Thursday, 22 January 2015

Three Bells in a Row and Euphoric Highs.

At last we have a full set, the global slot machine has finally hit the three bells in a row jackpot payout. The BoJ, Fed and now ECB have all paid out.

You will have to excuse this doctoring of an old Tenpole Tudor album cover that has been sitting in my collection since the glory days,  but the aghast faces add a little soup├žon of market QE commentary.

So what now? To be honest I was surprised at how long Eur/Usd took to make up is mind as to what to do with a dithering around the 1.1550 area until the details started to emerge of the who how and where's of the actions. But now that Eur/usd is on the move it won't be long until the extent of such moves are being quoted in standard deviations. Have you noticed how standard deviations of moves are only ever used to explain losses? Never profits of course as those are down to genius.

In the press conference Draghi was asked about Euro FX rates and his response was that FX rates were not targeted nor part of policy. This should be of absolutely no surprise to anyone as if he were to suggest that FX was an essential policy tool for rebalancing economic imbalances he would immediately be contradicting the logic of the original implementation of a single currency across Europe and effectively the existence of the ECB.

I haven't been through the whole structure of the ECB QE mechanism and there will be much smarter folks than me digging through the complexities.  I am half waiting for one of them to get to the bottom of it all and declare that actually it's all another accounting game dreamt up by the Obfiscators General, once again leading the market on a Euro Keystone Cops chase after the real stimulus.

As it is, we have a cart load of European debt being bought up and the yield curves being played with. Short term rates are unchanged in Europe but Denmark has gone even more negative (-0.35%) and bond yields across Europe are all doing their bit to make cash (as in piles of notes) the most attractive hold by yielding 0.

I have suggested before that with bond yields at zero any equity paying a dividend can be priced up to near infinity and still give better yield, but now with bond and cash in bank yields going negative we can say that an equity doesn't even have to pay a dividend to give a better yield. How strange it would be if we end up with negative dividend equities where holders are charged each year for the pleasure of owning the stock, but I guess that's only what a company doing countless rights issues is actually doing.

So whilst various quarters remark on the equity valuations being at historic stupid highs, with respect to earnings expectations rolling and dividend payouts, on a yield basis they are very good value. Add to that the fact that the market has been fighting every up move and is not monstrously allocated to equities I can still see those babies moving higher. It ain't over 'til the euphoria is at its highest but the market, like a clubber afraid of missing the fun, is only just fumbling in its pocket for the pill.

This of course applies to European equities more than the US, which is just coming down from its own MDMA (Monstrous Debt Monitising Action) induced high. Considering the mood toward Europe expressed by every US commentator from Novemeber to mid-January I would be very surprised if any of them are not longer than 'very short' which suggests there is plenty more Edward the Seconding to be administered to those positions.

Europe looks grim, but I am tending to look at this dip in the European economy as being near a natural low anyway, into which the ECB have now thrown a QE stimulus bomb. Like a homeopathist's argument with a near death patient, if the economy now grows they will claim success, if it dies they will say they were only cleared by the Germans to act too late claiming if they'd been allowed to do it earlier it would have lived.

I know that everything Europe is in focus, but if the emerging markets were bleating like hell that the Fed was cutting off their liquidity a year ago should we be looking at the ECB having provided the replacement? If so then the biggest flows could be coming from EM doing Euro issues instead of Usds which will really crack Eur/usd.

Now oil - I am going to own up to being a bit illogical and ill disciplined here. I own rather a lot of 'oil going up' related stuff now and am looking at this last 2 weeks of stability as a base formation. CTAs have been monstrous short, yet their greatest friend, momentum, is fading. Stimulus in Europe should be better for it than no stimulus and shale co's are shutting down faster than I thought. One other function I am wondering about is the cross hedging by owners of High Yield oily things. A logical hedge would be to sell oil forward against your HY risk. If this has been the case then any rally will see not only the High Yield pick up but also the oil hedges against it get lifted, creating a greater up move (and repeat).  I am hoping, in a not clever trader way, that the damn black stuff goes up again.

Interestingly oil co's are now saying there will be a supply problem further down the road if prices stay low. Which shows up an interesting feature of commodity markets caused by the harmonics of supply and demand along the forward price curve. If they are right then this fall in oil may not be the start of a steady low phase but more the start of oscillations, which if not damped, will cause a Tacoma Narrows bridge price event. 

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