What a long strange trip it's been

A long, long time ago (it must have been in the late 1990's), Macro Man can recall reading some somewhat flippant investment advice (he forgets from whom) to remain short the Nikkei and long the Dow Jones Industrial Average until their prices crossed, then reverse the trade.  Silly as this may sound, it actually proved to be a sage investment call; while the two indices crossed in the early 2000's, the Nikkei only traded at a maximum 7% discount to the Dow before soaring back to a 50% premium a little more than three years later.


Macro Man was reminded of this story when contemplating two of the more notable performers of 2016 thus far,  Valeant and GDX.  For they, too, have executed a remarkable share price round trip that dwarfs anything that the indices above could manage.  In just five years they have gone from parity to worlds apart and back to nearly parity again courtesy of VRX's latest swoon.


The logarithmic chart of the ratio looks rather like those of a few dodgy stocks that Macro Man used to follow at the same time he read the original Dow/Nikkei call.   Adam.com or Illinois Superconductor, anyone?



To quote the Grateful Dead, what a long strange trip it's been.  From the outside, one wonders if certain prominent holders of VRX have been smoking substances commonly found at Dead shows to have ridden this pig up and down the whole way.  It rather makes a mockery of Pershing Square's descriptive blurb:  Its investment objective is to preserve capital and seek long-term capital appreciation with reasonable risk.  Or B).

Still, Macro Man is reminded of the Dow/Nikkei tale.   Obviously, with a single security there are idiosyncratic issues that you won't typically find with indices, and prior to 2012 GDX traded at a very healthy premium to Valeant, so there is precedent for the ratio to go a lot lower.  It would kind of be funny, though, if it stopped at parity and turned around, though that would naturally douse the warm current of schadenfreude currently coursing through financial markets.

In any event, it does serve as a reminder that as great as the metals & miners trade has been, there's been nary a pullback to challenge conviction thus far.  Perhaps one is rapidly coming due?   Macro Man mentions this because silver, which has been a rock star (or at least a TV star) for most of this year is suddenly looking a little ropy.  While you rarely if ever want to preempt a neckline break, by the same token it's advisable to be prepared if one occurs.   Such an outcome is looking perilously close on silver, targeting just below $16/oz.


While Macro Man remains long GDX, he is down to his core position, having jettisoned the last of the spec portion yesterday.  He was intrigued to read yet another speech from erstwhile dove Eric Rosengren warning of financial stability concerns and under-pricing of  potential Fed moves.  As noted previously, this may just be a case of a leopard changing his spots; certainly Dudley's recent interview didn't indicate anything like this kind of concern.

Interestingly, however, we may be seeing some early signs of adjustment in European fixed income.  This is shaping up as a big year for German wage negotiations, and with a relatively high number of job vacancies there is surely a risk of an acceleration in wage growth.  Meanwhile, the Buxl (Germany 30 year future) is also shaping up for a potential head and shoulders when one looks at the chart of the June contract (though not the continuous, given the large basis between the March and June contracts.)

A break would target 30 year yields approximately 45-50 bps higher than the current 0.87% yield.   What a strange trip that would be.....
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Amplitudeisofftothebettingshop
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May 13, 2016 at 9:32 AM ×

You want a Friday trip..watch this.

https://www.youtube.com/watch?v=le5EFjDzVBY


ps. He was the best trip ever! no amount of money can bring that ride back.

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Matthew
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May 13, 2016 at 11:39 AM ×

As an aside, has team Macroman ever back tested common technical formations like head and shoulders formations and found them to be predictive in any markets?

Or for that matter, something as simple as resistance and support levels? Do they exist in the (recent, given the rise of algos) data?

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Anonymous
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May 13, 2016 at 11:43 AM ×

Y reinvent the wheel ? there are legions of books written on the efficacy of TA.

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Skr
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May 13, 2016 at 12:33 PM ×

Algos are written by humans.

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Andrew
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May 13, 2016 at 1:06 PM ×

Yes, indeed algos are written by humans. Humans that are aware of technical analysis.

However if algos that take advantage of TA are profitable, they will tend to move the market to diminish that profitability, as with any arbitrage.

I am not aware of any recent analyses, but if they still show tradeable information is present in these patterns, then the question arises - why haven't they been arbitraged out of existence?

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abee crombie
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May 13, 2016 at 1:46 PM ×

As the S&P continues to be range bound, the battle underneath the surface (for the holy alpha) continues. It seems like every week there is a new sector winner/loser.

REITs up, AMZN up, retailers down seems to be the one this week.
Health care down, utilities up the week before

if you ask me, trying to draw inferences from this type of internal rotation is limited. algos and HF's fighting...

Meanwhile Autos and Banks, the two biggest sectors for EU and JP are in the dog house. Time to check up their Q1 reports. Stay tuned

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Leftback
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May 13, 2016 at 1:53 PM ×

US retail sales stronger than expected. Too many tools think about the woes of bricks and mortar stores and forget about on-line sales, not to mention the positive effect of gasoline prices being up 25% in the last two months.

LB noticed many DEATH OF THE DOLLAR headlines and other dismal stories around in mainstream financial media.... "sell dollar rallies" and "DB lowers dollar forecast". As always, the one-sidedness is interesting. Same people have typically been telling you to sell JPY for months. Might be time to buy both, a real Risk Off combo, that one.

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washedup
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May 13, 2016 at 2:21 PM ×

@abee yes the sector rotation is now like the ending routines of a vaudeville juggling act - like I said a few days ago, the 'pass the hot potatoes game' keeps picking up speed even as the temperature of said tuber keeps rising.
End game? How about this - amazon forces us to use its site for searches, social networking, and ordering driverless battery powered taxis by virtue of its cloud dominance. Its stock price goes to 10000, everything else falls by 30-50%, and the S&P 500 stays at - drumroll - 2100.
Or b) - they run out of sectors to pass the potato to - like in '00 - or the countless other times this game has been played. We will see - at some point amazon will get blamed for stagnant wages - somehow - details are not important.
Remember when AAPL was a sure thing to $200?

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Corey
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May 13, 2016 at 3:53 PM ×

Yeah "safety" is expensive. Staples, utes anyone? MKC is one of my favorite names, 30x earnings, I keep waiting for it to pull back and alas it keeps going up.

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Anonymous
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May 13, 2016 at 4:00 PM ×

Yea - low vol ETFs have gone through the roof since last year.

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CV
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May 13, 2016 at 4:12 PM ×

Good one MM. I have wanted to pen some thoughts about Pershing, but refrained from it. Safe to say ... the current generation of high flying HF managers are, for a large part of them, walking a fine line with respect to their egos and conviction. Sometimes, you just have to give up and move on.

Anyways, what a fascinating retail sales report. Horrible retail earnings all week, but then Amazon is doing exactly what it promised to set out to do isn't? Services spending is another surging category which is poorly followed and reported in economic data releases.

In any case, I note that BOTH MM and LB are now souring on the long bond albeit in two different areas. I agree ... as for equities, well ... I still think a couple of sectors and names will pull well into late July. But it is getting more difficult here.

Oh, and also long gold miners/gold here. It has been a good run, but maybe a pullback beckons. I am holding on, though. It seems to be the last correlated asset there is.

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johno
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May 13, 2016 at 5:37 PM ×

Trading equity indices is not my thing (I'm so bad at it, as a rule I don't hold index positions for longer than a week) and I'm currently neutrally positioned, but ... seeing most thoughtful commentary here is negative, I thought I'd observe: 1) based on Q1 calls/disclosure, GS now predicts a +7% rise in S&P 500 buybacks this year (and buybacks and M&A, by various accounts, are the largest source of demand for equities), 2) the IG market which partly funds buybacks is performing well this year, 3) this quarter the proportion of raised forecasts to those that are lowered is the healthiest it has been since 2011 according to Thomson Reuters (is the corporate profit recession bottoming now?), 4) real money positioning isn't especially long is it? (these BAML reports showing protracted selling, so they can't be limit long, and I note, this market has steadily risen against that selling)

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johno
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May 13, 2016 at 5:41 PM ×

And I'll add one more observation, the PCOMP has risen 7% in the past 4 days since "Dirty Harry" won the election, so maybe markets won't crash on a Trump presidency (not an endorsement!!).

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Leftback
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May 13, 2016 at 6:02 PM ×

It's been a frustrating week. Here's a summary of what LB is doing, or thinks he will be doing (feel free to insert your own commentary regarding where his head may or may not be located).

We are in cash. Tons and tons of it. Other than a core portfolio [some REITs and other dividend payers], we are all cash. The central thesis here is that there is no easy money to be made, and that there is no longer any value whatsoever in stocks or bonds anywhere, only risk. USD can rally quite a lot from here (whether or not Dame Janet appears to want to leave the punch bowl on the table or remove it), even if only on incremental seasonal moves to produce firmer US economic and inflation data, and at some point soon this isn't going to be good for stocks or bonds. So we are long dollars (UUP), and short EURUSD. At some point we might also get long JPY for a trade, especially if we suspect the world is about to end for equities. We do see a much stronger (4-5%) USD by the July-September period, and perhaps even earlier.

We are short CADUSD, and added to this yesterday. Markets can be manipulated for a while via leverage and magic tricks like making some supply disappear by putting it on containers, but eventually in the absence of demand, all commodity markets revert to fundamentals. This may not happen tomorrow, but seasonal weakness dictates that crude oil prices will likely soften again by July. When this actually happens, it will drag CAD down with it. We also have some USO puts that reflect a view that oil can easily fall 20% from here. A 50-61.8% retracement of the move takes WTI back to the range of $35-40.

We are neutral equities right here, but we wouldn't be surprised to awake one day to a surging USD and JPY, and a large drop in risk assets leading to a waterfall-like event similar to or worse than January's decline. Again, we do have some IWM puts that reflect the non-zero possibility of a 10-20% drop this summer. We agree with others that we likely see one more slow low volume grind higher (days, weeks, a month?) before the bottom starts to drop out of the market. If a drop in equities does occur, a June/July hike might actually be a symbolic Buy The News event and terminate the selling pressure.

Bonds and GBP are difficult here, and perhaps best left alone... nevertheless, we have some TLT puts for a short term trade, and we also own a few HYG puts that reflect a view that we will see another sizable move (5-10%) down in energy credits when the present bounce ends.

Nobody knows what the trigger event is going to be for this market (China, OPEC, Fedspeak), but it is coiled for a major move. A look at the long term chart for IWM makes it easier to see what the direction of the move is most likely to be.

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washedup
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May 13, 2016 at 7:19 PM ×

@johno - on your 4 observations - some thoughts:

1) buybacks - is this such a silver bullet? AAPL has one of the strongest buybacks ever designed, but its been trading like crap and down 30% from the highs.


2) These days the IG market is driven almost entirely by crude - if you think the crude rally is real, sustainable, and on to the pre 2014 regime then you would be entirely correct - I know at least one hammock dweller who disagrees with you!

3) Do you really think the profit cycle is troughing? The best case I can come up with is a top plateau or stagnation for a few quarters - sales will grow more or less in line with nominal GDP, or 1-2%, and every thing I look at points to rising cost pressures on wages (unless we get a recession in the US, in which case sales would drop) - none of the drivers behind the productivity bust seem cyclical to me - I would argue the heavy lifting on equities has to come from multiple expansion and not profits - not saying that can't or won't happen, but to me that would be the bet.

4) Of all your points this is the one I agree with the most - I see smart money generally worried and nervous. Its not been a good idea to stay short for anything more than a few moons, obviously. Maybe this is a strong enough force to produce new highs, we will see. Just bear in mind we are talking about a market where max long means 99.9% people are long and max short means 98% are long. Equity selloffs are always about liquidation and never about shorts pressing.

To me the thesis is pretty simple - you get inflation, its all over - till then its a range trade.

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Anonymous
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May 13, 2016 at 7:22 PM ×

@LB, I mostly agreed with you and hold similar positions. The difference is that I hold some short REIT ETF positions and plan to add some shorts. My choice of ETF has a large portion of commercial REITs and just tested the all time high, which I believed are due to a deep correction.

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washedup
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May 13, 2016 at 7:27 PM ×

@anon 7:22 - do you include mREITs in your short thesis, or just vanilla? I hold the former and would be interested in your thoughts..

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Johno
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May 13, 2016 at 8:18 PM ×

From my phone ...
1) last year Dalio quantified buybacks and M&A as about 80% of (net) buying of us stocks. No silver bullet, but very material. Also, I think it matters more at the aggregate supply of stock level than on a company-by-company basis.
2) HY may be driven by oil, but I would think the reach for yield is the bigger driver in IG. As for oil direction, all forecasts I see suggest H1's glut will be followed by near balance in H2. I'm neutral oil myself.
3) I don't have a strong view on timing of the profit cycle, but if the balance of outlooks is turning more positive, it's worth considering. Generally, I've seen more commentary lately suggesting the profit recession is ending. Oil stabilizing will help too.
4) I'm not so sure investor underweights are so small. Looking at last week's Flows and Liquidity piece by JP, they see global non-bank investor allocations to equities 2% points below the average since '99. Their measure of G4 pension and insurance fund allocations don't look especially high relative to history either. Not definitive data ... Just what I could dig up on my phone. I'd be curious what measures readers use to gauge positioning of real money.
I agree that if we get inflation all hell breaks lose!

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Swiftie
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May 13, 2016 at 8:38 PM ×

No bulls anywhere to be seen. Not even jbtfd last he was here. Why would there be? US large cap is pretty much the last equity thing in the world that isn't in a clear downtrend. And the Fed's going to have to hike (unless the market drops, which is the whole point); national accounts profits, which usually lead, are atrocious; and the world economy - see their markets - looks like it's going doown... And then there's politics... Sadly I am mostly long today.

IG, though. Seriously. What an asset class. The Sharpe ratio of a boring US high-grade corporate bond portfolio over the last 7 years, it's what, 3? 5? 12? My god, it's spoos+blues wrapped up in a ball for you. I haven't had any this whole time, and as a result I hope it all ends terribly.

So, accordingly... we're all worried about the risk parity explosion but that isn't going to happen. Not for a long time anyway. It's going to be an IG corp credit risk blowout instead. Washed's inflation spike will be short-lived because it causes poor Janet to Trichet-hike into Nico and BinT's recession and bear market. Buy the last few positive yielding sovereigns while you still can!

Sounds plausible, doesn't it? But here's the key point. Is there anyone here willing to bet that anything even vaguely in that direction might start now? (Not Nico, he's short EuroStoxx; I'm only talking about the god here - greatest of markets, first in price discovery, obliterator of shorts, manipulator of central banks... the S and fucking P...) Really. Anybody?

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Swiftie
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May 13, 2016 at 8:41 PM ×

Johno - are you ready to buy here? If not (seeing as you don't normally do indices) - what it would it take to get you there?

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CV
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May 13, 2016 at 8:43 PM ×

"as a result I hope it all ends terribly."

It will; rest assured! But it takes time ... 2017 and 2018 are big rollover years. I think the "party" will begin towards the end of this year.

Corporate bonds is a clear and massive bubble since 2008 ... last remaining sector to lever up. We have discussed the issues here ad nauseum; liquidity, default cycle, energy bonds leading the rest of the market etc etc. I am just waiting for a catalyst now, but it won't happen immediately. Remember, the ECB is ahead of events by actually buying this stuff before it blows up. They will puff up a massive bubble in EZ credit.

In the end ... inflation needs to rise, and it will and then the CBs will be cocky and call victory. Then we have to worry.

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Cityhunter
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May 13, 2016 at 8:51 PM ×

@LB,

I agree a lot with your view in general but on position I'm more short AUD due to seeing credit expansion coming to a halt (temporary) in China cycle. Chinese iron bar and coal futures have given up almost half of the early rally in the year.

On Fed, less sure Yellen is willing/able to hike again bc US data doesn't really matter in the policy function. They know the rest of the world is so bad, and Yellen is determined to wait for inflation to overshoot, imho.

Europe in a mess, so is Japan. The equities are in a clear bear market for these two regions. Can all-in CB in save them? Oh wait, helicopter money haven't been deployed yet.



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Anonymous
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May 13, 2016 at 9:19 PM ×

@washedup,

anon 7:22 here.

I just bet against some vanilla REIT ETF with a higher portion of holdings on commercial side. I do not have any strong conviction right now. So put on tight stops on all my positions.

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Anonymous
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May 13, 2016 at 10:22 PM ×

To clarify, not a single person here - including me - or seemingly anywhere else of note is currently bullish on equities. Hmmm.

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AL
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May 13, 2016 at 11:30 PM ×

Trying to guess or measure others' positioning is often a useless effort. I mean, it could be useful for the classic punt or a short term trade, but in order to position a portfolio strategically is another story. The most useful thing is probably common sense: the incentive here to be long risk is very small in my opinion. Corporate profitability is clearly deteriorating, margins eroding and employment costs rising; the macro picture is pretty far from being encouraging, with today's retail sales and consumer confidence the only bright spots in a long string of disappointing data in the US. Central Banks? Well, in my humble opinion, the time to bet blindly on their action and trust unconditionally the effect of such actions on asset prices is long gone .... As such I position the portfolios accordingly, being very much UW equities, zero commodities, zero emerging markets, nervously neutral in EZ govvies and corporate bonds and pretty long cash (partly in USD - I am EUR based)... Yes cash , that ugly, distasteful thing that nobody likes.

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Macro Man
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May 13, 2016 at 11:44 PM ×

AL - out of curiosity, do you get charged for holding EUR cash or are you just getting nothing for it (= huge win)?

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Tim Schulace
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May 13, 2016 at 11:56 PM ×

Today was seemingly a "good news" day, yet everything was pear shaped. Things to consider heading into next week. Exposures right now are long gold miners, long duration, short commodities, modestly net short equties and long dollar vs aud cad NZD mxn zar etc.

Those numbers should have killed me but they didn't. Just sayin.

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AL
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May 14, 2016 at 12:09 AM ×

MM - Pension funds are spared from being imposed negative rates so far .... Don't know for how long though.
Managed accounts and mutual funds are charged 0,5% above a certain cash balance, but here you can avoid the penalty by transferring the excess cash to the margin account of ETDs' brokers, where, in most cases, negative rates are not yet applied.
But it's a narrow path yes, and getting narrower.

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CV
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May 14, 2016 at 8:20 AM ×

Great stuff AL, thanks for sharing! I believe the recent aggregate ECB data show -ve deposit rates for large corporates (on average) for the first time ever (I will check), but it is definitely a narrower path as you say.

The thing about the "portfolio balancing" effect is that it isn't working as well as the ECB thought it would be. You see ... according to the ECB, you're doing it all wrong ;). Why not invest in some dividend yield in the equity market and corporate bonds en masse? O.k. you said you had corporates, which is a smart move since these things will go up an up in the next six-to-12 months. But interesting to hear your thoughts. An insurance PM I know also noted recently that the very fact that rates on the "safe" part of his portfolio are being eroded leaves him less room to take risk with the rest (i.e. the buffer for losses disappear).

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Anonymous
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May 14, 2016 at 10:44 AM ×

@ Anon 10:22 PM - No one is bullish but no one is strongly short either. Sentiment is most useful at the extremes and we are not there.

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AL
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May 14, 2016 at 12:08 PM ×

CV - I must stress that I am a very small player in the landscape, therefore I assume that different conditions are probably applied to cash balances for bigger players who have much greater negotiating power.

As for the portfolio balancing: issuances in corporate bonds this past week were at insane levels. How much will it last I do not know and if inflation picks up it's gonna be a carnage of historic proportions. I have also a decent allocation to I/L bonds which makes me sleep a bit better.

In equities I perfectly see your point, but I also observe that since the ECB started with QE last year, EZ equities are in a bear market. The problem I have here is that allocating to such dividend plays has become really really expensive in EZ and the only cheap dividend plays in town are banks (with all the exceptions you are all well aware of), autos (which are also adding a lot of beta to the portfolio). To these two sectors I add technology in EZ which is trading on the cheap side after the recent underperformance and partially Travel and Leisure, i. e. mostly airlines.

The key point here is economic growth: US must pickup as LB is expecting otherwise we are cooked, while I fear at the same time we are soon gonna see disappointing data from the Euro Zone. Guidances from corporates are far, very far from being encouraging on this topic.

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Bruce in Tennessee
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May 14, 2016 at 12:46 PM ×

I bought gold coins Friday, my first time to do so in decades. I generally believe investing in gold is for nitwits, but.... I look at the landscape and feel we are in for ever more interesting times. You boys probably read the same things I do, and most of this stuff continues to look weak to me. Retailers are getting whacked and it isn't just Amazon. ZIRP and NIRP look like long-term negatives to me, and I've already stated my reasoning is that it removes a source of income from people who don't like the market here.

This year, I've been putting cash into very short term notes awaiting the decline in equities. Some of these things happening today remind me of the tech bubble in slow motion..and I still like LB's UUP....

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washedup
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May 14, 2016 at 1:16 PM ×

BinT - aren't gold coins a rip off i.e. you end up paying strange fees and markups vs wholesale physical gold? Interested in knowing what you learnt - if I buy gold I will definitely go the same route - I am not a huge fan of buying gold for 'armageddon insurance' and then having it (or rather, thinking you have it!) in an electronic brokerage a/c as a paper ETF called GLD held for you by a custodian, or so they say.

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Booger
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May 14, 2016 at 1:16 PM ×

B in T: gold may well go up a bit further but if there is further dollar strength due to a risk aversion move i.e a mudslide, it is hard to imagine gold not croaking in a major way. It is probably headed to $700 before new highs if you believe a mudslide is imminent.

I have to say, I am not convinced with the move in the dollar to date and still am wary of one further plunge in DX before a durable rally into the high 90's. I am pretty much in cash except a small short Spoos position.

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Booger
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May 14, 2016 at 1:33 PM ×

The next BOJ move should be very interesting. They cannot stay pat. They have to eventually wind back QE or scale it up. Marc Chandler has some interesting ideas about that in his recent article/blog. The rational thing to do would be to say QE has not worked in Japan in raising rates or even equity prices and redefine their goals and inflation/GDP targets to GDP per capita or something more favorable. I wonder what the effect of the BOJ capitulating would be ? Would Kuroda be able to do it or would they have to get rid of him first ?

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Anonymous
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May 15, 2016 at 9:51 AM ×

Booger, I think we will continue with the Bulgarian model for a while (some incorrectly attribute this strategy to Bernanke, but the Bulgarians knew about this and applied this theory of money long before).

The Bulgarians always say: "Brother, if you can't solve a problem with money... solve it with a lot of money."

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checkmate
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May 15, 2016 at 11:23 AM ×

I'm not sure about the comment that the "US has to pick up". In my view the global drag has been and remains to be European. For me growth in Europe is what it will take to put the brakes under the Asian (China) slide. By comparison because of it's domestic economy bias the US has toodled along. In essence the marginal consumer that makes the difference between low global growth and average long run global growth is European in origin albeit I also suspect demographics is lumped in there somewhere.
In effect with a belief like this you can't look for a pullout of low global growth without first seeing marked improvement in Europes labour market which remains fairly dire. So, lower and longer really means longerrrrrrrrrr way past most people's views.

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May 22, 2016 at 4:52 PM ×

The most useful thing is probably common sense: the incentive here to be long risk is very small in my opinion. Corporate profitability is clearly deteriorating, margins eroding and employment costs rising; the macro picture is pretty far from being encouraging, with today's retail sales and consumer confidence the only bright spots in a long string of disappointing data in the US. Central Banks? Well, in my humble opinion, the time to bet blindly on their action and trust unconditionally the effect of such actions on asset prices is long gone I liked your blog, Take the time to visit the me and say that the change in design and meniu?

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