Friday, 20 May 2016

Re-record or fade away

It happened again. The amount of intellect applied to forecasting what the Fed will do is completely out of proportion to the quality of the output. It’s alchemy, where the greatest of 15 Century minds were hell bent on the futile task of turning base metals into gold. Millions of man hours wasted. In the case of Fed studies, the detail of the finest fractal of economic data, the genetic make up of the board members and the analysis of language is all a complete and utter waste of time when any missive from the Fed results is the same. **FED MORE xxxxISH THAN EXPECTED.

Fed forecasting should be as taxed as tobacco and as discouraged as online gambling.  Why does anyone pay people to do this sort of thing? Ah yes, of course, it's media fodder. They do it for the same reason that any horse race on TV has commentators. Advertising. As the job of anyone who works in media is ultimately to sell advertising space, their main source of income, Fed forecasting is as productive a career as creating webpages of 'the top 10 celebrities who you didn't know had size 7 feet'

As regular readers know, I have a simple policy towards Fed shock. Just fade it. You wait a day and do the opposite because you can be pretty sure that every ‘Fed more hawkish’ will be followed by a 'Fed more Dovish’ and vice versa.

The other fade is the Brexit vote where over the course of three days the world has become convinced that the vote will result in 'Remain'. Everyone is looking at the polls but not at themselves nor their surroundings. I do not know anyone who over the course of the last week has changed their mind, but the polls say that a vast swing has occurred and the media are pumping it as a done deal. There is a psychology involved here that is almost self limiting in outcome. If the swing to remain is through a small tipping of the previously uncommitted then those marginals are probably now reassured that it will be a Remain win and so won’t feel their vote is as important and won't turn up to vote. With the bookies now quoting 80% chance of remain, that is worth a bet, probably more so than my GBP/USD options which are looking a bit sorry for themselves.

Mean reversion may be dull and anti-headline but it produces steadier financial returns than constantly betting on the outliers. Fade the knee jerk. Or perhaps we could just re-record what happened last time and play it again.

Re-record not fade away

Wednesday, 11 May 2016

The Glorious 11th

There is something about the 11th day of the month that has produced a near constant trend in price action in Stocks through the year - Can you spot it? The 11ths are marked with a vertical line.

I tried to title this post 'The Glorious 12th', the expression used to mark the opening of grouse season, but I couldn't really justify it as it's the 11th OR 12th when prices are beaten into the air with a flurry of feathers. Even back in January when the world was falling apart (apparently) the markets tried to rally on that day. Will today be any different?

This is where I run in to difficulty in substantiating things because, like any other human, I look for patterns that support the mental constructs I use to make decisions in life. We like to know that the rules work as that removes risk and none of us like risk. My problem is that I am turning bearish. I don’t want to be long of risk into June, though that has been my natural position all year.

Earlier in the week I pointed to the Chinese People's Daily article as a crack in the Chinese economic San Andreas fault, together with the normal catalogue of concerns. But two days later we have more bad news to add and can point to Brother Bear visiting Disney as a catalyst to last night’s sell off. We can also add price to my worries, as the zoom higher in equities over the past couple of days was pretty vapid other than put/call ratios into expiries and a few other technical issues. As also mentioned in that last post, the 2080 area in SPX is important and could mark a perfect point to form the right shoulder of a head and shoulders pattern. the price action of the last 12 hours fits that perfectly (go back to the top chart and look at the horizontal lines) and though no confirmation until 2034 breaks, more folks will be trading it as a possibility.

If I want to back-fit my 11th of the month theory, I may even try to say that it is a trend change day, or a rebalancing day of long term positions in order to lever the theory into my desire to sell. The rebalancing theory fits with option put/call imbalances and also with positioning data that, until recently,  has shown a market net short of equities against benchmark. But this month the portfolios and bear/bull indicators feel much more neutral (see BAML research).

As for the trend change day I will introduce another indicator. One that I am always ridiculed for following, but as have done so for the past 18 years I will proudly present it again. The Bradley Siderograph, which is showing the magical 11th of May as a market turn date. I feel too embarrassed to say it's based on planetary alignment, but it is.

I feel that the next two days are crunch time for trend. With VIX so low I am buying straddles, not just buying the VIX, as that falls as prices rise. I’d rather pay theta to receive delta. Which makes me think about all those people now trading VIX thinking they are trading volatility. In one sense they are, but they are not trading realised volatility they are trading implied probability so there is a huge skew of lost returns due to having neutral delta throughout and trading implied vs implied rather than implied vs actual (We can’t call it historic vol as it is the 'now’ component of underlying price you are measured against, and if you don’t believe that try buying historic vol and see if it moves!).

If I were to add a bit of reverse VIX input into my normal option structure I may be helped along the way by the market positioning in VIX. It would appear the market is very short of Vol (which always causes fun when the unwind comes). Wondering why folk are actuvely short vol makes me wonder if the chasing performance on the upside, by underwieght funds, has involved desperate beta subsitution through vol selling.

With thanks to Eric Burroughs (@ericbeebo) for the chart 

Just a final thought on the subject of risk, I have been thinking about attitudes to risk and what drives us as individuals and a society to reduce risks or take them. This led me to wonder if there is a Brexit in/out bias along the lines of market risk buyers and market risk sellers, with risk sellers preferring IN and risk preferrers wanting OUT. Intuitively that makes sense. But if it were true and we then drilled down and asked the market risk sellers why they were selling risk and they cited Europe, well then there is the twist. But, it's all surmise and wondering and only raised as it's the sort of thing my mind wanders off to think about in the great behavioural universe

Monday, 9 May 2016

It's war! War I say!

David Cameron has wheeled out the increased threat of a European war should the UK leave the EU in his campaign to Remain.

First of all let's address the assumptive use of 'could'. 'Could' covers every probability between won't and will, namely everything between 0 and 100%. We live our lives by juggling risks and without a valid input other than 'could' the term should be dismissed.

Even if we get to 'will' increase the risk of war, once again from what risk to what risk. This is a trick always employed by newspapers and politicians to shock their audience into reaction. Increasing a risk of cancer from 0.00000001% to 0.000001% is increasing the risk a thousand times. Panic horror! But in the real world, matters not a jot. So Mr Cameron, can we have some actual probability numbers to work on here?

Up until now we have been told that we have to listen to economists over the Brexit debate, which assumes that -

a) The whole debate should rest upon whether the UK is better off financially per household in or out. If this is the sole consideration we could sell our lawmaking process to, say, China. They may pay more than the EU.

b) Economists are right. Economists are rarely ever right. They are constantly changing their forecast of the future (never ever being brave enough to predict market prices). They can't even predict the now, with figures having to be revised later, and as for the past, well there is constant academic debate as to whether the past was good or bad anyway. Where economists are completely useless is in forecasting politics. They may be able to forecast a post Brexit world using today's inputs but the political inputs will change and you can bet that their 'revised reality' will be nothing like that currently predicted.

But we are on to Cameron warning us all of the possibility of war if a Brexit were to occur. One would have thought that if war is the alternative to agreeing a nice trade deal and a few strap-on extras with the UK, then perhaps the trade deal would be less onerous than mutual annihilation. But, hey ho, the EU is a funny beast.

Whilst Cameron may believe that leaving the EU would raise the risks of war, a survey carried out in January had the British people believing there was a greater risk of war should the UK stay IN the EU

With the threat of war upon us it must make fantastic financial news headline fodder and I have been trawling through market pricing today to see just how terrified the world is of Cameron's up coming war.

I have checked iron prices as we know that in times of war all the park railings are torn up and turned into tanks (or would be if they were the right type of iron) but Iron prices are down 7% over the weekend. I can only assume this is scrap metal traders flooding the market with their stock before national governments requisition it all.

Let's look at GBP as we face up to the prospect of WW3. Hmm its up a bit vs EUR. It's obvious why.  Algorithmic trading models which dominate the market are mining historical data and are buying GBP on past outcomes of European wars.

Oil prices should of course be up through the roof, it was up 3% as the full brunt of the news hit the market at midnight last night (nothing to do with the resignation of the Saudi Oil minister of course) but has fallen back hard as ..errr..  demand for oil falls as the population abandon their cars and head for cabins in the woods to hide out the war.

Stock markets. Does war mean that the stock markets should take a drubbing? Nope, they are hanging on in there because though war may mean a chance of mutually assured destruction, that is only a chance. Whereas central banks maintaining an accommodative monetary policy is a sure fire thing during war so BUY.

Gas masks. Well, to check this out I popped in to the village shop and there were absolutely no gas masks to be had. I can only assume they must have sold out in the rush, the proprietor said there weren't going to be getting any in any time soon either. This must indicate a huge national shortage due to a demand spike.

Food shortages. Stock piling is in evidence at Waitrose where I couldn't find any Appenzeller Swiss cheese at £24/kilo. They had some last month.

Anderson Shelters. My local Wyevale garden centre had garden furniture and barbecues, potting plants and plastic ponds. But completely out of Anderson air raid shelter kits. The same at the B+Q DIY store. Worrying if they can't keep up with demand for the most basic of family wartime protection devices.

Gold - Everyone knows that war means gold's value goes through the roof as we all buy it to barter eggs and to sew it into the seams of our our clothes as we escape across European borders. But, ahh, it's down. Gold is down on this incredibly real threat of war because .. err.. I m struggling now, because.. err..the producers have ramped up supply in anticipation of gold demand going up because of the obvious, guaranteed, certain outcome of war should the UK vote to leave the EU.

There, proved it. Cameron must be right. The economics say so.

Finally, Cameron has proved Godwin's Law.

The Chinese San Andreas Fault.

China has been the bear story that won't start giving. It has been the markets Wiley Coyote in a gravity free environment. It has been hanging in thin air longer than many shorts can remain solvent.

Last week I was sitting on my hands until just after the payroll when a few things not moving brought me in to buy equities. That 'not moving' thing was the price action 20 minutes after the print where the volume of the ‘huge miss on Non Farm Payrolls’ shouting peaked whilst prices had stpped falling. I couldn’t quite see how they were such a dreadful number and even if they were then equities would get a lift from yields falling and more Fed push back. As it happened, the triumvirate of rates, USD and equities all put in reversals and headed back north and we ended the week correcting out some of the previous days' risk off trends.

The one place I have been hurting is in metals, well copper to be precise. Every time I think we are basing I buy, get a bounce, then get crucified and stopped. The belief that commodities have had their spike driven by a sum of Chinese speculation, inflation acceptance, short covering and momentum has been rife and looked blindingly obvious as world supply and demand has not changed THAT dramatically. But being ADHD,  I had to get my adrenalin somewhere and hence kept popping in and out of the S+M dungeon of long copper. "The normal whipping please Miss Copper, but just a quick one as I have to be stopped out in 10 minutes”

So I went into the weekend long of equities and things were looking good. But the weekend has me worried about China. China, where normally I am happy to play risk much as Californians play San Andreas fault risk. Everyone knows it’s overdue a massive shake down, but folk still stay there.

Two Chinese factors hit us over the weekend. The first was the trade data, where the import data points to a slowing consumer demand. This hit commodities like a brick between the eyes and iron continued its falls, knocking off another 7%, and copper fell through previous support. AUD, still reeling from the RBA cut and bias shift took, took a further blow. Chinese stocks took another hit and the SHCOMP is now comfortably back below 3000. That alone would normally be enough to give the Developed Markets the heeby-jeebies, but they have held in with Europe ignoring everything out East and refocusing on relative value and out of date (March) German manufacturing data.

The second Chinese factor may not be seen as much to many, but as I am of the camp believing China will continue to 'credit away' their problems until it all snaps San Andreas Fault like, it appears as an important indicator. The People's Daily article quoting a figure in authority who, rather than staying quiet or denying all the issues that Western analysts have been screaming about, is warning of the same.

BEIJING, May 9 -- China's economy will follow an L-shaped path as downward pressures weigh and new growth momentum has yet to pick up, the People's Daily on Mondayquoted an "authoritative figure" as saying in an exclusive interview.
The country's economic growth, which slowed to its lowest level after the global financial crisis, will not see a U-shaped or a V-shaped rebound, but follow an L-shaped path going forward, the source said.
The People's Daily, flagship newspaper of the ruling Communist Party of China, did not disclose the name of the source, but the term "authoritative figure" is usually used for high-level officials.
The source said China's economic growth has been stable and "within expectations,” but warned of emerging problems such as a real estate bubble, industrial overcapacity, rising non-performing loans, local government debt and financial market risks.
High leverage is the "original sin" that leads to risks in the market for foreign exchange, stocks, bonds, real estate and bank credit, the person was cited as saying.
According to the authoritative figure, the country should make deleveraging a priority, and the "fantasy" of stimulating the economy through monetary easing should be dropped. The country needs to be proactive in dealing with rising bad loans, rather than hiding them.
The economy enjoys huge potential, high resilience and ample leeway, which means its growth will not plunge, even without stimulus policies, the authoritative figure said.
China will avoid a massive stimulus plan to boost growth, which would have a short-term effect but risk long-term damage. Instead, the country has chosen a much harder but more sustainable path of development in pursuing supply-side structural reform, according to the source.
The stock market, foreign exchange market and real estate market should return to their respective functions instead of being used at means of maintaining economic growth, the source said.

If this had been any of your normal Western analysis I would take it with a pinch of timing salt as there is nothing new there. But coming from an authoritarian Chinese source and being splashed on the official communist party newspaper it really does smack of message sending. The first tremor in the quake perhaps?

Yet today’s price action remains a game of two halves. China vs Developed Markets and I don’t know how long the DM post-NFP, Fed policy expectation, induced market rally will sustain itself. Granted, oil put in a rally after the Saudi Oil minister hung up his sandals, but if you are buying on uncertainty you might as well forget it. The power may have moved to a 30yr old prince but considering the amount of advise he is taking on the ARAMCO issue from western banks I doubt they aren’t also involved in advising on oil policy. One thought on ARAMCO IPO re oil prices - It is effectively a long dated oil hedge for consumers. If you buy it you may well want to sell some of the futures hedges you currently hold as the IPO will substitute them. Either way, oil has unwound most of its 3% overnight rally.

The mood out there from those I speak to is pretty neutral. Not necessarily deliberately neutral, more like ‘I don’t know’ neutral.

Even the charts aren’t showing much conviction and that main benchmark the S+P500 could be doing anything as it consolidates… or rolls. I know it’s far to early to call a head and shoulders but it hasn’t confirmed that it isn’t. 2034 area support is pretty powerful as a neck line should we get to 2080 and roll over again.

What do I do? The most sensible thing is to stick in a very tight stop on my equity longs ready for what I think will be a roll over later as post NFP bounces meet Asian woes, even if I would love things to scream higher 'for no apparent reason'

Wednesday, 4 May 2016

I don't know.

I have been hoisted with my own petard, or rather Hari Kari'd, by my view that Japan would do the predictable. I broke my own trading aphorism of 'if it starts with J it will have your arm off'. Well there you go, at least the stops on the positions were clean and the JGB trade didn't cost me anything. USDJPY, however, was a samurai sword severing my short 'UsdJpy put' arm, or rather leg,  just below 109.

Right, enough remorse. Let's look out there for the next great trade. Err....

I am afraid I really don't know. Momentum points to a roll over in commodities and equities and we are in May, traditionally a season for Euro-strife, but growth in the EU is good so it will be 'structural vs economic' which intersects at the ECB. Again. With regards to the EU, I am surprised the furniture fits in the room with all the crap being swept under the carpet in the run up to Brexit. Turkey extorting EU over migration, Greece deals, credit ratings on Portuguese bonds.. oh the list goes on.

BoJ Going all 'Carney' on us with a 'no change' gave a green light to Jpy buying and, considering the amount of jawboning about JPY being mispriced from the Japanese when we were just under 108, leaves them with a self inflicted own goal or implies that something has changed. Something big has changed or something big is about to happen at the next meeting. There has been talk that Shanghai G20 agreed to weaken the USD to allow CNY to devalue vs most trading partners but keeping the USD/CNY peg intact. This theory goes on to suggest that it involves Fed staying lose and ECB and BoJ tightening and BoJ last policy non-move proves it. Hmm. I don't buy it and still think there is room for Japan to act hard at the next meeting. Hence my currently worthless 115 USDJPY calls remain on the book. Never sell an option for 0.

My real problem is that I just don't know where there is value, though I can see plenty of places where there is no value. Everything I look at is priced rich on some measure or other. Long ends of yield curves look expensive in Japan and Germany, with steepening most likely, though of course shorting 30yr JGBs involves a 'J' and should only be touched with kevlar gloves and a fully noddy suit. But in the end, bonds are just a vassal of Central Banking madness.

Equities are back to 'meh' levels of equality between old fashioned valuations and comparative bond yields. Commodities have put in a hell of a retracement out of ubershort territory but the world hasn't changed enough for them to put on a real supply/demand led rally from here. Raw material metals are still a key input but it doesn't look as though there is much reason for seeing either up or down bias from here.

I am left wondering what the heck to do. Prices are telling me that everything is in risk off mode with little new to stop it. Positioning and bull/bear reports appear pretty neutral and just add to my confusion. Why am I not shorting everything in sight? Because the last 2 years have shown me so many false financial market collapses that I have faded, I don't want to be caught the wrong way around in another.

Is this the big one? The great Armageddon of market collapse where a return of inflation finally sinks the whole ship via a bond confidence shock? No idea. It's May and easy to strap a "sell in May..." term to it and we have the China bear story out of the cupboard again.

Maybe I'll just stay flat but buy some "Leicester City"s*

*A Leicester City is a the ultimate tail trade. Buying something at stupidly low odds that may well pay off. Macro Man mentioned gold touching 2900 within a year is a 1/2500 odds bet. I'll take a look.