Another day, another downgrade

Dealing rooms return to full staffing today, and with it the potential for a more interesting trading day than we observed yesterday.   Not that Monday was completely featureless, mind you; for example, cable reacted strongly to the Article 50 announcement, and has now apparently broken the shelf of support that constrained the post-Brexit vote lows.  On the face of it, this seems slightly surprising; after all, no one really thought that the government would try to drag its heels ad infinitum, did they?  Then again, last month's squeeze to 1.34 indubitably shook out a good number of discretionary shorts, who may then have turned their attention elsewhere.  

In such cases, the announcement may have simply refocused attention on the case for the downside.

Speaking of downside, that's a pretty apt description of the direction of the Atlanta Fed's GDPNow forecast.  While it's true that yesterday's ISM was generally solid, including a stonking 6 point uptick in new orders, lousy construction spending figures nudged the forecast lower.  Two months ago the Q3 forecast was knocking on the door of 4%; today, it's barely above 2%.

Such downgrades, of course, have been a regular feature of the U economic landscape all year.   In a stunning coincidence, of course, the Fed has stood put over the same period.  December's currently priced at roughly 60% odds of a tightening.   It seems clear that many if not most of the FOMC would like to put rates up; it's just a question of whether they feel they can.  Ultimately, of course, recent downgrades top the Q3 growth story (that's sooooo last quarter, dahling!) won't matter much if at all if there's rip-snorting payroll figures over the next couple of months.

Beyond payrolls, there's also the prospect of earnings season, which kicks off in earnest next week.  The comparisons are getting a little easier than  they were earlier this year, though if the recent skein of macro data is anything to go by it might be unwise to get one's hopes up.  Then again, the equity market has largely ignored the trend in earnings since early 2014, thanks to the miracle of financial repression.  Yet again, Macro Man's model loves equities.   While he remains personally skepitcal, to date the scoreboard reads Model 1,   Skepticism 0.

Then again, it was this week in the last electoral cycle that stocks broke lower, and it's certainly not like the choices are better this time around.  Fading extremes seems to be the most prudent course of action, and with Spooz within a couple of percent of the highs it's easy to see the attraction of modest shorts at current levels.  After all, we could be just a random DB headline away from a 1% move in either direction...
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Up_Side_Down
admin
October 4, 2016 at 8:36 AM ×

MM, could you overlay the actual 12M return outcome on your "model forecast 12M return of SPX" chart please?

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Anonymous
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October 4, 2016 at 8:56 AM ×

Wikileaks October surprise Livestream: https://www.youtube.com/watch?v=y7OwzD5yxUU&feature=youtu.be

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12yo HFM
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October 4, 2016 at 9:16 AM ×

Macro Man's model loves equities...
MM's model has always struck me as being a sensible and pleasant type of model - one that sees thru the obfuscation that is our modern market, to the shining glory of higher prices above, aided and abetted by our saviors of prosperity, the central bankers.

Once again, said model performed admirably, posting +1% in Eurostoxx barely an hour after the cash open. As I said previously, this must be the easiest job in the world. L8r.

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Fcp
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October 4, 2016 at 11:04 AM ×

Macroman would also be interesting to see your own equity market predictions (and/or) those of your readers plotted against the model with subsequent performance...

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Anonymous
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October 4, 2016 at 12:58 PM ×

... and also trade entries, sizings and stops, preferably through some sort of live feed. Cheers

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Anonymous
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October 4, 2016 at 1:02 PM ×

As a Brit, it's wonderful to see GBP fall so heavily of late. The FTSE is rejoicing breaking out to new highs, and the EU and US will lose to us in the zero-sum game of exports and competitive devaluation (I already see tourists everywhere here in the UK spending their hard earned cash). ZIRP and QE for several years, could not achieve what Brexit has done ! In addition we are free from the fascist dictatorship that is the EU, and May is looking to deport criminals and other foreigners to improve our lives and provide more jobs and wealth for British people. Finally our dependence on the City is being lessened as bankrupt banks downsize, pushing their liabilities onto the EU (another win!).

I hope you all voted Brexit and are similarly rejoicing.

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wcw
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October 4, 2016 at 2:05 PM ×

@MM, coupla typos if you care (e.g. 'skepitcal', or maybe that was a joke about California)

@Anon12:58, and a pony.

@Anon13:02, trade is not a zero-sum game. Or are you another bit of 12yoHFM performance art?

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Anonymous
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October 4, 2016 at 2:09 PM ×

Anon 1:02PM
It's wonderful indeed. It's great that all the tourists have more purchasing power when they visit our country, and it's a great opportunity to stop visiting other countries ourselves as they will now be increasingly unaffordable. Same with all the imported goods, it's about time we stop consuming foreign products, they are no better anyway.
We are indeed winning this game of competitive devaluation. Well, not quite yet, Venezuela is still in the top spot, but fear not, we will soon surpass them. Caracas was the top performing stock exchange last year I think, but its supremacy won't last long, London will soon be the best.
Even without banks. Who needs them anyway? It's not like they have the biggest contribution to the public finances. And anyway, the most important thing is to get rid of all the "criminals and other foreigners".
All good.

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Anonymous
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October 4, 2016 at 3:37 PM ×

We have reached the point of peak insanity...

It's a pretty sad day when IMF ( and the regional IMF ) are all screaming GDP collapse and Fed Reserve predicting imminent hikes to slow it down

C'mon MM go after these shills/missionaries.

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Anonymous
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October 4, 2016 at 3:39 PM ×

"Two months ago the Q3 forecast was knocking on the door of 4%; today, it's barely above 2%." -

I'm a small-town (really small) reporter and I cover local politics and budgets. I read this peice with particular interest and have a question that some market professional may be able to answer:

Local and state budget have seen their debt service over the past five (5) year rise 27% and 21% respectifully. This in turn with revenue shortfalls have strained budgets and more debt issuance which I beleive makes the issue worse (mathematically speaking).

Could this be reflective of what we see in corporate earnings over time? Or GDP under- shooting over "expectations". As corporates issue more debt (sometimes just for buying back their own shares), and now this debt servicing is starting to effect balance sheets/real growth? I really don't know, but I can certain see it in my municipal budgets and state CAFR's.

https://fred.stlouisfed.org/graph/?g=7xE6

That's a lot of coporate, government, and household debt. My own municipality has/is/continue to deficit spend for other indiscretions of the past. Cheap money appears to me this affords a doubling-down effect? I don't know.

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Leftback
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October 4, 2016 at 4:07 PM ×

+1 for "stonking" MM. Your (British) English is better than mine at this point...

Mr Market looks strangely as though it has gone back to trading Dec FOMC rate hike odds and is eagerly awaiting tomorrow's ADP number. Stronger DX today, with various commodity indexes (cough: GDX) getting shellacked.

CADUSD down hard today, even as oil nudges the upper Bolly band once more. More weakness ahead for the Caddy.

Very strange price action today. Little air pockets appearing out of nowhere in the spoos, bond yields higher. Not very good action for this early in the month. No doubt 12yo finds this bullish....

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Leftback
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October 4, 2016 at 4:22 PM ×

Btw, that correlation between USDJPY and Spoos? It's history.
We are back to stronger dollar, lower spoos/precious metals/ commodities/EM FX and bonds once again.

Small selling surges in spoos today, without any obvious catalyst... interesting.
"The Hunt for Red October"? (We wanted to get that in early this year, and then see it get borrowed by the Pink Blog).

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12yo HFM
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October 4, 2016 at 4:40 PM ×

No doubt 12yo finds this bullish....
Extremely bullish. No doubt.

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washedup
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October 4, 2016 at 4:50 PM ×

anyone else bothered by the price action in spoos today? For a market thats unch on the surface it feels like there is a battle currently on between a killer whale and a great white shark just under the surface.
Something is up. XLU, GDX, and TLT have been the superstar trades of 2016 - definitely pain out there.

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Anonymous
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October 4, 2016 at 4:52 PM ×

TLT goes down and eventually the rest of the complex follows. Now that December is getting priced in again, is anyone looking for a counter punch long in GDX, as expectations slowly start fading again, I mean, it's happened every time before so far innit? Of course the question is how do you know that it's fully priced anyway...

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Anonymous
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October 4, 2016 at 5:05 PM ×

Latest note from Goldman’s David Kostin, who observed that foreign investors and mutual funds sold $46 billion and $19 billion of equities in 2Q 2016. In contrast, corporations and households purchased $174 billion and $87 billion, respectively.

“corporate buybacks will remain the largest source of US equity demand this year. However, we expect share repurchases will be lower in 2H 2016 vs. 1H given reduced repurchase authorizations and weaker buyback activity in 3Q.”

"Our buyback desk estimates that gross share buybacks in 3Q 2016 will be 15% lower than in 2Q 2016. In addition, S&P 500 share repurchase authorizations equal $335 billion this year vs. $454 billion at the same time in 2015."

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Anonymous
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October 4, 2016 at 5:07 PM ×

@washedup

agree on the battle metaphor. But before the big tech's earnings are out of the way, I won't betting big on either direction.

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johno
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October 4, 2016 at 5:42 PM ×

I've been quiet for some days now, letting -EURNOK and +EURGBP ride. Closed former today. The past week or so, I've been waiting to see how markets would interpret the BoJ decision. Still unclear to me. On the day of announcement, the year ahead balance sheet target suggested an unchanged rate of asset purchases, but the Summary of Opinion released Friday suggest a slowing of purchases is intended under the new program. So, was the BoJ's decision a tapering? I open with that because the big question now is what to make of this Bloomberg article on ECB tapering. Recent commentary and reports on the ECB were less dovish. Is the ECB coming to its senses, realizing the incremental benefits of QE have vastly diminished?
With BoJ arguably tapering and ECB now reportedly thinking about it, is this a trend?

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CV
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October 4, 2016 at 5:50 PM ×

ECB taper, U.K. throwing out its EU citizens ... fun fun fun ... how is that basement of yours coming along LB ? ;)

I have a short FTSE position up my backside today ... so I am in the pub. Tomorrow will be better, I hope.

Be careful out there ... Mr. Market is in a foul mood, I don't think he will take prisoners in coming months on either side of the fence!

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johno
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October 4, 2016 at 6:07 PM ×

Further on tapering theme ... Bund seems a good short. Real money is long euro duration. Gold of course is in deep, deep trouble. Rates are not going more negative (esp. with USDJPY backing off 100) and QE tapering .. meanwhile it's crowded with fast money, sitting on sizable profits heading into year-end. EMFX, especially, ZAR vulnerable. ToT will hurt from gold and PGMs selloff, and SAB-related supportive flows will soon end. Flip side: Gordhan hasn't been harassed since August and latest reports are that they don't have a real case against him. Also, some arguing SA may avoid downgrade this year. Curious what others think there. Other trade ideas?

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Polemic
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October 4, 2016 at 6:16 PM ×

Short Bunds? I'd go for, well have, and have been for a while, Short BTPs.
Take away the bid from the most toxic of EU debt that has been only supported by ECB action and you can have a much more precipitous decent.

There is so much sound bite crime out there at the moment. Take a complex nuanced statement, pick a single sentence and then scream it portends doom. See it in ECB, Brexit and IMF.

But I guess everyone needs a coat hanger for their views.

GBP up on the day vs JPY .. and TRY. Not a loser all round!

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CV
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October 4, 2016 at 6:20 PM ×

"Take away the bid from the most toxic of EU debt"

Well obviously Polemic, that is the KEY story. I don't think for one second that they won't extend QE, but the mere hint of a hint of taper ... where is your BB -ve yielding EZ corporate debt turd now?

I think this story will be suppressed, but if it doesn't ... my goodness ... pain will ensue!

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Anonymous
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October 4, 2016 at 6:29 PM ×

ECB taper? No way.

12yo HFM, you should buy this once-in-a-lifetime buying opportunity. SPX, NSADAQ, UKX, DAX you name it.Why not lever up?

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Macro Man
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October 4, 2016 at 7:29 PM ×

@ anon 3.39 It looks to me like the tepid performance of corporate profits speaks more to poor tepid topline growth and higher marginal tax rates than it does to the payback of recently acquired debts.

However, if you refer to the general hangover from the financial crisis, then I think that is absolutely the case. Credit does not flow as freely through the entire economy as it used to, and the velocity of money remains very low, hindering economic activity.

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Leftback
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October 4, 2016 at 8:58 PM ×

Ignoring the Noise-O-Sphere, and just watching the Price Action, we're inclined to be short this week and to remain long USD. Short USO, IWM, CAD and EUR. Long UUP. That more or less summarizes where we are, we are holding a small sliver of short silver and TLT… irrespective of what central banks may or may not do, we see lower highs and lower lows in SPY and TLT since the start of October.

CV, there are a variety of high-priced basements in Alphabet City should you decide to abandon Theresa May's Albion. The ones under the tattoo parlors or launderettes are especially inexpensive… :-)

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johno
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October 4, 2016 at 9:10 PM ×

I doubt they taper, but I couldn't rule it out. I mean, who'd have thought that the kamikaze BoJ's Summary of Opinion would say, " "it is uncertain whether the pace of JGB purchases will slow down as intended and the sustainability of monetary easing consequently improve under yield curve control." Key bit there: "as intended." The BoJ seem uneasy not only with more deeply negative rates, but also with unlimited, endless buying.
Why couldn't the ECB be feeling uneasy too? If they are at all pragmatic, they probably realize that QE has minimal effect on the exchange rate (rate differentials do, however) and therefore HCIP inflation. Look how badly the vaunted "Soros curve" (relative bank balance sheets versus exchange rate) has broken down in the yen. Same happening to the euro (subtle, but happening). Credit easing is arguably beneficial, but just buying a quantity of stuff (like bunds) is not, really.
ECB will probably be moronic and continue at 80b/month from March, but markets may need to adjust further to the possibility they don't. Maybe a tradable adjustment. I'm giving it a go -- bund, rand.

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12yo HFM
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October 4, 2016 at 9:33 PM ×

@anon 6:29 - You know, I've always thought of you as a personable and intelligent Anon. You are indeed learning fast young grasshopper ;)

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12yo HFM
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October 4, 2016 at 10:21 PM ×

Today the ECB mentioned tapering QE, before suddenly redacting said comment. Fam, allow me to let you in on a little secret... it's all a fugazy. There will be no meaningful rate hikes, there cannot be. We face (literally) several hundred trillion of global debt. The US economy is slowing, EU economies are a joke, and soon we are going to get a recession. Winter is coming, and when it does the night will be dark and full of terrors. Then, dear fam, our Central Bank brethren will panic. And they will print. The Fed will unleash QE4, and equities will rise in wild abandon, unconstrained by the nonsense of "fundamentals" and "book value". And we who are long, we few, we happy few, we band of brothers; will be rich!!!

So tonight you have one question and one question only - where do you plan to baecation when our long-only equity mega-trades come to completion? Peace.

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Anonymous
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October 5, 2016 at 1:50 AM ×

http://www.bloomberg.com/news/articles/2016-10-04/ecb-said-to-build-tapering-consensus-as-qe-decision-time-nears-itvni14p

“QE is due to run until March 2017, and the most likely outcome to us is that it goes on for at least another six months at 80 billion euros per month after that,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Later in 2017, the ECB could think about tapering, and say try to wind down the program in March 2018, but these are hypothetical exit strategies, not something the ECB will likely implement for a while. Ultimately, the decision will be driven by the outlook for inflation.”

Draghi has repeatedly said that QE will run until the end of March 2017 “or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”

Even when QE finishes, the ECB’s balance sheet won’t shrink immediately. The central bank has already committed to reinvest the cash from maturing bonds. That means the stimulus effect will be maintained until the end of 2020, Dutch central bank governor Klaas Knot said last month.

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Anonymous
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October 5, 2016 at 11:38 PM ×

LB you're shot USO and $C

Please take a look at this chart

https://www.dailyfx.com/forex/technical/elliott_wave/oil/2016/10/04/eliottWaves_oil.html

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