Tuesday, 2 February 2016

Too many fires so run away.

The shape of the market bounces from extreme lows fits the ‘that’s enough’ picture, especially in oil where the shape and speed of the rally has had ‘speculator unwind’ written all over it. Real supply is still exceeding demand and any rally on news that OPEC may or may not decide to cut production has to be speculative by definition as current supply has not been cut.

The other great indicator was 'month end'. The run up into Friday's close easily fitted with rebalancing into equities, which have seen their values trounced in January leaving balanced portfolios less than balanced in $ value terms. This all leaves the field open for the next phase of play.

Correlation break down. Over the last week Oil and SPX have indeed shattered their intraday linkages and today's falls look more like a 'sell everything’ day, rather than a causal correlation day. Interestingly Chinese markets had also lost their linkages to SPX. Last week we saw China barely manage to stay afloat as the rest of the worl rallied and overnight it put in a rally that the rest of the world ignored and sold into.

"So what’s your poison today sir? Are you off the old Oil and China? A pint of bitter and twisted a little too basic for you? Can I interest you in a cocktail of Italian banks sir? All the rage with the shorts sir".

Italian banks are the meth of the short addict. When the speed of China or the crack of oil (puns intended) aren’t working why not skulk back to the cave and take a toke on Italian banks. The usual victims are crossing the wires like ghosts of 2011. But banks became zombies back in 2008. Henceforth they will never be allowed to make astronomical sums as regulation tightens the noose on profiteering and risk taking, with social oversight making sure they will get fined or taxed should profits spike. Yet on the down side they will not be allowed to collapse if there is risk of contagion.

Are Italian banks the new oil? Or are negative rates the new China? Or…. what are we watching? Getting confused? Then sell everything and just run to cash and Treasuries. But watch out which cash you buy as some demand that you pay to hold it. Here we must welcome the Japanese to the land of negative rates. Where the Newtonian rules of finance collapse in on themselves to be replaced by quantum finance, full of spooky action and entwinedness that will trigger instant problems in things so far away.

I have been marking myself bullish for a recovery for a while but the price action of the last couple of days has me neutral. Yesterday’s lack of comment was mainly due to the machinations of lifting off the risk pedal. Indeed I am getting caught up in the bear camp. The number of fires to fight is becoming chaotic so it’s time to step back and let things play out.

Yet there is one part of this that is most worrisome. The Fed say they’ll raise whilst everyone else in the world is cutting, even Carney* off the rate rise the pedal. The US bond market is now saying no too, or, with the flattening of the curve saying if you do - it’s wrong. We have two distinct spaces here. Market space and central bank space and they are diverging at the fastest pace I have seen in a while. Central banks are going to have to do something impressive pretty soon as their wayward child, the market, is about to lose all faith in them and head off out the door. The BoJ has not helped by doing the monetary equivalent of telling the market child that the whale liver oil they are giving them will make them attractive to the opposite sex.

Finally - I have at last worked out the way to make money. I always thought the way to do it was to build a successful company. What a waste of time. Instead start a company, dress it up as having a great future and then sell it to a mug for top dollar. IPOtastic? Trumptastic more like.

* Carney is like a bad trader, he buys the highs and sells the lows in a range bound market. If he’d just said or done nothing he wouldn’t have lost his credibility. 

No comments: