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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Nico
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January 3, 2019 at 7:15 AM ×

LB

with all due respect it is very disappointing to hear you pounding blindly on the Fed to no end joining the cohort of market professionals - i mean serious cats with 20, 30 years of experience who are in total disbelief today caught off guard and burning under their clients' ire - yes, they have been reckless yes, they rode the QE gravy train, and peer pressure made them ride the gravy train far too long

Remember that passive investing IS the last bubble and it burst in October: overcrowded long in US equities. To hear all the 'professionals' reason on how past bear markets went, -20% then 50% retracement then blablablah... NONE of the previous bear markets followed 10 years of artificial CB pumping worldwide to the point where the Swiss national bank became the world's biggest hedge fund.

Don't they look smart on their Apple holding now. Told'ya there was no support until the 130s. And even Buffet who bought too late... anyone? CAN'T WE AGREE THIS WAS ALL INSANE? and guess what. Yellen and Bernanke are meeting with Powell on Friday. The two old fools who created this mess... This is pathetic and desperate. to call Powell's 'parents' to try to rein in their turbulent, teenage boy.

Then you read the Reformed Broker going 'what if the worst was behind us'. Total blindness from people who have been burned and have been caught swimming naked... trying to defend their incompetence. I had a huge beef with the Ritzholz crew... they used to be pros and then threw all caution to the toilets. they personified Street hubris and complacency ... showing off their AUM growth and their brand new office in Manhattan, celebrity syndrome blablah

LB i still love you and wish you the best 2019. Wake up before a nasty third leg slices through 2350. You need real panic, capitulation for this market rout to impress Powell and stage a healthy comeback

- not a stupid '-20%' magic number!
- not a stupid US president making phone calls to PPT
- not Mnunchin and his Goldman coots
- and certainly not Yellen and Bernanke intervention

Everyone should be worried when everyone else speculates on a long awaited retracement 'just because' market went down too fast. It sounds just like that stupid inverted head and shoulder pattern everyone and their sister was discussing in November, including financial TV.

It is also too early for bargains in Europe although this is also where i would start, seeing the dirt cheap compression (2900 is a nice level on Eurostoxx). Italy's 10th bank was put under ECB's supervision yesterday. This is not a small matter. Remember Italian banking sector is the cancer of Europe. Until they fix this, there is no investing in Europe. That Italian news was buried yesterday.

Last... keep an eye on Tesla... the poster child of QE/unicorn investing. Tesla itself represents the 'blind faith' game that propped up US equities the last 10 years they are trying to hard to keep the dream alive

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Leftback
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January 3, 2019 at 11:53 AM ×

Thanks for the love, guys. LOL. Look, we are not going to stop complaining about the Fed, because most of us here don't believe in central banks, and believe them to be the source of all evil, and so, complaining, that's what we do...

LB loves a market panic as much as the next punter, but we try to be rational, even when all around us are engaging in herding behavior, and that of course tends to cause us to lose money for a while, even as we dig amongst the rubble for bargains and try to be "value investors", which often means buying when everyone else is running around with their pants on their heads.

The world is not ending. The sun will rise this morning. Life goes on.

Let's just put the panic aside for a second and think a few things through.

First, of all, what is oil telling us? Oil is not forecasting a huge global recession. The precipitous drops in crude oil prices we have seen in 2014 and 2018 happen because the normal laws of supply and demand in that market have been warped by a variety of very large players hedging, and by the presence of leveraged punters on the long side. It is the unwinding of these positions that creates the rapid drop in price, not a collapse in demand.

Second, and this also relates to oil, are we going to experience an imminent US recession? It is rare for the US to have a recession when gasoline prices are as (relatively) low as they have been recently. In 2008, the massive oil price spike undoubtedly was a contributor to the US recession, although the housing downturn had already set the wheels in motion. This recent price action doesn't qualify.

Third, stop yelling at me for criticizing the Fed. LB didn't create the asset bubble, the Fed did. Bernanke and Yellen will argue that their policies prevented a second Great Depression, or alleviated the worst manifestations of the one we are in. As the bubble was slowly being inflated (especially during QE3, which was controversial even within the Fed) we all warned that the reverse process would be tricky. Many commentators have described the Fed as being "trapped", and we may eventually see that they are correct. In any case, it was clear that it would be necessary to move VERY slowly towards a normalization of monetary policy in order to avoid global financial accidents. Whatever your opinion of the tenures of Yellen and Bernanke may be, they clearly understood the necessity of unwinding slowly, and both chairs managed to avoid anything more troubling than the Taper Tantrum and the late 2015 market turbulence (admittedly with fiscal assistance).

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Leftback
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January 3, 2019 at 11:53 AM ×

I am not sure what Powell thinks about. I don't think he is very bright. I really hope he doesn't think this is the 70s and he is going to Whip Inflation Now. Fighting the wrong war has always been a problem with central banks and leads to farcical mis-steps like Trichet's rate hike into the teeth of the GFC. Powell clearly lacks Bernanke/Yellen's deep understanding of the mechanics of the Depression, and this concerns me and others quite a bit. Trump might at some point go so far as to tweet to suggest that Powell is "a lemon" at the Fed, but we are more concerned that Powell is "a Mellon".

Finally, I do think that Powell has made rookie mistakes, and that he is in the process of being re-educated. I think they walk back the "autopilot" rhetoric, and indicate that the rate of run-off is part of the "extraordinary" tool box of monetary policy. That happens, and we get back to a normally functioning market, work through a soft patch in the US, and eventually resume a symbiotic relationship with China that has made the world go around for 20 years or so. It's unthinkable to me that they would now deliberately precipitate a second global meltdown, after going to so much trouble to repair the damage of the first one. Perhaps we could have a market later this year where unicorns don't have P/E ratios >100 while real economy stocks trade with multiples <5. You know this is unhealthy, but it is going to take a long while to get back to real.

You have to be rational here. Look around and all you see is this: strong high-dividend stocks are stupid cheap, especially in UK and Europe. We normally love fixed income, but we look at a 10y closing in on 2.50% when there is 5-10% yield available out there in stocks that are just not going to go away and die. Take a careful look through UK and Europe and you will find a ton of these; even China and the US now offer a few solid high dividend opportunities, especially if you are prepared to venture into the beaten down sectors of banking and energy, and a few other cyclical areas like autos and automotive parts that have traded like Armageddon is around the corner. It's a great time to buy the real economy; just ignore the unicorns, which are unfortunately bundled into many of the same ETFs. Do we hate passive investing and ETFs? We hate hate hate them and all the brainless portfolio managers and algorithmic traders who punt them.

Here is what's coming. The US will print a weakish set of employment and wages data. The Fed will signal that they are on hold, and that a March hike is off the table. Central bankers will stop saying stupid shit at press conferences. Britain will eventually fudge some kind of Brexit deal. Trump will retreat from the trade wars with some kind of resolution. China will inject liquidity. The ECB will kick the can down the road. The dollar will fall. OPEC will signal an additional production cut. Unicorns will bounce, unfortunately, but so will real economy assets, perhaps to the extent that we finally see that rotation from "growth" to "value" in 2019.

The world is not ending. The sun will rise this morning. Life goes on.

OK. Do we get our own blog now? ;-)

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Leftback
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January 3, 2019 at 12:16 PM ×

Btw, just in case anyone thinks that we are some crazy ranting lunatic on a fringe econ/trading blog, almost EVERYTHING we have written above about QT and rate hikes was stated by pillar of the establishment and former White House economic advisor Larry Lindsey, on Bloomberg recently. Of course he was smart enough to turn down the job at the Eccles building…..

Now to prove that we are crazy, we are even looking at dividend paying stocks in... France. In a few days we will give you all a list of insanely cheap names that will deliver 5-10% yield.

Nico G, I know you want your apocalyptic market meltdown… it would be interesting to watch the consequences (especially in Silicon Valley - how many of us dream of Facebook imploding?), but I don't think it happens now, and I hope it doesn't, for the sake of people's lives. Recessions kill and hurt real companies employing real people, especially those in our society who are least able to fend for themselves. There must be at least one or two people in the Eccles building who think that way.

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Moniker
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January 3, 2019 at 1:58 PM ×

LB,

Clearly, you are smart as whip and I tremble more than a bit typing this.

“You have to be rational here.” - well, https://en.m.wikipedia.org/wiki/The_Great_Illusion

There is no one more “rational” than the corporate board.. I think lower revs will drive dividend cuts/drastically reduced buybacks. Buying a stock for a dividend is like getting married for the sex. And boards’ timing are usually awful (I sat right behind a buyback desk from 03 to 11).

So, we are in agreement that value will win through this year. I believe Nico is spot on concerning inertia which will exacerbate the drawdown in equities.

Love the Mellon quip. I think Big Boy Larry qualifies as at least two pillars...

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Leftback
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January 3, 2019 at 3:52 PM ×

Agree, in fact, that dividend cuts are coming, certainly here and there in the US, where there has been a lot of misallocation of capital, but there are clearly some obvious traps to avoid. We didn't buy GE, for example.... but there are some horrible value traps out there in the US. If you look at the charts for big Pharma, like BMY, for example, they look bloody awful (even before today's news). This is just one reason why US equities are going to be a bit of a nightmare for a few years. There are going to be some nuggets out there, though.

A lot of bad news (including dividend cuts) is likely already priced into dividend payers elsewhere in the world, and of all those most of the companies will survive and not expire, especially some of the UK stocks, where rumors of the demise of capitalism have been greatly exaggerated (with great respect to those who have discussed the fear of Corbyn here at some length).

It looks like another great day to sell TLT. It makes no sense for people to buy the long bond after the ADP data, even though we know that softer data is probably coming this winter. 5y5y at 1.50%, but still....

What did people make of the Kaplan Fedspeak? I imagine most are waiting to hear Powell's comments tomorrow, not to mention the jobs data.

1s5s is now -16 bps. POLICY ERROR should be flashing on everyone's Bloomberg terminal at the FED.

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nevnej
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January 3, 2019 at 4:10 PM ×


Here it comes, the Fed "open to slowing balance sheet runoff"

https://www.marketwatch.com/story/feds-kaplan-calls-for-pause-in-interest-rate-hikes-says-open-to-slowing-balance-sheet-runoff-2019-01-03

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Cbus20122
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January 3, 2019 at 6:09 PM ×

People are happy about the ADP jobs data, but I prefer to look at the momentum in the initial claims. It's a bit of a more noisy high frequency indicator, but if you just smooth it out a little bit, it's the best overall unemployment indicator there is. It's not quite yet in red flashing light territory, but with today's data that was very much contrary to the other jobs data, I'm of the belief it's putting in a bottom here.

Historically, you can track this indicator bottoming with markets topping or putting in a top overall.

Regardless, as I mentioned before, the amount of people assuming we'll see 1. Liquidity injections of a similar size we saw in 2015-2016, and 2. an assumption that those injections will be as effective as they were in the past is bordering on being insanely naive.

I'm 100% not a permabear, and I'm 100% not someone who wants to see doom and gloom. But we're staring down a pretty precarious situation in the global economy right now, yet a ridiculous amount of punters are just looking at lagging US economic data and pretending everything is okay. We are every bit as vulnerable now as we were before the GFC, and I would even argue we have far less tools at our disposal to deal with some of the issues that are potentially becoming "real". Way too many people want to pretend that things can't go really sour simply because they've been conditions by the dip-buying successes in the QE era. But if you have any understanding of the effect of excessive keynesian interventionist economics, you would realize it just leads to bigger booms and bigger busts when things actually unravel.

So am I saying it will unravel right now? No, I'm not making an absolute call here (I don't work in absolutes). But I 100% think that the amount of people completely writing off the idea that this could unwind in a really bad way is utterly irresponsible and blind. Will it happen here within the next months? Probably not, but if something systemic goes belly up, then it could be the complete opposite.

And regardless of what I think might happen in the future economy, until the actual economic data and leading indicators start to show some life on the upside, there is zero reason for me to be biased long here. When you're in a bull market, you never go net short... When you're in a bear market, you never go net long. We are in a bear market right now, so the easy money is on the short side until proven otherwise. And FWIW, all my leading indicators I track are signaling steepening downside potential, not the opposite type of scenario where we may get a recovery ala 2016.

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Anonymous
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January 3, 2019 at 8:34 PM ×

Cbus if you care to share I’d be interested to know what indicators you track?

I see China not letting the bottom fall out (basic commods are not ultra weak like 15/16), and absence of credit bubble in the west, low absolute lending rates, cheap oil/energy make me think soft soft landing. But the ferocity of the recent moves in Eurodollar strip does raise questions.

It annoys me that the main overvalued asset class spz is resisting a decent correction while markets are trying to strong arm the fed into cutting pronto. Rates are still accommodative.

There is value emerging in European financials but timing the ultimate low is anyone’s guess

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Cbus20122
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January 3, 2019 at 9:29 PM ×

I'm not really a fan of looking at absolute levels too much. If anything, the fact that things have dropped so low is more of a warning than a good sign. Oil being low definitely helps ease things a bit, but it also provides less dollars around the world economy. There is also a significant lag between oil dropping off and the economy seeing the benefit from it.

What matters more is rate of change, and the rate of change of the stuff I'm tracking is why I'm more nervous. When the rate of change peaked and is now accelerating to the downside, you get much bigger issues popping up.

The primary index I trade off of and use as an indicator is a self-made model that includes a variety of highly cyclical stocks, etf's, spreads, and other items that historically peak and head downward before the S&P 500 does. It provides a pretty good early warning indicator of what is going to happen, and when things may start to accelerate downward. It started topping in February, and peaked around July-August this year and has basically been heading south ever since. Traditionally, in past recessions or slowdowns, this index will tend to bottom out around the time in which you would expect to see any type of significant bounce. Instead, I keep seeing further acceleration downward. Beyond that, European economic reports are not bottoming right now, and instead are accelerating to the downside. Same goes for most asian countries. When the rate of change is accelerating downward, you get big macro moves downward in markets. Note that the biggest drawdowns after the oil crisis didn't start until about a year after oil truly started to crash in 2014. And the worst thing, is that as I've been mentioning multiple times, China is not meaningfully stimulating. Everyone is counting on China to stimuluate to save themselves. But where is this stimulus now? It's not here, and for people who have been following their monetary problems closely, there is reason to believe they're somewhat constrained in being able to stimulate without breaking the yuan's soft peg of 7. Even if they do start stimulating soon, the actual effects won't start to show up for another few quarters, and a lot of that stimulus will be going to roll current debt over.

Personally, I think the best analogs for what the current markets are going through will be 1997-1998 and then 2015-2016. I say 97-98 because that was another offshore monetary crisis period with a rising dollar and a bubbling USA stock market. Definitely not the same however since the imbalances are far larger now than they were then, and the asian contagion problem was far far smaller than what we're potentially looking at outside our borders right now. We also were not nearly as globally linked as an economy back then. As for 2015-2016, the main thing to realize is that we haven't actually "solved" many of the economic problems post gfc. Normally, you get natural economic recovery (we've seen this a decent bit in the USA to be fair) after businesses fail and you see some austerity. But if you just do a short history lesson on the causes of the commodity bust, the causes of 2015-2016's slowdown, the causes of the euro crisis. All of those problems are still there, we literally never solved any of them, we just papered over them and hoped that giving the economy more time to reflate would alleviate the problems. But guess what... especially in the Eurozone, we haven't seen any real recovery, and now have even more risk than before due to the lack of triggers we can pull to provide stimulus.

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Anonymous
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January 3, 2019 at 9:51 PM ×

China's strategy so far is quite clear. Doing some small stimulus so that the economy won't outright collapse. So there will be infrastructure investment and targeted monetary easing here and there to hold an economic floor.

Negotiating with the US and trying to get a deal, then after that depreciate RMB over 7. After Fed stops tightening and even begins easing again, China would follow up with a bigger stimulus.

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Nico
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January 3, 2019 at 10:10 PM ×

"When you're in a bear market, you never go net long" Amen to simple market wisdom. My favourite:

"you are either too short, or not short enough" from an old pal at Trading the Charts

LB i do not want a crash. In 2008 the money i made barely gave any pleasure as my sister lost her job and so many folks were in deep shit. I will repeat for the 10th time, Spoos can go to 1800 and market will still look healthy on a LT chart. 1800 is no biggy.

I gotta say i want to milk current bear though, because the last two years were difficult for me. I was down almost 8 figures on spoos last September. It is sick just to write it. But I did so much insane trading on Eurostoxx throughout the period, that i returned P&L neutral at Spoos 2500, 200 points over break even and with about 2 million euro worth of paid dividend to recoup. This is what being short futures with such size for two years end up costing you - the real 'theta' of short equity futures

from yesterday morning i went 250 spoos and 500 stoxx short. biggest ever until i realised i could not sleep anymore and the wife made me cut the whole stash down to 125 spoos and no Europe (where i no longer have strong conviction). To keep until 1800 level. Holidays now.

After being the laughing stock of all 12 yo traders in 2017 - the year of the Greatest Financial Anomaly - i am glad to be back to perhaps offer caution to young readers who have never traded a bear. Do NOT believe the media when they tell you it's all right. No buy side crooner will ever tell you to sell. This whole charade is hooked on ever increasing multiples and Dame Yellen told you there would never be another financial crisis in your lifetime ! or hers mind you...

how about "you are only as good as your last trade" for market wisdom?

It does not matter what level you longed spoos between 2009 and 2018. Only the exit level matters. The whole world wants 2900 again to get out. Or 2800. Or 2700. Won't happen. The one thing you have to guess right is how many people must get out of US equities now bearing in mind record short convexity, short VIX, cov lites, COCOs and leverage loans in the pipe i.e. the fantastic Trump 'Animal spirits' house of cards

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Anonymous
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January 3, 2019 at 10:18 PM ×

Cbus, v interesting, thks for coming back.

I find your description of Europe a little irksome as it’s one I find quite often amongst yanks - yes for the last 9 months growth has softened, but over the last fours years there has been massive improvement since the ez crisis in employment. Sure real gdp hasn’t grown like the us, but it’s still grown and has worse demographics, and it’s had the headwind of ez crisis to contend with. The big questions around ez were not elegantly solved, but they were solved in European way - under the table transfers via ecb buying, ltro, and target 2, and the longer term stuff (Eu budget, fiscal transfers) is in motion but will inevitably be very slow moving - it is happening tho. Now unlike the US the EZ still has a decent amount of track to improve, particularly in periphery, and particularly post all the bank clean up of the last five years, so in my mind is more interesting, but this isn’t deep analysis - it just seems obvious from where we are in the cycle.

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Cbus20122
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January 3, 2019 at 10:41 PM ×

Anon, make no mistake, I don't mean this as a personal attack on Europe or European people. It's just being pragmatic with what is showing up in the markets, fundamentals, and econ releases over there.

"but over the last fours years there has been massive improvement since the ez crisis in employment" .

So what are the catalysts for the Eurozone economy to improve from here on? I mean, I think the easy answer to why there has been "massive" (have to feel this is an exaggeration from reality) improvement is the Euro bond buying program, but also the huge investment China has made in purchasing industrial production from Europe (largely Germany). But we're printing growth contractions despite these bond buying programs still going on. And now we have Draghi starting to tighten this with zero % interest rates and a rapidly shrinking bond market, and China is not making the purchases they once were in Europe (partially a product of their own huge problems). Regardless, what happened the previous four years isn't relevant to the going-forward outlook, and the forward outlook offers very little to be encouraged by aside from relatively cheap valuations.

As for the solving of the EZ problems, I would call most of what you listed as papering over and monetizing the issues. The Eurozone now has a nonexistant bond market and a ton of banking risk (country dependent of course) as a result of the "solutions", and there isn't even that much economic growth to show for this. This is just transfer of risk, not solving the fundamental issues.

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Moniker
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January 3, 2019 at 11:02 PM ×

Short EURUSD should be the trade of the year...

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Anonymous
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January 3, 2019 at 11:26 PM ×

Cbus, interesting albeit consensus arguments but they fail on balance because you are ignoring the glass half full side.

Apart from distorting bond markets the 2nd Eu qe did nothing for the real economy, which would have expanded anyway without the bond silliness. This I suspect is the root cause of our disagreement. I think most monetary intervention by Eu, fed and boj has been a total waste of time. It works in times of crisis to fight reflexive destructive trends but is irrelevant voodoo the rest of the time that leads to bad habits by investors. Powell with his “let’s get rates to a normal level” (ie those seen most of the time for last 200 years) had the right idea. All the focus on qt and daily liquidity withdrawals seems asinine because no one in finance can explain a mechanism that isn’t totally dominated by other factors like multipliers such that it becomes a third order effect.

Growth hasn’t been that bad in Eu, 17 was strong, 18 alright, let not the good be the enemy of the perfect. Look how strong Spain came back. Yeah Germany massively aided by exports to China which is fading, but peripheral will pick up the slack. There is low hanging fruit, and the employment situation and wage growth can be reflexive to the upside - it’s time for heat, and before the heat comes ourperformance. Europe is not going into a recession, Brexit willing, it will outperform the us by a margin for the first time in a while.

As to monetisation, that is baloney. Banks have raised serious amounts of capital after taking massive hits over the last 9 years. That’s real balance sheet repair. EZ governments have actually carried out austerity and for the most part got their fiscal house in order. Unlike the US they actually have room to stimulate in aggregate and given the rise in populism that is what is happening. The Eu is like US in 2012-2013, 3-4 years out of a crisis and ready to roll

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IPA
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January 4, 2019 at 4:54 AM ×

@Cbus, I also don’t get the whole Khashoggi effect bringing the oil down. If anything, it should be all the way around – weakened Saudis can no longer police the Middle East (ME) and the price of oil should be up on geopolitical risk. This may still be the scenario to unfold in 2019 with US troops withdrawing en masse.

I am loading up on oil services stocks here, and I am totally with @LB on energy being a very cheap group right now after it has been decimated. If anything major breaks out in the ME (and how could it not with Trump unable to help going forward) the price of WTI would benefit on ME production and delivery disruption resulting in crude shortage, and US oil services stocks would start to price in a reversal of 2019 US shale oil capex cuts.

I should also note that expectation of interest rate hikes is being priced out but there is no recession on the horizon yet. I am not blind and I can see that the market is predicting one but it predicted 9 out of the last 5, and I am thinking this rapid oil price decline is a head fake. Should there be no recession WTI has no business being at $47.

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Anonymous
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January 4, 2019 at 6:49 AM ×

IPA, - US wanted lower oil, Saudi had to immediately kowtow in the wake of kashoggi so they started dumping. This combined with Iran waivers triggered the fall which also unwound a massive speculative long. Oil isn’t sustainable here beyond 6 months, but dunno when it rises. I don’t see cheapness in energy stocks, just in oil itself

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Moniker
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January 4, 2019 at 2:39 PM ×

Payrolls give Powell just the cover he needs. Good luck with ending QT and hikes. I bet even Yellanke gives him an attaboy today. Stocks sacrificed on the altar of bonds. Of course stocks will be the last to know. Fun 2H19 coming up...

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Anonymous
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January 4, 2019 at 3:15 PM ×

kashoggi cannot be an excuse to push Saudi to dump oil forever. That card had been played and it has been done. Going forward, oil has more upside.

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Leftback
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January 4, 2019 at 6:03 PM ×

Afternoon, all. What a difference a day makes. Imagine Alec Baldwin in character here, as Trump:

"I am the greatest President. I talked to the Fed, and I talked to Chin-uh, and today I presided over the greatest stock market rally in the history of the country. People don't realize this, but it was the Dems who causes the sell-off. Yes. Nancy Pelosi was shorting the market. Yes, it's true."

Here is what we said yesterday:

"It looks like another great day to sell TLT. It makes no sense for people to buy the long bond after the ADP data"

and sell it we did, buying European equities at the close.

So we told you, and you read it here first:

1) Treasuries were overbought (highest RSI on record for 5s according to MM) and were a sell.
2) China would undertake stimulus measures, so China and EMs were a buy.
3) Powell would have to walk back the "autopilot" comments from his ill-fated presser, therefore spoos n Qs a buy.
4) A "Trade deal" is coming, China, EMs a buy.
5) Oil was oversold and would bounce hard. Energy a buy.
6) Brexit fudge is on the way from the UK parliament (still waiting on this one). UK a buy.

Now, you lot are still going to throw rotten tomatoes, aren't you? Because that's what we do here ;-)

For Heaven's sake, try not to be too critical. Look, we were correct about rates peaking in the Fall and then bottoming yesterday, and that's not easy to do. History shows we are often right but invariably early, typical of someone who is thinking ahead and isn't driving by looking out of the rear view mirror. LB isn't exactly annoyed, but it gets a bit exhausting at times to stay focused on making good contrarian calls when everyone is running around screaming with their pants on their heads. (No selfies, please…).

Later, we will offer some analysis of the Fed's current predicament and a careful dissection of the fascinating Fed Chair 3-way in Atlanta that we all witnessed this morning.

For now, let's go back to Baldwin as Trump: "I called Melania. I said, Melania, there's no problem with it, the jobs number, it's really big. She told me to keep it in my pants and not to tweet about the Fed." Looks into the camera: "I am the greatest U.S. President. Everyone loves me. Tax cuts, jobs, a market rally, even Chi-nuh, the people there, they love me…" Fade to black..

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Nico
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January 4, 2019 at 6:45 PM ×

spoos: I cannot resist this trading paradise and just redeployed that extra 125 spoos short covered almost 100 points lower last night (!!!) This is insane trading. And should not be a surprise to anyone: they HAD to close first week of Jan in the green > 2520 for that thing you know, the 'first week of the year omen' thingy. Now you know why they invented a way to make Powell talk this Friday.

congrats on the rates call LB it is indeed hyper arduous - and i agree that Europe is where the value is. I'm flat after... about 4 years shorting into it

oil: media should fear a bounce in oil prices everytime oil is too high and lands in the Fed's collimator, they will have to sacrifice and kill a journalist

market can have juice all the way to the 2600 but don't count on it - everyone should be worried of how much it takes to squeeze that sucker 5% up.

How many times can you use both Powell and China hype in the same 24 hours?

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Nico
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January 4, 2019 at 7:06 PM ×

PS: Henrich eloquence as usual, for the week end:

https://northmantrader.com/2019/01/04/the-ugly-truth/

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Nico
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January 4, 2019 at 7:08 PM ×

Free market price discovery would require a full accounting of market bubbles and the realities of structural problems which remain unresolved. Central banks exist to prevent the consequences of excess to come to fruition and give license to politicians to avoid addressing structural problems. And by preventing these market forces from playing out at each sign of trouble the can gets kicked further and further down the road. Each successive recovery keeps the illusion alive but the jingle is getting tighter and tighter each time around and requires ever lower rates before the monsters return. In the meantime debt keeps expanding while each recovery produces less and less organically driven growth, but ever higher wealth inequality. This is what this system produces.

Henrich

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IPA
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January 4, 2019 at 7:37 PM ×

LOL, @LB, we are in 2 trades together now: short TLT and long energy. Do I get a pat on the back from you? Pal, this is a venue for friendly exchange of opposing views for the benefit of the trading community – not a place for getting accolades. Besides, if you are making the same call on daily basis, you are destined to be rebuked, ridiculed, and sometimes accused of being stale (pardon the remark). So, don’t take the criticism here personally and instead just quietly celebrate being awesome. Get a drink!

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Leftback
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January 4, 2019 at 7:49 PM ×

All true. Good luck @Nico G but I think that shorting will be tough for a while here, looks to me like the vol sellers are back and we are going back to the early Dec VIX level of 16 or so.

LB is not political but there are political dimensions to what we do here, so we have to think about it.

Trump (the real one, not the Baldwin version) is in rare form today. A lot of what he says about immigration does ring true, with citizens, legal immigrants (who in many cases waited years to be admitted) as well as those who come and go legally every day to work - and pay taxes in this country. This is the problem for the Democrats, that Trump often manipulates them into appearing to defend things that are not only indefensible (drug traffickers, human smugglers) but also deeply unpopular with the US public (illegal immigrants who absorb a large amount of public money and "Dreamers"). The riff on the steel coming from US steel companies for the wall was clever; this is after all Trump's "infrastructure plan", and the fact is that it's a losing issue for the Democrats to oppose it.

OK, no more politics.

Big question in this space is: how does the market close today? Profit taking? Or a brutal short squeeze into the close? From our perch, we wouldn't be short at all, but certainly not until we see strong chart resistance and a stable low in the VIX.

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Leftback
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January 4, 2019 at 8:12 PM ×

Some thoughts on the Fed Chairs 3-some and the Fed in general:

1) Powell wasn't speaking extemporaneously, as Yellen and Bernanke did. He read from a script. This suggests to me that this script was provided by someone else (Clarida?) who has a clearer head and a more nuanced understanding of markets.

2) Yellen stressed that the balance sheet was just another part of the tool kit, almost as if she were chastising a not very bright pupil and reminding him of some basic fundamentals of macroeconomics.

3) Powell concerns me whenever he opens his mouth. It was notable that equities sold off a bit in the minutes before he spoke and whenever he went off script. Look for this again in the future (FOPO - fear of Powell?).

4) Powell isn't the sharpest tool in the shed. He actually said today that he worried when he first came to the Fed that QE would produce hyperinflation. This is not something I expect of a central banker. Perhaps from the wing-nut at the office or our friends on gold bug sites, but surely an experienced banker should know better? I see his term as short, ending in 2020.

5) Yellen looks very smart in retrospect. By moving extremely slowly and patiently, she showed that she understood the long latency associated with Fed monetary policy adjustments. This was Powell's error, he hit the brakes too many times in a short space of time and didn't wait for the hikes and QT to take effect, then was surprised when he flew over the handlebars.

6) Mester is frightening. She appears to be fixated on inflation, even when she has probably been told not to mention it. There is this whole group of people who have the 1970s burned into their cortex, and they are all disasters waiting to happen. There is a very low level of intellectual activity associated with this FOMC member, and we can only hope she does not get close to the controls. Like "W", Mester does not "do nuance" and we can only hope she goes away soon.

7) Yellen was very smart with the inflation hawks, and appeased them without actually damaging the economy. She knew that during a QE regime there would be mini-inflation scares driven by fluctuations in the dollar and commodities, but that they would be, in her phrase "transitory". Events proved her to be 100% correct. Mester and Powell are too stupid to see this.

8) Kaplan is smart enough to know what he doesn't know, to change his mind when the facts change, and to almost go so far as to admit that the Fed and Powell made a mistake at the December press conference. He represents the Dallas Fed, so you can bet he hears it from the Oil Patch whenever it looks as though the Fed is making the drillers and refiners bend over. I have no problem with someone who is willing to accept that the Fed is fallible. Thank goodness.

9) Kashkari is waiting in the wings in Minneapolis, like Grant in Galena. If the next US President is a Democrat, I would expect Kashkari to become the next Fed Chair. He and Bullard are often painted as doves, but are perhaps more accurately described as extreme pragmatists. They have a level of insight (gained in the crucible of the GFC) that most other FOMC members lack.

10) Brainard is something of an unknown quantity. After being rolled out as a secondary spokesperson under Yellen, she has been conspicuously silent of late, which is interesting during such a pivotal period of Fed activity. She might be a dark horse candidate for the next Fed Chair.


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Leftback
admin
January 4, 2019 at 8:15 PM ×

@IPA, all good, mate… on the calls, even a blind squirrel finds a nut occasionally.

Yes, it's been stressful. Will celebrate with your namesake brew this evening. Or perhaps sooner?

Would be interested in people's feedback on the Fed commentary. Whatever we think we are trading here, we clearly all spend a lot of time on strategy for game theory that involves these people.

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Anonymous
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January 4, 2019 at 8:25 PM ×

Today's bond move merely eliminated much of fear factors from the market, temporarily. It says little on lower inflation expectation or ballooning fiscal deficits.

Remember Powell only said that he would be flexible and he doesn’t think the portfolio run-off “is an important part of the story” of the recent market decline.

So he is likely to stay the rate and QT at the next meeting, which is marginally softer than his last speech.

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Moniker
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January 4, 2019 at 8:45 PM ×

@LB,

Nice Kremlin watching. I’m sounding like a broken record so apologies. I don’t think the US/EU/China political risk can be overstated here. Going to go out on a limb, but it appears none of us are old enough to recall truly horrific political risk impacting markets. When a President starts throwing around terms like ‘national emergency’ to get a measly $5B, we are rapidly leaving Kansas. I am certainly not nor ever have been a goldbug, permabear or prepper whackjob, but most traders have no construct for how politically fragile the West and China have become. But, of course, Dornbusch again.

I’ll reiterate, treasuries are my chosen instrument this year. Where angels fear to tread...when Druckenmiller gets negative he plays it through bonds and currencies. Too many facerippers in equities on the way down. Short end of the curve looks good to me as well as short EURUSD. Because, I’m sorry, European banks are garbage and the U.K. is leaving folks.

Finally to the Fed. It doesn’t really matter honestly. They’re all lapdog sinecures when leaned on. Powell is playing the game but I think he smells Trump’s vulnerability and will keep QT intact unless the world ends. 2020 is a long way away my friend.

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Leftback
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January 4, 2019 at 11:44 PM ×

Thanks for the reminder of the bricks in the wall of worry. We do see them, especially Brexit, and other sources of pain in the UK, where we have started small, with the expectation of several more apocalyptic sell-offs providing opportunities to add. Seriously though, British stocks are already at 20-30 year lows in dollar terms, but of course they can still get cheaper.

Far from being a Treasury bear here, in fact it's normally our favorite instrument along with divis, MM was correct in the Fall when he guessed that 5s might be the sweet spot, and so it proved. Staying long TLT worked well, but I think the USTs trade is done for now, govies and vol are going to be sold for a while here as we enter a two quarter period of Goldilocks - with very low inflation and low rates and multiples might even expand again - but the equity bear is going to return later in the year, for sure, thanks to the Fed once again - and then we will renew our relationship with Treasuries. Just at the moment, every soft data point will be met with Treasury rallies, which will then be sold b/c of people gaming the Fed. We would start getting very interested again if 10s re-entered the 3.00-3.25% range, but we don't see that happening for a while. Against this stable backdrop the much-maligned homebuilders and REITs are probably going to perform reasonably well for a bit.

There were some talking heads on today pontificating about rates and one total plonka suggested 10s were going to 3.50-3.75%. Think about that. 75-100 bps from here? Not a chance. Housing market would be stone dead - with 30s at 4.00% and mortgages at 5.5%. In fact, we think 10s will be constrained in a fairly narrow range for most of the year, as any excessive hawkishness from the Fed will simply result in the long end cratering again. Of course, a lack of fixed income volatility is good for high yield and it's good for equities. So that and a ratcheting down of trade war rhetoric will be the story of Q1-2.

Energy and emerging markets will be the most interesting story this year. The hope here is that they are the stealth risk asset investment of the year, grinding up quietly with low volatility. But we should all beware if they become jackass central, and here I am looking at you, leveraged hedge funds and Johnny Retail, after you did so well with large cap technology this year. If energy stocks do really well, perhaps on a weaker than expected dollar, and become the hot money vehicle, then we could even see another late cycle crescendo in oil prices, and those are always very very bad news. But we think that's the story of 2020, yes I know, echoes of 2008…. so for now, commodities and energy to be the winners this year, emerging market debt and equities too. Pain coming for health care, consumer staples, utilities and other overpriced sectors?

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IPA
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January 5, 2019 at 5:47 AM ×

Alright @LB, I thought we were getting some drinks tonight... What exactly has changed today? A duo of permanently scared, retired central banker doves got on the stage to do high fives and praise themselves for saving the humanity from starvation. Poor Powell could not get off the stage fast enough. You are chastising the wrong guy, honestly.

In any event, besides squeezing the shorts, would you please explain how leaving the interest rates where they are right now going to solve the new home sales slowdown? As I already said here, this is not just the rates but rather a very complex issue of demographics, shortage of labor and vacant land, tariffs on construction supplies and just about everything that goes inside the house (including furnishings), and most importantly - all resulting in the price of the finished product being completely out of reach for first time homebuyers right now. Give the homebuilders another 5-7% upside and one more week or so of celebratory cartwheels after which it will all come crashing right back down to earth, literally. While I covered my last scaleout of XHB short, I will be looking to sell in $36-37 range and targeting $28-29.

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Anonymous
admin
January 5, 2019 at 10:48 PM ×

Elections coming up in India. Second term for Modi? Anyone has an opinion?

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Eddie
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January 6, 2019 at 11:04 AM ×

Some Dalio for those who are interested and/or missed it:

https://www.linkedin.com/pulse/help-put-recent-economic-market-moves-perspective-ray-dalio/

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Gus
admin
January 7, 2019 at 3:26 AM ×

Talking about Dalio:

"Bridgewaters’s flagship Pure Alpha fund finished the year returning 14.6% net of fees, a person with knowledge of the matter said."

"The firm has operated the Pure Alpha strategy for nearly three decades and has generated an average annual net return of about 12 percent per year, with three years of losses over that time frame, according to the person with knowledge of the matter."

https://www.cnbc.com/2019/01/07/bridgewaters-pure-alpha-fund-posts-nearly-15-percent-gain-in-2018.html

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Anonymous
admin
January 7, 2019 at 3:44 AM ×



Is that the same Ray the bad man for shorting europe banks in his pure alpha fund.

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Anonymous
admin
January 7, 2019 at 4:00 AM ×



Who was a very bad man in 2018?


https://finviz.com/quote.ashx?t=EUFN&ty=c&ta=0&p=m

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IPA
admin
January 7, 2019 at 5:03 PM ×

Taking profits on 1/3 of my oil services longs here. Crazy moves of 20-30% off the lows. WTI will probably do a stop scoop just above $50 but it needs to build a base, and I think the battle is not completely won yet. So I'll buy some back on pullback if one is presented.

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cbus20122
admin
January 7, 2019 at 7:12 PM ×

Selling some OTM premium on NFLX right now, and selling off some of my SPX longs to shift into being more close to being fully short (mostly via options). I see a small bit of upside left potentially, but getting closer to the end of the rally here in my opinion. If i'm wrong, I'll gladly eat crow.

FWIW, an interesting anecdote is that the market's action is tracking the 2007 bear market beginning almost perfectly. Given, I'm not really a big believer in analogues as predictive type models, but it is an interesting item to follow.

I'm not betting for or against oil here right now, but I have a strong feeling that Oil has further to go contrary to everyone on the street trying their hand at bottom-calling right now. Also, @LB, I'll gladly take the other side of your bet on commodities and emerging markets. Funny how we see a bear market rally finally in these items, and everyone wants to call the bottom all at once. I don't like using p/e's or valuations to pick out bottoms. That has historically just been a great way to get caught in value traps on the way down as most people completely miss the whole "e" component dropping significantly during these times. From an economic perspective, the contraction is just starting in actuality if you look at the rate of change terms for USA and many other economies. Some (europe and EM) are further along, but still probably have more to go given that we don't have any meaningful stimulus in sight, and even that operates on a lag.

As I've said for quite some time, the market is just putsing around waiting for earnings to come in. Earnings and other econ data coming in soon here will start to confirm why things dropped. Earnings catch down to price action typically on the way down, so everything has a tendency to always look cheap when you're entering bearish periods.

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Anonymous
admin
January 8, 2019 at 9:16 AM ×


Ask yourselves this question at the end of the next earning season...where are macro mans flamingos?

Come on...give that quant desk.

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IPA
admin
January 8, 2019 at 4:48 PM ×

Surprised not to see more negative reaction to Samsung's earnings warning. I understand that chips have foretold this early on phone sales slump, but the data center weakness continuing well into 2019 is not something to take lightly here. I remember Druckenmiller's recent interview and his adamant table-pounding on cloud, he said the demand will not stop any time soon. Samsung did say things should improve in 2H but that's a century away if the trade deal is not struck here quickly - probably the only reason the bad news on data center chip orders slowdown is cushioned this morning.

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Anonymous
admin
January 8, 2019 at 6:16 PM ×


IPA, this is the way I look at it. You might as well start at quantitative with the technology we have today. Eventually you may blend it into your spatial analysis...this is what I refer to analyzing fundamental variables against and with each other. This way I may just be able to feed all the mouths it looking like I will have to feed in the years to come :). I want do you expect me to do...move to Hollywood and eat the grass growing out of the cracks of rusty's star...or do you expect me to move to NYC and play cops and robbers with the village people.

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Anonymous
admin
January 8, 2019 at 11:01 PM ×

LB what's happening with NLY? Issuing more shares!!!

Will they cut dividend?

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Moniker
admin
January 8, 2019 at 11:03 PM ×

SPX now a thin slice of CDO equity due to buybacks with 40% if IG debt needing to be downgraded on leverage ratios alone. Or so says Gundlach. With 500B QT, 1.8T deficit, 700B corporate needing to roll......all into “rising rates”, 2019 should truly be an interesting year. STFR chaps.

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Leftback
admin
January 8, 2019 at 11:16 PM ×

@Anon asked: "LB what's happening with NLY? Issuing more shares!!!"

This is perfectly normal all part and parcel of REIT investing. The timing is a bit odd, though, as they usually do issuance when the share price is at a local maximum. One assumes that they think this is a good time to go shopping, in line with our view that the US housing market does NOT crater this year (because rates stay in a narrow band).

"Will they cut dividend?"

It's possible, but unlikely that they do these things together. What we have done historically with REITs is buy the preferred on any panic in the sector (Taper Tantrum, e.g.) and hold on for dear life for the 8% divi. Then pick up the common when it is on sale and raining share prices (market and sector panics), being sure to unload a lot of it when the sun shines.

Honestly, all things considered, we would have to say that if inflation stays low (check), the Fed is on hold until later in the year (check) and housing doesn't crash (check) the environment is going to be OK for REITs in 2019.

OK, that's the REITs for today, now back to the broader market.

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Leftback
admin
January 8, 2019 at 11:27 PM ×

So we made some proposals a week or two ago (the bottom is in, sentiment extremes tend to revert, almost everything is oversold except VIX and Treasuries, vol sellers will come in, yields will drift higher) and you know what's happened since then. We haven't commented because we didn't want to annoy people….

We predicted pain for shorts. There has been pain. Although it's been a healthy run-up for spoos and energy, we're not yet seeing overbought conditions, and there still a lot more bearish punters who haven't climbed on board yet. So we think this move can last for another 5-6 trading sessions.

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Leftback
admin
January 8, 2019 at 11:40 PM ×

To be clear, we are mainly long EEM and XLE - along with a bit of QQQ for now, and a basket of UK stocks, drillers, US divis and so on. We are not long the XHB, but would not be surprised to see that continue to march upwards, for much the same reasons we outlined above. I don't think we have heard the last positive news trickling out of the People's Republic of China.

Eventually like all unpopular "wall of worry" moves, we can probably expect that this rally will be terminated by some Good News event. Bears will then look for new lows, retests etc.. but we have a sneaking suspicion they will be disappointed as Q1-2 are once again dominated by dip-buying. Just a guess.

There are some very interesting features to what happened last year that suggest that Dec 24/26 might be a real bottom for now. Gold miners bottomed first, then homebuilders, then energy and cyclicals, which is pretty much the sequence that you get in real market bottoms, whether associated with recessions, near recessions or earnings recessions. Not convinced 100% but if you asked me what my gut feeling is, this is it. Of course, if we get kicked in the gut, the gut feeling may change...

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fcp
admin
January 8, 2019 at 11:41 PM ×

Well done LB

Also very noteworthy that tech has rallied after the Apple and Samsung news.

Maximum pain trade is still a January rally... to lock in underperformance for anyone who sold in December and put them in a right proper pickle as to what to do next.

There is a significant equity short / underweight now, and a growing underweight in tech

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Anonymous
admin
January 9, 2019 at 12:55 PM ×

@LB re Reits, thanks for your input. Always appreciated

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IPA
admin
January 9, 2019 at 2:31 PM ×

@LB, gold miners have been stuck in a trading range for 3 years, pretty much closely tracking the underlying commodity. Not sure the spike from September (correlating to gold's bounce) tells us anything about the broad equity rally of the past few weeks. GDX is pretty much dead in the middle of that price range right now and backtesting the $21-22 resistance level. Longs are watching trepidatiously as gold seems unable to break $1,300. Believe me, it's been a mighty struggle.

As far as homebuilders and energies are concerned, they simultaneously bounced off of their respective 52-week lows along with the rest of the stock market at the end of December, as they were among the hardest hit sectors. Again, not sure that the oversold bounce tells us anything about "a" bottom or "the" bottom, recession or lack thereof. I'm enjoying the oil services rally myself but I have no idea how long it will last and gladly taking some profits off the table on nutsy moves.
Regardless of our gut feelings, should WTI stay above $50 for the rest of the week there may be some more positivity, especially if trade talks results are more than just a show of mutual respect, but if the level is quickly lost after EIA report today, and more importantly, lack of substantial progress on trade talks, then perhaps more time is needed for repair of long's' confidence and bottom building on the chart in mid to upper $40s.

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IPA
admin
January 9, 2019 at 5:14 PM ×

After a day of deep thinking punters are taking data center REITs out to the woodshed. This was a no-brainer via Samsung's warning of cratering chipset demand in the space. There has been more hardware efficiency, slower end user demand, and increased saturation by overbuilding. I get the whole idea of growth by adding new units and through acquisition of smaller players, but if you look at their cash rent renewal growth rates they are just on par with inflation. Take the interest rates slightly higher and you have a real problem.

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checkmate
admin
January 10, 2019 at 8:55 AM ×

Looking at the Bullish percentage measure the easy broad money is over for the moment as it recovered it's entire last sudden plunge in the USA. Ftse had a nice recovery moving into the all important January vote on Plan A (cough). With such a long run outward flow of money over a year plus we shouldn't be surprised. However, the news vacuum on that issue is now over with the vote now about a week plus away. The one way traffic should also be over.
Looking further out I can see at leas three option for risk and I have nothing that narrows it down on a probability basis as to which we will see. The known unknowns are bad enough to work out here never mind the unknown unknowns :)
That usually means I am happy to be balanced in my choice of risk and capital preservation at such times and this is no exception. Reading between the lines of the vigorous disagreements on inflation, economic growth, and future of central policy I'm obviously not the only one without a crystal ball.

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Leftback
admin
January 10, 2019 at 4:40 PM ×

A few interesting things going on today. First of all, it was a JBTFD day. Duh. You can laugh at it, hate it, but at the end of the day if we close green, you have to respect the price action.

Sectors that haven't previously been slaughtered were slaughtered today - airlines and retail today. They were overpriced and ripe for a correction. Many have warned about this and it does suggest that the rolling bear is still rolling under the calm macro surface. We suspect that there will be more slaughter in sectors that have escaped so far, big pharma and dodgy biotech are two that come to mind. A lot of other sectors are already set up for earnings to "beat expectations", LOL.

The stuff that has already been slaughtered in 2018, large cap tech, energy, autos, are all looking OK. The easy money has almost certainly been made, but that doesn't mean we won't continue to see a prolonged grind upwards. Everyone and their uncle will try to sell SPX 2600, but if the market pushes higher a lot of algos will flip to buy, and similar dynamics can play out to bring this market above SPX 2700, especially if there is a trade deal with China and PBoC adds to stimulus measures.

The fib retrace from steep panic sell-offs is almost always larger than punters anticipate. What terminates the "bear market rally", if that is what this is (and it seems a reasonable assumption) would then be the arrival of attractive Treasury yields. From our perspective a lot of the bid in Treasuries can come out of that market if there is a trade deal, and after the dust settles we may find ourselves looking at a 2.90%-3.00% 10y again, with HY spreads having tightened substantially once more.

What we should probably watch most closely is oil. Oil prices largely dictate US HY spreads, and we can't have another monster market dump or a recession without first seeing a mini-crisis in US credit. As long as WTI oil prices are comfortably between $50 and $70 (Brent $60-$80) we are in the Goldilocks scenario, US credit is fine and EMs are happy. Problems would arise if the dollar falls fast and we have a spike in oil as the US economy cannot handle WTI > $90, Brent $ >100. The other scenario, stronger dollar kills EMs, that was last year's story and will not be repeated here.





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Leftback
admin
January 10, 2019 at 5:52 PM ×

Charm offensive from Powell. Watching and waiting…. if he can get through this Q&A without falling over, markets may assume that he can now both walk and chew gum, and the rally may resume.

Note that for the last two weeks we have seen that for the most part it has been the "dumb money" selling between 9.30 and 10am, while the "smart money" has been buying between 3 and 4pm. As long as this stays in effect we think the rally has legs.

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Cbus20122
admin
January 10, 2019 at 6:48 PM ×

@LB, with respect, tech still has a lot of room to keep falling. People always point out the FANG's, but beneath the fangs, there are a plethora of non-profitable growth companies that are still very much priced to perfection. Regardless, I hate looking at valuations as a signal of a bottom, it almost never works properly because the "e" always continues to drop, making every "cheap" read just a stepping stone in the downward move until next quarter's earnings report.

Stuff like NFLX, TSLA, and almost the entire enterprise software sector is insanely valued, etc. Additionally, I think everything relating to the cloud has been way overbought at this point, and the capex rocketship we saw in cloud is already starting to slow significantly. Keep in mind, a huge portion of the cloud and tech earnings came from China's record stimulus as part of their China 2025 plan. That is wearing off now, and we're still waiting on meaningful stimulus (it hasn't happened yet). Then you get all the VC/Softbank subsidized junk such as WeWork, Uber, etc that has grown due to prices being subsidized by VC's and you get a pile of absolute manure that could crumble down surprisingly quick.

I'm not going short on semiconductors right now just because I know there is a risk that enough value punters will see a low p/e and buy into the value traps making it a bit risky from a timing perspective in the shorter-term. But the top-line growth and margins are going to significantly compress over the coming year here. The recent fall in semi's was just the very start of the top-line growth slowing, it wasn't by any means a peak in sequential sales dropoff.

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Leftback
admin
January 10, 2019 at 6:53 PM ×

Oh dear. Powell continues to be a bit of a douche when it comes to understanding the impact of his utterances. He needs to understand that he is no longer a private citizen, nor simply a FOMC board member. Dude, you are the Chair of the world's most important central bank. Get a grip and stop with these off-the-cuff speaking engagements. After today's completely unnecessary comment on the balance sheet - this coming during a completely unnecessary interview - one is really tempted to suggest to the Chair that it is the volume of his utterances that should be "substantially smaller".

Listen up, Powell. We don't want more transparency. NO MORE. NONE. If you must balance views, just let the hawkish wing nuts out occasionally to be hawkish wing nuts, so we can ignore them. [That's assuming Mester hasn't been immobilized in the Eccles building - she is batshit insane and also stupid].

Market participants to Powell: "Jay, STFU!" at least until the trade issues have been resolved. Spend more time at the Chevy Chase Club, Jay, have some three Martini lunches and don't say any more stupid things. Trump can do that for all of us.

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Leftback
admin
January 10, 2019 at 6:58 PM ×

@Cbus: Yes! Agree 100% with your comments on tech manure, semis and most of the landscape of Unicornia. Thanks for those negative thoughts on cloud and VC-driven IPO-ed shit piles. It's just an area where we almost never tread, b/c of valuations and b/c of other traders using metrics that we don't understand. We wouldn't short here b/c we think the relief rally will be longer lived than most suspect, but we do agree wholeheartedly that another leg down is coming to the Valley some time this year.

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Cbus20122
admin
January 10, 2019 at 7:10 PM ×

FWIW, I'm a huge bear on China in here as many have seen, but I just bought some deep OTM calls on FXI. Reason being that the more things tighten there, the more likely it'll be that Xi wants to sign a trade deal. Trump also needs to get this done for political purposes. Since both parties are politically incentivized to sign a trade agreement of sorts, I see tail risk of a huge spike in Chinese equities in the mid term. Speculation on this as well as potential stimulus is why Chinese equities haven't fallen off a cliff given their economic data recently. If those both fall short, look for a trap door downward to open up here.

Another point i'll make is that any trade deal would be a wonderful selling opportunity and great place to re-open a short on China once the post trade agreement boost wears off. The trade war matters, but it's only a small component of China's challenges. 20% minimum of their GDP is going to debt service, and that's assuming you believe their GDP #'s.

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Cbus20122
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January 10, 2019 at 10:02 PM ×

And just as an addendum to the previous post... how do we know when China is stimulating meaningfully? IE, how do we know when Chinese money printing will help solve issues within the global economy? You can simply look at Chinese PPI.

https://tradingeconomics.com/china/producer-prices

It's not a coincidence that Chinese PPI does a good job of bottom-ticking and top-ticking global market bottoms and tops. So long as the rate of change on this index is down (we just saw a huge negative here recently), I wouldn't count on Chinese stimulus from bailing anyone out.

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Moniker
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January 11, 2019 at 1:22 PM ×

A thought: Many folks here go out of their way poo-pooing recessions with ‘oh, I would never want that, it hurts so many people’ sentiments. That’s pretty fucking short sighted assuming we’re all lovers of capitalism. I can hear the cries now: ‘Trade the market you have not the market you want dickhead!’ Or, ‘you’re making the perfect the enemy of the good.’

Just imagine for a moment that the American Congress forced a second Presidential election in 2016 because they didn’t like the result. Apologies for the philosophical meander but if Brexit is undone by a referendum (to undo what hasn’t even occurred, wtf!) the level of damage in the U.K. will incalculable. Here is a prediction: if Brexit is undone, Corbyn will immediately finish off the Conservatives, win a general election and Labor will take the U.K. out of the E.U. anyhow. Corbyn can’t have Brussels mucking up his New Britain.

Yes, Brexit might be difficult, even recessionary, but, goddamn, the consequences of abrogating the people’s vote by the mother of parliaments is, frankly, staggering. I would agree with an earlier comment in this thread...New Labor Corbyn ain’t. Be careful what you wish for.

Congrats LB. You have been right on this month. Watch your cornhole buddy...

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checkmate
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January 11, 2019 at 3:37 PM ×

Moniker,
Corbyn does not want a second referendum unless there is absolutely no choice. Why would he? Brexit has an issue as had the Tory party/govt nailed to the wall and split asunder by interparty differences. Completely stonewalled from doing anythingelse in terms of meaningful policy. To send the Brexit issue back to the people for a second referendum threatens to take govt off the hook they have been impaled on for the last year plus. Whatever the referendum outcome was the govt then get to say 'it was your choice and we accepted it'. It resolves their biggest current problem.
No, what is likely to happen is the current proposal gets defeated and Corbyn waits a few days to see what plan B looks like. If that is also a nonstarter he will table a vote of no confidence in the govt and hope that he can pull enough of the serious dissenters from the Tory ranks OR of course he could win such a vote if just the DUP choose not to vote support for the govt opting perhaps for such a loss would then trigger the election that Corbyn so obviously wants. One certainty next week on is it's going to get noisy in market terms because where this actually ends up is just so unpredictable and by that I mean the probability of an election and the outcome of same. I really don't see investor moneyflow chancing it's arm against that backdrop, traders/short term stuff ok.

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Moniker
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January 11, 2019 at 5:11 PM ×

Checkmate,

Trying to wrap my dull, American (redundant?) brain around this.

“Whatever the referendum outcome was the govt then gets to say ‘it was your choice and we accepted it’.”...wait, what? Couldn’t they say that currently?

Seems to this moron that Hard Brexit, Brexit delay, 2nd Ref Remain win or Leave win, the Tories have made an absolute dog’s breakfast (perhaps on purpose). I was operating under the assumption (danger will robinson!) that a Remain win would need to naturally be managed by the party not riven by the European question. A Leave win would cripple the Tories irrevocably and May would go either way. Hard to see how Corbyn isn’t the next PM. Trying to figure out my Cable strategy...

But then again, I’m American and we voted Leave a long time ago. Huzzah for Lord North!

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Leftback
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January 11, 2019 at 6:43 PM ×

On Brexit, checkmate makes a lot of good points. My 2c here. This entire mess is completely owned by the Tories, and currently by Treezer. Nobody, not the Moggster, not Boris, not Corbyn, nor anyone else is going to want the PM job until this is disposed of, so that she can take the blame (which is also shared with Cameron). Labour doesn't want to Leave, but doesn't want to be associated with an unpopular position. For the time being, punters are going to give UK a wide berth (fear of Corbyn > fear of hard Brexit). This is actually going to set up some really good buying opportunities in UK equities. For the time being, Cable is going to yoyo. You can't make a long term strategy for sterling at the moment, except maybe a barbell.. $1.10 or 1.40?

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Leftback
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January 11, 2019 at 7:01 PM ×

Now, back to other markets. There are three schools of thought at the moment. You can make up your own mind about what's next but we prefer to take our cues from the market. Trade what you see, not what you think/want.

1) "Re-test". Everyone and their dog seems to be expecting a re-test of the Christmas Eve/Boxing Day bottom, presumably so that they can get long now after they missed out b/c they were running around with their pants on their heads at the low. This group also wants to pile into bonds again for another close-up look at a 2.50% 10y. The analogy for these folks are the previous corrections, e.g. 2016 and Feb 2018. Plenty of good charts out there to support this view.

2) The "V-bottom". These folks think that the bottom is in for at least the first half of 2019, if not the entire year. According to this view, the Christmas Eve event was so extreme and severe that it's unlikely the scenario can be recreated for the convenience of would-be longs. The chatter in the market at the moment reminds us of April-May 2009, after the March 6-9 bottom. Everyone called for a re-test of the 666 low, but it never came. In that case there was a unique macro driver that prevented punters from getting in: QE1. Should this be the correct model, a Fed pause in March, PBoC stimulus and a China trade deal would play the role of QE. It is hard to see another panic dump of equities if those should come to pass.

3) "Global depression". The Albert Edwards permabear faction more or less always predicts the end of the world. In this case a series of cascading global central bank policy errors results in the Ice Age scenario of global ZIRP/NIRP and universal hyper-collapse Japanese scenarios. All banks fail, we no longer have Bloomberg terminals or worry about the Fed, but learn to grow our own vegetables and live in caves.

OK, those are your choices. Now let's look at a few things that the market has been telling us these last few weeks, and then we can discuss what one might be doing now.

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Leftback
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January 11, 2019 at 7:58 PM ×

Now, some observations. We favor #2 above, the "V-bottom". People are not going to like this, but here's the rest of the analysis.

Treasuries first, then equities, and finally FX and vol. Bear in mind that we usually love fixed income, but we think yields bottomed out in January following the December panic, and that equities offer better income opportunities here.

TLT looks like it is forming a head and shoulders at the moment. You can make an argument for being long the short end or the belly in anticipation of Fed policy change (and that might be a good trade, looking at 5y5y forwards), although there are many better ways to play lower rates and catch yield at the same time. Nevertheless the long bond actually looks like a sell here, because it just doesn't trade well. Trade what you see, not what you think. We are selling strength, which means today we are sellers of TLT, and we would sell more if it is bid next week, despite the soft inflation data. [IPA, are you listening?]. There will come a time to buy the long bond again when yields are at more attractive levels (10y 2.90-3.00%?; 30s 3.25%?) by

Equities, whether US, EM or energy (note, we still avoid unicorns). Here's the thing. A lot of punters hate the rally, and they hate it in the same way that they hated it in 2009. Equities "shouldn't be rallying" on economic weakness, but of course they are, on anticipation of measures that should help to address economic weakness, namely: US, on a Fed pause and a Goldilocks year of 1-2% growth. EM on China stimulus and a weaker dollar. Energy, production cuts, China stimulus and weak dollar. Hate the rally all you want, but for the time being the smart money (end of the day) buys the dip or sits on its hands, while the dumb money (first half hour) insists on selling. We believe that fading the smart money isn't the best move.

Everyone now wants to set up short at SPX 2600, and then short it down to a re-test. Mr Market knows what you want to do, though. Sentiment has moved a long way already, but Fear/Greed index is still only 31, far from extreme. Apart from the drivers we mentioned, the final driver for the later stages of this bull run will be capitulation by the algos, panic buying and finally another bout of retail FOMO drives sentiment into the extreme greed range, perhaps some time in April/May?

FX. 2018 was the year of King Dollar busting EM equities, debt and FX, commodities and eventually US multinational and oil patch profits. 2019 will be the year of a lower dollar, stronger commodities, EM equities and debt. In FX, we may therefore see surprising winners. CAD, GBP, KRW and AUD are a few suggestions. There is a danger associated with a disorderly fall in USD (especially the JPY cross) but we don't see that happening if there is a trade deal.

Vol. VIX spikes do cluster, but the lower spikes are invariably followed by slow VIXsanguination and ultimately VIXtermination. As soon as vol sellers start to make money again they will return in force.

OK. That's it for now, and we are going to stick with this until something changes.




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Whammer
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January 11, 2019 at 8:10 PM ×

"Everyone called for a re-test of the 666 low"

Except, it should be noted, Leftback his own self, who called that the bottom at the time in the Ritholtz blog comments. Woe unto me for not paying attention to that.

- Whammer

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IPA
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January 11, 2019 at 8:57 PM ×

@LB, had it not been for the megaphone you are holding up to your mouth... Splendid assessment on TLT, sir!

Please clarify your earlier statement on retail, airlines, and biotech escaping the slaughter. All were down between 20-30% from their respective highs at the low on Dec 24th. Not picking on you, pal, but some of us actually pay attention to what's being said here, and I'm a bit puzzled by your remark.
Perhaps it's the steep and quick bounces that swayed your opinion to pain still needing to be felt in those sectors. Biotech? It's going to be tough for shorts, enormous short squeeze not seen in ages on BMY/CELG and LLY/LOXO deals. Airlines? Most of them peaked in Jan-Mar and it's been a year-long pain there. Retail? Yeah, it's a graveyard and bodies are buried all over the place. They'll be digging them up one by one on daily basis. M was found dead yesterday, so many more to go...
Anyway, maybe you can elaborate later.

It's time for me to take another 1/3 of profits off the table on oil svc stocks though. While I like the weekly close on WTI above psychological $50 level, the reversal at $53 resistance does not bode well for nervous longs. I see a cup and handle formation building with a possible pullback to $46-48 zone where I'll buy some more. Generally agree with you on oil as well, simply hard to see it down much more from here in the absence of recession.

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cbus20122
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January 11, 2019 at 9:17 PM ×

Interesting points LB. To me, the biggest risk to my bear case is that this slowdown bottoms and we enter into a dotcom style blowoff phase. I think the best bull case is that we're in a scenario very similar to 1998 right now, where we had a brief yield curve inversion, a big global growth scare and some real problems in EM, and a big dollar rally. That led into the dotcom blow-off phase.

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checkmate
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January 12, 2019 at 10:05 AM ×

I think one of the problems of political risk whether it's the effect of Brexit on the UK or the EU, or indeed Trump on China et al, is the danger of being distracted from asking where are we in the monetary cycle. How much of the current drop in growth across Europe and the UK for example is to do with reaching the outer limits of what cheap credit can do and how much is moneyflow responding to political risk? The kind of rally we have just seen in various markets is just not that unusual when you consider the preceding plunge and the speed of it. When it also comes across seasonal holiday periods where there is quite a news vacuum it's even less surprising. However, the fact remains the economic data in many places isn't looking good (outside the USA), the news is coming back, and we are where we are in a very old credit cycle where leading growth stocks have tended to support the theory that cheap credit isn't working that well anymore ..thinking autos and to a certain extent techs and even housing. I've never been one for getting sucked into trying to pick tops and bottoms so really for me thinking this stuff through is more about asset allocation and not whether I have a crystal ball that says this risk rally can run for another week or month. I know from where the bullish % measure is most gaps created by the last plunge have closed and that's why I say the easy money is over, because now we have a mix of punters who either have profits to take or a chance to rebalance their portfolios with smaller losses from buying above. In essence, it's time for select picking on risk because the broad markets already given most of what it had to give.

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Jim
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January 12, 2019 at 4:27 PM ×

LB: Please start you own blog or maybe go on Twitter. I now have carpal tunnel syndrome of my wrist due to the necessity of scrolling through hundreds of comments to view yours!

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Anonymous
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January 12, 2019 at 5:01 PM ×

2nd that but easier method - New blog entry please so we don’t have to scroll down

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Tonto
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January 12, 2019 at 10:30 PM ×

Jim and anon...just click on "newest"..it will take you to the end of the comments section with a couple of clicks.

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Skr
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January 14, 2019 at 1:17 AM ×

@leftback and Checkmate - I had a look at what you have both been saying and lefty by all accounts the bottom is in (batshit crazy,remember). Up 20 or 30 handles from here and retest of 2500 (Checkmate get your 3100+ Spooz options here).You can extrapolate your macro thoughts from this.
I am serious.

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Nico
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January 14, 2019 at 7:02 AM ×

SANITY FAILURE ALERT

"Everyone and their dog seems to be expecting a re-test of the Christmas Eve/Boxing Day bottom, presumably so that they can get long now after they missed out b/c they were running around with their pants on their heads at the low"

meanwhile:

Everyone else and their other dog seems to be expecting a re-test of 2660, 2720, 2800, presumably so that they can sell all their longs after they missed the end of the bull market b/c they were partying all summer with their passive pants on their heads

who wins?

the one who correctly reads the developing cold war with China, and panicks first, wins. As much as US equities are nothing without the Fed, world equities are nothing without China. That Gina house of cards that Trump correctly calls bluff is a much much bigger issue than bipolar Fed and the one million billion new BBB debt frankenstein it encouraged

looong time ago i said here that the Italian banks would be the demise of Europe, and that China would be the demise of world markets, at large. To hear some of you here think you can have a new high on US equities after their last trimester warning, itself following 30+ prior warnings from outside the US... or compare 1998 which was so benign compared to the capital dislocations and malinvestment of today.... NB: VIX futures only started in 2004

wake up guys, complacency was so 2016-2018, stop looking for similarities in the past when the situation at hand is more complex and more dangerous by many orders of magnitude

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Nico
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January 14, 2019 at 7:06 AM ×

Imports to China unexpectedly dropped 7.6 percent from a year earlier to USD 16.42 billion in December of 2018, missing market expectations of 5 percent rise and following a 3 percent growth in November. It marked the strongest decline in import since July 2016

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Nico
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January 14, 2019 at 7:09 AM ×

in other words, ignore deteriorating data worldwide - China, Germany, Apple etc vs. record corporate debt at your own peril.

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Leftback
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January 14, 2019 at 1:02 PM ×

@IPA: It's true that retail, tech, biotech and airlines had been slaughtered during the rolling bear. I still find most of that to be over-valued and would anticipate a second wave of disappointments for longs in this sectors. Much of that steaming pile still trades at ridiculously high P/E ratios, and over time you would think that multiples will decline. This is what I meant.

I agree on buying the pull-back in energy this week, it may take a few days for the entry point to arise. Once again, we would be selling Treasuries into strength for the time being - and buying EMs and energy. {This means I can afford to be agonistic about Spoos and Qs, although I do have a view}.

@Nico: We all play central bank game theory here, whether we want to or not. The China data were indeed TRULY TERRIBLE. If you could see the real data we would all be able to understand they are in a recession. To me and others that suggests that the pullback we see today and this week may be modest, as expectations build for more PBoC stimulus.

Don't please anyone tell me that they can't do it, or won't. The PBoC is well able to provide stimulus measures, even if they have to break through USDCNY 7.00 in the process. They can and they will, because they HAVE TO stimulate - if you think a bit of social unrest (gilets jaunes style) in the West might be a bit unpleasant, imagine the societal consequences of Great Depression style unemployment in PRC - 1 billion unhappy Chinese are more than capable of producing regime change - and the Party will not be having any of that.

As for the FED, let me send a clear message to our friends at the Marriner Eccles Building: only a moron would tighten this winter or Spring after these data and recent data from Yoorp. EARTH to POWELL: the reason you are WRONG all the time is that a lot of the statistics that go into your models aren't real. China isn't growing at 6%, OK? It's in a f*cking recession. It's f*cking obvious from today's data. US unemployment isn't 4%, either. Those figures are massaged b/c of multiple jobs and people selling trinkets on Etsy and calling it a job. Your models are wrong because the inputs are garbage. Garbage in, garbage out. Can you get this through your thick Georgetown Prep-educated skull, you absolute f*cking dimwit?

OK, I believe I just spoke for many market participants. Powell has already carelessly brought the world to the brink of a global recession, and now he and his brainless FED hawks need to sit down and STFU, while we watch the outcome of the Brexit fiasco and while the Chinese work through the consequences of their spat with Tariff Man.

Honestly, we would have to say that China needs a trade deal and stimulus and may now orchestrate them to happen in short order. @Cbus idea of buying FXI calls is an interesting one. Here we are just going to assume that pull-backs in EMs will occur - but will be brief and shallow, the same for energy and commodities in general.

The 1998 analogy is an interesting one, as are all the others. No template is perfect because of the unique circumstances of the moment. One or other of the "slowdown/no recession" bear markets may prove a better template here than the various "big ones". Of course that's coming, but it's still maybe a couple of years away.

Btw, and I offer this without any comment at all - did anyone catch the fact that the CEO of PG&E was making $4M/year for no obvious reason? You can't make this stuff up….

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checkmate
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January 14, 2019 at 2:22 PM ×

"Can you get this through your thick Georgetown Prep-educated skull, you absolute f*cking dimwit?". It isn't clear to me what you are getting at here. I think you need to stop being so politically correct and say what you mean ! :)

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checkmate
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January 14, 2019 at 2:29 PM ×

For clarity, my play here is a pullback ,but a multi week one, not necessarily testing the existing lows ,but obviously somewhat more than you would expect from something accruing over a few days. A pullack ,but deeper as we go into Feb expiry timeframe. A chance then to buy risk out of that into Spring and then seasonality of churn ensues. Don't really like that picture that much ,because I don't think the opportunities for portfolio change are going to be that sizeable.

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Anonymous
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January 14, 2019 at 2:38 PM ×

As we discussed here last year, the first quarter in 2019 would be a low point for China. The rush to the US holiday season was over and there would be much fewer new orders amid much higher inventory in the US. There is uncertainty and lost confidence before any potential trade deal. There is also the calendar effect. So we are surely going to get a string of very terrible economic data out of China.

On the other hand, I expect the SP500 earnings for q4 2018 would be better than the stock prices suggested.

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Cbus20122
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January 14, 2019 at 2:47 PM ×

@LB, I appreciate the China commentary, but I think you're off base just slightly.

China definitely needs to stimulate, but they're heavily constrained by their currency. You mention they would happily push through 7.0, yet they have publicly come out and said they would defend that level and not let the Yuan depreciate past that number. Going back to our game theory situation, this paints them into a corner.

First, China cares more about monetary stability than stock market stability believe it or not. The Chinese invest in real estate... their citizens are not heavy equity investors. They will happily sacrifice equities to keep the Yuan stable.

Second, if the yuan falls past 7, that indicates they're losing control since they have directly indicated they would not let this happen. There is likely a significant portion of people betting it won't fall past this # in currency markets as well. So what happens if this soft peg breaks? You would get a big move and lots of panic.

Third, a falling yuan means their dollar-based debts rise that much more. And they have a LOT of dollar based debts. I encourage you to read this article here on this: https://www.bloomberg.com/opinion/articles/2019-01-06/china-s-dollar-debt-is-surging-and-that-spells-trouble . If you've read what I've been writing here all along, this shouldn't be all that surprising, the world is facing a dollar-based debt crisis, aka a liquidity crisis. It should be readily obvious how this turns into a feedback loop leading to a stronger dollar and then more strain.

Fourth, you know how I mentioned where they keep their money (real estate)? That's the real bubble in China... it's the banks, SOE's, corporates, and real estate sector. Guess what a falling yuan hurts the most? Real estate. China can't let this fall or they implode.

Fifth, even if China can stimulate meaningfully, we're all assuming this will actually be enough to stop the downturn, and more importantly, that this is in the CCP's interest to do so. First off, each Chinese stimulus has provided fewer and fewer actual results. I'm not saying it wouldn't have an effect, but more and more stimulus each time they roll these out just goes into rolling more debt over, leading to less productive stimulus and far greater debt burdens in the future. Second, with Xi having a life-time term, he probably knows that a stimulus measure here may help them out for 1-2 years, but would likely cripple them thereafter. Xi and the CCP likely would rather let this stuff deflate now, use trade war rhetoric as a political scapegoat, and focus their citizens outrage on things like the USA causing said trade war. With that said, they're also incentivized to reach an agreement, but that's not a guarantee. We'll see what happens of course. But at some point, their stimulus will no longer work or won't be effective enough to stop the massive gray rhino coming from China.

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Moniker
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January 14, 2019 at 2:53 PM ×



It’s really the first cut that matters. Equities more likely to go bye bye when the eggheads finally admit growth ain’t so hot. They’re always behind the curve on the cuts not raises. Again, seems there is little appetite or capacity for another $5T+ stimulus, so look out. It appears China is the sickest man this time around (hear that EU?). China culturally implodes with regularity. Historically it’s of the Mime Falling in a Forest type. Now they’re in the system and everyone is watching. LB is correct: they have to pull out the stops to prevent utter chaos.

Always good to circle back to the fact that we all deploy on different time scales. I’m ex-buyside trader now managing HNW vanilla retail (yawn). My arc has gone from intraday to 12 months minimum. I get the itch again reading stuff here. Transition from Dailies to Annuals was really weird but the Better Three Quarters is muy bueno with the lifestyle change. You go around once and kids grow up fast.

Looking at Austalia/South America as Real Estate/China turd out...

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checkmate
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January 14, 2019 at 4:08 PM ×

CBUs,
In terms of your 'bang for buck' stimulus statement the same could be true globally. Afterall this is why we have been at 500 year lows on interest rates PLUS QE. Every iteration of monetary policy yields less and less actual growth and that's been the case now for probably 20 to 30 years minimum. Is it demographics? Is it that we have finally pushed the boundaries of productivty growth to it's limits without some new game changing tech that equates to what we saw about an hundred years ago? I don't have the answer to why ,but I'm very confident in the observation that monetary policy stopped working in any 'normal' sense decades ago and the graphic 'truth' of that is the long term market in interest rates.

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Anonymous
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January 14, 2019 at 6:18 PM ×

@cbus,

The data from Bloomberg is interesting. If you looked at the Q4 2014 and Q1 2015, you will see China's external debt doubled in one quuater from 800billion to 1.7 trillion, which is obviously incorrect.

From SAFE website, it looks like the correct number for Q4 2014 should be 1.8 trillion. Between q4 2014 and q3 2018, the lowest point of external debt for China was q1 2016, when oil prices hit bottom last time, if you do not remember, we could go back to the old posts here from 2016.

Now the quick summary of China's external debet between q4 2014, q1 2016 and q3 2018
Total external debt went from 1.8t to 1.3 t to 1.9t, an increase of 133 billion during this period.

China's long term government debt: 106 bilion in 2014 to 208 billion in 2018, an increase of $100 billion.

PBOC's external debt changed little.

China's banks' external debt: short term debt changed from 900 billion (2014) to 560 bilion (2016) to 894 bilion (2018), a decrease of nearly 100 billion. Long term debt increased by 75b. So the net change is a decrease of 20b.

China's other sectors-corporate sectors had an increase of 8b of external debt in total.

FDI external debt increased by 34b.

So the external debt explosion (133b between q4 2014 and q3 2018) seemed to come from government 100b and FDI 34b.

The above data comes from SAFE website.

The idea is that China has a debt problem. But is it more dangerous than q4 2014 or q1 2016? At q1 2016, there was a huge capital flight at the time and the decrease in external debt basically came from bank short term external debt and corporate short term external debt. The risk now is that Q1 2016 could repeat itself and this time there will not be a global coordinated stimulus.

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Leftback
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January 14, 2019 at 6:25 PM ×

@checkmate: LOL. LB is also a massive fan of the intellectual abilities of the UK's PM Theresa May….

@Cbus: that is an exceptionally informative and well-argued piece above on China, especially the discussion of the soft peg. Again we are talking about time-scales. Yes, you are correct. They will try all manner of stimulus measures (although a trade deal would be the best) and will definitely want to keep the soft peg at 7 for as long as they can. Your analysis also points out that in many ways the origin of all China's problems is the same as the source of their recent political headaches - the U.S.

As long as there is no Strong Dollar policy, China can probably keep all of the plates spinning for another decade before it crashes. In this case, the Fed really holds the cards, and although China has the option of selling US Treasuries in revenge against US tight monetary policy, this would probably force global rates higher and make things worse.

What I am suggesting is that if things were to get really bad over the longer term, and CCP were looking into the teeth of an outright deflationary depression, then PBoC would be asked to go Full Draghi, and do whatever it takes. The recent trade war climate has increased that tail risk to the point where one really has to think about it. We suspect that Churchill's statement regarding the Americans will prove correct once again, and that even the Trump team will eventually do the right thing - after exhausting all of the alternatives.

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Nico
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January 14, 2019 at 6:33 PM ×

Cbus

you make epic sense on China - my words exactly, if i could write. The fact that China may now gently deflate because it has a scapegoat (US trade war) is perhaps the most meaningful development in world economy/capital markets today

I live in Hawaii every winter and Chinese RE investing here is... overwhelming to say the least.

Asian politics is all about not losing face and Trump the scape suckling pig is a blessing if you found yourself cornered like Xi was. China deflating its economy is something that will take years to reprice in world equities

LB

indeed! googling that stupid PG&E lady yesterday the $4m 'salary' came up. Shook head. There is malinvestment and horrid pay scheme at every level of US economy. Don't get me started on Federal gardeners. All this is completely dysfunctional and unsustainable.

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Nico
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January 14, 2019 at 6:39 PM ×

i read your new post LB and sincerely hope China would never go full Draghi. They are too smart to do that. Look where Europe is today, the can that got kicked down the road morphed into a boulder that dwarfs ECB headquarters

zombie banks, angry populations. Who the fuck wants to follow European QE example today???

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Cbus20122
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January 14, 2019 at 7:13 PM ×

"As long as there is no Strong Dollar policy, China can probably keep all of the plates spinning for another decade before it crashes."

That's the problem in itself however. As more of these dollar-based debts come due (offshore monetary system), this becomes an implied strong dollar policy regardless of what the fed does. You're attributing too much to the fed here, when the fed isn't nearly as in control of this as you would think.

Ask yourself, who is creating these dollar-based obligations for this massive offshore dollar-based reserve system that is basically the oil that makes the world's economy function? It's certainly not the fed, and our own banking system domestically is not the primary creator of these obligations. Any of the major dollar dealers in the world (big big banks) can basically expand the us monetary base by creating these dollar obligations out of thin air, creating IOU's on "dollars".

To get to where we are at in the current market, people should begin by asking why we saw an emerging market and commodity bubble form in the first place after the tech bubble burst. Simply put, it was all these banks creating these dollar-based liabilities to fund the emerging market explosion from 2002-2011. The creation of these dollar-based liabilities artificially expands the US monetary base, which depreciates the dollar, causing its value to drop, commodities to soar, etc. etc.

The problem here, unlike standard printed US currency, is that the creation of these "dollars" need to be repaid at some point since it's all just a liability owed somewhere in the massive world of derivatives. So what happens when these "dollars" all start coming due? What happens when the banks that participated in this realize that this has been a terrible policy for over a decade and that they aren't likely to get paid back on all these, especially once the dollar has started to reverse, acting as a vicious adjustable rate loan? You get contraction in worldwide dollar liquidity, you start to see the dollar rising, and you see the banks that participated in this offshore dollar activity further retreating away from this type of activity. Surely, people can see how this is a very obvious feedback loop?

So to answer your point, China's only way to get a dollar policy that isn't strong is to hope that the major worldwide banks that created these dollar based obligations in the first place will restart the dollar expansion engine like they did in 2016-2017. Right now, china is trying to stabilize their currency, likely by selling off assets, but this isn't a sustainable policy. They're selling treasuries (and likely some equities too in the shadows), but this implicitly pushes up yields, creating a stronger dollar in the long run anyway. Once you see the big picture of how this is all set up, you can start to realize that there isn't any way out for the Chinese here. Now, you're right, they can keep the dog and pony show going longer and longer, but things are clearly getting more and more strained, and the way things have evolved, things are accelerating to the downside.

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January 15, 2019 at 2:21 PM ×

China came out last night unsurprisingly announcing tax cuts / stimulus measures. It's a step in the right direction, but it's not going to move the needle yet. I expect more to come in the coming months, and markets look like they're pricing this expectation in. I still do think we'll see a significant counter-trend rally in China at some point despite my very negative long-term viewpoint.

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230 vie loss is plan A dead and now we have the vote of no confidence in the govt to come. I'm going to guess that it fails and that the most likely pathway is a delay to the March exit and a reopening of talk with the EU with a view to a soft exit. The latter probably has more Parliamentary support than a no deal exit. Kind of makes me think that I should chance my arm on some domestic UK equity that may have been trashed in the lead up to all this so that means down in the mid and small cap arena.

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Δημιουργήσαμε ένα δίκτυο δανεισμού και
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Προσπαθούμε να διατηρήσουμε το πρότυπο αριστείας μας Εμείς
προσφέρουμε τις υπηρεσίες μας οποιαδήποτε στιγμή της ημέρας.
Δίνουμε ένα δάνειο σε όσους χρειάζονται οικονομική βοήθεια από το 1 έως το
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Οι υπηρεσίες μας περιλαμβάνουν επίσης

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Ένα δάνειο για να ξεκινήσετε το είδος της επιχείρησης που θέλετε να κάνετε;
Ένα δάνειο για εκπαιδευτικούς σκοπούς;
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Ένα δάνειο για να αγοράσει αυτό το αυτοκίνητο όνειρο;

Μην κοιτάτε ξανά, η LENDING TREE INC προσφέρει δάνεια
Δεν υπάρχουν κρυφές πληρωμές από 1.000 έως 20.000.000 EUR / USD / POUNDS
Σε πολύ χαμηλό επιτόκιο 3%
Δημιουργήσαμε ένα δίκτυο δανεισμού και
οικονομική βοήθεια σε πελάτες παγκοσμίως.

Προσπαθούμε να διατηρήσουμε το πρότυπο αριστείας μας Εμείς
προσφέρουμε τις υπηρεσίες μας οποιαδήποτε στιγμή της ημέρας.
Δίνουμε ένα δάνειο σε όσους χρειάζονται οικονομική βοήθεια από το 1 έως το
20 χρόνια

Οι υπηρεσίες μας περιλαμβάνουν επίσης

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. επενδυτής ακινήτων
. δάνεια για την κατασκευή
. δάνεια εκκίνησης επιχειρήσεων
. στεγαστικά δάνεια
. Η καταναλωτική πίστη,
. Δάνεια FHA
. προσωπικά δάνεια
. τα δάνεια αυτοκινήτων
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