Monday, 1 December 2014

Capitulation Count.

Today’s action in commodities, well oil and its associated bed mates, looks like it and all said bed mates have fallen out of said bed. The question is do they now roll across the floor, through the door and down the stairs or wake up.

The last leg down post-OPEC has seen towel chucking and associated price dumps to match. One stock I watch specifically for oil with a mix of Africa is Tullow (report here if you want some details). Now this isn’t about Tullow but more the delay in its price action to the latest oil fall. It held in for a long time and then finally caved in over the past 2 days. It looks like capitulation. The same can be said for the Russian Ruble (-9% down within the day).

With it has come an explosion of commentary about what will happen to the oil sector and how all the leverage in energy will catalyse a collapse in High Yield and hit everyone who has invested in the sector. But the way it is expressed is with a pregnant silence at the end, as if we are to imply this will lead on to a crisis in everything else. Sorry, as far as I’m concerned those getting their fingers burnt in the energy sector aren’t going to pull out of everything. Money will be lost but there will be equally benefitting High Yield sectors. This will not precipitate a global melt down in everything financial. It will promote rotation between the net losers to the net beneficiaries with a greater net benefit to all.

Low oil prices lead to the  QE’dom of the proletariat (to badly paraphrase Marx).

But lets get back to capitulation. Having mentioned before that the price action through 2050 on SPX has seen greater capitulation in commentary from the bears, it feels like a lot of rotation has taken place above that level leaving things not so sure and a good chance that the internals of the market will break through to the externals. Black Friday wasn’t a bundle of laughs anywhere. In the US it saw sales down 11% and in the UK it saw fist fights as hordes fought over meagre offerings (why the heck Black Friday sales have hit the UK is beyond me). Equity prices have stalled and with US holidays traditionally marking turning points it is worth being twitchy and leaves me looking for price falls now that we have had the capitulation of the bears.

We have already seen capitulation on the Europe trade. Since the Economist Cover Alert gave us the strongest signal that European assets were going to bounce along with the data (thank you), European growth assets (as measured by the ‘we make things’ Dax) has seen a dramatic turnaround.

Below is the Dax with the date the Economist was published with an assumed one week lead time marking where they probably thought up the story.

Assuming the delay in the Economist getting round to actually publishing their covers, I will safely assume that the next publication will be about commodities. It would be wonderful if they went full in with a cover about oil but after their famous call for $5 oil saw the base back in 1999 I doubt they will be that brave. I have however backed my assumption by buying some Tullow Oil (unnecessary disclaimer for Mr Regulator. - I am long Tullow Oil).

So where next?

I can’t help but question the positioning in the Japanese trade. Though I have happily been playing the long Nikkei short Yen trade on the basis that Mr Abe is going to firehose his way out of trouble and that there is a chance of a bounce in GDP at next data point, the trade is stalling. Falling oil should have been a boost to Nikkei yet there is little impact. USD/JPY made new highs overnight but gave it up. Even though I don't take much notice of the Jeremy Bentham of Japan, Sakakibara (see footnote), has mentioned today that USD/JPY shouldn't go much further. And finally, do you know anyone who is short USD/JPY and short Nikkei? If you do then you, or they, are a rare species. It is a long term trade I know, but on the rule of capitulation then, as they say on ‘Dragon’s Den’ - I’m out.

footnote - 

Sakakibara as the Jeremy Bentham of Japan refers to the founder of utilitarianism who had his body preserved once he was no longer influential (dead) and was, allegedly, wheeled into council meetings to be recorded as 'present but not voting'. 

At the end of the South Cloisters of the main building of University College London stands a wooden cabinet, which has been a source of curiosity and perplexity to visitors. The cabinet contains Bentham's preserved skeleton, dressed in his own clothes, and surmounted by a wax head. Bentham requested that his body be preserved in this way in his will made shortly before his death on 6 June 1832. The cabinet was moved to UCL in 1850. Not surprisingly, this peculiar relic has given rise to numerous legends and anecdotes. One of the most commonly recounted is that the Auto-Icon regularly attends meetings of the College Council, and that it is solemnly wheeled into the Council Room to take its place among the present-day members. Its presence, it is claimed, is always recorded in the minutes with the words Jeremy Bentham - present but not voting. Another version of the story asserts that the Auto-Icon does vote, but only on occasions when the votes of the other Council members are equally split. In these cases the Auto-Icon invariably votes for the motion. Stories of the Auto-Icon's regular attendance at Council meetings are, however, myths.

Postscript Dec 7th -

Economist cover 6th Dec 2015 - I'll mark that as a successful call, they even went for oil, but with no price prediction.

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