A few observations from the new gaff

Macro Man is now installed in his new house, and the Wi-fi is finally up and running.  While the move itself was pretty seamless, the endeavour was not without its aggravations; Macro Man's GTI packed in on the first morning of the move, and now apparently needs a completely new engine.  Somehow, he's more interested in looking for the bid for the car as-is than he is in paying the offer he was quoted.

In any event, despite his automotive travails he still managed to keep an eye on things from afar despite his lack of Internet.   The following are a few of his observations on the news and price action of the past few days:

* All time highs are all time highs.   While Macro Man was prescient enough to take off half of his short near the post-Brexit lows, the bit that he left went sour in a hurry- so fast, in fact, that he didn't ever re-sell the bit that he bought back.   His long-standing M.O. was to exit the position on a break of the previous highs, so he is out.


* QE is not what's driving this.   Despite the apparent enthusiasm in some quarters for attributing the rally to global central bank easing policies, this explanation rings false.  Consider, it you will, the dramatic under-performance of equities in those regions that are actually experiencing QE, which is particularly stark given that the competition from fixed income is less than negligible.  The Eurostoxx 50, for example, yields 4%....and is still down some 10% year to date on a total return basis, despite the fact that most of the German curve trades with a negative yield.  The Nikkei has performed similarly.

No, Macro Man sees the (relatively) stellar performance of the SPX has a function of two factors.   The first of these is the corporate leverage trade, viz. issuing debt to finance equity buybacks.   This is a well-known and persistent phenomenon that provides a bid to a number of stocks- though interestingly, most baskets targeting buyback recipients have underperformed the SPX thus far this year.

As Macro Man sees it, the real driver of this rally has been the apparent conditional commitment of the Federal Reserve to do nothing on rates over the next several months.  Now let's be clear.   Rates are not on a pre-set course, the Fed is data-dependent, the dots are a forecast, not a commitment, etc etc.  We've all heard it, and frankly, we all know that it's a load of mularkey.

Markets take their cues from what the Fed does much more than what the Fed says.   And what the Fed does it to sniff out, with a perspicacity that would elicit the admiration of Sherlock Holmes, every possible excuse, no matter how flimsy, to avoid putting rates up.  Again, this is hardly new news.  In a sense, Fed monetary policy is being constructed like a life-size replica of the Eccles Building fashioned from playing cards.    It takes a long, long time to build up the case for a rate hike, and almost no time at all to collapse the whole thing back to its foundations.

Insofar as the twin concerns of June- the lousy payroll figure and the financial stability threat of the Brexit vote- have been mitigated to a large degree, in a rational world the Fed should be hiking at its next meeting given the state of play in late May.   But it's not in the price, and the Fed has shown a signal unwillingness to lead rather than follow the market.

From Macro Man's perch, the anomaly is not that the SPX has roared to new highs (a possibly rational response to a better growth trajectory that will go unchecked by rate hikes), but that fixed income has not sold off more.   The SPX has retraced its Brexit move- and more.   Copper is well above where it traded the day of the Brexit vote.   USD/JPY has retraced its Brexit move.   US fixed income, however, has not- bond futures are nearly 8 points above where they closed on the day of the vote.   Frankly, given developments in other markets and the pattern on the chart, that looks like a better short than the SPX these days.


* Japan: the triumph of hope over expectation?   USD/JPY was oversold after the Brexit vote and given improved sentiment elsewhere, was probably due for a bounce.  However, Macro Man would be very leery of piling on, expecting an Abenomics 2: Electric Bugaloo rally to match the original.  After all, the BOJ has been going pretty much full bore the entire time, and it's difficult to see how much more they could do.   Yes, with a fresh mandate Abe can deliver more fiscal stimulus (presumably with the aid of a supplementary budget), but that's hardly revolutionary, is it?   Japanese governments have been going to the fiscal well for nigh on two decades with little to show for it but a temporary flare of optimism.   Barring a deeper, more thoughtful economic program, that's what Macro Man would expect here;  enough to push towards 110, perhaps, but probably a stretch beyond that without the Fed doing some of the heavy lifting.

* The interregnum is over: what now?  The implosion of the other candidates in the Tory leadership election likely says more about their lack of quality than Theresa May's abundance of it.  However, at least the most fundamental uncertainty surrounding the UK has been resolved much earlier than feared, which has got to be good news.   On the other hand, the more monumental uncertainty of when Article 50 will be triggered continues to loom, with the new Chancellor offering little clarity in his remarks yesterday.

Although one can understand the EU's frustration with the uncertainty, at the end of the day it's Britain's choice on how and when to proceed.   Extending the trigger date indefinitely has benefits but costs as well,  given the impact of the limbo-zone on the business climate.   It seems a dead certainty that Mark Carney will finally do something other than count his enormous pay packet this week; Macro Man will be keen to see how UK banks trade after the (widely expected) rate cut and possible QE.  The banking sector has been a pretty good barometer of the efficacy of easing programs, both successful (US, earlier UK, initial BOJ) and failed (NIRP in the EZ and Japan).   The BOE has long resisted trimming the base rate on concerns over the impact on the banking sector, but at this juncture seem to have concluded that the signalling mechanism of "doing something" will outweigh any tangible costs to financial institutions.   Macro Man is somewhat sceptical, but confesses that this view is based on gut reaction rather than any hard science.

As for sterling, it's had a nice squeeze, so much so that many who were calling to fade the post-Brexit sell-off are now only a few figures offside.  The vehemence of the rally almost certainly says more about the liquidity and risk tolerance of the market than it does about the underlying merits of either the new PM or expectations of Carney's policy shift.  Macro Man would be inclined to fade any post-Carney rally in sterling; after all, the major case for being short does not rest on rate differentials or monetary policy, but rather the long-term impact of economic uncertainty.  Macro Man's model target of 1.26 was nearly reached last week, and he sees relatively little reason to shift his belief that it will eventually trade there.

* Volkswagen sucks.  $8k for a new engine?   Pull the other one....
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12yo HFM
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July 13, 2016 at 8:23 AM ×

@MM, I hear what ur saying re: stimulus, however there's a big story doing the rounds (as of yesterday) that the BOJ are going to launch Helicopter Money, and that risk markets are surging on anticipation of this. We'll see.

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checkmate
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July 13, 2016 at 8:40 AM ×

The FTSE looks well extended at this point and coming into BOE and Opts it's looking like a buy the news and sell the facts situation brewing.

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checkmate
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July 13, 2016 at 8:47 AM ×

For clarity the shorter time frames suggest more wait and see for the week than an outright selling opportunity. Another pop still a possibility right now albeit my idealised reload point on a monthly chart was circa 6750/6800 so not that far away.

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Cityhunter
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July 13, 2016 at 8:58 AM ×

On factors pushing spoos to new high, I would say it's the combination of better US outlook + Fed on hold + QE infinity elsewhere, and I put these factors in sequence of declining importance.It is the better US data that offers a glimpse of hope going out of the global deflation environment.

As someone here suggested that QE money has been very selective on sector basis, the same argument holds on country basis too.

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CV
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July 13, 2016 at 9:16 AM ×

Great post MM, I agree on Spoos and rates, which also implies that whispers of faster rate hikes soon could provide a little banana skin for JBTFDers and their ilk.

And sorry to hear about the GTI; that sucks. Get a Beemer; one of the 2003-2007 vintages with a lumpy V6 without turbo or anything. they never break down. Right, LB?

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Anonymous
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July 13, 2016 at 10:07 AM ×

New chancellor?. May has yet to announce her cabinet?

Weight of money, whether a consequence of low yields from QE or perpetual low rates has to find a home. Maybe we try to complicate things too much?

Sorry to hear about the GTi, I hope you weren't stopped out by the timing chain tensioner on the Mark 6 variant, the one to avoid by the smart money.

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Macro Man
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July 13, 2016 at 10:28 AM ×

@ anon 10.07. Jumped the gun on Grayling, who's expected to be Chancellor.

Oh, and that's EXACTLY what happened to my GTI (purchased new six years ago before it was a known issue, and now out of warranty.). Grrrrr

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Anonymous
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July 13, 2016 at 10:35 AM ×

This morning in the UK, there is talk of Grayling taking over as Home Sec?

Ref the GTi, if you have VW service history they often give a contribution toward the repair, even if the warranted is out. Worth trying more than one dealer.

Mk7 is a step on in build & tech and no engine concerns as yet.

Good luck...sorry for going off piste, back to informed market banter!

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helicongrowth
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July 13, 2016 at 11:15 AM ×

I believe for the BoJ to do full helicopter money they would need to change some of the Public Finance Laws, specifically article 5.

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washedup
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July 13, 2016 at 11:58 AM ×

@MM/@anon 10:07 - my wife has a 2011 GTI - should I be worried?

On spoos - interesting observation on the real real real reason for the rally, as opposed to the no really real ones - I find it rather interesting that only two sectors, consumer discretionary and consumer staples as a cohort are actually making new highs as spoos continue their trip to, depending on your perspective, the moon or the sun - given the appearance of the word 'consumer' in both, I would hazard a guess that the fate of the world stock market once again rests on the mighty shoulders of all American C-Man, the iconic credit eating amazon prime sales spewing superhero!

So its down to retail sales, jobs, and such. Both have been tepid, but the market thinks (or feels or hopes) that a combination of continuing improvements in payrolls and consumer directed fiscal stimulus alongside a self-neutered fed will be the fuel for the big leg up - yes?

Or maybe we opine, narrate, and rationalize too much for our own good, and its all thin summer Opex - i guess we will find out soon enough.

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Anonymous
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July 13, 2016 at 12:13 PM ×

washed up, I am sorry to say there should be a concern on the Gti of that vintage.
Mk6 Gti was from 2009-13.... The issue is the timing chain tensioner which is oil fed.
VW upgraded this part 3 times during the model run. You need to check you have the latest upgrade, this costs $450/£300 to change. Symptoms are a rattle on start up which should go away quickly, if the oil pressure is not up the tensioner does not tension the chain and the engine timing jumps and valves hit pistons!
This is well documented on the net & VW forums and astonishing they get away with it?
I have never owned the mk6 variant for this reason.

On the markets, not long until Augusts, desks run on holiday staff, no doubt we will see some interesting moves on low volumes..at vertigo inducing index levels?

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abee crombie
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July 13, 2016 at 1:28 PM ×

MM, why do you want to keep shorting rates? I'm done with that trade. The Fed is useless, as you mention, and it seems like every time we get a move higher in rates, the trade is to buy bonds (like LB has been so good with) rather than sell them at extremes like we are now. I still think this global convergence to 0 rates is the story. If I'm wrong, I'd rather be long US financials.

I mean if you are a PM who got the staples/utility/telecom trade right, you gotta be thinking to take a little off the table. (and hopefully some of the quants, who are the majority of that trade, I think, will do the same). Buy some calls on financials. if the rally is for real they are going to catch up. If not, you locked in some of your previous gains and lose premium. Financials are geared to higher rates, so I like them better vs short Tsy. and they probably have a decent Q2, with higher oil prices and HY markets. But in general I am pretty skeptical of this rally, but I think it can last another month or 2.

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Anonymous
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July 13, 2016 at 1:40 PM ×

Fed's Mester Says Helicopter Money "The Next Step" In US Monetary Policy.

Won't be long before everyone's doing it.

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washedup
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July 13, 2016 at 2:09 PM ×

if the prospect of helicopter money is driving things, can someone explain to me why gold is dropping?
The price action in all these asset classes seen together, screams 'unstable equilibrium' much more than 'benign reflation' - actually make that 'headless chickens' - but we will see.

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Macro Man
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July 13, 2016 at 2:10 PM ×

@ abee if you are long GDX/reflation trades, the one thing that will kill you is a rise in nominal and real rates. As such, after an uber rally in FI, it kind of makes sense to me to let a little fly, particularly when the rationale for the rally appears to have waned.

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Leftback
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July 13, 2016 at 2:20 PM ×

Abee, remember that Q2 is "priced in" for financials, if you buy today you are essentially buying Q3 earnings, not Q2.

Oddly enough, CV, the old girl stalled last night on the approach to the Queensboro Bridge and the starter jammed. Luckily we have seen this movie before, and with a helpful citizen, backed it up a bit, put it in reverse and she started right up. The shapely young lady in the front seat was about to give up on the ancient machine, but in the end was pleasantly surprised as the monster roared back to life. They don't build 'em like that any more.

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CV
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July 13, 2016 at 2:20 PM ×

The HC debate is getting slightly ahead of itself, again ... but I do think we all have to look very carefully at Abe's next move. He just won a huge mandate, and could try to use that to go all in. I am not certain that they really know exactly how they would implement HC. It isn't that simple you know. Boosting ETF/equity purchases to a ridiculous level probably comes first to be honest.

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CV
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July 13, 2016 at 2:26 PM ×


"They don't build 'em like that any more."

They sure don't ...

Re Spoos; I have no position, but marginal new highs and VIX @ 13ish smell to me. I don't like the set-up at all. Best to avoid.

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Anonymous
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July 13, 2016 at 3:09 PM ×

@MM

"As Macro Man sees it, the real driver of this rally has been the apparent conditional commitment of the Federal Reserve to do nothing on rates over the next several months. "

"From Macro Man's perch, the anomaly is not that the SPX has roared to new highs (a possibly rational response to a better growth trajectory that will go unchecked by rate hikes), but that fixed income has not sold off more. "

It seems to me that if the driver of this rally is the market pricing out potential hikes for the next little while, we shouldn't expect yields to bounce back much higher. Alternatively, we'd see steepening at the short end of the curve.

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Anonymous
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July 13, 2016 at 3:24 PM ×

Factset:

Companies in the S&P 500 spent $166.3 billion on share buybacks during the first quarter, which marked a new post-recession high. Since 2005, only Q3 2007 produced a larger amount of buybacks ($178.5 billion). Dollar-value buybacks in Q1 represented a 15.1% increase in spending from the year-ago quarter, and a 15.6% jump from Q4. This breakout in the first quarter of the year comes amid somewhat of a stabilization period for buybacks since the middle of 2014. With that said, buyback spending still remained at very high levels for the index during this period.

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Anonymous
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July 13, 2016 at 4:32 PM ×

Market does not care about oil being down $2 today.

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Anonymous
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July 13, 2016 at 4:34 PM ×

If you look at US equity indexes futures, they basically aren't moving. This is what happens, either we have big pullbacks and rampant algo buying, or there is no trading. So easy to spot.

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abee crombie
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July 13, 2016 at 5:04 PM ×

Got it MM, long Gold, short Bonds makes sense here, cheers. XME and materials screaming up the past few days, along with cyclicals (financials, transports even autos). So while yes the dividend sector is up the most 12m, there has been rotation on a short time frame as they are underperforming.

LB I agree with banks you are buying Q3 in theory but you have to think they are the cheapest sector, very out of favor and have decent yields. If they post some nice beats I wouldnt want to be short. Alternatively if they do beat and then the market takes em down a few days later that could be your signal to trade from the short side.

Was looking at NYSE new highs. We had a nice thrust upwards the past dozen trading sessions. + for JBTFD & 12yrOlds

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Mr. T
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July 13, 2016 at 5:44 PM ×

Another week, another how many research notes talking about how over-extended the rallies in commodites are. Truly hated rally, but one that continues to broaden. Outside of agg, pretty much everything is up big. I think people have forgotten how much earnings leverage these guys can have, especially off small capex bunker-mode operating levels. While few of these names are showing up in the new-highs list (yet) their outsized contributions to SPX earnings growth in the next couple quarters may be enough move indexes to higher levels. This is all independent of the CB victory laps that higher CPI's will show, and the slosh from FI to Equity that will surely follow. There are still lots of names that are trading in the shadow of bankruptcy, but whose prospects have materially improved in the last 6 months. OOM calls are cheap and not reflecting the leverage potential imho.

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washedup
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July 13, 2016 at 5:58 PM ×

T - I will happily buy commodity equities after some big accounting scandals come to fore - have you ever seen a downturn in that sector where some big firms didn't head for confession en masse??
Abee - I really think financials are so regulated right now they have to be thought of as bizarro utilities in that they have all the same characteristics except they benefit from higher rates.
We were talking about utilities a couple months ago when XLU was 49 and I told you I was looking for 52-53 to go short - I am seeing enough of a breakdown there that I am starting to short with a 54 stop - I like the asymmetry here, and the lower volatility doesn't hurt (famous last words anyone?)!

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abee crombie
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July 13, 2016 at 8:33 PM ×

Mr T. I agree with you on the commodities, they do have lots of leverage to higher prices and the performance of XME should be proof. However do you really think coal is making a real comeback? Iron ore? common there is so much over supply. Copper and oil different stories each

Regarding S&P earnings to materials, materials are only 6.5% of the index and most of that is in chemicals and specialty chemicals, which look kind of extended to me trading >20x PE...

FWIW Id rather buy their debt. Thinking we can have a real massive rally in HY is Spoo's hold new highs for a bit.

Big banks are utilities. I agree. but not all finaicials are banks, yet they all trade with some much correlation mr algo doesnt care. Hence the opportunity

XLU- yeah crappy trade. Looking for more signs of negative momentum before I jump in..looking to short PUI.

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AB
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July 13, 2016 at 8:59 PM ×

my view is that low growth is a result of insufficient demand. Insufficient demand is a result of too small of a share of GDP/Income going to households in general, especially middle/low income households. Unlike QE and NIRP, I can actually understand how a regressive helicopter money drop would stimulate the economy. QE and NIRP seem far more radical to me. They are distortive and we don't even know if they work in the right direction over time frames that matter (I am a fan of QE when there really is blood in streets, in other times it is stupid policy)

The problems for assets
1) Household share of GDP should continue to revert to a more normal level. China has been absorbed and rates have hit bottom. Helicopter money should add fuel to the fire.
2) Helicopter money will cause GDP to grow faster. Cash rates will rise as a result.

1+2 = corporate profits growing slower than GDP with discount rates rising. Note the denominator in the dividend discount model.

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AW
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July 14, 2016 at 5:03 AM ×

*FED'S HARKER: UP TO TWO RATE HIKES MAY BE APPROPRIATE THIS YEAR

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checkmate
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July 14, 2016 at 6:52 AM ×

"FED's BARKER": Rollup roll up we have not finished f...g with you yet. In the words of Greenspan 'if you think you understand us then we have not made ourselves clear.

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