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Macro Man is back, and for once it seems as if the market took a breather during his holidays.  Indeed, the only real crisis point that he can identify occurred yesterday, when he inadvertently donated most of the family bedsheets to the Goodwill.  Sadly, they proved irrecoverable...much like any premium expended on SPX puts over the last seven weeks or so.

With the Olympics in full swing, there's a handy excuse for punters to largely sit tight for another couple of weeks until the Jackson Hole conference.  Sure, LIBOR has kept ticking higher, but that just seems like an excuse in the making for the Fed to do nothing yet again.   (As an aside, if LIBOR these days is still so systemically important that it can impact monetary policy decisions, why don't the regulators ensure that it is published in a timely fashion for the public rather than hidden behind a paywall?)

Last week was sufficiently uneventful that Macro Man has to concede that he took both eyes of the market for an extended period.   As such, it may take a few days for him to get properly back in the swing of things.  By the looks of it, he'll be afforded that luxury.
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12yo HFM
admin
August 15, 2016 at 9:43 AM ×

Fund Mgr Report, Aug 16:
Still on baecation yo. Was due to return to LDN but like really? Anyway onto mkts: Equities are lit! The fund is positioned long since like forever, so yeah loving this. Energy, small exposure but long bias on CL above 40. PM (GC, SI) we own physical for the simple reason that we love sparkly shit. FI/Rates, hahaha yeah whatever.
Our only concern is that the equity complex looks due for a slight pullback. If this occurs, we will once again BTFD, as per our last report. Peace Out.

Millennial/GenZ-speak to English:
'Baecation': You all know this one
'LDN': Like why use twice the letters yo?
'Lit': Amazing or 'popping'
'Peace out': 'Later', goodbye.

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Nico G
admin
August 15, 2016 at 12:08 PM ×

fascinating to watch such yield compression - in Italy notably moments after they tell you that all banks are bankrupt

meanwhile the 30y gilt (UK bond) is up 53% so far this year - this is bizarro power two

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Skr
admin
August 15, 2016 at 12:08 PM ×

Back just In time.

Dollar index at area of confluence
European indicies approaching key levels.

Breakout territory across the board.

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checkmate
admin
August 15, 2016 at 12:25 PM ×

Nico,
Long end gilts have been my best position of the year ,but post Brexit I've been selling off into it. Unless the world and the UK inparticular are going Japanese as far as the eye can behold then this is one that will run out of road in spectacular fashion.

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Europeanbull
admin
August 15, 2016 at 12:30 PM ×

Nico, what is your scenario how the story in fixed income unfolds? I read the post on Epsilon theory you quoted a couple of weeks ago and liked it a lot.

In my opinion we have already reached planning economies' tools in fixed income markets. The state not only controls the price of assets but by now also sets quantity and micro-manages who has to own what through Basel and Solvency regulation.

All that combined generates insane valuation levels, which obviously are going to end in carnage, but I have a hard time figuring out a chain of events that are going to trigger the carnage.

The simple fact that core inflation is positive in the western hemisphere despite everything we have been discussing this cycle does not seem to be enough...

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Nico G
admin
August 15, 2016 at 1:09 PM ×

hard to guess the 'catalyst' since they are always identified a fortiori - in March 2000 a lousy IPO sent the who castle down, there were no more buyers - in March 2009 Citigroup quarter beating estimate was all it took to ignite short covering, for the selling was exhausted

we are 100% in the last 'euphoria' phase of the rally but the timing is impossible. For short strategies, you will either be short too soon (myself)(and it's perfectly fine if you size well) or never short at all

to trim longs well, you would be a greedy swine if you had still not sold into the post-March recovery this year. I really feel for the suckers who are invited to the market this summer, so many blogs pitching another couple of years of bull etc

sure, yes, but the risk reward is abysmal on both bonds and equities, it is all about finding someone more stupid than you to sell to at this point

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Anonymous
admin
August 15, 2016 at 1:38 PM ×

Nico,

Curious if you are still legging into your shorts now or if you've capped it.

And, who do you think the 'greater fools' are who are still buying at this point?

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Anonymous
admin
August 15, 2016 at 1:59 PM ×

Could be years before it blows and I am not sure we have euphoria. In this case focusing on a crash is counterproductive to your pocketbook.

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Nico G
admin
August 15, 2016 at 2:05 PM ×

markets are not going anywhere i am 6 handles over entry, and doubled to reach 2/2 size. Hammock time now i am not even watching, and bidding 1/2 over 2100 and 2/2 much much lower.

greater fools let's see - the ones who missed 2009-2015 and/or the ones who missed the double dip this first quarter and/or the same guys who resisted selling throughout 2008 but puked in the first quarter of 2009? hard to fathom

this market psychology 101 ought to be kept as it is: simple. I have friends in Italy who have been long truckloads of Italian banks forever and are starting to panic. In such case it ain't about valuations only - they can be bubbled or depressed many sigma away from value - but you would have to look at both value & sentiment in current cases extreme complacency (Spoos) or near panic (Italian banks)

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Anonymous
admin
August 15, 2016 at 3:51 PM ×

Nasdaq 100 now up 15% since the post-Brexit low on 6/27. Missing moves like this due to "fear selling" is what crushes most investors... (Bespoke Invest)

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EuropeanBull
admin
August 15, 2016 at 4:18 PM ×

Thank you, Nico!

Is a spike in long yields necessarily bearish for stock?

I see tons of euphoria in fixed income but in equity land this is definitely the most-hated rally I have ever seen.

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Anonymous
admin
August 15, 2016 at 5:12 PM ×

Yes, a sustained spike in LT yields is necessarily bearish for stocks in nearly all cases, apart from the one where there is gangbusta world growth. Given that the main scenarios under which we are likely to be seeing such spikes -- a) VaR event/risk parity unwind; b) perceived major Central Bank helplessness; c) pick-up in inflation -- are all negative scenarios and stocks are priced in for exactly the opposite (extremely low yields *forever*), then it makes sense to think of short longer-term government bonds (especially those with negative yields) as a "hedge" for a long equity position. This is what happens when people buy stocks for "yield" and bonds for "capital gains".

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washedup
admin
August 15, 2016 at 6:08 PM ×

@anon 5:12 yes, and that long equity hedged with short bonds is exactly what got people carried out in dec-jan 2014/15. It's one of those trades that sounds great in theory till one realizes these are two very separate markets influenced by their own positioning.
I personally agree that the correlation between stocks and bonds is well on its way to +ve (if not already, haven't checked recently) - the tough part is getting the beta and the volatility right, and thats where the issues reside - I think volatility in treasuries may turn out to be a lot greater in the next 3 months than people think, for one. I do think short equities long bonds is a lot riskier than long equities short bonds, FWIW.

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Anonymous
admin
August 15, 2016 at 7:40 PM ×

At what point does Risk Parity rebalance from it's large overweight long bond position? There are limits to where the asset price can go.

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Anonymous
admin
August 15, 2016 at 8:02 PM ×

Swedish report shows that ALL rapists are immigrants:

http://www.zerohedge.com/news/2016-08-15/sweden-report-conclusions-are-frightening-amid-summer-inferno-sexual-assaults

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chas
admin
August 15, 2016 at 8:10 PM ×

remember, the key to risk parity is that they're not allocation assets per se...they're allocating volatility instead.

most bucket for four different economic scenarios which will then incur different asset class performance. the current construct is very long

i would imagine that the scenario which would most dangerous for these strategies (who lever returns on low historical vol asset classes or sub-sectors) would be an inflation impulse that would hit their sovereign bond allocation, as well as their 'low vol' equities exposure in defensives and bond-proxies.

that said, their commodities, FX, HY credit (coupon buffer), broad equities futures and inflation-protected tranches would help them mitigate losses on their straight govt bond portfolio in an interest rate shock scenario...thus, "all weather."

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checkmate
admin
August 15, 2016 at 8:11 PM ×

http://uk.businessinsider.com/jhl-capital-10th-anniversary-letter-2016-8

The above is a reasonable summary of where we are at. In effect you can't find assets to buy now that don't come with elevated risks attached based upon any possibility that the central banks stumble, or just don't make the right call.

Moreover for those above who want to take numbers (market moves 'missed' etc without putting them into any kind of risk adjusted context please note you have filled my mental waste basket to overflowing.

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Anonymous
admin
August 15, 2016 at 9:16 PM ×

The S&P, Nasdaq etc are up 8 consecutive weeks. Globally equities are rallying to 2016 or all time highs. I can't for the life of me fathom why anyone would even think about shorting stocks, it's abundantly clear they are going very very much higher.

People have to face the TINA (there is no alternative) fact. Everyone will buy equities because you cannot buy anything else, central banks have made the game so. In addition they will support global equity markets for probably the next 10+ years. Fixed income and FX markets have similarly been ruined by central banks, so again equities are the only game in town. It's sad but true. When the S&P500 is at 3000, people here will still be saying "the market is too high".

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Anonymous
admin
August 15, 2016 at 10:03 PM ×

FactSet: $SPX EPS estimate for Q3 has fallen 5.9% over past 26 weeks and 2.4% since June 30.

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