Three Tuesday thoughts

Here are five points on a Tuesday marked by holidays in continental Europe:

* So Carney is staying for an extra year, which will allow him to "see through" the Brexit negotiations and then scarper so someone else can deal with the aftermath.  The supposition is that he has reached a working agreement with the PM to let him do the job as he sees fit, which will presumably entail another couple years of dissimulation and misleading guidance before he rides off into the sunset, lugging his pot of gold behind him.   While sterling has rallied a bit in relief, it's hard to build too much of a bullish foundation into Carney staying; after all, he has been considerably more dovish than the data to date has warranted, and there's always the promise of a forecast downturn ahead.

* Bloomberg published an interesting story yesterday noting that US M&A activity in October was the highest in the 12 years that they have been keeping records.  While that isn't an a priori  cause for concern, coming as it does with record bond issuance, it seems clear that we are at the stage in the cycle where corporate leverage is being applied to financial engineering and takeovers to boost EPS numbers.   And yet the Fed has only put rates up once.  Somehow, it feels like financial market r* hasn't moved as much as the Fed might think....




*  The Nasdaq released updated short interest figures earlier (as of October 14), and they showed a broad-based increase in short interest across a range of emerging market ETFs.   EMB, for example, saw a 38% increase in its short base in the first two weeks of October.   Some of this, of course, is a function of weakness in developed market bonds; US fixed income ETFs also saw a tidy increase in the short base.  Yet it seems likely that some part of the selling is down to concerns about either the implications of a Trump victory (particularly apt for EWW) or general concerns about liquidity conditions over the coming months.   While such a large short increase among bond market weakness might make a tasty candidate for a potential squeeze, the chart looks dreadful, with a head and shoulders break and plenty of fresh air down below.  Frankly, it looks worth giving it a bit more rope on the short side to see if it accelerates away from the neckline.   Call it a "Trump hedge" if you must!

 
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Rossco
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November 1, 2016 at 7:55 AM ×

MM,

May I humbly suggest it would be an opportune time to take one of your polls as to whether a Republican victory would be a net positive or negative for a range of different financial assets ?

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Celeriac1972
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November 1, 2016 at 10:30 AM ×

I prefer to see debt being used to purchase the equity of other corporates rather than for buybacks. At least there is an opportunity for synergies etc....

The US election seems more personality-based and negative than ever before. I find it hard to believe that Republicans haven't come up with a candidate who is a nailed-on favourite to thrash the deeply-flawed Hillary Clinton. It is equally hard to believe that the Democrats haven't come up with a candidate who is a nailed-on favourite to beat Trump.

My simplistic analysis is that risk assets struggle when uncertainty is prevalent. Uncertainty over the election result will be resolved on Nov 9th. A Clinton administration will be seen as less likely to generate surprises going forward. As a result we may see a little equity rip. A Trump win may simply replace one set of uncertainties with another - an environment in which investors may prefer to hang on to the cash positions they've been building, perhaps a recipe for yet more unch...

A poll digging beneath this would be interesting.

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Anonymous
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November 1, 2016 at 10:59 AM ×

Trump 2016 ! MMGA ! (Make Macro Great Again)

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Mr. T
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November 1, 2016 at 11:56 AM ×

we are at the stage in the cycle where corporate leverage is being applied to financial engineering and takeovers to boost EPS numbers.

Havn't we been here for a while? From the perspective of "leverage to boost EPS" I cant think of a better example than issuing bonds to finance buybacks.



whether a Republican victory would be a net positive or negative for a range of different financial assets

What does "a Republican victory" even mean anymore? As I see it Trump's vision indicates some kind of post-globalization worldview, which if implemented would at least in the short run be hugely negative for US corporate profits - the labor arbitrage goes away, we'd likely see increased tariffs and general (continued) declines in global trade. In the long run maybe there is merit to having more local supply chains, but I doubt we would see the 20-30-50 years of consistent policy required to truly enact this type of change, so the (economic) result of 8 years of Trump seems to me as creating a lot of planning confusion. Should a company like NKE immediately pivot back to US manufacturing? Should they wait to see if this is lasting policy change?

But Trump is most assuredly not speaking for "the Republican party", which is anymore really an odd coalition of special interest groups.


I don't think Trump is going to win, and there is a fairly big uncertainty discount that will go away after the election.

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checkmate
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November 1, 2016 at 12:30 PM ×

Playing devils advocate exactly why do you think it would take '20-30-50 years' to enact a change of stance to global trade etc ? Brexit apparently will do it in anything from 2 to 5 years. Why does the US have to be so different?
'Should a company like NKE immediately pivot back to US manufacturing? ' Apparently large financial companies believe they can and will leave the UK due to changing circumstances so what makes Nike any different other than they actually make things :(

I do not think every election/vote should be an automatic candidate for the recency effect of the UK referendum. I do think what the latter highlighted is where the outcome is really so narrow as to excite a multitude of opinion then what we are going to have to accept is that polls are of little help to us in determining the outcome. We can 'think' whatever we like about the outcome that may suit our particular bias ,but do we 'think' with enough conviction to really back a specific outcome or do we step aside recognising that we don't have an hedge in a tight situation? Casting an eye around the markets I think I observe a lot of the latter which makes me pause that any adverse risk outcome may already be limited by the participants preemptive action.

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Anonymous
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November 1, 2016 at 1:08 PM ×

"financial engineering and takeovers to boost EPS numbers." -

Insiders boost their compensation by doing such, and given leadership only sticks around for an average of six (6) years now, what do they care. The EPS is specifically spelled out in company Proxy's, usually around 20% of executive compensation. Get in, use financial engineering (leverage) tools to boost pay and care less about investing in company, and get out, rinse & repeat. Everyone else gets left hold a bag of rocks.

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Leftback
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November 1, 2016 at 3:06 PM ×

Ignoring the election and spooz for a few weeks has paid dividends for LB, who is short CLZ6 from a variety of entry points somewhere north of $50. Looking at the charts, we see that there is the 200dma down around $46, so we may close this trade soon. So far this has been one of, if not our very best punts of 2016. Our long UUP punt is doing less well here, but it is smaller in size and the US employment data may change the momentum for Bucky yet again. Otherwise we are almost all in cash, and watching the fixed income charts almost as closely as MM.

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Anonymous
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November 1, 2016 at 4:27 PM ×

Maybe a little naive, but as a market veteran it pains me to say any opportunity the election gives to buy a dip in equity indices has be taken. We know rates aren't going anywhere fast.
I don't even see the Fed hiking in Dec as yet?

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wcw
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November 1, 2016 at 4:45 PM ×

Anon1627, the Fedwatch tool says the Fed is hiking. I'd suggest a December move is likely, but I am not a veteran Fedlinologist. Do folks here disagree?

On the election, the market is giving us a chance to buy pesos today. FD, no position.

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abee crombie
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November 1, 2016 at 4:52 PM ×

HY is having a nice little sell off...and spoos right at 2100... yes its election noise, trump fears whatever, but price is price . shorter term MA's all rolling over but LT (200 specifically) will still move up (unless we get a very big sell off) given the roll off from pices earlier in the year so not sure how technicials set up.... however the LT MA's would roll over on 2017

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Anonymous
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November 1, 2016 at 5:03 PM ×

WCW & 16.45, As you know, Dec Fomc is after the US election and both Nov & Dec job reports....
There is enough uncertainty, maybe Yellen will tighten from such a low base regardless and we can look forward to the next movement in rates in Dec 17 at the annual rate hike party?



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Anonymous
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November 1, 2016 at 6:13 PM ×

http://www.anonews.co/fbi-clinton/

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checkmate
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November 1, 2016 at 6:25 PM ×

I'm long that the post count is going to go higher in the days ahead.

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Nico G
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November 1, 2016 at 6:59 PM ×

i started writing on the Clintons 10 years ago pretty much when their friend Epstein got caught banging under 18 when i heard how much money those two were making. This last year i wrote intensively on Facebook. It was totally depressing to see how many 'bien pensant' peeps ignored the message and chose to pound on Trump instead, the easy guy to frown on.

Even when Clinton Cash documentary came out, the same peeps chose to look the other way. Maximum denial. If all the filfh finally is confirmed and known by everyone the coming weeks, and the Clintons shamed for what they have done it would be a mental victory much more important than shorting the spoos until 1700.

I metaphorically associated the resilience of spoos above 2100 with the denial and hypocrisy of everyone regarding the Clintons especially after wikileaks busted Podesta. It is Comey leniency that inspired me to short the Spoos long term. To suspect that FBI had a conflict of interest... it only meant bigger trouble would hit further down the road.

We're in the middle of it now, i do not know why some folks here think the 'uncertainty' will clear up on Election day. The chaos is only starting. America needs a good clean up i love this country but damm it is so way out of line. Washington is broken and the tragedy of 2016 was that a guy like Trump for would force people to elect Clinton even if she drowned puppies for breakfast. Until now.

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Leftback
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November 1, 2016 at 7:19 PM ×

Sometimes when the left/centre party becomes utterly corrupt and intellectually bankrupt (UK, 1970s; US, 1980s) the electorate comes along and does something unspeakable delivering the country to a harsh and unpleasant regime (Margaret Thatcher; Ronald Reagan). The resulting carnage allows for the left/centre party to be rebuilt and intellectually cleansed under an inspiring but unelectable leader (Neil Kinnock; George McGovern and assorted Democrats), before another enormously appealing snake oil salesman (Tony Blair; Bill Clinton) comes along and is elected and then there is a year or two of hope and new ideas and refreshing transparency. Very soon the lobbyists buy everyone off and then the whole nauseating cycle begins again. A similar thing happens when the right wing party becomes ossified under a hopelessly inept or corrupt leader (UK John Major; US Nixon, George W Bush) and then is massacred at the polls allowing the rise of slightly unbalanced candidates (The Donald, Barry Goldwater, John McCain).

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Polemic
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November 1, 2016 at 7:29 PM ×

I've had bets on Trump to win for a while, not because I though he would but because I though it would become apparent that it was going to be closer than the 20% chance I paid., looking to turn it as results came in.

However today I think he actually will win and am scrabbling around to find something that hasn't already moved. Considering the moves in bonds and the back ground feeling that global rates are going to go up it may be with buying them again. But which ones?

I may even buy Gilts because no one in their right mind wants to own gilts at the moment.

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Polemic
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November 1, 2016 at 7:30 PM ×

LB .. re the politics. the system is broken if we get to the point where the only output from the machine is Clinton or Trump

http://polemics-pains.blogspot.co.uk/2016/10/is-it-machine-or-input.html

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Anonymous
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November 1, 2016 at 10:08 PM ×

At the risk of people not wanting to hear the truth...

http://www.mostdamagingwikileaks.com/

And did someone mention Russia? "Julian Assange has also said, "Hillary Clinton is the only presidential candidate with corruption ties to Russia”."

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Anonymous
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November 2, 2016 at 12:00 AM ×

Lol at the truth tm

You think corruption is new to those who watch the financial markets for a living ?

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Anonymous
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November 2, 2016 at 1:01 AM ×

No, but I find it very ironic that basically 99% of the stuff that has been blamed on one candidate through the mass media collusion has not only turned out to be untrue but in fact regular activities of the opposing candidate in whose support those accusations were made. That's unprecedented and much bigger than common corruption.

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Flowthrough
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November 2, 2016 at 1:04 AM ×

LB, your post is a bit too political for my tastes. I am old enough to remember the 70s and 80s. Unless you think the government of USSR (or maybe Cambodia, which was nice and left wing) did a dandy job for its people or the governments of North Korea and Venezuela do a dandy job, you may want to stick to markets.
Biggest election risk is pubs losing house. Latest Clinton problems move odds of that from slim to zero. Pub house is as much of problem for Trump as Clinton.
Odds of Trump victory have gone up, but those on blue team tend to be loyal. Key is turnout. Heavy early voting favors Trump, as really his hopes are that blue collar whites who generally do not vote turn up. Maybe.
Also, fact all know election is getting close helps Clinton. She will make sure "walking around money" is fully funded.
Maybe I see Trump going from 1 in 5 to 1 in 3, at most. But odds still favor Clinton.
Also, we still have a week. Odds are Trump does something really dumb that helps Clinton (when has a week gone by when he has not).

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abee crombie
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November 2, 2016 at 1:11 AM ×

Pol, buy health care, though you probsbly want to be market neutral doing it.

Goog and aapl down after decent earnings. If fb doesnt catch a bid it would just be another growth stock that cant catch a bid.

Nico, i dont think it will get better after the election, but if youve been short and we go down another 5% or so in the next few days, you have to think of covering. Or at least that's been the play the last several years. Id rather wait and see than give back money ;)

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Leftback
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November 2, 2016 at 1:30 AM ×

Not generally interested in discussing politics here, but there are bad examples of all kinds of government in recent history. My point was more about the moral spiritual and intellectual decay of any party that spends long in power, no matter what the country or the leaning of that party. I do have preferences and although they are not especially relevant here, they include real (not crony) capitalism, fiscal conservatism, freedom of thought and expression, constructive international relations and liberal social policy. I suspect many here would sign up for that menu.

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