Redux Friday

There comes many a time in a Macro Boy's life where there is not much to do and no new ideas come immediately to mind. 

During these times, one can trade tactically or just sit back and keep hoping that core positions keep working. So Let's take this Friday to review some core positions.

Short CAD:
  • The short CAD trade got a bit too crowded. 
    • Crowded positioning doesn't automatically mean there will be a move in the opposite direction. But it does mean we are in for some chop even if we are right.
    • We saw some unwind during the week. I took the opportunity and actually put on the bulk of my position two days ago. I will be curious to see where the upcoming CFTC positioning show at the end of the week.
    • I keep wondering if CAD is the best way to express this housing bubble trade - I don't know...We shall see.
  • Canada (British Columbia) has elected to move very far left politically Read It Here
    • What does this mean? Well for starters, spoiler alert to what the world would be like if Bernie Sanders or Elizabeth Warren gets elected in this country. *shudder*
    • How does the political far left feel about housing bubbles? Clue: like a teenager with an itchy zit. Read It Here
    • This should be interesting. We might come back and discuss this on a later date.

Crude Realities (Short Crude):
  • Crude was chopping around when I last wrote about it. But any chartist would see that it was making lower highs and lower lows.
  • We had the OPEC meeting where they officially announced an extension of production cuts. Markets got slammed by 5%. Oops.
    • I put on a sizable oil short during that session
    • Market share, market share, market share...
    • I wrote it before and I will write it again. OPEC, who by the way is infamous for internal cheating, cannot sustain cuts (at least that's my bet) because of market share.
  • Then, Libya production was the news du jour - crude proceeds to sell off
  • Then, huge crude inventory draw - crude first gets bid but ends the session lower 
    • When price and headlines diverge, it's the market Gods' way of telling you that something greater is at work
    • This is where I should be stepping on the gas, but my position is already big enough.

  • Just for kicks and giggles, there's a demand side of the story too for crude. Has anyone seen these auto sale numbers (last printed a couple of days ago)? And this is before I massage the data to adjust for vehicle fuel efficiency. 

Carney The Cable Guy (Long GBP/Short Sterling Steepener):
  • Bottom caught that one and it has worked out well. 
  • The last couple of days GBP has slipped on election worries, as the market thinks Theresa May's party will be winning less of a majority than previously anticipated.
    • To me, that's all noise. If you're feeling a little bloated from this position, cap some profits. If not, probably better not to mess with it. 
    • If GBP falls, I see that as a buying opportunity. (Unless something unfathomable happens, election or otherwise)

Food For Thought (Long Wheat/Soybean Ratio, Long Grains):
  • Direction bet has not done well. Brazil's currency shock from a few days back really hurt the beans market. 
    • Weaker currency allows them to export more. 
    • Political uncertain somehow is also incentivizing farmers to sell more? (not sure if that makes sense, but definitely remember reading that somewhere...)
  • Looking at stockpiles/production/etc. for beans - although it's already extended, we can still easily go higher (there is even historical precedent)
  • Overall, grains going nowhere - maybe even slightly lower
  • I'm still a believer in the big move in grains (especially in corn and wheat). But the timing was definitely wrong. Maybe next year's crop.
  • The spread has worked. I am a believer here, but a bit concerned about the cost of blindly rolling. But in the meanwhile, there are probably a few hundred more bps that can be squeezed out of this position.

Long US Duration (Long End):
    • Thank you, Mr. Leftback
    • I was originally a major proponent of the reflation mega-theme (something that I used to think (and maybe still do) that we were at a starting point and would transpire over the next 20 years)
    • Covered my UST short back in mid-March. 
      • Was too shocked to go long. 
      • Went long duration in early May and then covered 3 weeks later
      • Put on another long position a couple of days ago
    • Chart-wise, it looks really good to be on the long side. Regardless of the upcoming jobs number.
    • A hike in June is all but a done deal, yet long end keeps getting a bid? Hmmm.
    • 2s10s keeps flattening - if the Fed stays pedal to the metal on the short end, are we going to go inverted? I think very possibly.
      • I think 2s10s flattener and 2s5s vs 10s30s box can both be chased here. Something I'm keeping an eye on.
    • US BEI curve is also flattening - another thing that I'm keeping an eye on, waiting to see if this thing goes inverted again.

    Long Equities (Long Turkey, EM, Europe, Some US Equities):
    • Small positions for me, so kind of a yawner
    • China is rolling. Both equity index and currency. The currency move was interesting - noted by our very own Macro Man, it was a record move since the RMB reference basket mechanism was introduced in 2015.
      • Macro Man says he needs more data. Personally, I smell policy move.
    • Turkey continues to be rolling as well. 
      • Think Brazil in beginning of 2016 and Argentina in the beginning of 2013. 
      • The market is often early to discount. Buy when there is blood in the streets.
    • Brazil is really interesting to me - I have strong feelings about meaningful reform taking place - I think this is could be a tantalizing chance for you to go long BRL and Bovespa - No dire rush yet, will do more work on it and discuss this in the future.
    • Merkel talking up the Euro economy, while everyone is underweight Europe
      • Same concept as going long EM. This will probably be a big long-term theme. Need to get more long.
    • The underperformance in the US has not materialized much against EM but should occur in the second half of this year. The US has started to underperform Europe.
    • Underweight the US, but still long some stocks out of general obligation.
      • Really liked the price action yesterday in Russell - seems like it's going to break out a long-term consolidation
      • Another market/chart truism: The market doesn't give you this much time to sell the top. We've been floating around for awhile, we are probably going higher. 
    Wow. That took longer to write than I thought.

    Well, TGIF guys. Good luck with the jobs and trade numbers. 
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          Click here for comments
          June 2, 2017 at 5:45 PM ×

          10s at 2.15%…. it's hard to see this not rolling all the way to 2% from here this Summer. It looks like we "got it right" this time, possibly like the story of the blind squirrel and the nut.

          Still… LB is considering taking a bit off this Long Bond trade, either today or Monday, especially if 10s run into resistance again (yield support) around the 2.14% area.

          Eventually we will get a TA retrospective post together on this trade, but let's sit back and watch for now. It must have been a bit of a painful morning for some - with a tasty squeeze bringing tears to the eyes of the (long) bond bears.

          June 2, 2017 at 8:33 PM ×

          Kudos to LB, for his rates call.

          And kudos to Detroit Red for keeping the posts coming. My own brief thoughts on themes you touched on:

          CAD -- Did you see Vancouver housing is at new highs? Again, a challenge to thesis that Toronto's measures will blow up that housing market. I'm not positioned either way.

          Oil -- Agree that market action has not been good considering the data. Still, I can't get behind a short here. Interesting to see well productivity flattening out in the latest EIA data for Permian. Had known that was happening for Eagle Ford (GS recently wrote that, excluding lateral length growth, productivity has been falling in Eagle Ford, actually). Surprised to see the flattening in Permian, though. Meanwhile, service costs are going up.

          GBP -- Election surprises have tended to favor the right, so I'm guessing Labour's surge is a scare. But, more generally, I'm thinking a shift in perceptions of the Anglo-Saxon model may be afoot. These countries (US, UK) have neglected education and the social contract in favor of the quick hits of debt and tax-cut funded consumption. You're now starting to see the consequences. Voters are becoming desperate. And desperate people do desperate things. Like electing an obvious con-man like Trump. Once he fails -- which he very likely will -- you have to worry about the desperate voter's next choice. Left of Bernie. How do you invest in these countries when in four years you can have rabid lefties in charge. Meanwhile, in Continental European countries like the Netherlands, Germany, and France, the Left is in ruins, replaced with pragmatists. To DR's point about Europe, yes man, I agree. Macron is looking increasingly likely to get a parliamentary majority. I don't have the trade on, but long CAC / short the Russell sounds good to me. One fly in the ointment is the likelihood of an Italian election.

          BRL -- You may well be right, i.e. pension reforms get passed. But the reforms are inadequate to stabilize the country's finances. In the current liquidity regime (abundance!), the market will likely look through it and just assume a newly elected government will address the problem of the additional reforms (like amending the minimum wage setting formula) needed to comply with the spending cap. BUT, if the US starts shrinking its balance sheet, and both the ECB and BoJ taper theirs next year, I really wouldn't be surprised if markets once again look at Brazil and exclaim, "this thing is f-cked!"

          China -- The Chinese credit impulse has turned over and will take global growth with it, based on the historical relationship. Fred Goodwin had a neat chart in his latest piece showing CHBGREVA Index (Bbg Intel China Credit Impulse 12 month change) leading the Global PMI by 1 year. It doesn't look pretty folks.

          June 2, 2017 at 8:41 PM ×

          Not sure that the action in USTs today was all driven by the US jobs data, although it clearly helped put a bid under the long end. There is also the matter of a large and once "popular" Spanish bank approaching what looks like liquidation. Remember when Yoorp "mattered"?

          LB well remembers waking up to a 5% drop in European equities that put a hole in his 2011. Spain, Greece, Italy… last time we looked they were still there and the banks were still loaded up with NPLs. This has been a big plank of our argument that more wary EU/UK/Japanese investors would continue to pursue the yield spread between USTs and bunds/gilts/JGBs, for example.

          That said, 2s30s is at a 9 month low, dollar looks set for a bounce, so wouldn't be surprised to see yields reverse for a bit. We plan to re-examine the technical picture at the weekend and then see what Monday brings (US factory order data…)

          June 2, 2017 at 9:49 PM ×

          Ok, not to start a brawl, I am a peaceful man anyway. But are you guys checking out all the negative US equities commentary that came from the big wigs of US investment banks this week? It was not on the simple basis of "my ass feels a correction approaching" either. Some pretty strong headwinds and downward revisions coming our way in economy here. Leftback & Co were the first receivers of this news and now JBTFDippers may get smacked by the fleeing masses. You aren't witnessing the exact scenario play out today though. It's to the moon, Alice, as the myopic Fed-is-not-to-raise-in-Sep crowd calculates exactly how high to take the indices using the magic discounting mechanism of where-the-f*ck-else-do-I-put-all-this-money(?), as analysts can't type their morning commentaries on the stocks they cover fast enough and are tripping over themselves while their glorified models project none of these headwinds whatsoever resulting in a new acronym of the day: JRTFPT - Just Raise The F*cking Price Target. Yes, new highs and perhaps even R2K is ready to join the party, but boy oh boy, you put a small dent in the whole theory by lowering the second quarter GDP by a full pct or two and you may have all it takes for this train to derail. Party on, the new fearless and brave investors, who can't imagine why the same report which is being celebrated today may expose the 70% of the economy which depends on the overworked and underappreciated consumer and may just be the reason for a few Fed members to dissent at the June meeting, completely spooking the players and starting the exact brawl I did not want to originate here. We have a blackout for Fedspeak starting tomorrow, so don't be looking for any hints before the June meeting. You are on your own. I hear it's pretty cold on the moon.

          June 2, 2017 at 10:10 PM × This comment has been removed by the author.
          June 3, 2017 at 10:35 PM ×

          Great post, thank you.

          Regarding CAD, since 5/12, CFTC net position showed the record level of short CAD position. But the price action of CAD did not seem to be correlated with this positioning. So I wonder if this is a valid indicator of where CAD is going.

          An observation on US consumption. The millennials now are at the point that they need to stop renting and start buying single family houses to raise a family. The inventory is so low. The construction cost is rising. They still need to pay back the student loans and their wages grow at a very slow rate.

          Add these together, they have to cut back spending on other stuffs and save money for down payment. We have seen the impact on retail industry this earning season. I suspect that the trend would continue for a while. So long the spread of XHB/XRT should still make sense this year.

          abee crombie
          June 4, 2017 at 4:14 AM ×

          Re Brazil. Comparing bovespa to Argentina in 2013 is a little too much, imo . #1 as bad as dilma/ lula were. Not in same ballpark as anti business kirshner. Merval is hardly a stock market. Not many listed companies and those that were there were at really low valuations. Bovespa is pretty decent market, even if high weights in banks and oil and InBev. Valuations are not nearly the same. Itau is a great company but it's not historically cheap. Quite the opposite. I like the carry trade better in brl vs equities. Plus nyc hedge funds seem convinced this temer issue and pension reform is not a big deal. Not so sure it's a slam dunk pt doesn't win next years elections. Pension reform is not popular with voters.

          On oil. Yes trend is down st, but be aware it's a nasty market to trade when not in long term trend. Not sure I would extrapolate too much of recent moves. But my dear, Xle is getting killed. That will probably be a nice tell if it ever starts going up.

          Nice post though. Thanks for sharing the ideas. Different views make the market.

          June 4, 2017 at 8:52 PM ×

          Any views on the new Fed nominee mooted, Marvin Goodfriend? Was difficult to read much into Quarles as he was chosen more for bank regulation, but Goodfriend maybe gives an idea what kind of a Fed the Trump administration wants. Initial headlines were "conservative" and proponent of "rules-based" monetary policy, but then I see the below post and wonder WTF this guy is about. Another academic-type with his head stuck so far up his own arse that he's actually advocated deeply negative rates?!

          June 4, 2017 at 11:38 PM ×

          In Richmond Hill (suburb of Toronto) the houses are sitting there for sale. In the past they would be gone in days. They are still sitting there for sale. Many are now almost 2 months on the market.

          Macro Clown
          June 5, 2017 at 12:32 AM ×

          Re: zh Jin

          I think positioning indicators need to be taken with a grain of salt. Positioning (although often) might seem like a directional indicator - it is not that. I worked at a huge quant fund that did work on CFTC positioning - running a regression of "extreme" positioning vs followed returns - there's nothing there. Positioning is an impact indicator - when you're right on a trade and positioning is stretched in the opposite direction, you'll have a bigger move than when position is not. This is particular true with something like FX, where no matter what positioning is like, the central bank of the country can simply come in influence the currency for a long period (in trading terms).

          Additionally, keep in mind CFTC positioning for FX is only a portion of positioning (the bulk of FX positioning is OTC and a more complete picture can only truly be gathered by getting FX positioning data from large PBs and custodians like State street, JPM etc. CFTC positioning should only be used indicatively.

          June 5, 2017 at 8:40 AM ×

          So, let's understand this. Mortgage lending is dropping as housing transactional volumes also dropping confirm. Autos hit the wall, so ? Yes, you guessed it another lending hit coming to the news near us sometime soon. Big yield payers in Gas/Electric face price capping post election and that's a best outcome assuming it's only a Tory led govt. Then let's hope the power of faith keeps UK equity up ,because on the fact of it steams bleeding out of all things cyclic at a time when policy is intent on squeezing yield earners. Looks like rotation into PM's is going to have to pick up a lot weight. There again looking at the sudden volume change last Autumn as yields started dropping and money chased equity on the usual whatelse can I do basis I'd hazard a guess wee retail will end up once again taking one up the arse for being late to the party.

          River OCean
          June 5, 2017 at 1:26 PM ×

          Paid news? Hope?

          "Toronto home sales crashed in May, but prices are still soaring
          Home sales plummeted in May as compared to May 2016, but the trend is likely temporary

          June 5, 2017 at 11:37 PM ×

          I wouldn't place too much emphasis on one month. I hear every day from my social circle about people having to walk away from offers. Situations where people are purchasing upsizing homes but having difficulty selling their current home, which is kind of stupid as why would you buy before you sell but I guess that is Toronto mentality right now as people think its a sellers market.

          Lets see how this unfolds as all signs from northern suburbs is that no one is showing up to open houses.