Market post FOMC

The FOMC once again managed to surprise the markets. This time by being a bit more hawkish than expected. This fit in with the feeling I’ve had for the past few days that the market is pricing max ECB action and max Fed no action leaving risk for disappointment on either. The FOMC statement with its missing reference to exogenous pressures might have surprised some but the Polemic FOMC market expectation model is still performing .
It's a simple model that plots market interpretation of Fed intention against actual fed action. So simple in fact that I can express it like this.

The subsequent price action in assets was predictable, right up to the point it was not. A dump and rally seeing indices close near/at/through recent highs again depending which one you look at. I can only assume it was a battle over impact and reputation of Fed action. Stay low and it's stimulatory but ZIRP nuts, move higher and respect is regained but it’s less stimulatory.

This caused some jitters at Polemic Position Towers, but the view that risk things roll over again is intact. Asia coughed a ‘meh’ with the FOMC caught between a strong Western equity close and a tap back towards ‘Fed rise = bad for EM debt’ but with Western market looking soggy again we may well see some contagion flip back into EM, which starts the feedback loop into DM, rinse repeat etc.

Last nights FOMC just adds to the interest in the stretch between FOMC and ECB policy. The obvious plays are EUR/USD shorts and ESTOXX vs SPX but that is so obvious I am looking at EUR/USD at 'only' 1.0950 and deciding that though everything should be set for it to fall it will stuff everyone again by returning to the 1.1100 magnet again. the catalyst could well be an ECB expectation catch up. We have seen Fed expectation move post FOMC, we may well see ECB expectation shift from uber-dovish on the next squeak out of them. We can't get much more dovish than now can we?

The Euro/US stock spread isn't performing that well either today with the move down in European stocks hinting that the sell off is going more general and with that in mind and the hefty falls in UK stock the mighty peaking US markets could be seeing the still kicked from under them ready for a catch up

In the last post (not the bugle call, though it may be apt in equities if my feelings play out) I said oil was the key to many thing and had pretty much thrown the towel in on seeing it rebound meaningfully. Well, add me to the list of oil counter indicators as the stuff shot up 6% as soon as I said that. But despite that my oilly stock things are still getting 'Shell'acked suggesting that the belief in the rally is not complete.

One last point on Central bank expectations. I wrote this a couple of years ago and it remains as pertinent now as it did then


And the US? We have been throwing around all sorts of arguments and analogies, most of them medical ranging from tearing off the plaster of QE as quickly and painlessly as possible, to continued methadone prescription, to amputation and stem cell therapy. Once again, as with Japan, it all rests on continued confidence and here we have a balance between confidence in the continued supply of liquidity if the economy needs it against confidence in long term Fed policy, the two being slightly different. The other point of confidence is who follows whom. the market the fed, the fed the data, the market the data or the Fed the market. We would prefer to think that the Fed will, as they keep stating "do what is necessary" (as the ECB also keep saying) to which point they will try and play the Goldilocks scenario of just the right amount for any situation. 

We would like to remain confident that despite the wild oscillations in central bank expectations the central bank Governors are indeed Governors - Those big Brass Balled governors on the steam engine of the World's economy and they can’t afford to choke off what confidence may finally have emerged. 

The markets are pricing the medicine, not a cure.

Since the Fed no hike decision and the ECB 'likely cut' press conference, it is looking as though markets are pricing interest rates rather than growth. The low rates lever has  been pushed down almost to the floor and expectations are now taking it into nutty negative territory. With EUR and JPY real rates at -40bps, there’s not much more they can do and my concern is that a further depo cut by the ECB will ultimately prove to be contractionary and/or neutral at best because of the bizarre nature of negative rates (I stand by my suggestion of a QE credit card to get the money directly to where it belongs).

The commodity sector is not playing ball as one would expect it to if we were looking through CB policy to the end game of that policy which is growth. Oil and commodities are not the only disconnect with equities. High Yield is too, with credit guys skittish and issuance starting to ramp up again leaving the credit markets nowhere near as bullish growth as the equity markets. Something is fishy.

US equities are effectively back in their pre August dump range and European equities are around their early 2015 ECB QE expectation hype levels. But the background situation is worse than it was either in January or August. Earnings growth is still weak/negative everywhere and I have a hard time seeing equities make new highs in that context alone.

As a background indicator I am wondering if the proliferation of stories about companies cooking their sales books to disguise falling performance is a sign that leverage can-kicking in the balance sheets is hitting a brick wall. Growth realities are poluting the growth dreams that many of these companies need to sell in order to survive. A company that borrows to fund a dream and then uses that borrowing to pay itself and the interest on its borrowing without earning anything will go pop. Unless it can resell the dream to the next punter willing to lend to it and repeat the process.

But it is oil that is my barometer. Oil is looking horrendously sick again and it is beginning to look as though the broader swing in oil is a leading indicator for how other markets will behave. A fall, a rally and then a fall. Oil is down 2.5% as I type and it is now really hard to see what is going to give it a lift if CB uber-dovishness doesn’t instil expectations of growth, Russia in the middle east doesn’t upset expectation of supply and the last bulls (including me) are throwing in the towel as the last rally fades. What is more we haven’t even had the press signalling a bottom by calling for sub £1.00 petrol imminently - it normally works a treat as a base caller.

I just can’t get away from believing that oil prices are the key to everything at the moment. Oil is the centre of one of those overlapping Venn diagrams we all learnt about at school, but have never really used since, other than as allegorical references such as this.

Oil is shaping Russian policy, it's reshaping US policy (or lack of it) towards the Middle East, it's driving CB policy as referenced by Draghi at the last ECB press conference, it's shaping financial stresses through high yield as well as long term mega-investment plans and it is reshaping political alliances in the Far East. It is now even being used to fund the US budget deficit with the sale of their strategic reserves (rearrange the following words - Brown, Gold, Gordon).

One of my embryonic pet themes is the relationship between Russia and Saudi Arabia. All roads, whether financial, economic, political or military seem to end with that interface as key. If the West is drawing battle lines supporting Saudi interests, to support their own, as Russia builds ties with the crescent of Syria and Iran then the easiest place to anticipate the make or break of the region is Saudi Arabia. Russia jabbing the Saudis is as good as jabbing the West, whilst also applying pressure indirectly by coercive pressure on Saudi to reduce supply or by wrecking the region making sure that supply diminishes. Europe’s increasing deals to procure Saudi oil as a means of energy diversification away from Russia is understandable but Saudi offering discounted oil to Poland is as good as Walter White selling meth in Los Pollos Hermanos. Gustavo ain’t going to be happy.

In summary, the oil and the equity rebound together with the positional/leverage reasoning mentioned yesterday has lead me to believe we are better set up now for a sharp fall in markets than we were in August. Oil remains the leader and it is telling me that equities are about to have a another big wobble. The markets are pricing the medicine, not a cure.

In the meantime I will nurture my Russia/Saudi theories.

First wave New Paradigmers rarely win.

Cor blimey governor. That’s a cool $4 trillion added to the world's stock market values in the last four weeks. I must thank @Groditi for supplying me with these natty representations of global market cap.

% of total

Total in USD billions

Anyone who thought that the Fed were solely guided by asset prices would be thinking that hey can now raise rates. But that would not be the cleverest thing for them to do because in doing so they would be telling the market that all they care about is asset prices. Which they don’t. If they did they would have raised rates in July.

The ECB appear to have lit the blue touch paper on bonds and equities and if it wasn’t October but January  right now I’d say it was groundhog year, so let's settle on groundhog 9 months. The market has reached for its Jan 2015 play card and hoovered up European equities, bonds and everything ZIRP. At this rate even Bitcoin is becoming a carry trade vs Euro. But then so is sand, dust, old plastic bags, dirty needles and anything else with zero yield. The ECB rally has knocked on to all global assets as the ECB is now seen as the cash water-cannon quelling the globes financial riots. If that wasn't enough China has cut rates this weekend.

The price action has led to most shorts having to refer to the Kubler-Ross model to explain where they stand as surely this was not meant to happen. I mean China? Debt? High Yield? Earning season? Wasn’t this the big one? Well no, in financial asset price terms it has run pretty much as I was hoping, because down moves behave in just the same way as sharp up moves during investment mania, whether the 1890s railroad, 1998 internet, fracking or any first wave of the new paradigm. Doom moves are just the same. The first in mortgage the kids to invest in the next big thing that is a sure fire winner based on long term arguments. Yet though the long term argument is right, the investments are done on huge leverage that the embryonic paradigm is unable to support in the short term.  The groundworks of infrastructure were laid in wave one but it is rarely the first investor who makes the big bucks. It's usually the second investor who picks up the assets for a song, once the first bows to debt load, who lands the sustainable profit.

So, I imagine, it will be with falls in asset prices.  The new doom paradigm kicked in in August, the first wave went nuts managing to reprice the world 10% cheaper in a couple of weeks, yet the real economy didn't see a 10% slump in those weeks. Since then the squeeze has been on as the disparity between price and actual performance has closed up. With prices nearly back to where they were pre-dump it's as though the investor community can brush off the post-explosion debris, examine the scenario afresh, take stock and now properly enter the trade they think best.

Indeed, now that the market has weathered China, high yield debt, growth, emerging markets and earnings it might well be the time to start worrying about China, high yield debt, growth, emerging markets and earnings. Add to that the feeling that the world is fully discounting further ECB action and the picture may be near to complete as current expectation are for ECB cuts, Fed inaction, BoJ  cuts and BoE dithering. The last few years has shown fading central bank expectation regularly pays off.

The market's reactions have been indicative of a rates response rather than a growth response and that is of concern. Until we get an uplift in demand expectation any rates linked market responses should be considered temporary. The way that commodities and particularly oil really didn't respond to other post ECB market moves leaves an important piece of the rally jigsaw missing.

For the first time in a long while I am actually short in stock indices, but am also now a tiny amount long a couple of dodgy oil cos to play a bit of performance spread.

Nobody expects any ECB action

One thing that we should have learned over the past few years is that that expecting central bank action is like expecting the Spanish Inquisition. No one should expect it.

With that in mind I give you the latest ECB press conference Monty Python Style  - No one expects any ECB action.





Market - Well I was just saying that there is a chance that Euro rates could drift lower, I wasn't saying I was expecting any ECB action.

Jarring chord. The door flies open and Cardinal Draghi of the ECB enters, flanked by two junior cardinals. Cardinal Vítor Constâncio and Cardinal errr the other one at the press conference who never says anything, Bonnici.

Draghi - Nobody expects any ECB action! Our chief weapon is surprise...surprise and fear...fear and surprise.... our two weapons are fear and surprise...and obscure communication.. Our three weapons are fear, surprise, and obscure communication...and an almost fanatical devotion to inflation targeting.... Our four...no... amongst our weapons.... amongst our weaponry...are such elements as fear, surprise.... I'll come in again. (exit and exeunt)

Market - I didn't expect any ECB action.

Jarring chord. They burst in.

Draghi Nobody expects any ECB action! Amongst our weaponry are such diverse elements as fear, surprise, obscure communication and an almost fanatical devotion to inflation targeting, and doing everything it takes, - oh damn! (to Constâncio)  I can't say it, you'll have to say it.

Constâncio - What?

Draghi - You'll have to say the bit about 'Our chief weapons are ...'

Constâncio - I couldn't do that...

Draghi bundles the cardinals outside.

Market - I didn't expect any ECB action .

They all enter.

Constâncio - Er.... Nobody...um....

Draghi - Expects.

Constâncio - Expects... Nobody expects the...um…any ECB ...um...

Draghi - ACTION!.

Constâncio - I know...I know! Nobody expects any ECB action. In fact, those who do expect...

Draghi - Our chief weapons are...

Constâncio - Our chief weapons are...um...er...

Draghi - Surprise.

Constância - Surprise and...

Draghi - Stop. Stop there! Stop there. Whew! Our chief weapon is surprise, blah, blah, blah, blah. Bonnici, read the charges.

Bonnici - You are hereby charged that you did on diverse dates commit heresy against the Holy ECB. My old man said you didn't follow the curve.

Constâncio -That's enough. (to Markets) - Now, how do you plead?

Market - We're innocent.

Draghi - Ha! Ha! Ha! Ha! Ha!

SUPERIMPOSED CAPTION: 'DIABOLICAL LAUGHTER'

Constâncio - We'll soon change your mind about that!

SUPERIMPOSED CAPTION: 'DIABOLICAL OBFUSCATION'

Draghi - Fear, surprise, and a most ruthless... (controls himself with a supreme effort) ooooh! Now, Constâncio, the expectations!

Constâncio produces a few charts that don't show much. Draghi looks at them and clenches his teeth in an effort not to lose control. He hums heavily to cover his anger.

Draghi - You....Right! Tie the market down. (the other ECB officials make a pathetic attempt to tie the market to ECB expectations) Right! How do you trade?

Market - Selling Bunds, staying long Eur/Usd and running short Dax.

Draghi - Ha! Right! Cardinal, give the expectations (oh dear) give the expectations a twist.

Constâncio stands their awkwardly and shrugs.

Constâncio - I....

Draghi -  (gritting his teeth) I know. I know you can't. I didn't want to say anything. I just wanted to try and ignore your crass mistake.

Constâncio - I...

Draghi - It makes it all seem so stupid.

Constâncio - Shall I, um...?

Draghi - Oh, go on, just pretend for God's sake

Constâncio makes a lot of random verbal gestures hinting at imminent monetary easing

The doorbell rings. Market detaches himself from ECB expectations and answers it. Outside there is a dapper Fed official with a suit, slightly detached from reality.

Fed Official - Ah, hello, you don't know me, but I'm from the Fed. We were wondering if you'd come across the pond and do a sketch over there, in that sort of direction... You wouldn't have to do anything - just look as though you don't expect any Fed action.

Market - Oh, well all right, yes.

Fed Official - Jolly good. Come this way.

No liquidity? More fool you.

There is a lot of concern that liquidity in some markets is so dire it could lead to some serious meltdowns. Eyes have been on High Yield via the energy sector but the perennial debate over corporate or emerging market debt liquidity risk rolls on. So here I post my strong feelings that I have expressed in this space before

But should we be concerned about a meltdown caused by low liquidity? The normal response is "Yes of course! Prices will collapse and there will be high volatility and and and" but am I allowed to ask “So what? Does that matter?"

If there is a meltdown in something it's triggered by an adjustment in perceived value. When there is no liquidity then prices pass through where people think fair price sits (otherwise they wouldn’t be moaning about a lack of liquidity) to prices which they feel are unfair or downright silly and don't reflect actual probabilities of default or yield outcome. So why are they selling at values that they think are absurd and moaning that it's due to lack of liquidity?

Most likely it can all be boiled down to money management rules creating large gaps between actual outcome probabilities and priced probabilities. This is particularly true in systems that use price as an input of probability in the first place, as we saw with CDS prices being quoted, wrongly, as actual probabilities during the EU crisis. So we could argue that any huge swings in pricing because of lack of liquidity will punish those who have to employ short term money management rules over those who can take a sanguine long term view. So rather than all being bad, it creates opportunity and acts as a feedback hopefully moving fund management away from the, sometimes cretinous, short term consultants tight risk rules back towards a more balanced macro big picture world.

But what about the losses? Well if the true price that reflects future outcomes has indeed moved then tough. That is nothing to do with liquidity. For those who are being forced to sell below what they see as the  real price, due to no liquidity,  their loss must be someone else’s gain as those selling must be selling to someone else who is picking up a bargain. So the negatives due to bad liquidity are offset by someone else’s positives.

So if there is to be a High Yield meltdown  due to poor liquidity I look forward to buying some at stupid levels caused by some VAR calculation deep in a fund saying  'spew at any cost'. Thank you.

Of course the wealth destruction argument is different. If leverage is involved, which of course it is, then book values will tank and no doubt the value of that book has been used to borrow to fund some other asset, which then has to be sold. Now THAT is the transmission risk to other asset classes.

It's not liquidity that is the problem, it's once again leverage.

QE card - That'll do nicely

QE - Nice idea but the whole process was like trickling water down a pile of sand, most of it got lost on the way down the slope due to seepage. QE was a great way to get the banks back in shape as they collateralised their debt but did the man on the street actually see much of the benefit other than by secondary effects from those who were able to hand over a bond for cash?

One thing I find peculiar is that a bank or central bank, will buy a bond made up of an aggregation of debt no matter how small the face value, but won't buy the same size debt from one of the entities that is a component of that aggregation. All debt is, at some point in the food chain, claimable upon a company or a person. Although a company is the sum of a group of people, I list it separately to a person because a company can declare bankruptcy thus protecting the people who make up the company from personal responsibility. In this respect you are less likely to have ultimate recourse over a company than you would do over an individual. Of course a person can declare bankruptcy too, but that is a lot more personally unpleasant than walking away from a company. Ask Donald Trump, he seems to worth a bob or two after spectacular bankruptcies.

So my point is, if you are going to look at the risk of lending then lending to people should be, in aggregate, less risky than lending to companies as people own all assets anyway but are less likely to walk away as a company would. A bailiff at the door is more worrying than losing your share holdings.  The argument against this is that in lending to an individual you don’t benefit from the portfolio effect of averaging default risk. Which is why anyone lending to individuals tries to garner as big a portfolio as possible to average out that risk. This is exactly how the credit card industry works.

Here I am surmising, so please excuse any unchecked facts, but my first surmise is that there is a feedback loop in setting the interest rate at which you lend on your credit card. Though you want to lend at as high a rate as possible, as you raise the rate so you introduce a bias in your client set. The higher the rate goes the more desperate a borrower must be to borrow through you rather than through a cheaper facility, so the more likely they are to have lower credit ratings.

So I am also surmising that the reverse is true. Lower your borrowing rate and the default risk of your client base will improve. So what if you lower your credit card rate to say 2% p/a? Wow, wouldn’t you love one of those puppies? The credit profile of the portfolio would increase dramatically as funding switched to it from otherwise credit worthy borrowers. We’ll all have one of those and at that rate we can afford to run our debt, not worry about paying it off and go and spend the proceeds.

But which credit card company could possibly want or be able to do that? They’d have to have a potentially massive balance sheet and be able to borrow short term at exceedingly low rates themselves. There is one bank that satisfies these conditions - the central bank.

In issuing a credit card at very low rates the central bank will have effectively QE’d the populations debt directly, putting the spending power where it was meant to be, with the population, rather than being usurped by replenishing corporate and bank balance sheets. This is direct democratic QE with individuals borrowing from the sum of all individuals, individuals deciding how to spend it and individuals responsible for repayment.  If you can’t lend your money to yourself then who can you lend it to?

So the pay day loan co's and loan sharks are bypassed, banks are let of the obligatory hook to lend more whilst trying to reduce balance sheets, squeezed corporate debt gets priced realistically rather than via QE comparables and Joe Public gets lent to. What is more, do enough of it and they can even move base rates off Zirp or negative levels and restore a bit of normality.

An impossibility in many minds, but it's always fun to try to bypass normal procedure as failure is the mother of innovation.

Just the 'J' word

There is a word that has the same effect upon me as a taser. Well, let's be honest here, I haven't actually been tasered, though I did once decide as a child to see how quickly an electric fire element heated up by touching it, forgetting that though my reactions may have been fast enough to remove my finger as the element heated up, they certainly weren't fast enough to avoid the onrush of 240 volts of alternating current that would be coursing through the element long before its natural resistance caused it to heat up. The result was a scarred finger and a lifelong lesson in stupidity management that has born me in good stead through my time in finance.

As I explained to my mother, I was just trying to see how quickly the element would heat up. And there was the word. Did you spot it? It was the word that should halt (Taser, or electric fire like) everyone in their tracks as it is a word that is a preposition for a further string of words that, without this magic word in front of them, would sound so ridiculous as to cause the listener to choke on their own epiglottis.

And the word was ... just.

The mighty 'just' word. My wife and I do battle over the just word. In her case it is a word that achieves the holy grail of physicists and sci-fi nuts. Time travel. Or at least the ability to travel faster than the speed of light. In my wife's opinion prefixing any task with 'just' freezes time allowing her, when we are already late for engagement, to 'just' pop back indoors to make sure that the bed is made, kitchen clean, curtains made, jigsaw finished or War and Peace read' without in anyway further delaying us. 'Just' also allows us to depart from home in a 'just leaving' sort of way at exactly the time we should be arriving not to be more than sociably late, thus imparting us with the ability to travel faster than the speed of light. Which is 'just' incredible.

Of course I also have found the word to be of use in the war against the laws of physics. In my case I can perform Messianic acts such as turning half a pint of beer into eight pints by making it 'just a quick half'. I can also conjure up free cups of coffee (I was just passing), cross oceans in the face of hurricanes (just a light breeze), consume cakes without putting on weight (just one more), cure life threatening disease (just a cold) and even attempt to avoid criminal prosecution (I was just the president of FIFA).

But where the word is most effective is in finance where one can use it to limit all losses, for not only does the word 'just' freeze time, in doing so, it suspends reality. The monitoring of the use of the 'just' word is imperative and if the cleverest algorithms out there can spot word tone in Fed statements I am sure it isn't beyond them to count the occurrence of the word 'just' in financial twitter or IB chats and plot that occurrence against price trends. For I am damn sure that any move in the market that is accompanied by a preponderance of 'just' is going to just right royally screw the 'just'erers.

The dismissal of moves against ones views with the word 'just' is highly dangerous. Let's take today's equity moves. In fact, let's take the last week's equity moves. The S+P500 battled through 1995, failed again at 2022 with many crying 'triple top' and fell in what must have been one of the most predictable turns lower we have had for a long time (as previously posted here). This obvious move lower would naturally have attracted in short term players and confidence in a renewed down move was notable Wednesday morning. Since then we retested the 1990/95 area and have had a climb higher (tripping my previously stated trailing stop entry trades back into longs). Nasdaq was the first to break key areas around 4390, leaving SPX to battle the 2022 area that had previously been reaffirmed as a safe top. Whoops. Not only did SPX break but it has been tracking higher.

Now call me old fashioned but if I was to be short and see this happen I would be rather perturbed considering I have had three cracks at trying to go lower on old bad news and failed. But no. There is a very good reason for this rally - it is, apparently, JUST option expiries. So that's ok then. Does that mean that the loss on your book isn't really a loss? Or do you actually mean 'I have JUST shut my eyes and stuck my fingers in my ears going nahnahnahnah ignoring everything until after option expiry at which point I will open them again and pray to God that prices have fallen because at that point losses become real again? Or are you allowed another throw of the 'just' word to roll out your position on maybe a 'just people being silly', 'just stupid, I'm right' or a 'just you wait, one day Greece will implode, China blow up, gold become the only currency in the known universe and Northampton Town win the FA cup'?

If prices were just wrong for a simple 'just' reason then logic would suggest that someone with ample funds to do so would knock them back to the price they should be at. If that isn't the case then one of two things is happening. 1 - The price is not 'just' at a wrong level. 2- There is no one left able or willing to short the rally. Either of these scenarios should be of concern to a short with a 'just'.

Just now my just indicator is bleeping just madly. That just may not be the end of this rally and may just go on to cause a lot of pain. That may not be just, but it is fair.

A SPX oddity - Fortress style

“2001 - a  SPX Oddity" grew to become the David Bowie song a 'SPX oddity' But it is all the more pertinent with a Mr Mike Novogratz having his fund at Fortress closed down. So this is for him.

Risk Control to Major Mike

Risk Control to Major Mike

Take your pro-plus pills

And put your best trade on.

Risk Control to Major Mike

Commencing countdown,

Euroswiss on

Czech/Brazilian 

Don’t let the markets f*k with you

[spoken]

AUM - Nine, Eight, Seven, Six, Five, Four, Three, Two, One… 

This is Risk Control

To Major Mike

You've really bust the trade

The SEC want to know whose shirt to tear

Now it's time to leave the company

If you care

This is Major Mike to Risk Control

I'm stepping on the floor

But the price is floating

In a most peculiar way

And the stocks look very different today

For here

In my really shit position

Far above the bid

Markets have the flu

But I don’t own the skew

nah nanah nanah nah nah

Though I'm passed

Three hundred million bucks

I'm feeling very ill

And I think my hedge fund knows which way I'll go

Tell my broker, I never liked him much

he knows.

Risk Control to Major Mike

The options dead

The expiry's gone 

Can you hear me, Major Mike?

Can you hear me, Major Mike?

Can you hear me, Major Mike?

Can you....

Here am I floating

Round the wine bars

Far away from funds

I don’t know what to do

Maybe guest on Channel 2?

(with thanks to @Zatapatique for giving me the idea and a couple of lines)

A very public rollover

It started with oil

It bled into commodity types and FTSE.

The US meantime tried to fight it with volatility also having a splurge lower

but finally followed the commodity leaders and tipped overnight.

This all fits beautifully with classic overbought signals  (I thank Cam Hui for this http://humblestudentofthemarkets.blogspot.co.uk/2015/10/a-whats-credit-limit-on-my-visa-card.html)

Capitulation of the shorts? We have even had macro funds throw in the towel and I don't just mean close down  positions. I mean close down completely. http://www.bloomberg.com/news/articles/2015-10-12/fortress-said-to-plan-closing-down-macro-fund-run-by-novogratz

But to be a perfect fall this should be accompanied by a new news devastating concern. So far this morning the news is recycled old, known bad news and data is being twisted to fit.

The Chinese trade data out overnight, though soft was not as soft as many expected. It was a classic figure that can be used by both camps, so in that respect it isn't of much use at all. But it isn't terrible.

the UK BRC survey was released late last night and hasn't picked up much attention but saw September like for like sales exceed expectations +2.2%. Another sign that Joe Public is disconnected from the concerns expressed in financial land and hasn't got the message that this is a crisis? Come on guys, don't you know you are all meant to be suffering?

I can't get as worked up about inflation figures as others as I still see commodity inputs as the main drivers. Wages are not falling, so in many ways this is still good deflation mixed with bad inflation - that of all the monopolistic costs we have to endure.

The next bleedin' obvious that appears to be taken as read is this quarter's terrible corporate earnings. Braced we are, veritably braced! But so far the dribs and drabs aren't all bad. (H/T AL)

DELL/EMC: Agreed deal worth $67bn. $33.15 a share
BELLWAY: Beats expectations & raises dividend.
SAP: Q3 sales/profits beat.
LVMH: Quarterly sales beat, strong Europe/US.

I really wish I wasn't so cynical, because in a classic case I'd be happily shorting the back end of this market but the lack of new bad news (not the shoehorning of existing news), the disconnect between financial commentary and what the public is actually doing  and finally the complete flip in commentary this morning calling this as the start of the next slide, makes me wonder if this turn lower is so so blindingly obvious it must be too good to be true.

And if you want any further evidence that the bear case may be a bit too discounted then this released by BAML over the weekend should be born in mind.

With this in mind and having cut my longs on Friday, I am working trailing stops as entries to long risk positions rather than piling into the shorts.

The Crouching Polemic

Last Thursday's market close was of interest to me. If we look at the SPX ( but any major index would do) we had an explosive lift off the earlier day falls that had made it look as though the bear army had already won the the battle of 1995 in SPX. But the following move up through 2010 was accompanied by a swift fall in the VIX too which has me thinking that this was the capitulation of the bears that I have been waiting for.

With this, my bull case has lost one of its main drivers. One of the other barometers of market direction has also swung - Fed, BoE and ECB expectations. These now appear firmly in the 'not for a long time' camp whereas a month ago they were in the field of 'tomorrow'. Meanwhile the macro position really hasn't seen any good news over the last month either to substantiate anything much more than this huge positional readjustment. With all this in mind I have trimmed my FTSE longs. I am sure there will be other opportunities to play coming along very soon but I'm not tempted to go actively short just yet. That will depend upon how Monday trades and though my suspicion is for a roll over, my key indictor will be copper.

Finally I'd like to introduce you to a very powerful chart formation - The 'Crouching Polemic'. It was first suggested by a commenter  (LB) but here I formally identify it and can use recent moves in the FTSE to illustrate it. This pattern is usually seen after sharp sell-offs and is a sign of  two phase base.

The initial bottom is just that, a bottom, followed by a rising body of recovery which encounters the falling humerus, which few find humorous, only to be followed by an acceleration higher in the direction of the forearms, technically called the ulna thrust.

The whole pattern is indicative of anyone who has been long through the move - crapping themselves.

The Battle of 1995.

Continuing from yesterday's post on 'Pain in the Hedge’ there have been lots of blow outs of popular shorts and as expected oil things were the most ramped. The likes of bombed out Tullow and Premier Oil are up 50% from a few days ago but even large corporates are on the move in dramatic style. Rio Tinto has busted a lot higher (+8% today). That is impressive for a very large corp that represents everything that is currently meant to be doom - EM, funding, China and commodities and growth. Arcelor is also up 7%. European steel up? It would be an absolute tragedy if SSI, the owners of the UK’s Redcar steel works, have stopped-lossed out off 1,500 UK steel jobs at the very base.

The idea that shorts are causing pain and a good indication of positioning to add to all the other exchange data we see, is a nice chart courtesy of Martin Edlund at Nordea. Macro performance vs MSCI World.  This was part of a piece by him actually questioning how long this rally can go on but it illustrates the point I want to make.

Though we are having spectacular rebounds in popular shorts, I feel that resolution of whether we are going further up or down will come in the form of 'The battle of 1995’. This isn’t the year 1995 but the SP500 level that has proven so tenacious recently. It falsely broke on FOMC day (not for long) and sees clusters of various technical levels, the most basic of which is seen here.

The macro outlook may not have changed and look rubbish but the price has and, as ever, money management rules married to price make people do things they really don’t want to or believe is right.



On a different note, it looks as though my car will be recalled by VW. My questions are 1) will any changes effect the performance and economy? 2) If they do so detrimentally do I HAVE to comply with the recall?

So far friends have advised me that the answers are 1) yes and 2) no. If this is the case and I am a typical customer then this recall is gong to cost VW a lot less than predicted as the number of no-shows will be huge. The only thing that would make me get it changed is if my insurance company started differentiating between fixed and unfixed cars or some idiot in government decided my car was no longer road legal though it produces less emissions than the 1985 school bus next to me. Or the Highways Maintenance truck that I was behind last week that had a vat of boiling tar on the back emitting more black smoke than Mount Pinatubo.

And finally finally, I gather that the UK prime minister has announced a project to build more affordable housing. It is to made available to those under 40. AGEIST! The further problem is that affordable housing is traditionally completely rubbish. Tiny shoeboxes that are destined to become tomorrow's slums that any occupant aspires to leave asap. So here's a plan. Instead of building shoeboxes crammed together in maximum density the government should build thousands of spacious 5 bedroom houses each in their own 1/4 of an acre. Affordable? Well they would be if the government built enough of them to drive down prices.  Not enough land? Errr.

Pick a green bit.

if you can find one.


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End of day update at 21.15 BST - Well fancy that. The SPX closed at, you guessed it, 1995. The battle rages on.

Pain in the hedge?

When I hear long term reasons for short term positions being rolled out as long term reasons for hopefully short term positions that finally have to turn into really long term bottom drawer compost heap trades (rotting through carry costs) on now very very long term views (Greece for example, hands up who is still short Europe because one day Greece is doomed) then I take the moves to be positional squeezes.

We hear lots about underweight equities in funds and how big PMs are hedged up to the eyeballs. Assuming that these massive hedges were on the back of the most recent China/slowdown/Fed etc theories then I presume they didn't put them on during the first four days of the August fall. Folks like to digest a monster dump before racing in with a hedge program. So that would imply that those hedges would be put on in the range we are now in for equities. Which would further imply that further climbs from here would mean those hedges are creating underperformance to the index. I don't know any equity manager who likes to be seen to underperform a simple passive index. *

VIX is a good indicator of hedge unwind activity. We are now sub 20 and with that in mind I would not be at all surprised to hear that most of this move higher is pain in the hedges. There is nothing worse than falling volatility and a counter directional underlying move to induce thorn bush, backward dragging, hedge pain. Well, apart from not believing the move and having to cut said hedges for pure money management rules. That's razor wire.

A 85,  90, make that a 95 point rally in SPX over the last 30hrs is garnering only a fraction of the comment a similar fall would, suggesting the longest river in the world is dominating the thought process. Denial.

It is interesting how a near 100pt rally in SPX over the last day and half can be dismissed as an understandable move,  yet to consider another 100pts higher for the rest of the week is considered sacrilegious and nigh on impossible as it would take us so near to the all time highs. But at current momentum the all time highs are only 3 days away. Absurd? Most likely, but let's get some symmetry into the assumed bear argument.

It also looks like M+A just keeps rolling along too. Never underestimate the power of a humongous heap of cash in the coffers, especially when cash has outperformed your stock and nearly every other asset recently. Fancy a bit o' sweet Symphony for an Alpha bet? (Verve verve voom).

Oh and thank heck for this rally as my FTSE long red hot poker has been replaced by FTSE long soothing balm. This is highest we have been since the August crash, even approaching July lows. Not bad for a commodity and EM laden index.

Or perhaps it was all on the back of the compulsory sale of 5p plastic bags by UK retailers. Got to be some inflation in that move.


*The old maxim - If you want a good hedge, go to a garden centre.

Are you so wrong it hurts or have you just tweaked your base case?

Are you so wrong it hurts? Or were you just so so right with your Fed and NFP calls?

As regular readers will have surmised I am a huge sceptic as to the value of each man hour employed Fed watching and forecasting. 

After the latest NFP figure I am hoping that guessing where NFPs will be is also consigned to the same trash heap of wasted manpower. Anchoring of expectations around an average has generated such a feedback loop of self-reinforcement that any deviation from expectation produces swings in response that dramatically outweigh what they deserve. Friday’s NFPs were a case in point. The market expectation was for a figure around 200k and a figure of 140k (a difference of 60,000 people out of 300ish million) has meant that expectations of future Fed rate action has been further pushed back, with the market now expecting that it may not be 'til March 2016  - which suits me as that’s always been my lazy 'uninformed but doing better than all you Fed analysts’ bet.

But you can’t have it all ways. You can’t say Fed forecasting is valid yet get it wrong in September in calling a hike, then shout and rant at the Fed for being so stupid, then forecast the NFP wrong with the actual figure then forcing you to push your Fed calls out to March. Sometimes you gain more respect and even gain a cathartic release, by just saying  “I was wrong. Just so wrong it hurts”. 

But no nononononononono. That’s as helpful to a career as a politician declaring that they take shed loads of Class As and have a penchant for butchered animal parts. It ain't gonna happen. Instead this weekend's bank research was littered with probability changes. Such as ‘Our model probability for an October rate hike is now below 50%’ Or ‘our base case for a September December rate hike is intact but our bias is for delay’ It’s all completely useless because none of this changed before the NFP was released and we could all see with our own eyes that it was lower than expected and probability outcomes had changed. If you can change your probability with impunity on a horse winning right up to the point it crosses the line then we would all be down at the track looking like gods.

Now even if you could call the Fed correctly that doesn’t mean you get given a cheque to retire on. That call has to be translated by the markets into cash and that is done by having a position in something. Granted, betting on Fed funds and the very short end of the curve is the most obvious high correlation translation of your Fed calling genius into profit, but most of the other stuff really isn’t. You can call the Fed spot on and still have a large probability of losing your shirt if you had put that into an equity index play. As we saw on Friday the NFP was bad enough not to cause any confusion as to whether it was bad or not, it was bad, yet the SPX, after plunging 2% on the falling growth story, put in a turnaround to end up 1%. Knowing the NFP would have been useless for you unless you also knew market positioning and which ever meme everyone else thought more important as we are back to 'Zirp forever buy equities' vs 'low growth falling earnings sell equities' basics. It isn’t easy.

I would also like to remind many commentators that Fed fund futures are NOT the probability of where Fed funds will be in the future. As they are set by the market we can add them to CDS and implied volatility as indictors that do not represent actual probabilities of outcome but market consensus guessed probability of outcome. 

The saddest omissions from all commentary this weekend are the apologies. I haven’t yet seen anyone apologise for their rants at the Fed for not raising rates in September, even those who are now saying ‘March earliest’. The whole Fed watching game is a game and I am hoping that the market will be getting bored with it and moving on to making investment decisions that aren’t based on 0.0025 of principal. 

Market from here - As per my last post I am still long FTSE things as it best encompasses all round risk bounces in DM, commodities and EM. I am fully aware that technically we are not yet out of the woods and I am equally aware of all the reasons for not being long which everyone who is short is screaming at me. When they are no longer short I will listen again. 

NFP guess generator.

It's that time of the month again when reasoned thought is replaced with illogical emotional outbursts and shouting and tears. Where how we feel over something that really doesn't matter THAT much in context, damages our relationships with others, but it will all be forgotten again in a week's time. Yes, it's NFP time when the market sloughs off another month of old jobs data in a histrionic fit of over concern.

NFP, the kitchen sink of data sets. Whatever your core view you can tie it to the NFP or, failing that, one of it's components as there's always a component to support any argument.

So fo all you NFP guessers I am recycling the NFP calculator I first published on Macro Man 18mths ago. Easy to use,  just in your max and min and the algo will do the rest