Number-crunching Leicester's title

As most readers are likely aware, last night's pulsating 2-2 draw between Chelsea and Spurs delivered the English top flight football title to Leicester City, completing quite possibly the most unlikely sporting success story in history.   Just how unlikely were those preseason 5000-1 odds?   Consider the following list of things deemed more likely to occur, and judge for yourself:

40-1  Bernie Sanders is the next US president   (William Hill)

50-1  Paul Ryan is the next US president  (William Hill)

150-1  Mitt Romney is the next US president (William Hill)

200-1  Tony Blair is the next UK prime minister (William Hill)

500-1 The Scottish National Party wins the most seats in the next UK general election (Boylesports)

1000-1 The Green Party wins the most seats in the next UK general election (Betfred)

2000-1 Duke University wins the 2017 NCAA football championship (vegasinsider.com)

2500-1 Eddie "The Eagle" Edwards to win a ski-jumping gold in 1988 (Daily Telegraph)

2500-1  Gold touches $2900/oz within 1 year

2500-1 USD/JPY touches 325 within 5 years  (actually, Kyle Bass is looking at this one and saying "where do I sign up?")

The bookies have learned the hard way that fat tails don't just exist in financial markets, registering the largest loss ever on a single sport bet.   This naturally serves as a signal reminder to both bookmakers and financial market participants that sometimes the unthinkable really can happen.

That doesn't mean that the unthinkable will necessarily happen, of course, though in financial markets it does tend to occur rather more frequently than many would wish.   The ongoing travails of the dollar make an interesting case, as the DXY is bang on some fairly significant support.


Now, only a great fool would mindlessly extrapolate the last few months' price action ad infinitum into the future.   By the same token, it would take foolishness of equivalent magnitude to assume the dollar must necessarily bounce here just because there's a support level and, well, it's a bull market, innit.

From Macro Man's perch, he's peeled off a bit of his long GDX because price action late last week was just a little too parabolic for his taste.  he's still long, mind you, but there's certainly no harm in ringing the register, particularly given the proximity of the support level.  After all, you don't need to hit 5000-1 odds if you want to make consistent money...but you sure as shinola can't get caught on the wrong side of those odds, as Leicester City have demonstrated.
  


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Celeriac1972
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May 3, 2016 at 7:17 AM ×

A wonderfully memorable example of just how difficult pricing in the tails of a distribution can be.

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jbtfd
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May 3, 2016 at 10:40 AM ×

As I've been saying for ages, these equity indexes were a definite sell ;)

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Skr
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May 3, 2016 at 11:10 AM ×

A bit like the (Arsenal) invincibles.

I'm happy to go long the dollar at this level, first entry this morning at 92.04

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Tim Schulace
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May 3, 2016 at 12:31 PM ×

Kept the GDXJ on, but went short a basket of commodity currencies as a hedge at month end. Better lucky than smart.

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Booger
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May 3, 2016 at 1:03 PM ×

It sure is tempting to buy the dollar here, but I think I will pass. The turn is close, but I think there is still too much risk of being stopped out. Buying DX here I would need to have a stop at 89. The risk is being stopped out a tad too early, being affected by that and missing the monster move when it reverses to 120 or wherever.

Gold around 1400 could be a good short. I wonder if NFP could get us there by week end. We are due for a disappointing number and that could have an asymmetric effect on the dollar.

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abee crombie
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May 3, 2016 at 2:08 PM ×

Well that was a nice one by RBA... JPY crosses finally comming under some pressure.

Cramer has a good interview with Tim Cook last night and gave some good insights into both LT Apple holders and how the street views post growth stocks like Aapl. For those more macro in nature the reason to care is bc AAPL is the biggest company, and according to Cook, made twice as much last year, $50B in earnings, than anyone else. The way S&P calculates EPS for the index isnt the same way it calculates the price (weighted avg). The EPS is simply a sum of all earnings from all companies (makes sense). Therefore AAPL has a disproportionate call on S&P 500 EPS. And since we all like to look at forward EPS expectations, this does matter a lot.

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abee crombie
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May 3, 2016 at 2:12 PM ×

http://www.usatoday.com/story/money/markets/2016/03/02/6-companies-make-50-us-profit/81175914/

AAPL's weight in the index is ~ 2.85% vs 6.7% of the profits

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Leftback
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May 3, 2016 at 2:18 PM ×

LB is inclined to think that rumors of a US recession, like those of Mark Twain's death or Leicester City's thin squad, have been greatly exaggerated. "Goldilocks" data or even better are likely this week from the ADP and BLS, along with a modest rebound in retail sales. EURUSD has been a bit parabolic of late and we might start to short € soon.

We are long the dollar and short AUD and CAD as an expression of a Risk Off tendency. Short AUD is already turning out to be a winner, and after last night's RBA rate cut and soft Chinese data, renewed AUD weakness seems likely even without a bout of commodity selling (which we think is also on the way). No way we are shorting JPY here, not until the recent enthusiasm for risky assets has unwound significantly.

Yesterday we added to IWM short position at the close, probably going to take some of that off this morning, but retain an expectation of a fairly deep correction in the next month or two as Mr Market faces the cold reality of a June rate hike. All of the other meetings would probably be seen as too close to the election, so Dame Janet can either continue to fluff the Spoos (Ht: MM) and let the lower paid renters continue to enjoy 4-5% inflation, or she can do something about it before the polls. Remember that most of the US electorate has little to no stake in the Spooz, and those who do are not swing voters. This is clearly a divergent point of view at the moment, but we think it is worth considering, at least as a significant tail risk.

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Anonymous
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May 3, 2016 at 2:44 PM ×

Just picked up Adam Kucharski's new book The Perfect Bet: How Science and Math Are Taking the Luck Out of Gambling:

Anything to help improve on this year's trading :)

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Booger
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May 3, 2016 at 3:46 PM ×

LB: I am a bit skeptical about the AUD weakness. I think it depends on the dollar more than the AUD side of things for the time being. If the dollar correction continues, AUD could experience what NZD did a few weeks ago, and find itself at a higher level a few days after the rate cut. I think RBA and RBNZ should have saved the ammo for next month or whenever the dollar has finished it's correction, to get more bang for their cut, if they are interested in an exchange rate boost.

I am working on a grand unified theory of one, where everything is converging to one (rounded off to the nearest number): including GDP growth everywhere, inflation everywhere and rates everywhere. The grand unified theory of one suggests as things get to one, at some stage they will converge to zero. Which will be my next theory, which I think I will call 'the theory of one to zero everywhere'. When zero is everywhere, the CB's can then have the motivation to sacrifice the bondholders/savers and go crazy with nuclear QE and inflation can then skyrocket. Iterations of goldilocks rebound would be a pesky detour to this endpoint.

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Anonymous
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May 3, 2016 at 4:09 PM ×

It is nice to see commodities have some long over-due corrections. My thinking is that top is usually flat, so there will be rebound and retest and the big wave is not here yet.

The first sign is the crash of the Chinese commodity future bubble, which is an accident waiting to happen as I mentioned in comments in older posts. WSJ/NYTimes also had several articles about that. No Chinese government fund would ever rescue the future markets. Now let's see if the crash there could cause some domino to fall elsewhere.

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abee crombie
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May 3, 2016 at 4:35 PM ×

Neither VIX or HY spreads really screaming alarm here. S&P still above 2020 and oil above $40..

Currencies are going nutty, I'll give you that but not sure I can extrapolate much into this selloff. we have gone in a straight line up since Feb... a little pull back is normal

China commodity bubble is scary. Any ideas what to watch? Steel futures? Also which Shibor do ppl key in on?
http://www.shibor.org/shibor/web/ShiborJPG_e.jsp

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Anonymous
admin
May 3, 2016 at 5:21 PM ×

@abee,

For China commodity bubble, I will suggest steelrebar (http://www.shfe.com.cn/en/products/SteelRebar/). The reason is that it is closely related to the over-capacity of steel industry in China and its current reform efforts to cut production and rebalance the economy. Also its secondary impacts might include changes of iron ore price, AUD and mining stocks.

I actually agree with you on short term equity market outlook so I have trimmed my VXX long. Again, China commodity future market is still small and isolated so the crash should only feel like a crack in the international markets. I am looking forward to seeing if something bigger is next: maybe some bad debt problem somewhere.

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Corey
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May 3, 2016 at 7:09 PM ×

Hard to have any conviction here. I can make a good case for the dollar to go up or down.

We all know that to the extent the commod rally is due to Chinese speculators it will end in tears. There are some signs that it may have already popped, copper struggling w triple top anyone? Yet, the Chinese do love to play the casino so may be back for another spin of the wheel shortly. Their PMI wasn't so hot which reminds me to think about the possibility of another fiscal boost at some point down the road.

I think the market does a decent enough job on pricing implied Fed hikes that it would be unwise to expect something different from the Fed at this juncture. Even if we have a blowout # on Fri the Fed isn't going to extrapolate one months data. To the extent the $ does move higher it will likely be safe haven rather than hawkish fed.

At any rate w/ the G-7 this mo I would believe the next monetary shot will come from Japan. Depending on what type of bullet they use it could sink or save us if only temporarily.


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washedup
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May 3, 2016 at 8:47 PM ×

"To the extent the $ does move higher it will likely be safe haven rather than hawkish fed"

You nailed it corey - I have long been a proponent of the idea that secular dollar rallies and selloffs have been risk on for half the move, and risk off for the balance (not necessarily in that order) - it will be a bit of an adjustment for the markets to re-orient themselves to this idea - its been a good 7-8 years since we have seen a regime like that.

Of course, as MM suggests, there is no guarantee that we are still in a secular dollar bull move any longer, but with the kind of overcapacity and mal-investment we see in EM, kind of hard to see them as a destination for greedy capital till demographics tip the balance, and thats a multi-year process.

Interesting tell today that treasuries and dollar are up together - thats one for the 'dollar as safe haven' argument, of course just one data point.

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Corey
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May 4, 2016 at 5:10 AM ×

While it's obvious that we're oversupplied w most commodities and the initial rally is probably out of juice, I imagine spec interest will pick up again as soon as everyone realizes that it's nice to own hard assets with a Fed who is getting behind the ball on inflation.

Not that I have, but has anyone on this forum considered what a socialist in the White House would look like for markets and the economy?!

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