Our 36 hour "wait and see" has thrown up some interesting factors over that period. There has been a growing consensus that the background economic picture is picking up, led by the shipping times of Japanese components to global production centres. But against that has been renewed dung chucking in Europe. Yesterday's European PMIs were soft but interestingly pretty much ignored at the time, only to be wheeled out as ammo post the Portugal downgrade. Just as interesting is that this bombardment of Eurowoes has remained pretty much Eurocentric with little knock on (so far) into the usual risk suspects.
This leaves us thinking that either:-
A) This is a last death-twitch of the bears as they try their utmost to reverse the recent rallies using Euro ammo, but failure to make advances in non-euro risk components will mean they finally capitulate and everything rallies again.
B) It's all going to go Pete Tong (wrong) again and our "sell last Friday" theory is about to be rewarded.
Which is back to our heads vs hearts problem again. To us it is becoming clearer that there really is a supply chain led recovery coming via lorry or ship to a factory near you, which is good news for the private sector and equities. Against that, the public sector is still in a mess with western debt structure on a life support machine hoping the private sector pick up can come to the rescue before it dies (highlighted specifically by today's minor Euro-panic).
Our heads say buy equities, sell vol and buy commodities for a bigger recovery, yet our hearts know that it won't take much to burst the euro-rescue bubble. But even then we need to ask how contagious Europe is to the rest of the world at the moment. If, as we suspect, the US markets are getting numbed to the European noise and are now getting more introspective towards their own recovery then we should see them come in and buy again today.
We may be sounding very short-termist when perhaps we should be being long-term Macro, but that's only because we believe we really are on the cusp of setting the next serious direction. Hold the line for another 24 hrs.
This leaves us thinking that either:-
A) This is a last death-twitch of the bears as they try their utmost to reverse the recent rallies using Euro ammo, but failure to make advances in non-euro risk components will mean they finally capitulate and everything rallies again.
B) It's all going to go Pete Tong (wrong) again and our "sell last Friday" theory is about to be rewarded.
Which is back to our heads vs hearts problem again. To us it is becoming clearer that there really is a supply chain led recovery coming via lorry or ship to a factory near you, which is good news for the private sector and equities. Against that, the public sector is still in a mess with western debt structure on a life support machine hoping the private sector pick up can come to the rescue before it dies (highlighted specifically by today's minor Euro-panic).
Our heads say buy equities, sell vol and buy commodities for a bigger recovery, yet our hearts know that it won't take much to burst the euro-rescue bubble. But even then we need to ask how contagious Europe is to the rest of the world at the moment. If, as we suspect, the US markets are getting numbed to the European noise and are now getting more introspective towards their own recovery then we should see them come in and buy again today.
We may be sounding very short-termist when perhaps we should be being long-term Macro, but that's only because we believe we really are on the cusp of setting the next serious direction. Hold the line for another 24 hrs.
19 comments
Click here for commentsAs always an excellent post TMM and it is a dilemma.... I've used todays dip to JCYFS at a small loss.... too many known unknowns!!
ReplyExcellent post :)
ReplyNFP week, and everyone I know is expecting the estimate to be smashed to the upside. I think we get risk off consolidation all week and Mr Market might get another reality check on Friday.
knightian uncertainty comes to mind when describing the possible outcomes in europe. stay overweight cash.
ReplyChina raised its interest rate. This is a surprise.
ReplyRecovery in private sector is only feasible with current levels of government spending. Which is unfeasible unless...
ReplyThe only alternative to bankruptcy or depression is printing its way out of the debt trap. Which is really not a long term solution. This goes for EU, USA and Japan.
Given the market reaction to the portugese debt downgrade (over 100bps shift up and increased inversion), it seems tough to argue that eurozone woes are fully priced in.
ReplyJuly = sitting on hands.See ya eOm.
ReplyBuying stuff you like and overwriting calls feels about right now. I think for Europe the issues are becoming one of not if someone is going to pay buy whom - that is, German taxpayers or equityholders of Eurobanks when they need to issue. Being short BPTs, long equities and short eurobanks still feels pretty sensible.
ReplyAs for Asia I hope by now its clear that the next shitstorm is brewing out East.
hey captain nemo, what should we specifically be looking at out east for plotting a course?
ReplyWatching US bank performance this week makes me reluctant to believe there is much/any upside conviction in this market for the time being.
ReplyDon't forget the upcoming effects of the US's 100% deduction on first year depreciation of assets.
ReplyLombard Street Research figure US firms will be bringing forward their investment plans for 2012 into the second half of this year in order to take advantage of the tax break. So we see a Q3 boom in the US and any other country that supplies the US with investment goods and then a big slowdown in the first half of 2012.
My reading of this is that equities go on a tear through the autumn and then wake up to the fact of no more QE, no more fiscal stimulus and, quite possibly, central banks shifting to a tightening bias.
Viz Asia look for a continuing pattern of greater inflation, derating of equities (ya know, P/E=D/E*(r-g) - even if E is going up a big leap in nominal r will screw what "normal" valuation levels are but provide some nice carry and likely currency appreciation. Equity appreciation as Borat says - not so much.
ReplyWatch the China banks situation. I think China now faces a touch choice - really high inflation with equities flat to up depending on sector as inflation rips but PEs decline in order to inflate away the NPL problem, or, alternately, a hard landing to some extent to get inflation under control and get housing prices under control.
China and Vietnam's kleptocrats both have a high reliance on housing prices for their day to day rent seeking and no particular vested interest in monetary stability. Vietnam just cut rates with 20% inflation - China won't be far behind.
@Nemo,
ReplyThanks for insights on Asia.
Also, Wen's Op-Ed in FT -"Inflation under control" - all clear - so why overnight rate hike. LOL!
Agnostic on US equities for now. We seem to be stuck in that [slightly weaker data ok, slightly stronger data ok], chop and slop range trade zone. Happy to sit tight in a few dividend payers, avoid index ETFs and then fade punter's enthusiasm, or lack of it. Agnostic on US fixed income as well, same reasoning.
ReplyJapan looks OK, for a change, despite universal skepticism. Staying long. Once the Momo monkeys finally discover the Nikkei again, I will start scaling out.
More than a few problems in submerging markups, China, Brazil especially. Any commodity bust will do them in via carry unwind. So short EEM, here and there, and XLE, XLB here and there.
Overall this seems like a time for cheeky short-term and - above all - modest-sized punting.
Tyler - if you think Portugal isn't priced in, wait until we see how not priced in Spain is.
Blackswan currency trading's Jack Crooks on why China financing Eu debt - self interest. Whose going to buy all that plastic?
Reply630pm Anon: I can assure you that there is a similar deal being done by the swiss - sell them watches, buy their el crappo fake cowbells so they can sell them to American tourists.
ReplyOn that basis, I think the Swiss are the smartest of all.
The European bond debacle continues. Portugal, Ireland, Spain 2y are all rising and Italy touched new high yields today.
ReplyAs for Greece, it reminds me of Panto season.
Market: "Look out, Pap, a default is behind you"
Greeks (theatrically): "Oh no, it isn't"
Market (taking another look) "OH yes, it is..."
Greeks (theatrically): "OH no, it isn't"
Audience (wearily): "oh yes, it bloody well is"
ECB (wearing long nose) "oh no, it isn't"
... and so on.... from alpha to omega.
leftback panto comment = genius!!!!
ReplyI thought it's a wall of worry to climb, not a wee kerb of worry.
Replyjbtfd
seriously, I'm not a pro trader just a scientist and fan of Macro Man (the original).
From a Macro view, it seems to a naive simpleton like me that it's worthwhile to be in risk assets (jbtfd) and eat the noise, unless there is a Major Bear Market Near-Collapse which eats up years of gains.
All of those recently (2008 global from developed market housing, 2001 tech bubble, 1998 Asian bubble) were pretty well telegraphed ahead of time and valuations were CRAZY not just exuberantly elevated.
I don't see this today. The next big Macro Collapse is obviously China housing. That is a sui generis situation, and it could be years from now. When that's already cracking then it's time to sell.
Personally I shorted (and fearfully was stopped out) US housing way too early and then thought I had missed all the profit when I was on holiday in August/Fall 2007 (yes 7 not 8) and saw the subprimers finally catch fire. There was a whole lot more short left in the barrel as it turned out.
From this history I think it probable the Macro-sized tsunamis will be announced with detectable seismic waves.
(Maybe a few well-deserved bullets in the head of some Chinese Angelo Mozilo)