P/E's are re-rating

Its been a long time, we shouldn't of left you



While its been a while since I posted here, not much has really changed in financial markets this year. People still worried about China, US FAANG stocks still going up, Europe is always a mess.

While there have been moves in sectors and markets this year for sure (EM and Frontier managers have been busy) the real big change in markets, which perhaps still needs many more months of digestion is the rise in US Long rates (ie 10 and 30 years). Since breaking the psychological levels Gundlach and others have mentioned as 'lines in the sand' price action has been pretty boring. But I do tend to agree with them that rates have entered into a new regime.

Of course the first asset class to react to higher rates was the Dollar and EM. They seem to have quite a bit priced in already and add in a pinch of China slowdown concerns its easy to see why they have under performed. I dont have much to add. Perhaps they are oversold. You can add in US homebuilders and Capital Goods to that list as well.

The next to go IMO has been parts of the duration trade. Muni's, preferreds. They have moved a little but they can still move a lot more if rates go much higher.

The last to go, and we all knew it was going to take more time than markets, was the US stock market. Its been the best place to be for the past several years and its more of a growth vs value play which means rates matter even less.

If you only follow the price chart, you could be forgiven for assuming the current bull is intact. I'd have to agree as there has yet to be a flashing 'dow sell signal' yet. Though I could easily see a topping pattern set up from here.

But lets turn to a few charts of the market P/E and EPS, which combined give you the price.



You can see that for most of 2017, 17.5x PE was a nice level the market was supporting. Then in January, when analyst estimates really got revised higher for the tax reductions we dropped down to 16x. Its been hanging around 16-17 for most of the year and on the recent dip, dropped below 16. Some, like Morgan's equity strategist now see 16 as the ceiling for the market, not the floor. His reasoning is that higher interest rates impact investors risk premium. Something to think about. Russell seems to have go the message loud and clear


While companies in the US may still be beating earning and buying back shares, its possible that investors re-rate regardless. 


Now what happens is EPS estimates start to turn down, like they are in Europe. Well then that would be cause for real concern. But we're not there yet. 







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Leftback
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October 19, 2018 at 4:26 PM ×

Cracker, Abee. Welcome back.

A few additional thoughts from LB. Themes for the next few weeks:

lower vol, lower dollar, lower US growth forecasts, lower yields, lower break-evens, lower 2019 Fed hike forecast

the answer to River's question on oil (not that I am an expert): stable now and into US midterms, medium term drifting higher (lower dollar and seasonal), next spring to summer, falling on slower global demand and rising US stockpiles.

rebound in emerging market bonds, stocks, FX; rotation from US growth to value

lower "highs" in the cannabis complex (currently trading at sky high multiples) - Canopy and Cronos report mid November, Tilray late November. it's likely that they will be sold off well ahead of the releases, but if not there will surely be ritual slaughter in these names after earnings. It's always fun to wake up and see 30-50% off a single name (see Bank of the Ozarks today, WTF were THEY smoking?) and I think that's a possibility with all the marijuana stocks if they don't correct earlier.

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Anonymous
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October 20, 2018 at 2:35 PM ×

I would think that a lot are dependent on this midterm election. If Dem takes the house, then you can expect a frozen front on the fiscal policy. If GOP keeps the house, then there will be another fiscal stimulus coming in 2020.

The labor market is indeed really tight based on my limited knowledge on private businesses, and businesses are stocking inventory as much as possible to avoid tariff coming at the end of the year. The consumer spending/retail sales seemed to be just slightly better than flat. IMO all these point to a huge inventory early next year, coinciding with a seasonal retail slump next spring. With one or two rate raises into next spring, there is a strong possibility that an inventory recession occurs in the first half next year.

Maybe the recent market drop, especially IWM, really began to price in such future.

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Leftback
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October 22, 2018 at 11:59 AM ×

Anon, I think that's an exceptionally good read of what has occurred during Q3 and what is to come. Tariffs will end up being mildly deflationary via the mechanism you outline above. Retail stocks have largely priced this in, interestingly.

In respect of such a prognostication, it seems that emerging markets have already priced in most of a mild US recession. EM bonds and some equities have already picked up. Gold and silver seem recently to be smelling a weaker dollar ahead, as they sometimes do. The next pieces to play catch-up would be FX (way too many FOMC rate hikes priced in for 2019 at present), US Treasuries (growth/inflation fear/optimism is completely over-blown) and US growth stocks (laughably over-valued for years). A series of saw-tooth re-pricing events are ahead of us during Q1, even though Spoos may rally into EoY (looks like that process is getting started, although along a bumpy pathway). One or more monster squeezes await the increasingly rabid and almost psychically unhinged bond bears, as slower US data begins to emerge, perhaps after the Dec rate hike.

Having said that, there will be some gems among the rubble for US stock pickers. Rate-sensitive issues have already taken a beating and will benefit from the rotation from growth to value. Some kinds of "growth" sectors (Cannabis saliva, for example) will prove to be especially over-valued.

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Simran Shah
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October 22, 2018 at 12:55 PM ×



Really got a useful blog to read today. Its very informative, keep posting more like this.
Sebi registered advisory company

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P.P. Mazzini
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October 23, 2018 at 2:03 PM ×

LB,
Your comments on here are awesome. I have followed them since before the financial crisis. In light of current conditions at the MM blog, I wondered if you would consider starting one of your own? I will organize it for you. All you have to do is post your short commentary as it occurs to you.

Regardless, thanks for many years of insightful comments. Listening to you has been a postive NPV exercise.

Cheers.

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Leftback
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October 24, 2018 at 9:03 AM ×

Thanks for the above, @PPM, will give that some thought.

@River, Note that I have already been spectacularly wrong on oil. Never was much good at picking that one, so I stay away. A bit more accurate on the cannabis complex, though.

So, no time for a prolonged post, but does anyone remember when we had a market? You know, where people would look and say hey, F, Ford, that's a real car company that makes cars and people buy them and the company pays its workers and they have shareholders and they get a dividend, cool, huh? RIght now the shares in total are worth less than the book value of the company. Kind of makes you feel like investing, no? Now TSLA, that's Elon Musk, who is a crazy guy who does coke and then tweets, with a few warehouses in Cali and they lose money but the shares are priced to the moon. Not investable, right? Now do that with T (AT&T), or TKC, Turkcell (loads of Turkish people paying to having a natter on the phone) v. Twitter (loads of people posting garbage that most of us aren't interested in). Hmm, you can buy shares in Gazprom or Lukoil (sells something that people need every day and pays a healthy dividend, but oooooh it's in a naughty country) or you can own a shale oil wildcatter in North Dakota somewhere. Easy choice, actually, when you look at the details.

Pretty obvious which ones you'd like to own? You can go on and on like this comparing "real economy" stocks to invest in with "unicorns". It's possible we are just beginning to see that process happen now, and in truth it's not uncommon for this to happen very late in the economic cycle. But you have to ask, like in 1999, or 2007, WTF were people thinking?

Imagine if we had a market? Maybe that's what recessions and bear markets do for us. Somewhere near the bottom, like 3/6/09, all the b.s. has been stripped away, the valuations have corrected and just for a few moments, before another round of central bank intervention begins to blow the next bubble, a miracle occurs, and there it is - we have a market again.

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October 24, 2018 at 12:09 PM ×

Leftback, your back in London by sounds of it. Back trading within the big boys club. How can I tell?....no...it wasn't your London Snow reference. It was your John Maynard impersonation.

Have it old boy!

The local bar reveals all....after too many.

And seriously , if I can't kick a goal on a S.E.A beach resort left alone at my own pace..what hope I have got making money for those ".........." anyway. Who cares.

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River
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October 24, 2018 at 2:22 PM ×

@LB, thanks for the reply

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CV
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October 24, 2018 at 8:36 PM ×

The gang is back in the house. Good to see. Great post. Higher oil/yield probably have dented multiples, and now with EPS growth rolling over. Yikes! Two questions now seem all encompassing.

1) Will the Fed blink? A dovish hike in December?
2) How do you feel about the long bond above 3% here LB? I have been buying both long and front-end this year, and now I feel like I should buy more.

As for equities; it is grim.+7% on AT&T seems way overdone to me, but hey ... when sellers take over. I reckon some of the turds in EM and Europe will rebound first out of this, but I can't be sure. Overall, it seems to me that a big part of this market would rip higher on even a marginal shift in the Fed's message.

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Leftback
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October 24, 2018 at 9:23 PM ×

@CV!

Yes, in fact Mr Market may do the hard work as usual and move the needle on hikes before the FOMC follow - as usual. Hike in December with downward Dot Plot sounds about right.

Loving the Long Bond, and munis, have been buying every yield surge since the spring. This week have been getting into the REITs (look at NLY and AGNC green today). Just added some T today among the carnage, prepared to see it under $30 tomorrow morning when Johnny Retail gets involved (or his stops get hit). Like F after the recent trip to the woodshed; TKC looks strong after earnings, [and as USDTRY eventually corrects]. You'd have to be bonkers not to grab some 6, 7, 12% yields here by dipping into the "value" and EM bags, and hold 'em into the New Year fund flows. The Dogs of the Dow strategy again. Other than that, all I see are overvalued momos and hedge fund hotels. The average millennial portfolio must be looking ugly.

Shorting TLRY has been the Gift that Keeps on Giving this month. Toke on, bros, keep bidding that dog up at the open every day and I will keep selling it until the RSI is in the teens and even Mr. Margin Clerk doesn't call you any more.

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Leftback
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October 24, 2018 at 9:38 PM ×

F reported decent earnings, btw. We were buying calls all week and Mr Shorty is going to wake up with a surprise in his rear end in the morning. A week of selling is going to get erased and maybe more.

Hey, come on, kids, Look and Learn, I mean you could buy some Silicon Valley unicorn or probably fraudulent biotech instead - on the promise of imaginary profits at some future date and piss all your money away - but why would you?

Back to basics this week. Utilities, REITs, munis and real profitable companies are all going to get a lot of love in Q4.

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Justabeancounter
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October 24, 2018 at 11:02 PM ×

Awise from the gwave.

Good to see some action on the blog ; thanks for putting some thoughts together Abee.

For me, regardless of the recent vol, I'm actually surprised by the resilience of the markets thus far. Until I see some commodities really puke I'm probably in the (dare I say it) JBTFD camp re: the US.

Don't get me wrong, I still think odds are on a "correction" in the medium term in the US.

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CV
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October 25, 2018 at 1:05 AM ×

Good man LB! That's what I like to hear. F is an interesting one ... everything automotive just seems to be going down the drain, but I would love to see a turnaround story in Ford! That would be a stunner of a trade. All the European core brands look absolutely horrible too. They're trading below book value!

TKC is interesting too; I wasn't aware that this play on TRY/Turkey was available.

"For me, regardless of the recent vol, I'm actually surprised by the resilience of the markets thus far. Until I see some commodities really puke I'm probably in the (dare I say it) JBTFD camp re: the US."

Fair enough ... what's really interesting to me is that bond yields haven't cracked yet. NDX was down over 4% today and you got six basis points and change on the 2y; that's really poor. Suggests more pain is possible, but as LB suggests the re the yielders, EM etc. If the Fed steps back, even slightly, we're off to the races.

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Leftback
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October 25, 2018 at 10:54 AM ×

Another bounce is forming this morning. Other than very specific stock/sector picking we feel absolutely no desire to get involved. Although we may be wrong, we believe the Top Is In, that 2018 is playing out like 2007 here, and there is an overwhelming consensus beginning to form around that conclusion. If you want great charts, take a look at Northman Trader's stuff on the negative divergences and the technical damage to many broad market charts. It's very convincing.

Given this initial assumption, we have probably moved from an environment of "JBTFD" to "JSTFR". A few stocks may have just seen cycle lows, F for example, but one never knows. Looking at RSIs it is reasonable to predict that you might also get a tradable bounce in homebuilders here, and we love the REITs. Stay away from FAANGs and banks. More pain ahead in those sectors, although there are going to be some ripping squeezes (usually the confirmation that a bear market is in force).

What we do expect to see, at some point is a lower dollar, esp. USDJPY, where we cannot understand the current yen weakness after all the US equity carnage, surely this heads lower [as Jordan Rochester of Nomura discussed on BBG TV earlier today]. Some of what we have been seeing is hard to explain, as noted above, we are not seeing many "flight to safety" dynamics in credit, so this is presumably an unwind of the leveraged "Buy FAANG, Sell JPY and Vol" trade that was prevalent in 2017-18 among 12 yo hedgies. Does it make you sad to think of so many 12yo HFMs losing a year's worth of P/L in three weeks? We are deeply moved.

Along with the lower dollar, we also expect to see the following predictable results: EM FX and equity recovery, a return of the US curve flattener and the growth-to-value rotation in the US (also mentioned this morning as a late cycle phenomenon). Larger US exporters should also see some relief at some point. The next group of sheep to be slaughtered are presumably going to be Treasury Bears. Watch out for credit spreads to widen gradually - the TIP/TLT ratio has already cracked lower.

Btw, TKC bottomed below $4 a while ago, when the TRY bashing peaked, we started fishing then and still like this as an under the radar "value" play with "growth" potential. We do a screen of RSI<30 from time to time that throws up these things, but the FX dump meant that Turkey was on the screens constantly. Argentina may be a similar opportunity but USDARS hasn't budged which means TEO, CRESY etc. have languished in the vicinity of the woodshed. These are good lower dollar plays along with other stuff like Brazilian utilities that can also offer divis and a leveraged FX play. Even Russia offers value. Anyone out there remember BRICs? It might be time for that idea to make a comeback, but we'll lose the C this time. China looks like a no-go zone for the time being. There will be great value there one day, after the mother of all credit crashes plays out.

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October 25, 2018 at 11:47 AM ×

Lefty, you know what amusing me the greatest about this market. The Paris stock exchange market. If the Challenger company public issue of shares was conducted today, I'm sure the CEO would agree with me ...just like he did many years ago....that a "...." is always a "...."!

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October 25, 2018 at 11:54 AM ×

I'm waiting for your next phone call "...."!

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Anonymous
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October 25, 2018 at 4:18 PM ×

@LB: If you see a US curve flattener coming up, wouldn't you want to get away from REITs instead, especially mREITs that benefit from a steep curve?

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Skr
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October 25, 2018 at 5:20 PM ×

Abee(nod),Gents - a simplistic view from the hammock... why get involved if you don't have too? (because some have too).
Not one for loquacious,it comes down the markets v FED/ECB.

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CV
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October 26, 2018 at 7:30 AM ×

Thanks for the perspective LB. I tend to agree. Cash and bonds look good here. The trick is not to get lured in value traps, but T sub 30 ... I mean, that's a low bar ;). The big question for is really unchanged. Can this market rotate away from growth/momentum *without* everything getting destroyed? If it can, I think we're in business on a number of big themes. If not, well ... we're in a for a ride.

One thing I note for example is that when the FANGs take a beating, many of the downtrodden names rally, presumably because of short-covering. Of course, that hasn't been the case recently. The Q3 earnings season is a classic case of "you better beat your low bar, or else ...!"

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checkmate
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October 26, 2018 at 3:14 PM ×

SPX bullish % down to 32. Can go lower and has in the past, but if so then clearly you're firmly entering oversold and short covering territory even if you do want to JSTFR thereafter.

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CV
admin
October 26, 2018 at 3:36 PM ×

I hear you Checkmate, if this price action holds today, I reckon the MSCI World will be down nearly 10% month-to-date starting next week ... that's Lehman Brothers territory! It will bounce, eventually, even if it is a dead cat

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October 28, 2018 at 10:05 AM ×

Since the wildlings have taken over this blog since Macro-man 1 and 2 and 3 have sailed off into the sunset, allow me to just get this out of the way before Macro-man 4!...takes over.

The Cox plate $6million horse race has been run and won, and won by a horse for the fourth time in a row. Yep, I watched the race , and now I have seen it all in racing. Thank you racing , its been good, but , you just don't do it for me anymore.


Special thanks to aussie battler , he has reminded me how conflicted and spiteful the racing industry underbelly is. I didn't need reminding since I think I was about 6 years old when my grandfather used to come a pick me up and take me over to his place to sleep with his greyhounds in the kennel's to shoo away the fence jumpers'. But , you old boy...your worse than fence jumper ( the lowest of the lowest on a track mind you...).

You've restored exactly the reason why I left the track ..apart from injuries. No trainer , and no jockey can ever instill good faith in books ever again. So don't waste your time , leave old amps alone to his own. And the lads over at the other blog, you can email me anytime want for a tip, or a beer , or both..not a problem.

S.E.A here I come!

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October 28, 2018 at 12:40 PM ×

Just one more thing...

Arki...do the world a favor. Just marry the thing. Stop being a gaylord and hiding behind your mates uber sharing network and put a ring on it. You've put all your mates reputations on the block and plenty plebs on your mission to put one solitary person in jail for it.

I'm dying see it swing off your arm.

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October 28, 2018 at 2:05 PM ×



arki the gaylord...here is my IPv4 Address: 192.168.0.57.

Pass it around your uber sharing network and do your best.

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October 28, 2018 at 2:07 PM ×



arki the gaylord...here is my bitcoin address BTC: 3HcEB6bi4TFPdvk31Pwz77DwAzfAZz2fMn

Pass it around your uber sharing network and do your best.

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October 28, 2018 at 2:10 PM ×



arki the gaylord...here is my home address

https://www.google.com/maps/dir/86+Hardgrave+Road,+West+End+QLD/Lower+Hardgrave+Rd,+West+End+QLD+4101/@-27.4853643,153.0042032,17z/data=!4m14!4m13!1m5!1m1!1s0x6b91509894937117:0x52646447e0dcbbf1!2m2!1d153.0071144!2d-27.4828977!1m5!1m1!1s0x6b91509a34d8800b:0x483bde96ebe739a1!2m2!1d153.005908!2d-27.48808!3e0

Pass it around your uber sharing network and do your best.

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October 28, 2018 at 2:17 PM ×



arki the gaylord...sorry to have disappointed you and the uber sharing network for running into a dead end upon those valid personal credentials. But cheer up old boy! Someone's looking after you ...that's for sure.

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Nico G
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October 29, 2018 at 9:25 PM × This comment has been removed by the author.
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IPA
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October 29, 2018 at 9:26 PM ×

@LB, not often I find myself on the other side of your trade. REITs? You better be out soon, and I really hope this is just a short-term punt for you. When I say short term I mean a week or two. This is a train wreck in making. You don't need to believe me, just look at charts. Specifically, the two you have been mentioning here, NLY and AGNC are heading for their respective lows, imho. Head and shoulders and a major downtrend to continue. I am more inclined to short the group on any rally, specifically, IYR to sell right here and then slightly above (on retest of $80, if it ever gets there) with the following scaleout targets: 73, 70, 67, 63.

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Leftback
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October 29, 2018 at 9:53 PM ×

@IPA: Interesting and thanks for the input. I was thinking that we have already seen a short term bottom in all the rate-sensitive stuff, as Mr Market starts to adjust to slower US growth rate expectations, and so we are predicting a rotation from growth to income/value that may last into the New Year. Eventually we might have another housing/MBS crash, but for the time being we don't see that happening until credit cracks for real and employment starts to go with it.

Lots of talking heads would tell you to run from REITs here, b/c "interest rates are going higher", but what if they are wrong, the Fed may signal a pause or a slower pace of hikes in 2019 and then there will be a wicked short covering event in Treasuries, which will be good for REITs, utilities and so on. We also like the idea of an EM bounce for the same reason.

The march down for REITs has certainly been a long one, and RSIs were fairly low when we started to nibble a week or so ago. Notably AGNC was bid after Q3 earnings report, unlike most of the market. Anyway, the next week or two will tell the tale. We are probably one weakish jobs or inflation number away from the monster short squeeze in bonds.

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IPA
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October 30, 2018 at 6:28 AM ×

@LB, not to start a lengthy in-depth discussion on a mundane subject, but REITs are not exactly immune to economic growth slowdown. If anything, it is not uncommon to see them cut dividends (in some cases quite heftily) during a recession. They don't operate in a vacuum and I'd be surprised to see them outperform, let alone be immune to a slowdown you are thinking is about to ensue. Look at what happened to them during the last recession - it was a carnage of gargantuan proportions. And while many of them recovered, it took them a lot longer than growth stocks for sure. I am not sure what saves the group from another leg lower especially if you consider that commercial real estate may be about to take the same cliff dive as residential did during the GFC. So whether it's higher rates or slower growth, I think REITs can't get out of their own way fast enough to reverse the enormous fund outflows that they have experienced in the last few months.

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abee crombie
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October 30, 2018 at 1:39 PM ×

@LB I like AGNC and NLY here as well. Nice hedge in case rates ever go lower. RE:IPA fears, the mREITs are mostly a spread game, credit risk is minimal (though not in 2008 with GSE fear etc). For other REITs I am with you. Rates are going higher, maybe not in the immediate future but in the next few years. 3% cap rates are just stupid. It was dumb money, lets be clear. The same money that was chasing AMZN at $1800.

on AMZN and tech in general. Look there is a huge transformation coming with AI, connected devices etc. The value of AMZN is mostly in AWS. They own the cloud and the only reason MSFT or anyone else has a footprint is bc companies are worried about over reliance on AWS so they are splitting workloads. Problem is AMZN financials are purposely misleading. You have no idea what is really going on. But to think a $1Trillion dollar company is going to have the same 5 or 10 year returns it had in the past is foolish. Law of large numbers will hit eventually (AAPL after it buys back all the stock).

Seems to me a lot of ppl moved from Bitcoin to AMZN/ BAT/ cloud stocks. Same movie. But economoy isnt falling apart. Just expectations bieng re-set. And market wants Fed or Trump Tarriffs to blink. I think it might be a while before that happens.

Also RMB is going to break 7.0. Hopefully its not the end of the world

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Anonymous
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October 30, 2018 at 2:02 PM ×

Regarding currency, why is JPY not acting like a risk averse vehicle lately? USD looks like that it is going to test previous peak in 16/17. I think LB is early on shorting USD trade.

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Cbus20122
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October 30, 2018 at 8:09 PM ×

Good to see some life in here.

@IPA, you've been calling for REIT's to get taken out for a long time. Yes, the chart may look a little bit negative, but to me, it's somewhat a mirror of REIT's in 2014. They had a failed head and shoulders back then, and rallied into the slower growth period and deflationary period of 2015-2016. Yeah, they're economically sensitive, but I think that's where you pick and choose your sectors within REIT's at least. Regardless, I've been saying since the late spring that commodities are telling us what is going to happen in terms of rates. With commodities not faring well, we shouldn't need more hikes. Most recent GDP report even confirmed this to an extent with subdued inflation measured. This is bullish bond proxies to varying degrees.

@LB, I don't think Ford or any automaker is a good place to be right now outside of a short term trade or two. Relative to Tesla? Sure, but that's not saying much. Autos have so many headwinds right now it's not even funny, and we all saw how they performed during last recession where half of them had to be bailed out, and we still needed a stimulus program (cash for clunkers) for them to survive. Even if we don't see a recession, I just don't see the upside here. Higher rates, cars are lasting longer, increasing wage costs and a tighter labor market, tariff issues, high debt levels, and potentially peaking growth here. We are definitively late cycle, and Autos have pretty much never done well during a late cycle environment. The best case scenario here is that you get a nice little dividend with a ton of risk. Their valuation isn't high right now, but that's because their revenue is not performing well and does not have any positive catalysts on the horizon any time soon.

Domestically I think we get a lower high rally that starts around election time after FANG earnings have been fully digested. We could be at lows, but if Apple fails, that'll hurt more. Overall, I'm pretty heavy short Brazil right now.We'll see how that turns out of course, but with Dollar looking higher (it's touching on a neckline of an inverse H&S with lots of positive catalysts to push it higher), I think the political froth is going to wear off and they'll realize they have just as many problems as they had before and then some. For EM's, it was the only EM to not be rising recently, and there isn't any fundamental reason aside from political items, which aren't actually as related to the bigger macro problems there as many think.

Bigger picture, I've been realizing that we've been in a huge wordwide bubble that started building around 2001, and has been trying not to completely deflate since around 2013. That being the worldwide short-dollar bubble. People like to say we had a commodity bubble, but that was just a component of things. The more you look at how the global offshore dollar system is set-up, the more you realize that the dollar had been artificially bludgeoned as lending in dollars around the globe caused the dollar sink, and propped up commodities, emerging markets (china), and other areas. This was exacerbated by low rates and QE of course. But regardless, those dollars need to be paid back still, and without the lending growing, the dollar can't head south for a consistent amount of time any more, and we're starting to see this unravel. I think the end game here is potentially quite ugly, but we'll see if we can continue on for longer.

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Skr
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October 30, 2018 at 9:35 PM ×

@Cbus20122,that's Quality.in fact - if the posters names were removed,it deserves a stand alone Macro Man post.

Of course the first Question people would be asking themselves is - how should one position in a high Dollar environment?
Do the opposite, if one thinks there will be an extended low Dollar environment.

@Commodities, Agree. Where is the love?

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Leftback
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October 30, 2018 at 11:48 PM ×

Great stuff, people. This business is about getting tow things right: timing and direction. As a frequent options punter it's the timing that's especially important to me, and yes I am known for being early, although trading has cured me of that lately.

I have definitely been early on the USD turning lower, but I still think it's coming. Tariffs, higher rates, Fed balance sheet and the payback for all the activity that was pulled forward by the tax cuts - these are all going to conspire to slow down the US economy and USD will follow. If you want a contrarian indicator, how about this one? We have been hearing a lot of this lately:

https://www.zerohedge.com/news/2018-10-30/peter-schiff-rising-interest-rates-will-collapse-stock-market

Peter is a broken record and a bit of a rear view mirror navigator. He isn't good at short-term market timing. SO… here we go, you're going to hate this. I am going to suggest the following unpopular ideas, specifically THAT:

1) The US economy slows somewhat over the winter, to a 1-2% pace. [NO RECESSION] REITs do fine.
2) The pace of Fed rate hikes for 2019 - as interpreted by the market - decelerates. Long end rates fall.
3) The housing market picks up a bit - although a dead cat bounce. Homebuilders do well for 6-9 months.
4) Conditions ease for automakers, again for 6-12 months. Ford will do fine.
5) Emerging markets finally have a recovery - EM bonds do especially well, as do rate-sensitive EM equities.
6) The dollar falls, but slowly enough that hardly anyone notices for a while.
7) Commodities are a bit firmer, but not enough for inflation fears to bite. Gold bugs are frustrated.
8) Oil is steady or rising slowly at least until late Spring or mid-summer.
9) Break-evens continue to move lower. Utilities and telecoms do fine.
10) We may have an echo of this "earnings recession" sell-off in Jan/Feb, but nothing larger than this.

In other words, I think that we are going to have 6 months of bloody Goldilocks - and the market will love it, and we will see the mother of all squeezes, and it will frustrate the crap out of natural bears like me. This is why I think you can buy XHB, F, T, NLY, AGNC here, and a few other washed out US equities and sit on 'em for at least two quarters before the environment changes radically again, because the consensus model for 2019 that is based on rapidly rising rates is WRONG. You can also shop for beaten down EM yield in whatever locations you happen to like. I like Turkey (TKC) and even Argentina (TEO) as they have already experienced the FX beat-down of the decade. Brazil is dodgy for sure, but it wouldn't surprise me if the new fascist got some love of a year and EWZ rallied hard. After all, Trump got a rally.

ONE BIG GIGANTIC CAVEAT: The above assumes that China or Italy don't precipitate a global recession by starting a banking and credit crisis that would obviously create worldwide contagion. Let's assume that this doesn't happen just yet.

OK, buybacks are back in play - sooner or later someone will try to make money by selling vol - and succeed. I will not be the first, but I would be gradually reducing shorts and lifting hedges over the next week or two. A slow painful grinding squeeze is coming, so why waste all the money you made in October by fighting it? Grab some longs you like and a few beers and sit back and enjoy the ride into EoY knowing that you are way ahead of your benchmarks, your neighbors and 12yo HFMs not to mention the "passive investors" among the millennials, who are getting their first real taste of a correction. It tastes like ass.

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CV
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October 31, 2018 at 9:35 AM ×

Excellent LB, damn excellent. Mainly because I want to believe it ... badly ;). The key parts of that story is a crack in the vice which is currently the 3-to-4 hikes next year. I agree that this probably takes the dollar lower.

One thing though, and this is very clear from speaking to clients. No one believes Trump will do the 25% + $267B. That is NOT priced -in. For the record, I think the consensus is right, but it worries me.

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Leftback
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October 31, 2018 at 12:13 PM ×

Another quiet green day looming as we continue to see month-end rebalancing. If we had to guess, we would suggest that there are probably two or three more ugly down days ahead of us before it becomes clear that this Hunt for Red October event is over and the vol sellers re-emerge as markets drift higher, perhaps all the way into the end of the year. Like many here we see December's rate hike as nailed on, but with the 2019 (and beyond) dots coming under debate going forward. If you don't believe me, you don't have to, just look at Eurodollars and break-evens, as collated here by Prof. Sanders:

https://confoundedinterest.net/2018/10/29/bond-market-losing-confidence-in-federal-reserve-sp-valuation-near-cheapest-since-2016-inflation-expectations-cooling/

With the US ADP number due tomorrow, our playbook suggests that we take advantage of any exuberance in US economic data to buy weakness in Treasuries, maybe JPY or gold if that's your thing. We would use further weakness in equities during early November (which seems likely) to add to things we like, real economy stocks, some EMs and REITs.

CV, there is substantial pushback against the 25% tariffs from the C-suites of major corporations. These policies are the brain child of Navarro, who is frankly a loon. If he is pushed out of the WH it will be a sign that corporate America is in charge. China's economy is teetering on the brink at the moment, and students of Niall Ferguson's "Chimerica" will understand that the connections between the economies are intricate and not easily unwound. That's the message Trump will be hearing.

Happy Halloween, punters.

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Leftback
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October 31, 2018 at 12:53 PM ×

Interesting technical level spotted in QQQ. The closing price of May 14, 25, June 27, Oct 11 are almost identical, range 169.50-169.75. One might propose that a rally into 169 would produce some selling pressure, shorts might enter there with 170 as a stop. Possibly getting ahead of myself here, but it's possible we could enter that zone today. The SPY chart isn't identical but the same level exists there around 272-273, which is also close overhead from here.

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Cbus20122
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October 31, 2018 at 1:19 PM ×

@LB, I agree with your idea on US weakness in the next few quarters. But I'm not buying the deficit and spending causing a big break in the dollar's rally. First off, everywhere else in the world is doing similar things or worse. If we stop hiking, we'll still see big gaps in rates between the US and other areas in the world.

Regardless, the dollar's primary issue isn't that of carry or other more traditional items. It's all about liquidity and the massive amount of US dollar denominated debt coming due in the next few years after over a decade of gorging on dollar-based debt to fund the massive EM expansion (China's bubble). I realize there are now a lot of USD bulls which is skewing the COT towards over-exuberance, but I'm not sure that's going to matter when the primary driver is China's black hole of dollar funding sucking all the USD liquidity away from markets. This will only get worse as the primary dealers in issuing eurodollar funding are likely getting more scared, and with China not seeing their dollars coming in via export trade as much due to increasing political pressure.

I want to believe emerging markets will get better, but I tend to be on the side that any rally right now in EM will just be the bull trap that catches a lot of people way off guard for what is really happening.

Perhaps the "short dollar" bubble can tread water for a little while longer, but this is going to come crashing down at some point or another and tensions and shifting sentiment toward China make me believe it's becoming much more likely that we'll see a hard landing in China and a massive liquidity crisis.

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Cbus20122
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October 31, 2018 at 1:31 PM ×

And another thing with that idea I just mentioned is that most of the technicals back it up pretty well. We have Gold, Silver, Copper, and a lot of other commodities either sitting on or just breaking a decade + head and shoulders pattern that are all highly correlated with the dollar. If these are true H&S patterns, we would see gold fall back to around 400. We have USDCNY threatening to break 7. The DXY index is coming up on breaking an inverse head and shoulders that would target 110+ on an implied move. This is all of course in alignment with what's been happening around the world over the past year. Can this stuff stop? Sure, but I wouldn't bet against this trade on a long term or even medium term basis.

And I'm a little worried about treasury's. I've become more and more of the belief that a lot of the recent weakness in treasurys is a result of foreign selling along with lack of foreign buying. This coincides with foreign slowing of easing programs, but it's also noteworth that Chinese holdings of UST have dropped. And no, I do not think China wants to sell US treasuries, nor do I think they would do so as a retaliation against the trade dispute. BUT, I do think China will sell US treasuries, Gold, and US dollar denominated assets to stabilize the Yuan, especially as it approaches 7 or breaks past that #. Therefore, I think a dollar bear has to also be of the belief that China will be able to maintain their currency from breaking past 7.

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Anonymous
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October 31, 2018 at 2:17 PM ×

I think the price action on Oct-29 responding the news of 25% on 267b did show that the market had not totally priced in the last leg of tariff.

However, I happen to believe that it had priced in that Yuan to USD will break 7. PBOC maybe be waiting for the leadership meeting to decide whether it wants to protect that level. Also, if China indeed does a hard landing, Yuan will drop at least 30% from its peak, given that USD dropped more than 20% between 2008 and 2012. We should know where it goes around next spring festival.

With lower USD liquidity in the international markets, rising Treasury issuance, and unwinding of fed's bond buying program, even if fed slows the rate raising process in 2019, the long-term trend of Treasury is still going downward.

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Leftback
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October 31, 2018 at 2:35 PM ×

The QQQ 170 level didn't last long! Today's market is like a rising knife.... don't touch it until it has stopped just below your bollocks. We are probably going to see gaps filled one by one on the way back up. Thursday's close ~171 is next on the list.

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IPA
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October 31, 2018 at 5:01 PM ×

@LB, "homebuiders do well for 6-9 months"?? Man, they could not rally for more than two consecutive weeks this whole year. Any time you have a >30% decline in the most cyclical sector of the market when economic growth actually picks up you have to back off and think about the reasons. This is not your typical supply and demand equation any more. There are serious structural faults (no pun intended) in the sector - lack of available and reasonably priced vacant land, building supply constraints and rising prices due to tariffs, demographic shifts in the market, and yes, rapidly rising new home prices (on top of rising rates) are finally stifling the demand. You tell me how you are not worried about the blow-off tops on the homebuilders' charts? That spells DEATH. You did say dead cat bounce, but this is not bottom fishing, it's like fishing in a pond full of dead fish. XHB sold to you on a two-week rally, if it can muster one.

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Leftback
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October 31, 2018 at 11:52 PM ×

LOL. I have really missed these fireside chats about investing. First of all, this week's bounce may reverse as soon as Friday if not tomorrow. FOMC is going to be launching more bonds into the void, and we are going to see more sickening dumps. With this in mind we do have a small short in QQQ overnight to go with our short of TLRY, still trading at 100 x book.

Now, looking ahead, THIS IS NOT THE GFC. The World Is Not Ending. Yes, this market will eventually end up going down in flames, but not yet. This isn't 2008, more like 2007, or perhaps 1999 is a better analogy. Tech garbage, cannabis growers, money-pit biotechs, all that shit is going to burn to the ground, but not the real economy stuff. That's why we are long a few decent beaten down value/income stocks like T, F, NLY, as well as some beaten down EM stocks like, TKC, TEO.

Btw, GE is not on our list, wake me up when it trades below $5 and they start selling assets. What a disgusting pile of excrement that stock became once Welch and Immelt had finished hollowing it out, and what a crime against its workers and those who built it up. In a just society, Jack and Jeff would be doing time breaking rocks instead of on TV or the motivational speaking circuit. Perhaps the SEC will finally send in some forensic accountants to find out where the money went? Criminals.

I think I poked the hornets nest by mentioning XHB. Now I am not in fact long XHB and nor am I proposing anyone get long. Is the top in? Abso-fucking-lutely, as it is for the broad market, agreed? Just pointing out this - that whenever sentiment is very very extreme, and it is or has been clearly extreme recently in TLT, XHB, REITs and munis, well we all know that monster rallies/squeezes get started that way. XHB is quite capable of rallying over several months to a 50%, 61.8% or even 72.4% fib retracement. We have seen them happen.

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Leftback
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October 31, 2018 at 11:52 PM ×

Look, @IPA, you are a very smart punter, and everything you say is true. But the weakness in XHB has largely been on the back of the overwhelming rising rates consensus, and NOT (as yet) weakness in the overall economy. Remember people nowadays buy payments not homes, so it's the 5% mortgage rate that has hurt XHB and the REITs in tandem. They are the poster children for rate-sensitive assets, even more than munis, preferreds and utilities.

Now let's say, just for argument's sake, that we get a weak(er) Q4, say 1.5% and a weak (seasonal) Q1, 0.5%. Unemployment might even tick up slightly. I am going to argue for now that 5y5y forwards are already predicting such an outcome. Nothing drastic, no recession, but a seasonal slowdown. This will happen b/c this economy simply cannot take present interest rates.

What do we think is likely to happen? Remember that we have half the population of the punting universe massively short Treasuries with leverage. This reminds me a bit of 2010, where EVERYONE and their uncle was short the long bond and the 10y. The US slowdown that followed was painful for almost everyone except Treasury longs and holders of a bag of rate-sensitive goodies such as REITs and munis, and precipitated looser monetary policy (QE2).

I am not going long XHB, but I would warn against shorting this group, or the REITs, as I think the conditions are in place for a very naughty squeeze that will give Mr Shorty a very sore bottom indeed. It was, after all, just this time last year that the homebuilders went on a tear, carving out a 15% three month long rally into that blow-off top you so eloquently described. One last note: the RSI for XHB bottomed out two weeks ago in the teens, for heaven's sake, and is now in the 40s. Don't believe me? Just look at the charts. This sucker will bounce. Let's reconvene in March/April and see how it turned out? I also want to look at REITs and extreme oversold EMs like Turkey and Argentina at the same time.

None of us should be surprised if a basket full of tech turds, Silicon Valley unicorns and other momo garbage turns around here and puts in a stirring rally into EoY, simply b/c it is all so oversold, people have year end targets to make, and then there are the January fund flows to front run. There are quite a few worthwhile assets that may even outperform at the same time! Once vol sellers get involved again this could be an absolute rip-snorter, so watch out.

Man, it is so weird when I am the most bullish commentator here. I assure you it's just because I am immune to the madness of crowds. Bullishness is probably temporary…

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IPA
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November 1, 2018 at 1:28 AM ×

Fair enough @LB, let's put the issue to rest and reconvene in March/April (which some on this board will call a "long time") and see how it turned out indeed. I actually have a buck or two on this trade to make this valid. I appreciate your compliment!

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November 1, 2018 at 1:36 PM ×

@theclub, I'll throw my dart in the ring with some technicals. The Nasdaq is woeful...and for repairment to the upside...it won't be constructive for a while. The Spooz 2278 level is first major resistance. Anything that sits above that will be fragile until the Nazzy catched up. cheerio ...ahh, that beach in Thailand, can you all see be spread eagled on the beach with passengers trying to wake up at 7am with my face bitten overnight by beach worms.

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Cbus20122
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November 1, 2018 at 3:10 PM ×

Anyone else playing that big gap closing somewhat soon like me? I've got a few short term options plays on that closing shut... holding my breath here...

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Leftback
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November 1, 2018 at 6:59 PM ×

@IPA: Honking rally in XHB today. Just sayin'... wonder if XHB smells US weakness and sees the lower inflation expectations?

@Cbus: QQQ looking at overhead resistance at the 200DMA just above 172, at 172.21, that's the next stop. Yes, that gap will get filled to 179 in QQQ, 287 in SPY. Gaps get filled, but maybe not yet.

@amps: AAPL is critical for Nas. AAPL trading weak today into earnings and throwing up a doji. Weakness in AAPL would drag the index lower from this critical resistance and stall the bounce, for a while at least.

I am guessing that there will be a face-ripper soon, but it may not happen this week. One more day of red screens ahead of us?

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Leftback
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November 1, 2018 at 7:10 PM ×

@Cbus, did you perhaps mean the gap below - SPY to 268 and QQQ to 166? Yeah, I like that, in fact I think that one maybe closes before the real ripper begins.

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Leftback
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November 1, 2018 at 7:19 PM ×

Bear markets and deep corrections often have nasty Friday sell-offs as punters become increasingly reluctant to take too much risk home for the weekend, and big down Fridays often bleed over to the Monday.

There are a lot of catalysts available this week. If the market dumps, the headline writers will be able to choose their culprit from: "short-term overbought", "AAPL missed on top/bottom/guidance", "overheating jobs market" or "cooling employment data".

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Cbus20122
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November 1, 2018 at 7:37 PM ×

@LB, yes, I'm referring to the gap below to 268 on SPY and 166 on QQQ.

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IPA
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November 1, 2018 at 8:18 PM ×

@LB, I thought we were going to wait until March to claim a victory. You realize how small this daily advance looks like on the monthly chart. I had to switch to a 15-min chart to see it.

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Leftback
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November 1, 2018 at 8:56 PM ×

@IPA, you sound like Real Money. Monthly charts, indeed. IPA we salute you, we was just messing with you, because you're a mate, innit. Yes, yes, the finish line is March op ex, OK?

@Cbus: AAPL guided lower, LOL, and looks like it will fill the gap from today's open. Great chart read there Cbus, and I think you're going to get that lower gap filled, excellent marksmanship, sir, and we are right there with you, my friend, punting QQQ from the short side along with some weed stocks. Looks like we will both be smiling tomorrow whatever random number is on the ball that the BLS lotto spews out.

@12yoHFM: if you're out there, a few of you chaps are going to get a lesson in market structure again tomorrow. Punters sell AAPL, and because it is such a large constituent of the indexes the ETF houses have to sell SPY and QQQ, which drags AAPL lower, which means ETFs have to sell SPY and QQQ. Rinse and repeat. It means that the consequences are greater than the event merits.

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Leftback
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November 1, 2018 at 10:45 PM ×

Hmm… AAPL down 6%, the Spoos are off 11 handles, Qs are down 80. Nothing biblical as yet, but we are slightly worried about our limited longs in case of a waterfall event, although they might end up as safe havens, if Treasuries rally, rates fall then REITs look good at last. It's all relative. Anyway, to offset the longs, we are short QQQ, and a cannabis stock that could go to $10 in a selling panic. Now why exactly am I sounding so concerned?

Tomorrow [and Monday] we suggest, have the potential to get a bit larger than most people think - for several reasons.

One, POSITIONING - far too many punters were climbing aboard the recovery train today - this on the back of a small month-end rebalancing bounce (Tuesday) and a wicked hard squeeze of most shorted stocks, mostly the trash. Far too many weak hands are offside now, and are going to wake up to a Gap 'n' Crap in the morning. Johnny Retail isn't the sharpest knife in the drawer so he isn't going to find out what's up until lunchtime Friday and then he isn't going to sell his stocks until Monday morning, which will make a large decline somewhat worse. VIX just declined sharply today, which means there aren't a vast number of shorts ready to cover, and there may be some new vol sellers exposed tomorrow morning.

Two, TECHNICALS - we were looking at the 171 level in QQQ, but the 172.21 level (200 day moving average) came into play today and was observed almost to the penny (HoD 172.24) before holding into the close. That is going to form a very very firm overhead resistance from now on, which will limit the potential for the next bounce. It wasn't the easiest trade to enter but it did observe the technicals very well in the end, for those who were alive to it. The next rally is going to be fighting $60B of monetary tightening during the month of November.

Three, GLOBAL PARTICIPANTS. AAPL has institutional holders all over the world, including the Swiss National Bank and other SWFs. These fine punters have never had to deal with a really stomach-churning plunge in the fruit. Well, this may be it. Are Sven, Horst and Mohammad going to dump their AAPL and other USD holdings, if it all goes pear-shaped? If so, then we are eventually going to see one of those things where USDJPY loses 1 or 2 handles overnight, and then this will be ugly indeed.

Fourth, MARKET STRUCTURE - when you think about the reflexivity implicit in the relationship between AAPL and SPY/QQQ, and the rather dim-witted nature of many of the passive investing and younger margin-dependent punting proletariat when it comes to market structure, it makes one wonder whether a really big feedback loop might come into play. Perhaps if the dump goes really large they will bring Taleb on to explain to the spokesmodels exactly why it is happening.

Fifth, SENTIMENT has yet to see extremes during this correction. No-one has yet seen a Canadian crying into his medicinal cannabis chest, or talked to a millennial who lost his parent's house because of a margin call. That kind of stuff only happens when liquidity dries up, and then markets will finally reach sentiment extremes, and when that happens there is always towel-chucking and lumpy trading of illiquid assets because punters have no alternative.

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Leftback
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November 1, 2018 at 10:45 PM ×

"Crashes happen from oversold conditions" as the great Ritholtz once lectured us, "not overbought conditions". We do not expect a crash this year but we accept that tomorrow has at least some potential to set up the conditions for one to occur. The wild cards in the wings are Trump, and more importantly the Fed, which could end any carnage with a dovish signal.

If this does get nasty, there are going to be some flash crashes, so we'd suggest that tight stops are going to be useless, this isn't going to be a time for catching falling knives, and we should try to avoid having to trade anything illiquid until the dust settles. Price discovery under duress can be an ugly business. Of course this may end up being a pothole and not a massive volcanic caldera. We give this just a 10% chance of evolving into a 1987-style crash, and a 20% chance of generating a 2008-sized 7-8% dumper. Keep an eye on the term structure of the VIX, as it will indicate the likelihood that November op ex makes things worse, not better.

There, that was almost a post… succinct and to the point. Now let's sit back and see what happens. One thing is for sure, loads of people are going to dismiss this as alarmist nonsense and they may well be correct. I am interested to hear what some of the chartists have to say like Northman Trader and a few others.

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Skr
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November 1, 2018 at 11:30 PM ×

@leftback,... "Man, it is so weird when I am the most bullish commentator"

You are frightening the crap out of me, you are now the most bullish and bearish commentator. Chill man, let it play out, wait till next weekend to look at the charts,with a clear head.

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IPA
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November 2, 2018 at 1:02 AM ×

@LB, do you subscribe to Sven's calls? I heard a few guys say he was good but most said not worth it. I guess like with all other chart gurus it is a hit or miss. But I am not sure we need someone like NT to tell us what is going on in TNX and TYX. Those two are up to making some serious damage above here all the way to their next respective resistance levels. So let's just say not tomorrow and not in a few weeks, but by the end of Q1 we will be talking about TNX in 3.4-3.5 and TYX in 3.7-3.8 area. I know you are going to call me delusional on this and say that stock market will roll over and die before those levels are hit. I am going to take that criticism in stride. :)

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Cbus20122
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November 2, 2018 at 4:37 AM ×

By the way, does anybody else get a feel that markets are acting very... odd right now? I get that after a correction, we're conditioned to feeling a bit more scared, wary, etc. But that's not really what I'm talking about here.

1. Oil is breaking trend. It also has gone into contango. I'm not a futures or oil expert, so I'm not super nuanced in this, but I know enough to know that the trend break here at this time is significant and interesting.

2. Libor-OIS is once again skyrocketing. This lends more credence to my dollar bullish thoughts, despite today's "pullback" in the dollar. And by skyrocketing, it's literally going to the heavens. This is the biggest move by velocity in Libor/OIS since December 2008 when liquidity was nonexistant. Of course, this move seems to have just started, but I think this is extremely telling. Liquidity in the coming months is looking to be potentially problematic.

3. Note the interesting USDCNY move yesterday at the same time that USD went down. Very obvious defending the 7.0 threshold, but with what? My best guess is something commodity related, possibly with Gold (note the gold move upward that is concurrent with the USDCNY move). Buying gold helps to prop up CNY I believe, whereas CNY devaluing means gold will probably drop. Just an interesting note on positioning, and where you should have your views if you think that a Chinese currency deval may occur.

4. As mentioned, most of the rally recently has been a traditional bounce via shorts covering into an oversold position. For the last 10 years, buying the dip has worked quite well, but I do worry that at some point, people will get far too complacent. The speed at which the market is shifting to bullish after recent weakness in my opinion seems to be a bit of pavlovian conditioning. But they will 100% get set on fire by this at some point or another. IS that time now? Could be, but who knows, hard to say.

5. There are some other items I've read about in the monetary / dollar sphere that make me wonder what it is that's about to blow up. Very specifically - this blog post highlights a lot of it. https://www.alhambrapartners.com/2018/10/17/the-very-very-very-big-things/ . May not be anything yet, but with the way Libor/OIS is surging right now, I wonder if there is something going on here more specifically.

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Leftback
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November 2, 2018 at 12:24 PM ×

@Skr. LOL. True. Will get back to you next week on that one. I looked at the long-term chart for INTC, and thought about how pre-eminent that stock was in 2000, and how no-one thought it could fall. Then I thought about AAPL (or AMZN) and the parallels are obvious - and I began worrying. In fact, it was a bit frightening, and then AAPL guided lower for Q4.

The apparent schizophrenia at the moment results from being long real things that make sense and being short things that are (marijuana) smoke-and-mirrors. I imagine the 2000-2001 period was a bit like this. Back then there was a mild slowdown in the real economy and what was initially a slow-motion crash in start ups with imaginary profits. Spoos ended up outperforming Qs by a wide margin. In fact I think that this may end up being a re-run, and maybe this is why many of us who didn't experience 2000 are struggling a bit to make sense of things. Take a look at the 2000 chart for INTC, and then imagine even an echo, let alone a repeat of that today, but with AAPL. I think the US election is creating a lot of noise and that's making it hard to step back and see the big picture. AAPL is down 6% in pre-market trading, and to me that's more important than Trump and the BLS, once we get past today's data and the mid-term elections.

This is going to be an interesting day. The Trump/Xi two-day love fest continues and the overnight move in USDCNY drove futures higher. We still haven't seen how the market parses the overnight action, the employment data and all the political noise of the day. While we are generally constructive on what you might call Real Economy stocks for the time being, we just wonder how is the NASDAQ going to move higher (next week, not today) with AAPL falling? - it is 12% of the index. Imagine a 150 lb marathon runner being given an 18 lb weight to carry and that's what it's going to be like being long the NASDAQ for the time being.

@IPA: TNX and TYX. Yes, rates are going higher. We all know this to be true :-) except 5y5y break-evens.

There are some problems with this consensus of inevitability thinking, which is just a sort of recency bias, no?Markets are supposed to "know" about things like wage inflation in real time, so that should be "priced in", no? If everyone knows TNX is going to 3.5%, shouldn't it be there already? It isn't there for a reason - b/c a number of market participants don't believe the inflation hype, and think that (to borrow a phrase from Dame Janet Yellen) it is "transitory". There are signs of softness out there already, and sooner or later the Treasury shorts are going to get clubbed over the head with one soft US data point. The results of extreme positioning are unpredictable.

Anyway here comes the number! BLS Bingo may now commence. +190k here - but sell the news on wage growth?

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IPA
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November 2, 2018 at 2:27 PM ×

@LB, I experienced 2000 and can tell you that while charts look somewhat similar the thesis was a bit different in tech. There was an artificial tech demand going into Y2K, a genius way for tech giants to juice the corporations into upgrading. Once the clock turned 12:00 and the world didn't end it was obvious, the page was turned and all related players got smacked, with INTC and MSFT being essential components of the upgrade. I am oversimplifying of course, as you correctly pointed out, at that time dotcom was also crashing and the whole notion that we were going to lock ourselves in a dark room in the middle of nowhere with nothing but a computer and a mouse and click our way to prosperity was dispelled. Fast forward to today, that notion is actually a reality and that's why AMZN and AAPL went to $1T (albeit Mr. Market is doing a rethink on that large number). You can't call them garbage now and I would argue that they are a big part of the real economy of today that you are so keen on. So I doubt we will see crash and burn of big tech here like in 2K but a selloff to reset things a bit was needed indeed, hence we are seeing one. This ain't 2000 moment in tech, imho.

Now, with that being said, the cliff diving that 2000 brought in tech is nothing new to this country or the stock market. We go through these bubble phases and it's something different each time. Tech in 2K, real estate in 08, and will it be the Treasuries this time? You see, why it takes a while to get to 3.4-3.5 on TNX is because Treasuries are presumed to be non-fast-moving vehicles and there was (and still is) too much Fed intervention to undo. Once it's out of the way Mr. Li and Mr. Watanabe will do their part and that will leave an enormous void to fill and lead to the "inevitable" - 12yoHFMs reacting the same way they did in 2K and 08. I think the day may come when we will wake up to a limit down on Treasury futures. Do "we all know this"? Hardly!

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Cbus20122
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November 2, 2018 at 3:00 PM ×

I think it's pretty clear that we aren't in a 2000 style tech bubble. But that doesn't mean we aren't extremely pricey. The nifty 50 stocks of the late 60's were a bubble, but that wasn't anything like the tech bubble.

Honestly, I think there are some isolated sectors that are extremely pricey, but it's more of a very broad load of expensiveness right now that is the bigger issue. I somewhat blame the bubble in bonds pushing people out the risk ladder. As bonds got more expensive, that pushed more investors into value stocks. Those value stocks no longer have great yield, and aren't growing much either. As a result, normal value investors have gotten killed, which has pushed people into growth stocks more than other times. It's all about the push down the risk ladder due to QE distorting the normal mechanics of the market. Too much money and too few places to put it.

Also, side note, but on the talk of bond bubbles and such. I think that any bubble in bonds bursting won't really be catastrophic as a bond owner. If a bond bubble "bursts", people will step in to purchase bonds at higher yields, at least assuming the bond itself is safe. I think this is more about the knock-on effects of what happens if bonds don't keep rising. We can look at Japan as an easy example of how a bond bubble can just stay lower for longer, even after breaking multiple trendlines. The big issue as I see it is the massive amount of systematic strategies such as risk parity that are built with leverage on bonds, and will have to re-lever as the stock-bond allocation doesn't perform the same way it did during 35 years of falling rates. I see this similar to the housing market bust in 2005-2008. Home prices didn't need to drop 50% to cause problems, they just needed to drop enough to cause issues through the collateral system. If we do have a bond bubble, this will really cause pensions a major headache.

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Leftback
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November 2, 2018 at 3:09 PM ×

:o] @IPA is promoting his new Death of Bond movie. Let's get back to that one later, shall we? I think you would have to cast Mnuchin and Trump as the villains in that one, as they are issuance fiends and Trump isn't known for paying his debts.

LB loves AAPL products but if you close your eyes and touch the elephant, you will find that this is an over-priced slowly growing growth company with a small dividend. Let's get chartist for a while here, friends: AAPL has a gap down to 194ish. Not going to see that fill today, but next week? Another 5-6% move down from here is hardly out of the question, especially when there is simply no reason to buy the stock. Likewise the gap to 166ish in QQQ pointed out by @Cbus is definitely in play. New intra-day resistance is being built as we speak at 171, 170.50 maybe? The 200day MA now looks like a trap door overhead that has been slammed shut. In AAPL, today's opening price of 209.50 may prove very sticky, or we may never see it again.

Credit where it is due? Nice call, congrats to one or two punters here who called the AAPL/QQQ downturn. Let's see if this turns into one of those late cycle Fridays where the market closes at the lows of the day. It's not like it hasn't happened lately...

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Leftback
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November 2, 2018 at 3:11 PM ×

Strange but true department: Democrats doing well in the midterms may actually be good for Treasury bonds… !!!

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Leftback
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November 2, 2018 at 3:37 PM ×

We did mention, did we not, this wasn't going to be a day for the Kevlar Gloves™? Knife catchers have already lost a few fingers and other appendages in AAPL and QQQ today and we haven't had the 2pm margin call witching hour yet.

Btw, I thought this was a good read, not much bloviation and fits in with our "Japanification" world view.

https://www.dlacalle.com/en/the-next-financial-crisis/

@IPA, we can't have the "Death of Bond" and "Turning Japanese". Incompatible. Which means … ONE OF US IS WRONG. One outcome is stagflationary, the other deflationary, and Western demographics seem to support the latter unless there is massive money printing. Oh wait, BoJ did that and it didn't work. My position is that there are masses of punters out there who are going to be only too eager and ready to learn about the joys of Treasuries once their beloved "aggressive growth" equity and high yield bond funds start hemorrhaging.

"Same as it ever was…"

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Anonymous
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November 2, 2018 at 3:45 PM ×

well, it could be different time frame. Bond is dead in short term (1-2 years) and we all become japanese (after 3 years) in the long term.

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IPA
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November 2, 2018 at 3:52 PM ×

Lol @LB, you completely coerced my reference to Mr. Watanabe (wouldn't be the first time). I meant China and Japan selling down their US Treasury holdings after Fed support waned. Regardless, you really need to chill and stop the minute-by-minute bond commentary if we are going to have an adult conversation here. One of us is already wrong. Care to look at monthly chart of TLT? Let's just say I'm not telling you what to do, but man, you gotta zoom out. Once 116-117 support broke the movie has already ended. You are staring at a gigantic H&S. I wrote the scenario many moons ago right here in black on white. I believe we have already had this conversation before. You are too preoccupied with myopic observations vs the big trend. Next solid support on monthly chart comes in the 101-102 area with a brief stop at 106-108 with the "face-ripping" daily rallies a few times in between notwithstanding. I'll give you a big credit as you do cartwheels on those days. You can do the math on what TNX may be trading at when TLT hits 102. This has nothing to do with a default, Trump or Democrats.

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November 2, 2018 at 4:01 PM ×

Hey, Lefty...I wonder if this hedgefund trader is going to get a margin call one day. World's best hedger...till not.

https://www.instagram.com/catmcneil/

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November 2, 2018 at 5:15 PM ×

That's right sweety...your in there for life. Not even the new york savant masochistic club would dare go in there.

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Leftback
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November 2, 2018 at 6:15 PM ×

@IPA. We sincerely apologize if our stream of short-term chart consciousness has become irritating and maybe not very appropriate for the blog. 5 minute macro as MM himself used to say. We are who we are, and you're right, swing traders and options punters don't spend a lot of time looking at longer term charts. Guilty as charged.

Look, first of all, we are not disputing the fact that you got it right on higher rates this year. OK? So, yeah, no question that you have been correct with some great (long-term) chart reads and calls on bonds. We stand corrected, but as always we are still trying to focus on what may or may not be ahead of us. The level of sentiment extreme in bonds at the moment is reminding us of 2010, though. I would add that we found 2006 a difficult year to negotiate, probably for similar reasons.

Btw, we would argue that the last few months action in Treasurys have not really been due to China, Japan, Russia or other foreign entities selling. More to do with the fact that non-traditional leveraged players (US hedge funds) know that the Fed is selling, and are leaning short with leverage. This is the same game that is usually played with crude oil from the long side. It works fine, until it doesn't, and then everyone is caught on the wrong side of the boat.

Mrs Watanabe is usually part of the FX conversation, is she not, as a Japanese punter eager to chase yield outside of yen-denominated assets? We are always eager to insert Japan into the debate, as a living laboratory of what madness central bankers can achieve.

OK, back to something we seem to know about, today's dump. Will it accelerate after 2pm?

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Leftback
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November 2, 2018 at 8:40 PM ×

There is a great chart in here that illustrates the analogy between today and 2000 in terms of asymmetric valuations, this is something that you feel every day (how can Ford trade below book and other stocks trade at absurd multiples?):

https://www.zerohedge.com/news/2018-10-30/reuters-calls-it-growth-stock-days-are-gone-value-back-play

Somewhat astonishing to see US HY ETFs untouched today with Treasury yields screaming higher. There are some unusual dynamics in US credit markets that are indicative of "unnatural market participants". In equities we expect more weakness ahead of the midterms; after all it's hard to see how markets can rally without AAPL which didn't muster even a dead cat bounce.

This was a tough but interesting week. Next week, midterms, Fed, promises to be just as challenging.

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Skr
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November 2, 2018 at 10:16 PM ×

Just to follow up on a previous post about the "markets v FED/ECB", the first signs came from the ECB today that the markets are going to win, more TLRO's anybody? I think it is consensus that the FED has won their bout with the markets .
Which leads back to Abee's post on P/E's (didn't want to inturpt peeps in full flow, seriously good stuff by the way!), European P/E's on the floor with US on the relatively high side.
P/E re-rate you ask? P/E rotation one answers.
I'd say there is probably a few more trade idea's in there - but I'll leave that to more qualified.

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checkmate
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November 3, 2018 at 1:01 PM ×

Surely the moment Trump pushed the fiscal, spend/tax cut buttons, it was time to rethink what we expected from US Bonds ? I know I certainly thought again whether I was still comfortable with inflationary risk and decided to step aside. You might take the view that with employment being tight (relevant skills tight), some evidence that the trend on wages is now up, and Trump tax cuts offering another real increase in disposable income, that the Fed have all the reason they need to keep going until the evidence changes. They've been gifted a chance to 'normalise' rates (whatever that really means) and as such they may have a view it's in their interests to build some dry powder for when ever they need to use rate management in the future. I think it's impossible to know with foresight where rates will finally top ,but do we need to know that?
Personally, when the yield on US bonds started showing fresh air over and above the yield on the SP500 that looked a great reason at least to be risk cautious. That's at least part of the reason for the divergence between growth and value stocks isn't it? The problem as we have seen though is when growth leaders start not delivering the growth numbers expected they go south in a major way.
At the moment the bullish % on the SP500 is very low, because both value and growth don't look worth the risk, but it doesn't surprise me that we can see short covering and some value buyers out there simply because how fast and how far markets travel matters, but with that rate question unresolved I think the news isn't good for growth or value buyers other than for relatively quick trades. For longer term people like me the cash to sell any rally plus some uncorrelated holdings is the way to go. I don't want to be short US bonds even though I still tend to think they have some way still to go. Indeed if I want that type of play I'd rather be short UK bonds right now, because as resistance to a Brexit deal crumbles away the BOE will play some catch up and we know what that would mean for bonds, or maybe I should say that will be what the market will tend to perceive even if Carney refuses to deliver because the 'smell of his bacon frying' tells him not to raise rates.
As usual time frame matters and it's very easy for people who have different time frames to disagree because all too often they are talking about different ways of playing the market.

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Leftback
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November 5, 2018 at 1:38 AM ×

This piece might qualify as a bit of a contrarian indicator. Gundlach correctly points out that the concerns about MBS are a bit overblown at present, although there is no doubt that the housing market is slowing to a crawl in places.

https://www.zerohedge.com/news/2018-11-02/mortgage-bonds-suffer-worst-month-2-years-marginal-buyer-fed-pulls-out

Many of us have pointed out that in some respects the balance sheet reduction by the Fed is a more serous issue in terms of tightening financial conditions than the gradual and well telegraphed procession of 1/4 point rate hikes. It is unquestionably true that the combination is unprecedented, and therefore no-one has traded through this type of Fed program before.

We suggest that the logical conclusion of what we are experiencing currently is that as equities weaken and the bull market is finally declared terminal, if not dead, then US hedge funds, Real Money and overseas investors all emerge as buyers for MBS, munis and Treasuries, all of which have seen prices fall, and the market carves out a path to lower rates before the Fed, in its usual fashion, adjusts policy after the fact, to reflect the slowing economy.

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Leftback
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November 5, 2018 at 1:48 AM ×

Now to return to equities. We are bullish and bearish, as we mentioned last week.

We are bearish as hell QQQ for tomorrow and Tuesday, will be looking around for value at the same time as we expect another wave of selling in "tech", "FAANG", or whatever you want to call the over-priced growth sectors, now that last week's dead cat bounce is behind us. There will be more bounces but the charts seem to be pointing to new lows for FAANGs.

It might be a good idea to be flat by Tuesday evening, Wednesday morning rather than to try to game the midterm elections. Another relief rally is probably not far away unless there is some outlandish result. There is also the argument that a less powerful Trump and a reined in Mnuchin would lead to less issuance and be positive for Treasurys.

We are bullish rate-sensitive sectors, as we anticipate some kind of hand signals from the Fed later in the week. Even a reminder that they remain "data-dependent" might suffice to trigger a short covering rally - in bonds and stocks.

A good week to be extra nimble and not too dogmatic?

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November 5, 2018 at 7:27 AM ×

The last three years I have been studying the underlying fundamentals that make a market. I haven't put to much effort in trading the dummy account. But that is well over , and its time to trade.

This link is very agreeable , I have found , since you really have to know your own time frame...are you are 1% stop losers? ...or a 3% percenta.

https://www.zerohedge.com/news/2018-11-04/morgan-stanley-pain-was-greater-many-investors-could-have-imagined

If I had been trading as 1% percenta with cash in hand , I doubt I would be in this situation...agree, lefty.

But, that didn't happen. I made some calls, and within a respectable degree of percentage leeway , I think I have got this right.

Be that as it may, this is going to leave me with my new wealth of information of markets to find a secluded place to do what I do best , eat , train , research and punt...and you know what...and be left alone to work from here. This link is a good starting place.

http://www.vietnam-guide.com/da-nang/top10/best-da-nang-beach.htm

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Cbus20122
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November 5, 2018 at 8:37 PM ×

https://www.project-syndicate.org/commentary/china-opaque-foreign-development-loans-by-carmen-reinhart-2018-10

This article is a great window into how the "short-dollar" bubble is coming frayed apart.

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Leftback
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November 5, 2018 at 8:53 PM ×

Time to get flat.

QQQ didn't fill the @Cbus gap to 166 but we closed that trade out this morning for a profit. Have a few smaller things on for now. If we had to guess, we'd say that some kind of relief rally would ensue by virtue of eliminating uncertainty of outcome.

But really, it's time to sit and watch, and then perhaps find something extreme in the reaction to fade. Certainly we would fade a dollar rally. Looking at this from another perspective there is something more important ahead than the midterms - the FED!

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November 6, 2018 at 2:13 PM ×



Been flat for a while. That Spooz levels I have put on display...can you see the whole thing now. Not much to it...daddies money.

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Cbus20122
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November 6, 2018 at 6:51 PM ×

I'm starting to wonder if we get a sell the news type signal here post election. I think I've lost count how many times I've heard that statistic about how markets always rally after midterm elections. Stats like this are great for getting a bunch of people stuck on the wrong side of things in my opinion.

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November 6, 2018 at 10:43 PM ×


Cbuss20122, you know what side you had to be on if you like your freedom?

When this song played at the half-time superbowl , and that troll-lette piped up over at her instagram straight afterwards many years ago...the cat was out of the bag for public viewing.

https://www.youtube.com/watch?v=mlQazNBH5fY

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Leftback
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November 7, 2018 at 4:17 PM ×

Well, there's your post-election relief rally as one layer of uncertainty is lifted. The biggest reaction to the shift in the HoR is probably going to be in EMs, especially China, where any weakening of Trumpian power will be viewed as a good thing. We have avoided for now the broad market consequences of AAPL's lower guidance.

Interesting to see that value stocks are NOT doing well today in general and that all kinds of garbage is up big. So this is a squeeze. Certainly we would add there is definitely the beginnings of a squeeze in Treasurys, presumably b/c there isn't going to be another Tax Relief for the Rich "fiscal stimulus" reverse Robin Hood ahead of us now and the details of yesterday's 10y auction were generally positive. Perhaps indirect and direct bidders were also awaiting the election.

Now we can forget politics and focus on the FED. They are in a tight spot, wanting to take some more froth out of the market without driving another nail into the coffin of the US housing market. A dovish hike is in the cards for December, perhaps the best that they can do here is to say they are staying on course but remain data-dependent. Any shift lower in the dots might well be read by the market as a move towards a more dovish Fed in 2019.

Trading wise, there are clearly going to be some technical levels that present tactical trading opportunities over the next few weeks, but it's hard to shake the feeling that a long and painful grind upwards into EoY is clearly the Pain Trade, for the shorts at least. Buybacks are back, and it's tough to fight the flow. For now this market is going higher, retracing its steps and filling gaps, although FOMC OMO activity mid-month might elicit a wobble along the way.

Trade what you see, not what you think?




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Leftback
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November 7, 2018 at 4:55 PM ×

A look at the latest US housing market data suggests that some kind of slowdown in the Fed's tightening program may well be forthcoming. Remember they still own a shedload of MBS and the world's biggest hedge fund likes to make money, not lose it. Also it's not just the Fed itself who are going to suffer, but their masters, the money center banks like Wells Fargo. Here are the gory details on mortgage apps from Prof. Sanders and ZH:

https://confoundedinterest.net/2018/11/07/winter-is-coming-residential-mortgage-applications-decline-with-interest-rate-increases-and-seasonal-effects/

https://www.zerohedge.com/news/2018-11-07/mortgage-applications-plummet-18-year-lows-rates-hit-2010-highs

Expect to see a lot more curve flattening posts now that winter is here. I know that I have been a broken record and early - and that IPA has duly and appropriately excoriated me for this, but I still think US long bond yields have peaked and are heading lower for most of Q4 and probably well into Q1.

Anyone got any thoughts on the incredible Teflon US HY and IG credit market? Clearly stunningly overvalued and yet almost untouched by the higher rates narrative. Are markets smarter than we are, or is a substantial spread widening in the works? Maybe this is another of those things that will happen, "later" than everyone imagines, and then "all at once".

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November 7, 2018 at 10:23 PM ×

Lefty...overheard at the local post-election watering hole in Brooklyn.

Her: what's this election about bro?
Him: not much, it's only mid terms.
Her: well, bro...its not only mid terms, little bro...
Him: pipe down , sweety...and continue to finish that...
Her: listen, little bro...this town is ours...
Him: i get that, i'm a foreigner, and your the local...
Her: listen, little bro...that newly elected sweet ass back home is our ass , too...
Him: did you say , our ass?
Her: Yeah...
Him: okay...our ass , is your ass here too?
Her: Yeah...
Him: so I shouldn't bother voting anywhere then?
Her: Yeah...no vote for you...our ass, and our little bro!

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November 8, 2018 at 2:04 AM ×

Lefty,...overheard in the post-election dayclub session.

Her: see that hoe over there...
Him: yeah.
Her: that's one of my hoe's.
Him: is your hoe... mean our ass?
Her: yeah.
Him: i wouldn't speak like that about your friends.
Her: f##k off...you need a gun.
Him: sweety, pipe down...where at a dayclub...enjoy the chemicals.
Her: yeah...look where we are...that would be right. you need a gun.
Him: ...um, tell me, sweety...you'll think little bro over there has gotten this far without one?
Her: shut your face c##t.
Him: okay...I'm getting out of here now. your mentally challenging me to much for a dayclub session.

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Skr
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November 9, 2018 at 3:55 PM ×

So the midterms and FED are out of the way that just leaves tariffs, right? Or as Meatloaf famously phrased it "Two out of Three ain't bad".
A very quick run through as we head into week close[as I suspect ya'll are itching to get back in here:)]

Dollar - Up
Commodities - Down
Equities - Upish (relief rally?)
Bonds - Neutral /slightly Upish

@leftback we could do with them chart views as well as those Macro fundies.

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Leftback
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November 9, 2018 at 4:18 PM ×

@Skr, you got some of that right… 3 out of 4 ain't bad. Equities were a bit overbought so that is being worked off.

Hmm, today's big story? What do you think is more important for bonds? Yesterday's Fed? The crappy 30y auction that preceded it? This morning's super hot PPI number? Or the price of WTI and Brent?

The oil price, without a doubt. How do we know this? Look at the Treasury market. Hottest PPI print since 2012, and what did rates do? It was Sell The News in rates this morning. OK let's explain this: the PPI is a (somewhat) backward-looking indicator, whereas today's oil price move is essentially baking in and forecasting a move lower ahead in PPI and CPI.

LB doesn't have the time available just at the moment to dig out and post charts, but perhaps we'll get there during the quiet week around Turkey Time. Not sure we will see much happen in November except a bunch of highly profitable range trading! Bulls should beware - all we see in the charts today is the gap lower in SPY and QQQ to Tuesday's closing level.

Looking ahead to next week, would not be surprised to see the aforementioned gap filled early in the week, before the relief rally resumes into op ex on Friday. Makes sense, no?

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Leftback
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November 9, 2018 at 6:46 PM ×

Munis and REITs are out-performing today as rates slide lower, and generally there is a bid for value over growth in equities. We expect to see a bit more than that going forward. Reports of the death of NLY and AGNC were perhaps greatly exaggerated.

Cannabis companies report earnings next week, we can confidently expect that the trade in those names will be more fun than a barrel full of monkeys. This week's action was especially manic. The lock-up period for one of these names ends in January. There is only one earnings report ahead of the deadline and then one after… it will be interesting to see how long investors wait before trying to get out of a burning theatre through a very small door. Mondays have often been … difficult for cannabis longs.

In other news there is a possibility that the fire in Malibu will burn all the way to the ocean. Insurers must be on edge again. Let's hope everyone can get out early and safely. Don't mess with the Santa Ana winds.

https://losangeles.cbslocal.com/2018/11/09/woolsey-fire-75k-homes-evacuated/

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Cbus20122
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November 9, 2018 at 6:49 PM ×

https://www.bloomberg.com/opinion/articles/2018-11-09/china-s-scandal-hit-bad-banks-are-being-forced-to-shrink?srnd=markets-vp

And yet another window into the enormous bubble in US dollar borrowing, aka the "short dollar" bubble as I call it. This has been unraveling since 2012 somewhat slowly, being held together only by money printing. But this is starting to unravel more quickly recently.

This is the steamroller in my opinion, everything else is just picking up pennies right now. Given, it's one and the same with China's credit bubble, but still worth paying attention to. Watch Chinese real estate and banking health (as much as possible given the lack of data) for signs this is coming undone.

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Leftback
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November 9, 2018 at 7:45 PM ×

@Cbus: We just don't know how many resources PBoC can devote to holding it all together. Given the societal consequences of a deep recession in China, one imagines they will fight hard. USDCNY 7 seems to be the line in the sand for now as they try to avoid another episode of capital flight.

For now, we think it holds, the dollar retreats a little and EMs and China catch a bid into EoY.

The gaps we alluded to may be filled on Monday or as early as today. Then we find out whether some of the oversold bounces we saw (XHB, for example) are real or of the dead cat variety. If the latter, we break to new lows, if the former then next week we will see a return of dip-buying action. On balance we think that lower rates will begin to help and the dip buyers will return.

Marijuana stocks are down, with earnings looming next week. No worries though, a few extra BONG HITS and STONER, I mean, punt, I mean a new generation of marijuana INVESTORS will be, like, TOTALLY STOKED, and unconcerned with enterprise values for individual names that are 5-10x the projected size of the entire global market for medical marijuana. Going to the MOON, dude, gonna TOKE our way to wealth as marijuana millionaires, stocks targeting $420 - like that dude, MUSK, hey, man, that was so cool, although those down days are GNARLY.

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Cbus20122
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November 9, 2018 at 8:39 PM ×

@LB, obviously a Chinese hard landing is something everyone is watching, and a CNY break of 7 would be significant, especially since they outright stated they do not want to pass this. If it goes past, that likely indicates things are getting away from them. At the very minimum, the market as a whole will have this general belief. It probably will hold for the short time being, but for how long? They're already selling their reserves. They last did this in 2015-2016, where they sold over 1 trillion of US reserves, yet this did nothing to stop the bleeding... in large part because it causes a feedback loop in the US dollar as well as US treasuries, making their dollar-denominated debt more expensive as they sell their reserves (which almost entirely negates things in the first place).

The main problem is they've hit a wall in expanding US dollar denominated credit. When in expansion mode, China's dollar problems aren't so problematic, but that requires lenders to lend to them in dollars. It also requires chinese export of goods to return lots of US dollars. Well, right now, USD lending is starting to pull back, and China's current account has flipped negative for the first time in 17 years this year (not coincidentally around the same time a lot of this stuff started to blow up). All this means that we have huge black hole worth of dollar needs coming from China, and they're not able to get their dollars as liquidity has dried up quite a bit.

This thing has legs, that's all I can say. This has been souring since roughly 2014, but we got a reprieve in 2016-2017 as China unleashed the largest wave of stimulus in their history and was able to restart some of their dollar borrowing. With that said, the 2016-2017 period of stimulus and dollar borrowing was more of a last gasp than a recovery, and it likely sealed the deal by expanding their overall dollar liabilities and financial instability issues past the point of return.

This is going to crash at some point, and it is going to cause a global financial crisis, one that will likely rival or surpass the GFC. I know that's an extreme statement, but it's basic math, economics, and understanding the scale of all of this. Are you confident that the duct tape is going to hold this together much longer? It's possible, but everything is fundamentally pointing against that right now at the same time that a lot of the technicals and market action is also confirming those items.

Like the GFC, this is not some black swan that "nobody could have seen coming". It's more of an issue that people have stuck their head in the ground on and pretended it couldn't come unglued since it continued on for such a long time they felt it could never come down.

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Anonymous
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November 9, 2018 at 9:51 PM ×

@CBUS, Based on an old wsj article (https://www.wsj.com/articles/chinese-investors-are-getting-fed-up-with-their-countrys-dollar-debt-1524475803), between 2013 and 2018, there would be under $400 billion bonds denominated in USD issued by Chinese companies. I assumed that before 2013 the USD bonds issuance might be really insignificant. I could be wrong though, as I do not have any data. And the government itself has little USD debt.

Those bonds are not going to mature at the same time, probably spread out in the next 3 to 5 years. Those are mostly corporate bonds, not all of them are SMEs, so they could actually default on the bonds without creating any systemic risk.

Therefore, I am not sure if your theme of the big China USD bonds bubble bursting has such a huge impact. I am not saying that China does not face great difficult time ahead. Just I see its problem has more to do with plateau labor productivity and inefficient financial system. Yes, USD appreciation is a serious issue. The EM markets in general are in for a rougher ride.

But one lesson everyone learned from the GFC is that you could monetized your debt and ride out of the crisis, especially when China's main debt burden is still RMB denominated. And as far as I can see, a large part of China's local government debt had already been monetized. And with the recent fiscal stimulus, monetary loosening, and deregulation actions in China, they probably can muddle through, though not pretty.

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Anonymous
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November 9, 2018 at 10:01 PM ×

Also, a large, unknown portion of USD-based bonds issued by Chinese companies were bought by Chinese investors based on the WSJ article, presumably with borrowed USD from China's foreign reserve. So when a default event comes, it could be interesting to know how the repayment would affect the whole foreign reserve.

In addition, the current deficit could be a symptom of capital flight, given it is really difficult for many folks to move money out of China.

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Cbus20122
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November 9, 2018 at 10:53 PM ×

@Anon

" And as far as I can see, a large part of China's local government debt had already been monetized."

And guess what Chinese monetization is backed by? USD based assets. Without access to the dollar their currency starts to destabilize, and then that poses risks to their internal debt bubbles. It's far from being limited to just dollar bonds, and while China is part of the epicenter, they're not the only player here. See the chart below. For whate it's worth, their dollar bonds outstanding are almost 1 trillion right now.

https://amp.businessinsider.com/images/59dfb421d4e9201f008b45a9-480-598.png

There is a lot more out there than just publicly listed dollar bonds. Almost every major commodity, to which China is a bigtime importer of is traded with via dollars. A rising dollar makes everything more expensive for them.

The truly silly thing is thinking that China can just print away all their debts without ever facing any consequences for this. The recoveries after their waves of stimulus have in fact have been a series of lower and lower high points despite larger and larger stimulus going into effect. If stimulus was effective there (aka, inflating away the debt) then this wouldn't be a problem. But as their debts mount and they have struggled to keep their currency above water (which requires more USD backing). Now, all we see is slowing GDP, mounting debt, and increasing currency problems. They've been riding out the problems for the past 2-3 years, but the issue is that it's not working. That's what many are failing to see as there has been no recovery in inflation, gdp, or anything truly positive, and their problems have only gotten worse. All this will do is make it harder and harder to keep their currency stabilized and the other problems will continue to snowball as they have.

Here is a very good big picture view of chinese money printing: https://twitter.com/Jkylebass/status/1051256440353169408

So if they're printing so much money, why haven't we gotten a major devaluation? Well, it's largely due to immense capital controls so far and other gimmicks that aren't really sustainable on a long-term basis.

The main point is, we've been in the stage of China trying to monetize their debt and muddle through things, but it's not enough. You can keep a dam plugged by putting your thumb in the hole, but eventually new holes start to open up. Plugging it will delay things, but it can't stop the inevitable.

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Anonymous
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November 10, 2018 at 11:05 PM ×

@cbus

Yes, China has a RMB debt problem, we can all agree on that. But does China have a USD-based debt problem?

"For whate it's worth, their dollar bonds outstanding are almost 1 trillion right now. "

What is the source of the above statement? Based on the WSJ article, its USD-based debt should be around $400 billion, including rollover so the total inventory now would be lower. The difference between WSJ number and your number is $600 billion. That is not pocket change and could change the situation dramatically.


"Almost every major commodity, to which China is a bigtime importer of is traded with via dollars. A rising dollar makes everything more expensive for them."

Right, but then the rising dollar also tends to make every commodity cheaper.

I also want to emphasize that during the past 2-3 years, China was spiking the leverage in the economy. The monetizing part had not begun in full scale yet. Look at the Shanghai interbank rate, until May 2018, China is in the monetary tightening mood, then the rate drop, coinciding with the trade war. The tax cut, the deregulation, and some more fiscal spending, offsetting some impacts of trade war, means China would muddle through with a bleeding fx reserve in 2019.

The future growth rate will be low, as I said, it is labor productivity problem. The vast number of unskilled labor, basically they have reached their peak earnings and there is few policy tool that could help them grow their income at the fast speed as before. Credit cycle does not help, but this China's problem is more fundamental than debt bubble.

AUD and NZD already in some extent reflected loosening China monetary conditions. Before the Trump-Xi meeting, RMB would not break 7. After that it is anybody guess. 7 is a psychological level. Is breaking 7 a big deal? Again we come back to the USD-based debt level. If it is about $400b, then there will be short term panic. If it is indeed $1 trillion, then there will be much bigger shock.

Regarding the trade talk, it looks like China would make some concessions in the leaders meeting, but also it prepares to intervene the offshore RMB market just in case. So the unpredictable part is the US response IMO. I am a little pessimistic as the trade hawk really seems to have an upper hand. Buying some cheap protection in the next two weeks could be a good idea. Next January and February would be the real test.

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IPA
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November 11, 2018 at 6:09 AM ×

@LB, am I hearing you hedge your XHB bet a bit? Lol, just teasing you, pal... In any case, check out DHI's fresh 2019 guidance, err...lack thereof. The best builder out there has no freaking idea what the market is doing now after raising their guidance just last qtr. I bet they are scaring the crap out of everyone, therefore the dead cat bounce you referred to is going to be short-lived indeed. I know, I know, until March OpEx we wait. Perhaps it won't take that long :)

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November 11, 2018 at 6:28 AM ×

@IPA, you what gave the bears and bulls the audacity to think they could take control of everything?...

The premier league guy. Lot's of laugh asshole.

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November 11, 2018 at 6:34 AM ×


I'll give a tip on where oil will be next century. ummm...$1.00.

You can trust me to give you my utter most best market valuations from here on out. Sir.

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November 11, 2018 at 6:38 AM ×



Seriously, macro-man team..can you imagine me being let loose amongst the oil oligarchs trading books for a week? or even one wall streets big houses.

Please please please ...give me a job...pretty please.

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checkmate
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November 11, 2018 at 10:43 AM ×

China is going 'western' economically albeit very slowly. Moreover, I can see a lot of people losing consistently over a long time period by essentially betting against the Chinese govt and their ability to 'slowbleed' their adjustment problems. In effect betting on the 'big one' , a currency crash or debt crunch whilst the govt just keeps grinding the losses slowly away. If I had to find an analogy it would be those traders betting against the Japanese Bond markets all those years to the degree it coined the term 'widowmaker'. Clearly you can win big betting against govts like Venezuela etc, but it didn't work in Japan and I suspect it isn't going to work in China either.

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November 11, 2018 at 11:42 AM ×



You say China 'slowbleed'...nah,... the oligarchs and the street houses books would go through this before they noticed anything...

https://www.youtube.com/watch?v=Pk2ZX8UqHaQ

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November 11, 2018 at 11:56 AM ×



This one's a better ((version))

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

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November 11, 2018 at 12:51 PM ×



The mid-term...not the short-term, votes are in, and macro man has been delegated by trumpy to supervise the congressional funding and building of the wall in...Israel.

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Leftback
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November 12, 2018 at 5:54 PM ×

Well....... I agree with @Cbus that China's debt is a massive scary problem and with @Anon that it isn't going to burst before New Years, which is the time frame in which we are currently focused.

@IPA - chart watchers can read the XHB chart in a number of ways, one of which is that a meaningful bottom has been made for the time being after a RSI down in the teens (we are not long btw, just pointing this out). Like the REITs, XHB trades stronger than the broad market today, and this will persist as long as we see a drift to lower yields. As always, getting the dollar and rates correct predicts many other things. We didn't expect to see King Dollar spike to new 2018 highs this morning but there it is.

Most of the things we like (F, T, NLY) are trading strongly today, whereas things we don't (AAPL, QQQ, IBB) trade weak, and we think that's a theme for Q1 2019 at least. Of course there is probably going to be another massive bounce in over-priced garbage at some point.

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Leftback
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November 12, 2018 at 9:29 PM ×

...and today saw the @Cbus gap to QQQ 166 more or less filled. A similar gap in AAPL is also almost filled. Good eye!!!

The jewel of the cannabis complex reports on Wednesday, Canopy Growth, after Aurora reported this morning. Note that Aurora beat, but was dropped for a 4.5% loss anyway. Tilray reports after the close tomorrow. Veteran cannabis watchers will know that the pumpers will be out early, pushing TLRY and CGC up at the open, and perhaps into the close as well; then the real fun and games begin. No new catalysts for this sector after this week, now that legislation, elections and earnings will be behind us. It wouldn't be a big shock to see this small segment of the market retreat from its "highs"; many of these stocks have price/book ratios > 100.

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IPA
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November 12, 2018 at 9:43 PM ×

@LB, yes, on short-term basis RSI is used as a reset of sorts and only another reason for bears who scaled out earlier to re-enter on rallies. Let's see what HD has in store for us tomorrow (pun totally intended). I suspect there will be very little holiday cheer for them this year. It's a barometer of the sector, and if they get taken to the wood shed then XHB will follow in a short order.

@amps, I am used to your gibberish and simply skip over your nonsense here. But pal, you wouldn't expect me to stand next to you at the pub and not send you to the dentist after your "kind" remarks about me, would you? Let's just say you should be glad we are thousands of miles apart and you are in a need of a stronger medication I simply can't prescribe.

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November 13, 2018 at 4:11 AM ×

@IPA, ah well. Wouldn't be the first time. But , you know what. You cannot frustrate me out of it...and you cannot frustrate me into simple mistakes. Punting is what do...win or lose. Be gone!

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Leftback
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November 13, 2018 at 3:17 PM ×

There are still two naughty little gaps in the chart of AAPL to be filled, the lower one to 187.88. For those of a bearish hue, that suggests there might be further weakness ahead. On the other hand, we are flirting with the 200 day MA, so the daily and weekly closes will be very important, and there will be many with an interest in keeping the stock afloat as we head to op ex., so maybe that lower gap goes unfilled for now.

Dollar and rates a little lower, defensive (rate-sensitive) names seem to have anticipated that yesterday, although Treasury futures have retreated a little from yesterday. REITs persist in rallying and so do the homebuilders. Sometimes the market has x-ray spectacles on and sees something coming before the talking heads and market pundits, even the commentariat at MM.

Peanut gallery has been divided here between "winter slowdown / dollar and rates reversing / end of year risk on rally" (LB) and "dollar and rates screaming higher/ stagflation / run for the hills" (IPA). Every day you can see the push and pull in the market between these groups. If you are on TeeVee of course, you just look at the direction of the day's arrow and spout off accordingly, b/c that's the way the game is played, my friends.

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Skr
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November 13, 2018 at 7:47 PM ×

Dax futures are holding up well against its US counterparts - maybe the first visual of the rotation I mentioned.

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cbus20122
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November 13, 2018 at 9:46 PM ×

Others here see markets slowing down, with treasuries outperforming and dollar rising (and commodities falling). Standard deflationary / liquidity crunch playbook.

FWIW, will be interesting to see if bonds can continue falling in the face of Oil getting crushed here. History says Bonds will outperform, especially if Oil continues to come down. And oil is looking like it has more room to fall (may have some very short term rallies, but this is an oil bear taking hold). Oh and guess what also happens when oil falls? The dollar tends to rally... imagine that :)

Oil was the last holdout in the "we're facing inflation risk" narrative that comes at literally every market top, and somehow still catches everyone off guard thinking we're facing more risks of inflation than deflation. Given, the two are closely related (inflation LEADS to deflation typically). From here on, we get CPI coming down, ISM Dropping, dotplots coming down, fed halting hikes, etc. This could potentially be bearish on the dollar, although how that actually plays out is all strongly relative to what other countries around the world are doing, which will possibly be even more dovish than anything in the USA, meaning a potentially continuing strong dollar. We will see.

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cbus20122
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November 13, 2018 at 10:25 PM ×

On another note - I came across a perfect visual for a lot of my thinking. Please view the graphic below (copy paste address)

https://pbs.twimg.com/media/Dr6jViLUUAAunRD.jpg:large

I post this not because of the current debt to gdp ratio of corporates being worrying (everyone already knows that). I think the far more interesting item is if you look back to the earlier portions of this chart where debt to gdp for corporates was extremely low... notably during periods of high inflation.

I mention this because people get super caught up in looking at deficits and such when trying to predict a big inflationary bust (as people called for in 2007, and more recently with the bond bear calls) vs. our more common deflationary busts, and completely ignore the reason why we likely can't / won't have any real type of long term stagflation like we did in the early 80's.... US corporate and consumer debt prevent any real long term stagflation from ever taking hold.

The main issue is that if rates and inflation become too high, it becomes very hard to see a sustained level of inflation in a slowing growth environment because you then start to see defaults pile up. It's the basic story of the fed raising rates too fast - they raise rates due to inflationary issues (as they have to) until the point where they hit the ceiling and those rates start to cause cracks in the credit market. From there, we flip a switch from inflation to very rapid deflation as the market can't handle the higher commodity costs, higher borrowing costs, higher employment costs, etc and then has to delever and reduce expenditures in a hurry.

We can however see a real stagflationary event when our debt levels are relatively low since rising costs and rising rates won't cause the same squeezes they do when an economy is highly levered in corporate and consumer debt.

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IPA
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November 13, 2018 at 11:59 PM ×

@LB, I said nothing about the dollar, stock market, end of year risk on/off or stagflation in general, did I? I did make three clear and precise calls though: XHB to 28, IYR to 73, 70, 67, 63, and TLT to 108, 106, 102 - all by the end of Q1'19. Now, you may interpret those calls as stagflation for the sector I think gets beaten senseless - real estate, both commercial and residential, due to higher interest rates. But there is a whole a lot more sector specific to my call than just rates, which, not to be redundant, HD conference call pretty much confirmed today. I made no FX or any other market calls, so let's get that clear, please.

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Skr
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November 14, 2018 at 12:13 AM ×

Guys - I'm gonna flip this one!
So, what I'm getting here is - peeps are looking back on historical /empirical (and dare I say curve fitting) /talking for the sake of it (yes you ,33% and your buddy brings in at 50%), but hey, we all have different ways of working.
The confusion (yes you again Dr. Hyde) is hilarious.

Get comfortable in that old arm chair and regale to the grandkids what happened when ya lost ya balls!

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Leftback
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November 14, 2018 at 1:16 PM ×

@Skr??? Not sure what that means or at whom it is aimed… funny though. LOL.

@IPA. Sometimes LB reads, thinks and writes faster b/c of shortage of time than is merited, and simply makes errors. Apologies. Mind-altering substances played no role in these mis-statements, however.

OK, where are we this morning? Flat futures, awaiting CPI, which - if it is screamingly hot - must surely be the last in a screamingly hot series, b/c as @Cbus outlines, lower oil will drag US yields down with it, b/c it is the major US inflation driver. Skate to where the puck is going to be, not where it is as The Great One once stated from the Great White North.

Speaking of Canada, sector leader Canopy Growth missed, Tilray beat but still lost a fabulous amount of money on $10M annual revenue, and the entire cannabis sector looks like it will take a trip to the woodshed today for a whupping that may last into expiration and perhaps become prolonged in the absence of upcoming catalysts. Profits up in smoke….

We continue to be long "real economy" things on the grounds that recession isn't yet imminent (although winter is coming). Not touching any kind of "tech" although AAPL looks due for a bounce, interesting to see the world's most important stock getting oversold. Maybe the Swiss National Bank are smarter than we thought, apparently they unloaded some in Q3.





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Leftback
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November 14, 2018 at 3:38 PM ×

AAPL still trading heavy. That gap down to 189ish more or less filled now, so it's ripe for a bounce. Certainly the major averages are not going to get far without, so it's critical.

We could be wrong but the chart of EEM seems to be constructing the framework for a stealth end of year rally. REITs also, for example the chart for the MORT ETF has a double bottom.

Chairman Powell's utterances may be of interest tonight. With crude oil prices cratering this week, perhaps this might not be the time to broadcast a hawkish view.

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Cbus20122
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November 14, 2018 at 6:39 PM ×

Just a technical thought - that gap I mentioned a while back... we're sitting on top of it with the spoos right now, but haven't broken. Some may construe that as being good given that we haven't broken it yet. But if we bounce from here, I would be even more worried about at potential head and shoulders if that were to occur. If we broke that head and shoulders neckline, based on traditional h&s stuff, we would likely see a measured move to new lows.

With that said, this hasn't happened yet, just saying it *could* be forming.

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Cbus20122
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November 14, 2018 at 7:36 PM ×

Okay, so nvmd, closed the gap right away. But I still think a potential H&S is in play. My guess it that we will likely get a small rally into OPEX as LB brings up, but if stuff weakens afterward, then we'll be right on the neckline in a hurry. But once again, who knows. I'm not counting on that, but just preparing for the possibility of this scenario happening.

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Leftback
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November 15, 2018 at 12:33 PM ×

So…. one of the more interesting things about this business is how many moving parts there are and some days they all seem to be in motion at once. Now, another edition of what the hell just happened, part three for the week. Let's review a few issues, and then the peanut gallery can throw things at each other as usual:

1) @Cbus gaps closed in spoos, Qs and AAPL, which sets up the market for a bounce, according to one interpretation.
2) Op EX Is fast approaching which tends to support the thesis in 1)
3) Chairman Powell made utterances last night, which were at first interpreted as hawkish. It's not clear he intended this.
4) While 3) is going on, we have a crisis in the UK government once more related to May (or May Not) and Brexit.
5) Because of 4) cable is down a big chunk, and gilts are bid, with UK10y down ~10bps.
6) Oil is steady this morning for the time being at $56 - but has fallen 20% very quickly.
7) Perhaps because of 4), 5) and 6), and not 3), US yields are drifting slightly lower this morning, 3.10% on US10y.
8) 3.10% is an important support level for TNX, (and there is a huge short position).
9) Some people's favorite FX risk barometer, AUDJPY, is flashing green, USDCNY < 7, and China was green last night.
10) VIX is slightly lower, perhaps because of 2).

In the old days, world events in other large economies used to matter for FED policy. It's not clear if that's true any more, but one could certainly make an argument that some members of the Fed might see fit to send out a slightly less hawkish message, in view of what is fast developing into an absolute dog's breakfast in Westminster. Future BoE hikes are being taken off the table by the market even as we type.

OK, you can throw stuff now.

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Skr
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November 15, 2018 at 1:10 PM ×

The empire is dead, long live the empire.
No one is throwing anything. We are all chums here on the soapbox at speakers corner.

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Cbus20122
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November 15, 2018 at 2:47 PM ×

"9) Some people's favorite FX risk barometer, AUDJPY, is flashing green, USDCNY < 7, and China was green last night."

This is definitely somewhat bullish EM in the short term in my opinion, and the charts are looking reasonably favorable to EM. Tencent finally had decent earnings, and some of the economic data from China wasn't quite as bad as it had been the previous month. So I'm kind of with you in the thinking that China could see a short term rally, but I don't see the risk/reward being favorable to try to trade this.

I think the big thing to keep in mind is that China is selling forex reserves. This is a very desperatate move to keep USDCNY from devaluing too far. We literally saw this playbook back in 2015-2016. Everything going on in the markets is very similar to that time, except we have higher rates, higher commodity costs, increased debt service costs globally, and bigger geopolitical risks. I truly think 2015-2016 gave us a playbook of how to play the current markets. So basically, we're in a groundhogs day version of 2015-2016, except we have less tools to fight against gravity compared to back then. Obviously, watch for the QE's to come roaring back here, but I'm not convinced they can save markets indefinitely as there have been greatly diminishing returns and more political pressures.

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Leftback
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November 15, 2018 at 3:13 PM ×

US rates are lower, quite sharply so at the short end, which is in theory the end of the curve most directly influenced by the Fed. Hmm. US 10y yield support level at 3.10% has been breached, and 3.06 and then 3.00% are the next levels to watch. For those who watch this and consider it important (and we do) AAPL is up on the day. With op ex ahead, I am finding it hard to conjure a horribly bearish scenario out of that lot, especially after the @Cbus gaps™ have been filled yesterday.

It's probably not going to be the most fun day ever for longs, but it may end up OK. Look around today and you will see that here and there some long-only equity guys with cash on hand are going to be filling their boots a little bit into the end of the year. Why? Because they have to - it's their job. Whether that can constitute the foundations for a face-ripper is hard to say, but it's likely that watching AAPL will pay off as the market's most important stock should provide some useful direction.

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Nico G
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November 15, 2018 at 4:00 PM ×

so that's it, it comes down to Apple saving the entire world market, a day before expiry? that is an insult to the short gamma exposure out there..

long term the $181bn of AT&T debt, soon to follow GE glorious future, and the whole credit ETF house of cards are some of the issues for US markets. QT and trade tariffs were announced before Trump got elected. Markets for two years, decided that only tax cut mattered. They need to go back to pricing QT and tariffs en vitesse. It will hurt.

long-only equity guys investing here will have 1/10 of the shelf life of corporate buybacks (the theft of the century, don't they look smart right now) - those short term considerations are good for a pre-Santaish push over (spoo) 2800 something where everyone should plan to trim equities holding to zero, nothing more

long term there is only air until January 2016 lows. It will still look mega bullish on a 20 year chart, and offer close to 40% discount to 2018 market top, but a lot of pain until then for anyone who can't break their 2009-2018 POMOQEFOMOBTFDTINA wanton brainwashing

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IPA
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November 15, 2018 at 4:31 PM ×

@LB, peanut gallery is divided indeed. But perhaps in your own words, we are looking at different timeframes and really starting to pull apart here. Some of us are simply picking up pennies in front of a steamroller. I am pretty sure you are checking out new 52 week low on AGNC this morning. Also, while you are at it, look at the absolute carnage in homebuilders, new 52 week lows on many, KBH is down 17% as I type. Powell didn't mean anything other than what he said last night and really, so many times before - it's the Treasury and not the Fed who has gone crazy. "Unsustainable fiscal path", and he is not about to change his mind because FAANG is in a bear market. Don't fight the Fed!

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Skr
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November 15, 2018 at 5:12 PM ×

@leftback- "US rates are lower, quite sharply"
Forgive my ignorance - but does that mean some are buying bonds and if so whom?

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November 16, 2018 at 6:19 AM ×

Exactly.

If we have learned anything around here among us trading postulater's, it is that we all have bigger concerns on our own individual trading techniques and analyses to be worried about the neighboring trader in the pod next door taking advantage of our generosity with the after hour ladies and the reserved tables on weekends after the races. Punters have been brainwashed from the very beginning all because lady luck wouldn't accept that one solitary punter was willing to lay against her. All day.

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checkmate
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November 16, 2018 at 8:34 AM ×

Uk got it's first warning yesterday as to what capital flight looks like if even the possibility of an election and Corbyn govt become a concern. Currency, Banks, Builders, Insurers, Utilities , even domestically focussed retailers. All got sent to the toilet. Pretty clear signal of intent I think. So, as it stands either we get more of the same OR we see the PM gone fairly quickly accompanied by a policy change that might have some chance of success. Lord knows what that would look like. Turbulent times over here.

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forgot2hedge
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November 16, 2018 at 2:16 PM ×

Nico, welcome back! I recall you describing market tops as a brief period up to the top tick followed by a quick cascade down. Does that fit the description of what we are seeing of Spooz since october 4? Or do you think it will be a protracted decline of sideways action and lower lows? All the ingredients of further declines are there - ugly technicals, credit issues emerging to the public, FAANG looking ugly, bond supply rising, PMs holding firm, etc...

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Nico G
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November 16, 2018 at 3:25 PM ×

Powell 'beyond' neutral comment triggered the top. Everyone already wishes the Fed would change its mind. We tripled on the way up, but 6 or 8% down and you find the pomoqefomobtfdtina junkies asking the Fed to reconsider. Come on. Fed knows this is the best way to deflate the economy. By deflating risky assets, by a long shot.

Powell top has put everything in motion. Read somewhere it ain't frequent to reverse so fast from an all time high so you can argue everyone and their end of year 3100 target got taken by surprise. What to expect? ginormous credit/margin deleveraging in line and en route towards the EM and Europe abysmal performance that US decoupled from.

The biggest bubble this time is 'passive investing'. Everyone has done the same pomoqefomobtfdtina waterskiiing behind the Fed.. Doesn't matter that US financial system is 'better' now than in 2008, NYSE margin, corporate and consumer debt is at record level. The whole system fed on more debt, more credit-based consumption and more leverage chasing stocks reporting credit-steroids earnings when they were not purely fake from floating reduction (buy backs)

It was like this in 2016. But the animal spirits of Trumpism - some sincere, some jejune - have stretched that new normal to the limits so I see the situation much worse than 2008. Passive investing, ETFs everywhere, all threaten liquidity. The car industry is broken. What is the notional of auto subprime again? What is fair value to Amazon business again, when real rates reach 5%?

My Chinese friends tell me of domestic fraud of EPIC proportions. Nothing in the news of course, but how long until Chinese shadow banking implodes? It ain't about the tariff. They don't help, but Chinese house of cards will die on worldwide consumption gloom. That is an awful lot to reprice.

Everytime i go long counterrallies (like now) i feel totally bipolar and oblivious to the bigger trend at work today. Trade safe. The bigger trend is down.

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Leftback
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November 16, 2018 at 3:52 PM ×

@Nico G said: "Everytime i go long counterrallies (like now) i feel totally bipolar and oblivious to the bigger trend at work today. Trade safe. The bigger trend is down."

Yes, those are my thoughts ad feelings exactly. It has played out as many of us had outlined. However, we are a bit bipolar b/c we think that a rip-snorting face-ripper is on the way. Why? Because short end rates have dipped (that means there is a bid in US2y - in other words people are buying bonds, Skr), and now the Fed has begun to blink…. their main concern will be, not equities, but to avoid prematurely precipitating a major crack in corporate credits before it arrives of its own accord.

I thought that Powell's comments were even-handed, more or less, which is appropriate for a Chair not named Janet, but Richard Clarida's interview this morning shows that he clearly leans one way, with a dovish tilt. The market has already begun to move to price in 1-2 hikes in 2019 and then a pause or full stop, or in other words a maximum of 2-3 more hikes. The dollar fell quite sharply after Clarida's comments.

Clarida may already represent one of the lower dots, and we are likely to see others come out and reveal lower dots in the days to come. Macro Man has called for the demise of the dots, but it may not be dispensed with until the Fed pauses. Very very good discussion of all this on BBG this morning with Luke Kawa, George from Nomura and Krishna from Oppenheimer. I thought they were all very lucid as one would expect from some of the very best of the rates and bonds guys.

Lower levels are ahead, especially for Qs in the New Year, but for now there will be vol selling - bears should beware the rip-snorter! You can hear the hooves in the distance.

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Leftback
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November 16, 2018 at 4:12 PM ×

Already getting some pushback on the above. Some sages clearly think that the FED continues to grind onwards until the dollar gets so strong that something breaks. [Given the current situation in China, UK and other places, that would be pretty stupid.] Markets agreed with the FED for a while but are maybe beginning to dissent. Let's see if the Fed will eventually follow the Eurodollar market? They can, after all, continue to tighten financial conditions to some extent via QT, without hiking rates.

The problem with the FED (and the reason they are so often late and sometimes disastrously wrong) is that they tend to look at so many lagging indicators. Unemployment is a notorious lagging indicator, CPI also has quite a slow reaction function to input costs. Lumber, oil, pending home sales, gasoline, PPI, retail sales are probably more useful real-time indicators.

There is probably room for one more plunge before the bounce, but don't count on it when too many people are calling for it. There is already a decent stealth rally in emerging markets.

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Anonymous
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November 16, 2018 at 4:27 PM ×


On one hand, Fed may be softening and markets could rush to safety. On the other hand, the US fiscal deficit would only increase. From now to the first quarter next year, my view is that the economic difficulty in China and economic slowing in the US would very likely force capital to rush into T-bonds for safety. Once Fed indeed pauses hiking the rate. The increasing US fiscal deficit would again become the dominant factor.

The above assumption is based on no trade ceasefire by the end of this month. If there is a surprising trade ceasefire, then there should be a short term relief, before the market returns to panicking about 2019.

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