave Geithner a Credit Line to Invest With Warburg Pincus...

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jbtfd
admin
February 8, 2016 at 8:48 PM ×

US indexes reversing their -2% losses in 30 mins. Thank you "Ramp Capital LLC".

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Nico G
admin
February 8, 2016 at 8:52 PM ×

anon845

not wishing to debate penis size here, you do need to know i am trading clips of 50 lots on estoxx, or 20 eminis, for the last 20 years. My biggest size was 500 stoxx in 2008. Those are almost investment banking punts. Try to understand what it means for a lifestyle. I am really tempted to forget this blog because of trolls like you. You really bring nothing to the community

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Macro Man
admin
February 8, 2016 at 9:07 PM ×

Children, come on, play nicely. I guess I am going to have to start doing something about he random 'CB buying equities' posts because they are clearly trolling. I'd really appreciate it if the comments didn't devolve into a " A makes more than B" schoolyard argument.

As for the comments, if you are registered with Blogger you get your name in white. Otherwise it's dark. On ethe front page if you click on the "53 comments" link it takes you to the old-style comments page.

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February 8, 2016 at 9:16 PM ×

Nico, ignore the clowns mate, anyone who has been in the market long enough values your input.
MM I seldom contribute, but please do something about this flood of trolls...makes even lurking unpleasant...tia

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Polemic
admin
February 8, 2016 at 9:37 PM ×

MM time to axe the anons. There is enough class registered by name not to need them. If people want to play then they can at least make that small commitment to play under a name. If they aren't willing to do that then do you need them?

Pol.

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Anonymous
admin
February 8, 2016 at 9:37 PM ×

Nico G-

Been reading some of your comments as a long time reader of this great blog and thank you for them. I may or may not agree but they add a v good perspective from a different point of looking at the market. Very healthy to read them IMO to me at least. Cheers from a Frenchy punter in London

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rp
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February 8, 2016 at 10:01 PM ×

Say what you like about Aghi, Trichet would have hiked twice by now.

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Macro Man
admin
February 8, 2016 at 10:06 PM ×

And there we go. First troll deleted.

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Macro Man
admin
February 8, 2016 at 10:18 PM ×

Kindly piss off back to whatever dunghill, intellectual or physical, from whence you emerged.

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February 8, 2016 at 10:27 PM ×

You didn't find either of my posts funny? Why this hostile tone?

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Macro Man
admin
February 8, 2016 at 10:40 PM ×

Because I am tired of trolling comments and people ignoring requests to be civil and not act like idiots.

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February 8, 2016 at 10:55 PM ×

@nico:
You were talking about a bullish bet on sx5e some days ago, changed your mind?
However according to you markets need to be fixed by themselves... You defined a level random at 1400.. Why not 748 or 1047?
I'm 95 %cash but this doesnt solve any problem. If according to you everything is shit,ok you're a permabear. But please give us some scenario where risky assets stop to fall or is it impossibile? What could changed this state of the world?

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JohnL
admin
February 9, 2016 at 12:20 AM ×

Abee: I think CHK is just the beginning. I don't think it's their pipeline biz that is the problem, but their gas plays.
I think these charts are the most import tools to determine the fate of tight oil and gas companies.
Decline rate
Rig count
So tight wells run down about 80% in 60mnth or so and drilling started declining Q1 15.
So based on that. The way I see it is, these companys have a ton of debt and are going to pump to beat the band to service that debt. Their going to pump till the wells go dry. That should be happening this year or early next (I'm sure a sharp penciled analyst could peg each co to the month)
The other kicker is economically recoverable reserves, I believe they are based on year end price or a moving average. Either way reserves should also be tanking soon with balance sheet pain to follow.
So I expect more is to come.
As an aside. I've been struggling with the notion of SPX/INDU or what ever, correlation with $WTIC. Oil fell out of bed the middle of 2014. SPX figured this out when January? Seems like the popular meme for now so I'll go with it till other wise.
Anyway if anyone has any colour or corrections to the above I'd be happy to hear. I'm just a macro tourist here!

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Bruce in Tennessee
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February 9, 2016 at 2:32 AM ×

There is something else one might consider and that is a bear market in a ZIRP world. How might the Bear go forward if zero rates change things....? As I doodle through it, it seems to me it might have less of a dampening effect, that is, bonds and cd's one might think go toward softening the effects of the equities bear market as they are a place to hide when the investor is losing money and leaving stocks. But the polices of the Fed have taken that foundation away, and when John Q Investor seems his net worth go down month by month, it would seem to me he will MORE speedily withdraw money since there is not an alternate investment that might temper the bruising he's getting.

2 cnets...

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Leftback
admin
February 9, 2016 at 4:30 AM ×

Bear market in a ZIRP world? Sure, Japan had years of that. I have no problem whatsoever imagining such a thing.

This is a situation where you have to think globally. There may be years when you can't make any money in your own country between ZIRP, low rates and falling equities. So you search the world for yield and punting opportunities to make a living. Yes?

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