Prices

Although yesterday's price action was generally uninteresting with respect to the magnitude of most market moves, the reaction of fixed income markets to the tepid CPI print was perhaps worthy of notice.  The data was, after all, disappointing, with core inflation registering its first decline in the y/y rate of change since last May.


Even with the strong recent performance of risk assets, one might have thought that this might kindle another round of fixed income buying, particularly with Dennis Lockhart disavowing any support for a hike at this month's meeting.  However, bonds and the short end both sold off moderately on the day, which was all the more surprising given that equities took a break from their recent squeeze.

An incipient signal that enough's enough and that it's time to start moving the price the other way?   Perhaps.  This weekend's IMF/WB meetings in Washington will see the usual confab of policymakers and punters, and it's not an unreasonable assumption to think that word might filter to Ms. Yellen that things are a bit better than she feared in her recent teeth-chattering communications.

It's interesting that despite steepening (and breakevens) being a consensus trade since the dovish Fed a month ago, neither has really performed particularly well.     2s10s still looks like a decent steepening bet with a tight stop below 100, but the concern is that there's already a lot of money in the trade that may rapidly be getting bored.  And if the Fed does sound more upbeat in a couple of weeks, isn't there a risk of a further flattening?


It looks like a great set up to go short the front end again (markets "always" top on good news, remember?) , but man...it's hard to get excited about it.  Macro Man's lost count of the number of times he's thought that over the last year or two, only to get a few days of joy and then...pffffft.  As such, he might sit this one out until it becomes a lot closer to can't lose.  If that means missing it, so be it.

Elsewhere, speaking of prices work has continued apace on Macro Man's CTA proxy models.  He's at the point where he has it cranking out position recommendations in a few markets, most notably FX.   As a sense check, he compared the historical model output with IMM non-commercial net futures positions as a percentage of the spec open interest.   The results are broadly encouraging; the charts below plot the IMM position versus Macro Man's for the EUR, JPY, GBP, CHF, AUD, CAD, and MXN:





The scales for the model positioning are relatively unimportant, as they are a function of a totally arbitrary vol target.  What's encouraging, however, is that the models tend to pick up on the broad moves in IMM (read: CTA) positioning, albeit with a bit less noise.  The correlations for every currency but the CHF are in the 70's, which is a pretty solid result for a single model trying to replicate the behaviour of a population.

For what it's worth, current model positions as of last night's close are as follows:


There's plenty more to be done; Macro Man ideally wants to model a range of markets and compare the P/L of the models with historical CTA performance.  If he can come close to matching it, then he'll know he has a pretty good handle on what trend following positions are out there...and where they are likely to flip.

Stay tuned!

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abee crombie
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April 15, 2016 at 9:07 AM ×

You could also play rates via financial equities which are looking good.

Technically, 5 &10 yr US rates look like they did a false break in Jan. I'm looking for them to go back to the other extreme.

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abee crombie
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April 15, 2016 at 9:07 AM ×

You could also play rates via financial equities which are looking good.

Technically, 5 &10 yr US rates look like they did a false break in Jan. I'm looking for them to go back to the other extreme.

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Bruce in Tennessee
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April 15, 2016 at 1:23 PM ×

MM,

I think all of us realize we are in the era of bad choices. And no, I don't mean as investors, I mean as peeps who live under bad choices by their governing bodies or their central banks. Today I read that the Chinese are still producing record amounts of steel. There is no good choice to continued production, firings will create even bigger problems. The Chinese and Japanese and Europeans are also continuing this zombie recovery with new debt. The financial sell side calls this credit, but the global individual investor knows it is debt.

I see your reliance on your computer models. I suppose this is better than your gut, but I am certain this ends badly. The problem is: What is always the largest problem for an individual investor. Timing, and knowing when to sell.

Sigh.....still waiting for what you describe... "As such, he might sit this one out until it becomes a lot closer to can't lose."

...I still plan to do that by shorting equities, but for now I'm just in my futon. Can't lose seems very far away, still.

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abee crombie
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April 15, 2016 at 2:17 PM ×

BInaT, why are u so sure it will end badly. I agree there has been a mis allocation of capital due to central banks policy, though mainly in China. As well inflation I think will re appear at some point globally. But not sure all asset prices will "end badly". I can see scenarios where it does happen but also where it does not.

As long as the governments control the money supply, I find it hard to see all asset prices declining long term by much. while BoJ is the poster boy, make no mistake the U.S. can ill afford another extended bear market in US equities as damn near all retirement/pension money is playing it.

Inflation is the biggest problem, but so far cb, think it's not bc they can just remove accommodation to tackle it. Or should I say stagflation wi.l be the problem. But it still seems a bit off,

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Anonymous
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April 15, 2016 at 3:09 PM ×

Abee..."as damn near all retirement/pension money is playing it."

Are they though? Why are pensions pulling cash out of hedge funds?

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Bruce in Tennessee
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April 15, 2016 at 3:30 PM ×

abee,

Look, I know the end of the worlders write about gold, leaving the US, and other tripe that I just can't follow. But I am sure this will end badly with a severe correction, I just can't time it. My thinking is as follows:

Central banks are playing with fire. There has always been a business cycle, where the economy corrects and resets at a lower level. Happened twice already this century, and it will happen again. The ZIRP and QE movements have already "brought growth forward" as has been admitted by Fed members themselves. Are you telling me you believe that very low interest rates and increasing levels of public and private debt are sustainable? If you are then we just disagree.

Japan's Nikkei was 40,000 in 1990. Our own Nasdaq was over 5000 16 years ago. Have they recovered?

You've also lost the contribution to the economy from savers. So you do have true bubbles in equities and housing. How's that rent working out, too?

The era of misallocation of investment is too numberous to mention many examples. I'm sure you are as aware of these things as I...but markets can and do correct. This one is odd, in that no central bank has the guts to normalize rates, but the corrections-that are badly needed- will bring us back to a new business cycle in the end.

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washedup
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April 15, 2016 at 3:33 PM ×

@abee not that I disagree with your idea that there are multiple possibilities here, but on your 'make no mistake the U.S. can ill afford another extended bear market in US equities as damn near all retirement/pension money is playing it.' is akin to saying a bad outcome unpalatable therefore will automatically be prevented, even temporarily. There are merits to that, but have you noticed that the velocity of these moves (up and down) has been increasing steadily for the last couple of years? At some point its reasonable to imagine a move will happen quickly enough that it will do too severe a damage to put a quick speech bandaid on - strong market + weak economic data may be goldilocks, but weak market + weak economic data may turn self fulfilling (on both ends) pretty quickly.

Oh enough of that nonsense - now let me go buy me some spoos - today is op-ex we always rally today.

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Anonymous
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April 15, 2016 at 4:22 PM ×

Yes, I believed most here agreed that this business cycle should turn to its ending period and the market is overdue for a deep correction. But the question is timing. I am also looting at yields. I have the same problem as Mr T and many others had mentioned: bond yield is so low that there is no alternative place for capital to park if equities were to fall from here.

Also, the yield spread between AA corporation bond and BB corporation bond is currently pretty high, which is not exactly a sign that the market is over complacent.

Finally, I thought we experienced the current situation before: yield down and equity up at the same time. It is irrational and will correct itself. But it could last longer than our patience.

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Anonymous
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April 15, 2016 at 4:35 PM ×

For this to end well we need to see marginal consumption and thus GDP being forced up from the bottom via real increases in disposable income. This is fiscal primarily and should come about IF minimum wages continue to be increased by govt intervention. As with property for the rungs above to be impacted they need levering from the bottom. This is where the great mass of people DO spend very buck they get AND do not seek to plant it into some store of wealth. IT could actually happen and eventually it could lead to price inflation via price pass through rather than credit expansion. The question is can central bank keep the monetary balls in the air long enough and can politicians keep activists away from the eject buttons long enough. In fact we just don't know. All we can do 'vote' the way we are ... Nico glass half empty and JBTD half full. The rest is just the normal human rationalising that goes into finding enough conviction to act on that view of the glass.

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washedup
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April 15, 2016 at 5:06 PM ×

@anon 4:22 some great points there (especially on an anon adjusted basis!) - here is the part of your statement that I struggle with, especially when smart people such as yourselves make it:

"I have the same problem as Mr T and many others had mentioned: bond yield is so low that there is no alternative place for capital to park if equities were to fall from here"

Best I can tell, this idea is predicated on a 'flow' model - i.e., there is a constant amount of money getting generated (presumably through perpetual surplus savings globally, a problematic concept as it is) which then constantly decides between an allocation to bonds and equities, finds equity yield higher, and considers all other risks between the two asset classes IDENTICAL.

Really? money placed way down in the capital structure of a junior miner deserves the same treatment as money lend to a sovereign with an army and tax collecting arm?

OK - lets not quibble, even if that were true, when this fountain of money goes and purchases equities because of the higher yields, someone is selling, yes? Wouldn't prices be determined by the risk aversion of the buyer vs that of the seller? Wouldn't such risk aversion be influenced, perhaps, in the face of a 20% decline, by the fact that 10 years of aforementioned dividends were wiped out in said decline?

My conclusion is simple - call it a wall of worry, and prosper climbing it all you want, but don't try to convince me the wall isn't made of cards - the only thing keeping equities up is that equities are up. All the other bearish and bullish nonsense (CB, buybacks, deflation, China etc etc) are convenient narratives to support ones point of view, but don't lose sight of the fact that this is a confidence game in the end.

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Anonymous
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April 15, 2016 at 5:41 PM ×

@washedup

You are right about the risk factor. Normally someone happily exploits those yield gaps between bond and equity and collects premium by selling vol. But then some event hits then he could lose all his capital.

Very valid points. But we still need to look at the current conditions to get the timing right. One is the catalyst. A risk event needs a catalyst and a catalyst can be seen by someone. The example here is the previous two drops caused by Chinese RMB devalue. Last August's sudden devaluing was proceeded by the dramatic drop in Chinese stock markets. Of course at the time, most people did not foresee that reaction. The mess this January again was caused by the trouble in China, capital outflow confirmed by forex reserve number in last December and the free fall in stock market at the beginning of the year.

My point is that a catalyst could be spotted and there is time to enter our short positions after we confirm it. As of today, I do not see the sign of catalysts from China or the US. Could the earnings of big techs be that catalyst? I do not know.

Could a disappointment from the OPCE meeting be that catalyst? Or the inadequate Italy's bad loan fund be the one? Or the rising Yen? It could be but I still think that the risk event is not imminent.

By the way, the yield spread between aaa and bbb bonds just came down from the highest level (last December) since summer 2009. I would think that it takes more than one quarter to go back to that level again.

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abee crombie
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April 15, 2016 at 6:57 PM ×

Washed and Bruce , I am on the same page I think. For sure there will be another recession in the U.S. At some point,there always is, and equities will go down 20-40%, and towards washed points for sure it could happen really fast ( hence why the market go so worried in January ) but a protracted bear mkt I don't see. Does that mean I play thinking the yellen put will always bail me out, of course not. I'd love to trade from the short side when it makes sense.

All I am saying, which some of the anons, alluded to is that real money doesn't have much choice but to play equities ...and cb know this. They will probably end up doing more qe after they realize what they have done bc the alternatives are worse (debt deflation). This is just my thinking, and has influenced my retirement money but not much else. Please tell me what else to put my 401k into ? Gold?

Taking the case of Japanese and Nasdaq vs today ignore the severe overvaluation in those markets. Sure s&p isn't cheap but it's not in the same league as the aforementioned.

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Anonymous
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April 15, 2016 at 8:08 PM ×

Markets top when and only when people stop having stupid internet fights about whether they're topping or not. Not a second earlier.

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Bruce in Tennessee
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April 15, 2016 at 9:21 PM ×

abee,

I am the wrong guy for suggestions. MM and Lefty are pretty bright boys, and one of the reasons I read this blog is because of the ideas (without trolls) that the investors who frequent here have. I read everything, including Krugman, but then try to shift the wheat from the chaff. The problem here is that ultralow rates and the associated baggage that is associated with it, like QE, HAVE brought growth forward, although it could be argued that it isn't organic growth, but rather stimulated growth. So here we are 8 years later, and it seems like we see the same La Brea Tar Pit story time after time in the economic news. We know that China is a command economy, and that only repeated doses of stimulus is keeping it going. We know Abenomics isn't working. We know southern Europe is a disaster, and that PIIGS is pigs. We know Brazil is lost, at least for years. We know that demand for oil has diminished. And all of it centers around debt/credit...(same thing). Yet, why hasn't the grand market correction of 2000 and 2008 begun yet?

I DON'T KNOW! But it is my opinion that it will begin, and I am preparing to short the market as I did at the first of the year. I was wrong with timing, and only made a small %tage on SDS, but I am equally sure in my gut that the market will correct again relatively soon and that I won't get stopped out this time.

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Anonymous
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April 15, 2016 at 9:37 PM ×

Short away Brucie, I'm sure the market will follow your gut, especially since you already know everything. Your insistence that the market must go down for some grand correction reminds of "but she looks like a witch"

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Whammer
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April 15, 2016 at 9:40 PM ×

BinT in futon vs. LeftBack in hammock!

Film at 11!!

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Skyguy
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April 15, 2016 at 10:21 PM ×

Well, not an original thought, but everything looks expensive to me here. The stuff that has already been beaten up (energy, EM, Europe), are almost worth bottom fishing for. Almost. I picked up some DVYE, HCP, and MPW during the last market swoon in Feb, that stuff is doing fine, and the yields on all of it (+7%) made them worth the gamble.

I also bought a big dollop of SPY puts at SPX ~1840. That, needless to say, didn't work out so well.

Selling covered calls (and puts when pricing gets extreme) on TLT has been my go to trade for the last 18 months. Consider selling the call naked and risking the short position when TLT goes above 130 (like it is now). And it does pay you something to hold it. My time horizon is weeks or months, not days.


Regards,

Skyguy

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Polemic
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April 15, 2016 at 11:06 PM ×

If everything is so shit theoretically in DM should we buy Africa for a laugh?

Anyone recommend any good funds? As soon as I bought Rennaisance subsahara and Ren Africa they closed the damn funds down. At the bottom. Typical.

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Bruce in Tennessee
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April 15, 2016 at 11:16 PM ×

@anon at 9:37

Thanks for your recommendation. Please open the window before you leave.

...Loser.

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Skyguy
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April 15, 2016 at 11:57 PM ×

@pol,

I think the PC term is "frontier markets"!

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Skyguy
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April 16, 2016 at 1:50 AM × This comment has been removed by the author.
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Anonymous
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April 16, 2016 at 5:39 AM ×

B in t

anon at 937 Has a point, humility is required inevitibility about anything is not good for the pocketbook.

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John Shultz
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April 16, 2016 at 6:25 AM ×

Greetings,

Can't thank MM enough for maintaining this space, despite the myriad challenges.

Regarding rates. Isn't that a big cup and handle/double bottom with handle pattern in UST bonds on a weekly chart??? Seems like a massive breakout in the offing. But I am a mere punter....


Cheers from Osaka...

japanjohn

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Booger
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April 16, 2016 at 1:42 PM ×

Bin T: your patience and discipline will be rewarded eventually. I agree with Washed, valuations are a confidence game at these levels. But timing is tough in terms of shorting. Despite the limited success to date in shorting Spoos, I like the odds of punting a short around 2100 with a stoploss 2130. The R:R is at least 1:5 and at some stage the market will break out of this range. With the current fundamentals, one would tend to think not to the upside, but anything is possible. However, if it does break down to 1800 again, I think this time the bulls will be crushed and we will see the real thing. A starter position from here to 2100 is an attractive proposition to me.

On the fundamental basis, earnings as % GDP are at all time highs (due for mean reversion), one would tend to think debt deflation will have to be reckoned with at some stage unless the business cycle has been repealed, and Q.1 GDP growth is likely to be low enough that the economy could fall into recession in the next year. To play the long side you have to basically forget the underlying bias to think about real valuations, but until the music stops it works. I guess it depends on your timeframe and what you feel more comfortable with. You could also play small on the short side and wait for the big break. You could do just as well with this and only trade bear markets.

What could be the catalyst. Who knows, a recession perhaps, earnings rolling over further, a credit event (DB, energy player, could be anything). All I know is a hunch that the potential return from going short risk here is more than long risk.

What is the best vehicle, I don't know. The options I see are :
1. Short Spoos @2100
2. Short oil after the OPEC meeting (sell the news) - $45-$48 would be interesting
3. Short commodity currencies - aud.usd around 0.8
4. Short currency hedged Japanese or European equities.

Spoos seems closest to the top of my estimated range, possibly within 1-2%. But the OPEC meeting could propel 2) and 3) to a nice level also. From there a breakdown could be at least 10% and have room for a position to be pyramided.

My guess is we are seeing a last hoorah into risk currently that will last into the end of April. Then the sell in May...My hunch is it is not worth playing the last 1-2% of upside on risk in the next 2 weeks, rather it is the time to be looking for nice levels to lay on some short positions.

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abee crombie
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April 16, 2016 at 7:58 PM ×

@pol, Morgan Stanley frontier markets fund. Mfmpx...active mgmt in frontier can be a big source of alpha. ..but lots of flows into the asset space in past few years. Not exact sure if bottom is in.

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Anonymous
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April 16, 2016 at 11:04 PM ×

http://www.telegraph.co.uk/business/2016/04/15/a-century-bond-just-think-what-can-happen-in-100-years/

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Anonymous
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April 17, 2016 at 6:42 AM ×

Would be hilarious if the catalyst was that the saudis get tied to 9 11 And they proceed to follow through, nobody really expects that

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Anonymous
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April 17, 2016 at 10:37 AM ×

Europe's Summer of discontent:

(It misses terrorist attacks, Irish elections, Austrian banks, Spanish elections etc but decent)

http://www.bloombergview.com/articles/2016-04-12/bond-market-will-sweat-in-greece-s-summer-of-discontent


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Anonymous
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April 17, 2016 at 7:46 PM ×

Time to be short equities and oil again for medium term. Doha collapse and IMF spring nothing burger. Regret not nibbling on Friday.

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