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.....