Buy The F/I Dip

This is a short update on the status of our bond trade. After finding a bottom as selling pressure abated, the PIMCO ETF “BOND” eventually broke above the 20- and 50-day moving averages in the first few trading sessions of 2017 (1/2 – 1/5), but has since pulled back, suffering a sharp reversal. After a few days when Mr Bond was clinging on to the 20-day moving average BOND closed on or very close to the 20 DMA on 1/19, dipped briefly below on 1/20, but has bounced back strongly on Monday.



Price action in other fixed income instruments such as TLT, MUB, IQI and AGG has been broadly similar, with the trading picture most favorable for MUB.



Here at Falling Knife Capital, we still think that Mr. Bond will have a soft landing this time.  In fact, now that the Inaugural is behind us, with all of its “Sound and Fury signifying nothing”, Mr. Market will likely undertake a more cerebral evaluation of the likelihood of 4, 5 and 6% US GDP in 2017. A renewed safe haven bid for Mr Bond and other fixed income assets seems certain before long, as Real Money and commercials have increased their net longs. The speculative community remains extremely short bonds, providing a mechanism to accelerate any recovery in fixed income once it gathers speed, eventually forcing a surprising number of concealed shorts to return to a more neutral positioning in Treasuries.
In many ways, the recent and imminent price action for Mr Bond may now follow the script of this action sequence: [wherein Bond hangs on for dear life, while economic optimists receive a sudden outpouring of chilling data. Bond then has a soft landing and adopts a firmer tone from a horizontal posture, before he finds that he has unexpectedly strong support, as a surprising number of concealed allies appear, resulting in a vertical take-off and a happy ending for Mr. Bond.


(in which Mr Bond clings on, has a soft landing, finds unexpected support and finally takes off….)


This post was written by Leftback

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Nico G
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January 25, 2017 at 9:59 AM ×

https://www.bloomberg.com/news/articles/2017-01-24/ecb-s-lautenschlaeger-would-like-talks-soon-on-gradual-qe-exit

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happyfeet
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January 25, 2017 at 12:25 PM ×

the comments last post make it feel like the market is up 500 bps for the week!after checking i realise up about 50 bps for the week(spx).
i don get why anonymous bulls keep having go at shorts..i am short ,underwater, but see no reason to panic nor would i gloat so some of you out there grow up


one interesting trade idea here is feb vix- under 13 vol with a lot of time to expiry. i am sure its pretty limited downside here -yes contago is high but keep in mind one 100 bps move in spx and spot vix fixes itself.
for those keeping score its been 60 + days since we had a 1% move in spoos so...im sure buying it here will allow a higher sale before expiry

i think key here me is to trade around my short but- so core short in place but jobbing around to pay for some of the premium.

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Anonymous
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January 25, 2017 at 12:35 PM ×

Worth a read:

https://notayesmanseconomics.wordpress.com/2017/01/25/rising-bond-yields-are-feeding-into-the-real-economy/

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Anonymous
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January 25, 2017 at 12:38 PM ×

happyfeet, I think the anon's are making the point that US equity markets likely will be up 500bps soon, and the sizable bearish club here is most definitely wrong.

Also I do agree with the point that selling a market because you think it's "too high" is rather silly, kind of in-line with: I'm betting red on roulette because we had 4 blacks and it's about time red came up...

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Anonymous
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January 25, 2017 at 12:52 PM ×

Dow Set To Open On Verge Of 20,000 As Trump Trade Sends Global Stocks To 19 Month Highs

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happyfeet
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January 25, 2017 at 12:56 PM ×

anon 12:38
ah sorry i misunderstood what they meant...
find it very presumptuous on your part as to reasons people are short/want to sell.
its a bit more nuanced than red/black roulette...
over the last 18 years of fairly successful trading i have had way too many losers so if i am wrong here its not the end of the world. its just a trade- and i have more scars than you probably have trades
but one trade i have always taken is to fade sentiment- ( and yes i was a buyer last feb so no I'm not a perma anything)


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checkmate
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January 25, 2017 at 12:56 PM ×

I have not seen a regular poster here stating he is short because the market is too high. However, please feel free to construct your own reality. I know many people do which is why I so rarely pay attention.
Sorry guys, but I think the Anons are going to reduce this blog to the typical crap found elsewhere. Hence, I will say farewell and thanks to those literates amongst you,but I am away back to my cave of solitude where meaningless garbage cannot offend my senses.

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IPA
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January 25, 2017 at 1:57 PM ×

checkmate,

If we all leave they won. Just ignore them. If anything, use them for sentiment fading. They exist everywhere (in all facets of life) and we have to learn how to live with them. They are a byproduct of instant gratification modern world, where the attention span is seconds, therefore they'll be gone and we could have a discussion again. Let's just tell them we all blew our accounts and are here to simply talk about the meaning of life. They would disappear into the ether as all that interests them is a five second fame.

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johno
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January 25, 2017 at 3:09 PM ×

In equities, I am sidelined. I sympathize with the anons, frankly. Unless a recession is 13 months or less away, the market historically just does not enter a bear market. We are in a JBTFD regime until then. Furthermore, at this point in the cycle with tightening just underway, equities are a better bet than bonds.

Not that bonds could be a good long trade here. However, you may want to bring up two graphs for consideration: the 30Y JGB yield and the 10Y US breakeven. Both are trending higher. The freest point on the curve of the sovereign market of the world's savers, the Japanese, is going steadily up. Up. No one buying a dip there. And the breakeven in the US isn't flinching. Up. Trump is a protectionist and that means one thing for prices. The economy is at full employment and that means one thing for prices. Real rates meanwhile are low seen historically.

Anyone have a view on the ruble here? Oil is a crowded long and the central bank is about to announce a program to buy FX with oil revenues above the budgeted Urals=$40. Why NOT short some Rubles here??

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EM/PM
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January 25, 2017 at 3:26 PM ×

Would agree that RUB risk reward is getting assymetrical here and shorting does look attractive. However the CBR program to buy will probably not exceed $1bn USD per month, hence $50mn a day is not that large to move the needle, more symbolic. I think the real trigger though would be if they do start cutting aggressively to remove the large carry trade. Or oil correction would do the trick.

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Anonymous
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January 25, 2017 at 3:45 PM ×

@Checkmate, HappyFeet (and pretty much everyone else)

These anon's are filling a deep seated emotional need to be right, to gloat, and feed whatever hole they have that was likely rent open in childhood. They are nasty, because that is how someone taught them to communicate. Sadly the world is full of many of these sorts.

Just scroll past (so very simple) - this blog is what it is because of who stays, not who leaves.

Anon's: give yourself a break - look in the mirror and ask why you do what you do... and if (everyone) is feeding your trades, then be quiet and have at it... Would that not be smart of you?

Everyone else:

IPA: "If anything, use them for sentiment fading."

Checkmate: "....please feel free to construct your own reality. I know many people do which is why I so rarely pay attention."

Excellent and succinct summation.....!

So many others here have covered this before: They are likely very young, clearly don't have much to offer in depth, they have their one opinion and will keep pushing it until one day they simply won't be back. It is clear that it is all they know how to do.

So the rest of you regulars: Don't be going anywhere - you are needed here.

Just scroll past -



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M
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January 25, 2017 at 3:55 PM ×

Wow, I'm kinda surprised how touchy some of the posters are here. Many of the anon comments are childish but so are a lot of the reactions.

abee & johno (& buystocks & these jbtfd anons) are correct though. Equities are a one-way street. We're now making gains of circa 1% per day. Good luck trying to short that.

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Macro Man
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January 25, 2017 at 4:04 PM ×

Sean Spicer, is that you? The SPX hasn't had a 1% up day since December 7.

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Anonymous
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January 25, 2017 at 4:09 PM ×

@M,

I am the touchy anon from above (if you meant me).

hmmm. not really touchy, so much as bored by the nastiness of it all. Don't even disagree on all anon's points necessarily, just think the world requires a more nuanced view. And more civility, not less, is order currently at this stage in our (supposed) human evolutionary juncture. Jmo. rant off.

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washedup
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January 25, 2017 at 4:10 PM ×

Its not Sean spicer - he would have said, 'we're now making gains of circa 1% per day, PERIOD!'

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Anonymous
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January 25, 2017 at 4:20 PM ×

Macro Man said... Sean Spicer, is that you? The SPX hasn't had a 1% up day since December 7.

I think 'M' said "circa 1%". To be honest 0.7%+ per day gains qualify as "circa 1%" to me. With inane comments like the above, I can see why the anons have targeted this blog.

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M
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January 25, 2017 at 4:25 PM ×

Macro Man, Russell 2000 made gains in excess of +1% yesterday and today. Other US equity indexes have made daily gains of +0.7% to +2% since the breakout. I did not mention SPX specifically.

Maybe stick to writing, and leave the trading to us?

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Anonymous
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January 25, 2017 at 4:30 PM ×

Canadian Banker - Good points, well made. I think a paradigm shift has taken place in financial markets post-GFC, and many here have missed this, with the consequent results of missing the biggest bull market of our lives. Not surprising then, that emotions have run riot :)

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Leftback
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January 25, 2017 at 4:39 PM ×

Johno,

We know that our viewpoint on USTs is not going to be popular, but we are not alone. Outside the hedge fund universe, slower money is already adopting a much more constructive posture towards US fixed income assets. The 10-year yield peaked a month ago, and often leads the Citi economic surprise index lower, btw (see Figure 3 below).

http://www.yardeni.com/pub/citigroup.pdf

You are correct from a 5-minute macro perspective (yields are higher today), but perhaps not over the medium and longer term. Trump will in my opinion end up ushering in deflation rather than reflation if he begins a full-scale trade war.

Any inflation triggered by Trump's policy initiatives has already been priced in and the much-touted $1T infrastructure deal remains (for now) a pipe dream that is unlikely to survive the Republican House intact. The oil price y/y increases are going to fade out of the inflation data once we pass the anniversary of the February 2016 low. New tariffs on Chinese goods would have a chilling effect on lower-end US consumers who shop at Wal-Mart etc... and would produce an almost immediate slowdown in GDP, if not a full recession. The cure for high prices is high prices (and lower sales figures), as they say.

With respect, the present "full employment" isn't full, and this isn't your grandfather's labor market. Lots and lots of the new jobs "created" under Obama are part-time, and many are occupied by people who are >65. A large segment of the 25-45 age group exists outside the labor market and is thus invisible to the BLS. Let's get past the Treasury auctions this week, and take a peek at Q4 GDP on Friday, before we draw too many conclusions about where rates are going. This economy remains hamstrung by demographic changes and deflationary forces that will continue to retard its growth to below 3%. Yellen is fully capable of dampening expectations of Fed rate hikes (simply review the Fed playbook of 2014, 2105 etc...).

We maintain our view that the major selling event in USTs is over, and that sentiment and positioning are now so extreme that covering by shorts will eventually force a reversal lower in yields, one which the USD is apparently already anticipating. The sentiment and rhetoric we are hearing now are very similar to those of Spring 2010, when the US was having a little growth spurt and 10y touched 4% briefly - before reversing 150 bps lower during the year (ONE HUNDRED AND FIFTY!!).

http://www.reuters.com/article/china-yuan-midday-idUSL4N1FF1MP?feedType=RSS&feedName=financialsSector

China tightened overnight. If Trump continues down the road to protectionism, he will squash the recovery in global trade and unleash a recession of gargantuan proportions on China that will undoubtedly have financial (and perhaps geopolitical) ripple effects globally. Just as a string of policy errors in the 1930s led the US economic machine to drag down the global economy, so a hard landing or crash in China in the present era will impact the "recovery" in the developed economies. A 1937-style slump is possible, but there are even worse scenarios that might play out if the policy errors become global.

Higher rates will arrive eventually, but it is not going to happen overnight, and the move will not be a one-way street. Expect a few more deflationary waves to break across the bow of the US economic ship... after GDP and the January jobs data, rates will fall between now and the end of next week.



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Macro Man
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January 25, 2017 at 4:40 PM ×

Well, if we're going to be like that, maybe you and the another anons can stick to "trading" your 10 lots of SPY or IWM and leave the discussion to the adults who can think in more than one dimension? I really don't want to waste my time deleting trolls but am prepared to do so if required.

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Leftback
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January 25, 2017 at 4:45 PM ×

Bloomberg on the consequences of a US-China trade war:

https://www.bloomberg.com/news/articles/2017-01-22/list-of-u-s-china-tension-casualties-could-span-nike-to-lenovo

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Leftback
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January 25, 2017 at 4:47 PM ×

MM, just want to add that it's interesting that the post today is about Bonds, but all the commentary is about Spoos. It's not clear that the anons have a point of view about bonds, or even know what they are and why they might matter....

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M
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January 25, 2017 at 4:49 PM ×

Macro Man, don't dish it out if you can't take it.

PS Re: trading, do you mean 10 lots of ES or TF? (These Futures/ETFs all a bit confusing eh? ;)

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Anonymous
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January 25, 2017 at 4:54 PM ×

Leftback, no we're good: bonds are things that Central banks buy. They call them 'asset purchases' and use them to push rates to the lower bound, which means that we can all borrow stupid amounts of money and buy stocks. So you're right, they matter because they (indirectly) make stocks go up. Do I get a star?

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Macro Man
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January 25, 2017 at 4:59 PM ×

Actually M, it's the JBTFDers who seem fixated on others' P/Ls that are dishing it out and polluting this space with their drivel. I don't have time for it, and neither do many other stalwarts of the comments section. Saying something like "equities are a one way street" is at best foolishly naïve and at worst misleading, given that for the past six weeks the direction of that street has been sideways.

And finally M, I don't have to take it. The place still has my virtual name on the door. Perhaps you'd feel more comfortable elsewhere.

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washedup
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January 25, 2017 at 5:03 PM ×

@left all good points, but I will respectfully take the other side - for full disclosure I am not short bonds in any meaningful size because the positioning is too extreme, but I have a hunch that will resolve in time (say a few weeks) with price not rallying much. We are close to the point where PBoC will have to get a lot more aggressive in offloading treasuries given the new US administration's stance - did you know they were 75% of the flow post election when the big move came, based on TIC data? $66.8 Bn to be precise in Nov alone, not counting Belgium. I urge you to look at flow and let go of inflation fundamentals for a bit, this just happens to be one of those times when price leads - I think you are about to be proven absolutely correct on your prognosis of an IP slowdown, and wrong on the idea of yields going down much from here - in some ways thats a double whammy on financial tightening (if the dollar rallies anyway into that that's be a 1-2-3 punch).
I like short CAD/MXN here - the rhetoric may be reaching a fever pitch and carry is +ve.

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Anonymous
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January 25, 2017 at 5:08 PM ×

http://thereformedbroker.com/2017/01/25/the-entire-world-breaks-out/

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Mr. T
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January 25, 2017 at 5:35 PM ×

As everyone needs to talk about the spooz - my view is US stocks (most sectors) just are not a great risk/reward right now. Do I wish I was balls-deep NQ's from election? Sure. But -

a) getting long into what looks more and more like a blow off top at the tail end of an 8 year rally makes me nervous. Thats not the same thing as "selling a market because its too high", at least not to me.

b) the fundamental case seems weak, unclear, and based mostly on politicians wishes.

- Lower tax rates are bullish, but the effective tax rates for many US corps are already well below the rates being thrown around. Moreover, a move to change the taxes paid from "net income" to "domestic cash flow" changes that dynamic significantly. Current consensus for SPX EPS is ~$131, but EBITDA is ~$256. Slap a 20% no-loophole rate on EBITDA and shit's not looking nearly as rosy. Moreover, much of the street has a 'wink and nod' approach to net income, looking much more closely at cashflow. 94x earnings for AMZN looks crazy, but 26x cashflow seems a lot more reasonable. Don't get me wrong, I think plan floated to tax cashflow makes sense, its just not a tailwind for many companies.

- Cutting regulations makes sense sometimes, but thoughtlessly slashing them does not help. Also, consider that these same regulations create moats around a lot of businesses, particularly in the big stock indexes.

- Cutting government spending, if it happens, is negative to GDP and corp revs.

- The US economy is growing around 2%. Wall Street pretty much demands corp profits grow in the 7-10% range. How is this possible? Cutting expenses, leveraging the balance sheet, etc. If the mandate from executive is "buy american", its going to be a lot harder to meet wall street expectations.


None of this is ground breaking, its mostly rehashed bearish arguments that have so far meant nothing. But it presents a case where you can look to other markets, with upside, that have weaker cases against it. For example - Hang Seng @ 11x earnings, 9x cashflow, 20% off its highs looks interesting. I'm also long India's nifty, which despite horrendous newsflow is still charging hard. I think Europe has some interesting pockets, including some financials set to benefit from changes. You don't have to go to far away from the US to find interesting, uncorrelated values. Anyone notice that junk bonds (and their ilk) are continuing to kick ass, particularly in inflation-sensitive sectors? I'm treading lightly long this area - a bit nervous about where I think we are in the greater credit cycle, but still see value. The list goes on. So would I like to have SPX/NDX returns? Absolutely. Do I think buying here presents good risk/reward? No.


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Anonymous
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January 25, 2017 at 5:39 PM ×

Mr T, good post. My only caveat is that many here, including Macro Man, were saying that US equity markets were over-stretched to the upside and offered poor value several years ago. The Dow is up 5 to 6 thousand points since then... just sayin'.

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Macro Man
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January 25, 2017 at 5:47 PM ×

Well, I did try to short US equities...but guess what, I stopped out of that soon after. Over the last 3 years the total return of the SPX with dividends re-invested is about 9.5%. Dunno about you, but I haven't found that particularly hard to beat in the PA.

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Anonymous
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January 25, 2017 at 6:17 PM ×

MM, interesting that you chose the period with the most sideways movement in SPX since 2009 :)

If we make it about 4 years (2013 to now), we have SPX going from 1466(2013) to 2297(now). That gives a +56.7% return not including dividends re-invested. If we assume +1.98%pa for dividends, we have: +64.6% total return (or +16% pa).

If you're beating that, let's talk ;)

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Leftback
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January 25, 2017 at 6:38 PM ×

Yes, we who remember bear markets and corrections should all retire from money management, and leave the field to the 12y-o who can use their hand-held devices and apps to "beat the market" using "passive investing" in ETFs…

The problem is that the recent relative success of such "passive investing" is just another example of the equity bull market phenomenon known as "a rising tide lifts all boats". What we face today is we have yet another generation of investors who have never experienced a bear market and have no plan on how to deal with one. As another famous risk manager once put it: "Everyone has a plan, until they get punched in the mouth". Lance Roberts reviews some of the problems that can arise:

https://realinvestmentadvice.com/the-myth-of-the-passive-indexing-revolution/

To summarize prevailing sentiment, "spooz rool, bears drool". We know that this remains true as long as vol is low and the equity market drifts sideways or higher on pathetically low volume, but the history of markets is that this state of affairs is not eternal. "95% boredom and 5% sheer terror" is another way of describing a career in money management.

Good luck to all punters out there, just be sure you know where your exit is. It might be best to prepare one ahead of time.

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johno
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January 25, 2017 at 6:53 PM ×

LB, I appreciate your excellent analysis and don't necessarily disagree with the main points. I'm not sure it's totally consensus that rates are heading higher, however. Looking at JPM's client survey, for example, it looks like asset managers have been reducing their duration underweights. The COT also shows the same, with speculators taking the other side of the trade. You also have Gundlach, whose pronouncements everyone is at least aware of and affects the consensus narrative, talking about a "tradable rally" from these levels.

To me, break-evens and the Japanese long-end are telling me one thing, but the secular stagnation thesis and crowded fast-money shorts argue for another. That leaves me undecided for the time being.

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IPA
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January 25, 2017 at 6:55 PM ×

Leftback, as I said before, I think we will see a print or two above the Dec high on TNX, before it goes back down to fill the gaps you mentioned in your previous posts. I realize that you mentioned other various debt vehicles that may have more complex structure/components, but just wanted to voice my "intern" opinion. My pea-sized brain tends to agree with @washedup, never mind the mtg refi being frozen, wait until the mtg purchase market is in panic - half of the congress will be calling the white house as constituents start to squeal for help. Those who think equities will reap the benefit as a part of rotation, may be in for a surprise. As a result, a bit of a paradox, something that happens rarely, but seen in '08 here when things were in a total point of disarray - equities and treasuries may decline in tandem until tranquility or at least a compromise is reached. Should not be prolonged, but nevertheless. But what do I know, I am short spooz from 667 and on my fifth trading account.

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Unknown
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January 25, 2017 at 7:09 PM ×

Lb - don't agree with a genuine trade war being deflationary. If the us were to repatriate manufacturing of basic goods prices are going way up. If import prices go up prices go up. It's stagflation, I don't think it's that likely but it's terrible for bonds and stocks.

Mr T - the corporate governance of the hang seng is probably the poorest in the world. It's a punting market only, not the home of genuine investments

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Nico G
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January 25, 2017 at 7:09 PM ×

http://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx&mod=MW_story_quote

is all am watching at the moment - a new high above 2.60 would confirm a brand new bear market on bonds - which dwarfs oil, EURUSD or any Dow 20,000 in terms of things to come

if yield turns back down after a lower high (<2.60) then LB's thesis may work but as much as its hard to know when equities top their blow off, my personal strong conviction is that yields will keep moving up which will impact every other risky asset

if bond bear market is confirmed then yes, you can prepare for a recession some 9/12 months away. Bull markets on equity end on good news and 100% optimism. This is all quite exciting

watch the 2.60 !!

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Anonymous
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January 25, 2017 at 8:01 PM ×

Nico,

Gross thinks 2.60. Gundlach thinks 3.00 is where bear territory begins. We'll see. Personally I think Trump's policies will lead to a lower USD, easing some pressure on rates. Furthermore, by the time the Fed ever raise rates meaningfully we'll be due for a business cycle downturn and the mini-recession will cause them to take rates back down. Also if equities ever fall, they'll panic and drop rates. And if everything is golden, they'll not let rates rise because we have $20Tn of debt, and 6-8% of that on repayments is quite a lot. So rates are boring. I'm off to buy some stocks.

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Canadian Banker
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January 25, 2017 at 8:18 PM ×

I'm surprised that Treasuries haven't fallen more, given the rapid change in China's holdings. In the current environment where an historically larger proportion of the stock of bonds is held by central banks, it isn't crazy to think that is the force driving rates, to a much greater extent than ever before.

Bonds are falling because China is selling, at a rate that is much faster than they accumulated them by the way. This has never happened before, so there is no reason to expect historical relationships between rates and economic growth (in the US) or risk appetite to be the central governing factor on rates, as it may have been in the past. If I am right, then smacking China trade-wise, driving more capital expatriation, and a lower trade surplus is going to drive rates even higher in the short term, regardless of what happens with the US economy.

I wish that I could show some numbers to back the hypothesis, but I don't have the resources to put together the evidence.

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Nico G
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January 25, 2017 at 8:20 PM ×

anon 8:01 do what you do best

as it's been reminded on this page China dumping its UST alone pretty much trumps any other consideration in the kingdom of rates, there are much bigger forces at play worldwide + you now have Fed on a normalising mission. They keep on confirming that but go figure it used to be a worldwide spot to decipher every subtle change of wording at every Minutes and now that they are screaming 'we're hiking' the whole financial sphere looks the other way

If i am China and i read the Fed, if i am China and i hear the Donald, if i am China and i sit on an Everest pile of UST i'm going to sell strength in UST every day this year especially if you believe the dollar index has peaked

going back to basics, what's the impact of 100bps raise in EPS calculation for the entire S&P500? from what was discounted using 1.50% last summer, to using 2.50% today it gotta scratch multiple expansion somewhat


IPA "short spooz from 667 and on my fifth trading account" was super funny!

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Mr. T
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January 25, 2017 at 8:32 PM ×

@anon-801 - Lets play a hypothetical game where rates are not controlled by diktat. Does that make the market any more interesting? If you look at who the big buyers of treasury debt have historically been, and what the trends of their purchases look like, its a very dynamic market - one where that 20T of debt that you are saying makes it boring does quite the opposite.

Does this set of foreign holders of US debt look like a net positive?

I'm going to date myself, but I remember a time when investors actually feared the fed. I remember when the primary policy goal was not boosting economic activity through the wealth effect. I think there is a decent chance we'll see Gundlach's 6% rates pretty darn soon - how does 1.2T/year in interest sound? What multiplier is needed on debt-financed stimulus in order to make that even work at higher rates?

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washedup
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January 25, 2017 at 8:35 PM ×

@anon 8:01 - which of trump's policies favor a weaker dollar? the import tariff? the bring jobs back to america? the repatriation? Sorry but I must be missing some items on my checklist because, far from a weakening effect, I don't see anything that doesn't send it to the moon.

Perhaps you are referring to jawboning? Let me inform you that Donald trump has about as much control over the dollar as king canute did at the beach - bitching incoherently on occasion about how he would 'prefer' a weak dollar doesn't count unless he is willing to go plaza accord at some point, and right now neither he nor his treasury secretary have the chops to pull together that international coalition of, um, establishment folks - especially not in the dog eat dog world that we are now supposed to live in.

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Nico G
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January 25, 2017 at 8:36 PM ×

In conclusion, i trust most of the board may agree that we are in the final euphoric Trump blow off phase of a 8 year old rally absolutely oblivious to the peril at hand. It is the good old disconnect you need to bring every last buyer on board to chase a parabole. The best technician i know has a perfect 21500 target on the Dow from his initial projection of Spring 2009 (!!!). Nature never ceases to amaze but 5% adverse against 10 or 20 or 30% correction is an amazing risk reward

whatever Trump does domestically, and i really support his effort, has awful implications internationally you can NOT switch from a fully globalised, interconnected world, back to a world of nations without financial earth quakes here and there. If it's truly America first then it is America alone and/or the rest of the world is fucked. I think China knows that. And Europe is shitting their pants (cf. NATO)

all this is before we even mention the death of the EUR project this year. Watch Dutch elections in March and French in May. I wish i could be optimistic i take no joy in being so cautious.

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Nico G
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January 25, 2017 at 8:42 PM ×

washed

enthralled by your spectacular hot dog rap allow me to offer Fela's best interpretation of the current world you depict

https://www.youtube.com/watch?v=eJ7XpBimxgE

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Mr. T
admin
January 25, 2017 at 8:46 PM ×

...did I just see Acompora on CNBC fist pumping dow-20k? Is it really Anon-pora?

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Anonymous
admin
January 25, 2017 at 8:49 PM ×

lol @ Mr T

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washedup
admin
January 25, 2017 at 8:55 PM ×

@Nico exquisite - always a fela fan.

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BuyStocks
admin
January 25, 2017 at 9:14 PM ×

Guys, always good to have some context. Here's a chart that looks like it's going down, you may all like to get heavily short: http://imgur.com/a/zluoA

In other news, we just had record closes for the US equity markets. It's almost like I told you so in advance, oh wait, I did hah!

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johno
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January 25, 2017 at 9:25 PM ×

Selloff in US rates, risk-on, but the yen is rallying (!). Something is up. What??

Re discussion on flows, yes, China is a seller although they may be LESS a seller now that they're cracking down so hard on outflows. The Japanese aren't buying, judging by post-Trump MoF data. Mutual fund flows are slowing (but not turning negative) as equity inflows pick up. Pension funds, I don't know. JPM's Flows and Liquidity piece has recently argued they were unlikely to be big buyers on weakness. Then there's money managers ... they were all underweight duration for years, underperforming benchmark. Then Trump comes along and gives them an opportunity to get back closer to benchmark and take you out of much of your cumulative underperformance (if you've been suffering in a losing trade for a long, long time and the market gives you a chance to get out flat, isn't it human nature to jump on the chance and get out of your position? that's my sorry nature). If these guys are close to benchmark now, they may not want to go far away from benchmark/overweight duration so soon (that's not really human nature, is it?), which would argue against a big rally in rates from here.

That's my take on flows, but I'm not sure it amounts to much of an argument if the economic data starts turning down as LB suggests. Data surprises tend to cycle with some regularity and that would suggest worse data soon. Also, as LB points out, moves in the 10Y tend to lead the economic surprise cycle ... I saw a post on Variant Perception's blog the other day arguing for a fit between the 10Y 6 month yield change advanced 6 months and the Citi surprise index, which would suggest a big cliff ahead.

For my part, I'm sidelined in US rates.

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Nico G
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January 25, 2017 at 10:46 PM ×

"if you've been suffering in a losing trade for a long, long time and the market gives you a chance to get out flat, isn't it human nature to jump on the chance and get out of your position?" this is probably the most essential question in trading - the answer is yes but personally i fail often, wanting to be 'paid' for the pain

the worst thing is trading is this: being underwater for so long, being given a chance to exit at entry level, sticking to the position demanding that the pain be remunerated, only to see the market turn away again leaving you with a profound sense of stupidity and two balls to gnaw on

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Anonymous
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January 26, 2017 at 4:50 AM ×

"Personally I think Trump's policies will lead to a lower USD, easing some pressure on rates,"

What planet are you on? A lower dollar allows the FED to hike rates faster.

I actually think one of the key factors of the next year can't be seen yet, and that is the desire of FRB officials to hit back at Donald Trump (not that they would ever admit that). If they cut back on supporting the equity market just to cause problems for him, look out below.

I have no idea when this insanity will stop. I remember at the end of 1999, with the Nasdaq Composite just over 4000, saying that it was on its way back to 1800. It ended up going all the way down to 1108, but of course, it topped 5000 first.

While equities still could go up quite a bit from here, the VIX absolutely can not keep going down forever, and looks to be near a major low. Closes below ten are few and far between:

19931222 9.31 (record low close)
19931223 9.48
19931227 9.70
19931228 9.82
20061120 9.97
20061121 9.90
20061214 9.97
20070124 9.89

For reference, the Wednesday close was 10.81 (with the intraday low 10.51).

This is the chart this looks ominous to me. Multiples can't keep expanding forever, either.

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IPA
admin
January 26, 2017 at 6:25 AM ×

I better put some thoughts in before the children wake up at 9:30 am eastern and pollute the thread.

New home sales are bound to take a hit. Number is out at 10 am tomorrow. I think that a combination of rising mtg rates and tight vacant land supply may finally start to put a dent in. I think we saw a cycle high in July @ 622K. MTG rates are popping and are at 4.125% - 4.375% today. I loaded more XHB short on this crazy two-day pop. Before I get comments about pissing against the wind, it ain't breaking out here yet. A firm H+S is in on longer-term chart. DHI gave a kick in a butt with their good numbers and everyone forgot the higher rates for a few days. And DJT cancelled the PMI halving. At avg sales price of $360K it should be an upsetting moment for those who are looking to put a contract on a property or worse yet, already in escrow and will cancel. Should we get a consecutive month of lower new single-family housing starts as well, it will not be too long before folks exit in droves.

Also, have you guys been tracking the rent rates? They are cratering (inflation? what inflation?) as saturation of new supply is now starting to take a major toll in many hot markets. The apartment tightness index is now below 50 and is flagging a possible cycle high as well. Rents probably have peaked and began a multi-year decline. Who cares? Non-spooz traders do. This means residential REITs, especially the A multi-families are about to puke. Not that they have not started already, due to higher rates, but further down from here they should go, I think. Loaded a bit more EQR short, momentum is scratching the floor here but could be embedded in sold for a while. And to take this further. Multi-family construction will start to slow down, as financing gets harder to obtain (due to rates) and the investors harder to find as the treasuries are starting to compete for yield, especially against the A type properties which yield lower than B and C. So lets see how that affects the GDP a bit. But why should we care? We are going to build the wall :)

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Nico G
admin
January 26, 2017 at 7:10 AM ×

Trump did his own Dow 20,000 post on Facebook... we're leaving interesting times

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Anonymous
admin
January 26, 2017 at 7:32 AM ×

Any thoughts on why Dax is so strong relative to others? I mean, Trump and Merkel haven't even spoken yet. Relations are not good and you would think German exports might suffer.

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Nico G
admin
January 26, 2017 at 7:36 AM ×

Dax is just a risk on proxy for Europe

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Anonymous
admin
January 26, 2017 at 8:31 AM ×

Well, we've got some spread between Dax and BTP!

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Anonymous
admin
January 26, 2017 at 10:34 AM ×

Nikkei up 1.75% in one day. Probably more than all the bears here make in a year.

Let me know when you sell guys, so that I can buy some more.

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Al
admin
January 26, 2017 at 11:13 AM ×

I'm a bit surprised when I come to this excellent blog with excellent contributors and commenters, that somehow it degenerates into a slanging match.

One thought is can we get rid of anonymity? Why would anyone post as Anon unless they just want to say any old crap without being traced? It also makes it pretty difficult to see which Anon is which when reading thru' the comments.

Secondly, on the other side, I don't understand why people get upset at crass Anon comments. There is so much crass comment everywhere, life is really too short. I guess when it comes to money and betting, it becomes more emotional and you don't want some know nothing 12 y-o tosser rubbing your nose into it whilst you wait for your excellently placed long term (losing) positions to come good.

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Macro Man
admin
January 26, 2017 at 11:29 AM ×

I am tired of the inanity from Harry Hindsight anons. Henceforth a registered name will be required to comment.

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Rossco
admin
January 26, 2017 at 11:43 AM ×

Am I the only person who sees Trump's policies as stagflationary.....at best?

@LB, re your 2010 analogue above

I remember being the only person in my trading room in early 2011 to be losing money because I was so keen to fade what was an obvious reflationary headfake. I couldn't wait for the Fed to end Qe2 because I thought it was so obvious that the market would discount it ahead of time. It didn't.

Nonetheless I was pretty much the only person standing by August of 11. Having very similar feelings now but being more patient.

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