Tuesday, 29 March 2016

Yellen, are you fully in the price?


Yesterday started well for this born again bear. Commodities continued to roll over with oil and copper indeed leading the way with European markets not taking long before they got the hint and headed south. the FTSE hitting levels about 100pts below its overnight future equivalent highs. Oil was off 3% when the US markets opened and the US markets opened on a down wave. But the subsequent price action in US stocks was not really melting. Of course we then had that Yellen speech which stamped a great big dove over the recent hawkish tweakings of various other FOMC members.

The one take away from Yellen, more than her being hawkish or dovish, is that she was decidedly 'stockish'.

I’m now going to say something sacrilegious amongst us macro folk, I did not listen to nor read one word of what Yellen said. I just watched the price, well I watched lots of prices. And here’s why. I just cannot compete in speed of comprehension, analysis or action against the rest of the players in the market. It’s not that I am too old and senile, it’s because I am a human and not able to keep up when the actions in the market are conducted by robots. These players can parse text at near the speed of light, deduce the tone using key word sampling and then act on it. So what chance have I to get ahead of the price before the price reflects the new information? Very little if the information is binary or relatively simple. So instead I watch the price and that tells me most of what I need to know. I will, later on, probably read what was actually said and see if there is any undiscovered discarded morsel of germ in the chaff discarded under the dining table of the algos, but let’s be honest, there probably won’t be.

The 'beat the algo’ game is easier when it comes to the ECB. The complexity of the ‘unconventional’ policy actions does need a human mind to unravel the non price dependent linkages to the economy. Here we stand a chance. But with FOMC type statements it may be easier to play the counter moves to the knee-jerk ones.

In the case of today’s new Yellen information we had the spike, we had the second spike and then I assume that the information is in the price. Granted there are good old fashioned funds who will it down at their monthly asset allocation meetings and discuss the new information and act upon it with respect to rebalancing, but they are now in the minority and normally have missed the bulk of the price move. I would be happy to say that any modern day player worth their salt would have reacted to the Yellen information by now. So that’s done.

So I examine the price of stocks in the context of the other factors that appeared to be driving them the morning and deduce that, not suprisingly, the bulk of the action was in the US markets. No genius involved deducing why. But it was interesting to watch the response of oil, copper, European stocks, and FX.

Oil ripped higher off some new lows but couldn’t hold it for long and still looks offered. The same with copper. As these are the two puppies have been so influential in the original market woes and the subsequent comfort bounce this is notable. AUD and AUD/JPY meanwhile caught me out through the morning's down moves by really not joining in. A counter clue there. FTSE made new recent lows but bounced, yet is now looking as though it's the higher part of a new lower range rather than the base of a higher range. Dax is caught in a EURUSD vs global stocks move and is not really showing any general love form Janet. The rates markets have liked it though, with USTs and Bunds both enjoying the ride.

So here I am thinking out aloud. The markets and relative inputs into price were looking shakey into Yellen’s announcement. Since then stocks have rallied and the US ones are threatening recent highs again. This I take on board as it challenges my ‘things are rolling over’, 'born again bear' theory of last week. In these markets you can be as dogged as you like about your fundamental theories but at the end of the day you are paid by price not on academic peer group review.

But against this all the risk ducks are not lining up. The peripheral ones I am watching could well turn and join the flying formation but as yet this doesn’t look like a full set. Being so close to my stop levels on my medium term positions I am not going to towel chuck to the upside just yet, instead I am going to leverage up some larger short term shorts with tight stops. As I consider us at do or die levels, that justifies do or die trading. Well not die, but larger risk than is usual for relatively small moves.

By the time you read this my stops may well be done and you’ll have have started laughing long before you reached this line which was written with SPX at 2051 (market price, not my stops - they are above 2060 and dependent upon other indicators being in line too) .


One last added factor to the short loading rather than longs - The market, especially the US market commentary cannot cope with grey (as we saw with their interpretation of Europe a few years back). It has to be black or white and with the fed only looks at last thing spoken by anyone. So, last week was tending more hawkish than FOMC and now we are back to total dovishness expectation. The truth lies in between. But market narrative doesn't do in between. That's actually one reason I chose the short side to load up on rather than the long, on the belief that the next oscillation of Fed expectation has to be back from this current uberdove puff.

And finally, having embarked upon the series at last, I ask fans of "House of Cards" - Does Yellen have a Tusk?

----
Addendum 8.30am London Time 30th March.

That didn't take long. An explosive Europen open leaves me stopped out of all shorts. I will sit back and watch the fun from a distance as I de-stress and spend time in pursuits that don't involve staring at price covered screens all day.

Have fun out there, I'm planning a long lunch.

In the waiting room



I consider the current state of the market much as the time between the ignition of the fuse and the ignition of the charge.

I have declared my hand in looking for the markets to turn ‘risk off’ in a hurry and I am waiting for them to do so. My short positions are the lit fuse, I now just need the explosion. As with all fireworks, the time between striking the match and boom is occupied by a fizz. I am just hoping that this is not a damp squib.

Thursday saw the markets turn tail refreshingly swiftly but the recovery and lacklustre day on Monday, despite being a European holiday, defused any fear momentum. In fact there appears to be very little fear at all. But I will stay my ground until recent highs break again at which point I will consider the short play a dud and throw a bucket of wet sand over it, though I always wonder as one is never meant to return to undetonated fireworks, if there are tiny pockets of the world considered as mini Chernobyls. “Wooh up there sir, you can’t go down to the bottom of the garden. Why? Because in 1934 a Mr. White attempted to set off a Catherine Wheel down there and it failed to go off”

Without a bijou dumpette in the markets soon, momentum is going to get the better of us and we are going to creep higher again as no big news does tend to bias carry creep. If we look at that greatest of carry crosses, AUDJPY, we can see that it’s still looking perky despite shouting about the RBA and housing market. But there are signs that the pressure is still downwards. As I look at things this morning, copper is down again, oil is lower and China sold off. Without positive news to bolster things it is hard to see FTSE and finally the other DM stock markets not following.

Turning points are never easy to play with the most usual pain inflicted through them not turning out to be turning points. They are made even harder when one thinks they will only be corrections, as I do. So though I am in the waiting room at the bus station waiting for a bus heading South, if the one heading North comes first I’ll cross the road and jump on that in a flash.

Saturday, 26 March 2016

"Stuck in the Middle" - North London remix


Stealers Wheel wrote 'Stuck in the middle with you'. Here's the North London luvvy remix "Stuck in the middle with no clue"




I live in North London, am arty and despite,
I’ve got a two mil house, I really hate the right
I’m on 250k a year yet have a socialist air
And right now I'm missing the days of the Blairs.

Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue.

Yes and now the Brexit voters want us out of EU,
And I'm wondering what it is I should do.
It's so hard to keep from losing face.
Keep writing to the Guardian, it’s the only place.

Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue.

Well I started off with nothing
Well, my mum was vegetarian
yeah
Now my friends at dinner parties say,
"oh darling, can’t you make it all go away?"
Please . . .
Please . . .

Trying to make some sense of it all
But I can see that it makes no sense at all.
Can I represent the shop floor
When I've a two mil house and I‘m definitely not poor?

Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue

Stuck in the middle
Stuck in the middle

Corbyn to the left of me!
Boris to the right!
Corbyn to the left of me!
Boris to the right! (Stuck in the middle)
Corbyn to the left of me!
Boris to the right! (Stuck in the middle)
Corbyn to the left of me!
Boris to the right! (uh-uh)
Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue.

Well I started off with nothing
well, no more than any Oxbridge man.
ah-ah yeah
Now my friends they all are tweeting,
"Please, we can't carry on this way'
Please . . .
Please . . .

Well I know the editor of ‘Newsnight'
Even he's got the feeling that something ain't right.
I'm so scared, about me they don't care,
Why can’t we just bring back the Blairs.

Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue.
Stuck in the middle with no clue (ah-yeah)
Stuck in the middle with no clue
Here I am!
Stuck in the middle with no clue
no clue, no clue, no clue ....

Wednesday, 23 March 2016

Turning to the dark side.


As regular readers would no doubt have become infuriated by, I have been pretty bullish for risk assets for for the last 2 months as the original game plan for the year sort of played out as hoped, apart from a pretty painful interlude whilst I was away in Austria in early February. Though it was a skiing trip, it felt more like a visit to a very Germanic Spa run by Herr Doktor Proctologist but I survived the delving of the market depths during maximum noise and rode the move back higher to this point.

And here we are effectively at the end of March having had nearly every great ‘trade for 2016’ washed out, stopped out or back to flat. Or all of that. Which really does justify the timing rule of ‘how to make your annual market predictions’ which states

"If you have to publish before the start of the year then don’t do so until Dec 31st. Doing so in November wastes a month of information to consider. Preferably publish your trades for the year in March of that year, or even later. The first few months of the year nearly always go the wrong way and you will have three months extra information to trade on. You also have the advantage of everyone else’s trades looking pretty stupid by then and investors looking for alternatives”

Where now? After the ECB and the Fed it looked as though it really couldn’t get much better for equities. The ECB had unleashed a package of unnatural unconventional methods to get things going, The Fed had shocked, nay stunned, the market with its swing away from outright hawkishness (though I'm not sure why the market was surprised as this was what the market wanted to hear) and outright fears of imminent China death or Western recession were receding fast. Great stuff. Metals and commodities did the “hang on, they aren’t meant to go up” move that backed the whole ‘risk on’ thang and credit obliged by stepping down from the parapet after being told how important it was that it didn’t jump .

But the last week has been a bit of a quandary to me. US stocks spurted up but European versions have struggled with Dax at 10000 and FTSE at 6200 being veritable struggles to breach, despite the US rallies. Now much of this can be excused by USD FX plays but still, it’s FTSE that has been troubling me as it really hasn’t breached that 6200 level I was so looking to break a couple of weeks ago and it should be nicely representative of all the things that are putting in bounces - miners and oil and emerging market interests all with a good US stock reflection. But it hasn't.



The way it has behaved around the 6200 level would, if I saw that in an FX market, make me think that someone has an awful lot of optionality at that level, but surely we aren’t being driven by a large option position all the way through March? No. I’m probably being too suspicious but the price behaviour has tweaked my concern.

Today added to my concerns towards a continuing upward path as a certain degree of momentum is needed in supposedly correlating markets to keep the third party on its way up, yet the momentum is fading.

Metals - a favourite lead indicator for me since mid February. Copper has lost its bottle




Oil - likewise, but it has the added concern that the storage figures really haven't given much hope despite the monster bounce. It's an overhang that is hard to ignore forever.


AUDJPY - Another of my favourite 'up' trades has lost momentum and today was a notable down spike.


Fed speakers - The tone of recent individual Fed board Governors is not as dovish as the group speak suggested at the last meeting.

Financials - Whilst banks are pretty zombified, with them not being allowed to make great profits but having their downsides cushioned to protect society from contagious meltdown, the action of ZIRP on their profits is devastating. The state of the financials is picking up as a meme.

ECB - We’ve had two weeks to digest that their actions are actually pretty good news but prices have stopped responding.

Aussie Stocks - OK, these double count minerals price action but the chart pattern looks worryingly double top like with a neck line that has past history.





China price action - SHCOMP is rolling a touch but alone looks unconvincing, yet look at H-shares and it looks like a more convincing roll over



Buyback blackout - Corporates are entering a period of buyback restrictions.

April - Tis the season to look at Europe. Greece should be causing stress by Brexit time in June, Brexit should be causing Brexit stress by any time now (I still see the Exit vote as higher than the 37% currently priced at the bookies so of course I’ve bought that price looking for a nailbiting just sub 50ish outcome).

Algos -  Imagine you are a vast algorithmic trading fund and you have parsed the hell out of the last few CB minutes yet prices have stalled, momentum has faded to the upside and is starting to pick up on the downside in assets you use correlation matrices against. What is your model most likely to do on the European open?

Marc Faber - Someone told me he’s turned bullish.



So, put that lot together and apply an aphorism of my own that "Trading markets is like yacht racing. You have to watch the wind and the tide but it's most important to watch for when the others tack" and I have done something I haven’t done for a while. I’ve gone short stocks but will of course flip out should recent highs breach (and yes the large SPX short positions are still there to play havoc on a run).  But for now, I’ve joined the church of the sellers and I am sort of hoping for Chinese stocks to dump overnight as some form of corroboration. I’m not looking for complete doom but a correction in an uptrend, but hey, if it does melt I can still claim a victory. Who needs to be right for the right reasons?

Please excuse me, I have to go now. I have to write a really complex academic paper on why the world is doomed (see yesterdays post here)

Tuesday, 22 March 2016

It's not bigger and it's not cleverer (to call doom rather than boom).

Is it clever to be bearish? There does seem to be an assumed intellectual bias towards calling disaster rather than 'Ok'ness. One only has to read the Prof of Black Swans, the Nobel Memorial Prize in Economic Sciences Prof New York Journo fellow, or the British Scottish Laurence A. Tisch Professor of History at Harvard University Senior Research Fellow of Jesus College University of Oxford Senior Fellow of the Hoover Institution Stanford University and visiting professor at the New College of the Humanities History Prof writing economics man.... or infact any of the Prof Prof Prof of Profdom to notice a sell pitch of intellect towards calling doom.

Or is it just the way it's reported? One rarely reads a headline along the line of '"Everything to be just fine and stocks will probably grind 2% higher this year" says Dr Professor Nobel Laureate who also called the pretty dull year of 2004 absolutely correctly'

It is fascinating psychological field which I think rests upon a feeling that OKness implies no need to do anything, so no need to think, so an implication that those being carried in the tide are unthinking and lazy. Whereas those who question the tide and worry about waterfalls ahead are therefore perceived as thinking and sensible.

But this assumes that the tide of laziness is to be long equities or yield versus cash as there is more risk in equities so therefore those who express a full understanding of the risks to being long will be best evolved to survive. Which is right. But where a market is just as driven by people taking active shorts the reverse is just as applicable but often not noticed. The value of wisdom of knowledge of why not to be short is just as valid as why not to be long. This should apply to 'long only' managers who have to explain away any underperformance to their stock index benchmark and for whom being short in a rising market can be as career threatening as being long in a falling market. For these investors, cash is the riskier asset and so the intellectual bias should be to evaluate every nuance for why the value of cash versus an equity would fall.

If we were to use this year's US stock market performance as a measure of the wisdom, intellect or sageness of either camp, we can see it's a draw. There may be very clever intellectual reasons as to why the market has/should/will fall but that cleverness needs to have a deeper level of cleverness applied to it to explain why the first level of cleverness has been wrong. The easiest, dismissive self placating, ego rectifying, world modelling way is to state that everyone else is stupid and you are clever. You see this everywhere. But really, assumed intellectual bias is self disproving. You may think you are clever but if you are wrong by the measures you yourself have set then you are not. Unless of course cleverness is not measured by outcome but by process. In which case we need to reweight the importance of cleverness in making money in markets (now that is a huge topic in it's own right).

But here's a thought. If the market price is the weighted sum of all expectation, and the cleverest are in a minority by definition, then the minority of cleverest are not those that can deduce the most complex of reasons for future moves but simply those who understand the less clever the best.

You be as intellectually clever as you like but the way to making money in markets is understanding what other people will do before they themselves do. And that has no directional bias.



Addendum -

In today's world there are so many 'academic' papers in existence there's one for every cause. I have thought of developing an app called ' "acrapadimiciser" a tongue twisting name for an app that automatically finds and attaches supportive papers to any argument, no matter how crap.

But here I introduce the paper that will support not just my argument of the futility of supporting your argument with papers, but also the point first mentioned in this post of academia really not being able to call social and behavioural outcomes as science really is different from the social arts (yes social arts they are not sciences). I give you the infamous Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity by Alan D. Sokal http://www.physics.nyu.edu/faculty/sokal/transgress_v2/transgress_v2_singlefile.html

If you don't know why it's infamous read THIS

And finally a paper on why papers are more likely to be believed if written by a 'name' https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/4570/false%20enforcement.pdf which used the Sokal paper as its subject matter.

Papers on papers showing papers may not be worth the paper they are written upon.

Thursday, 17 March 2016

Thoughts from a snowy refuge



One of the of the greatest pleasures of not being confined to a dealing room is finally enjoying the pleasures missed whilst being confined to a dealing room. That may sound odd, but when I started my career as a "junior probationary assistant dealer", back in the days when titles reflected the true nature of your post rather than today's director, VP nonsense attributes to the most mundane of today's investment bank desk jockeys, I used to aspire to going out for lunch at 12 and returning, hammered, at 4 to then put a bin on my head and pretend I was a Dalek whilst trading USD/DEM, as my ’superiors’ did. By the time I reached the level of seniority that would have permitted such behaviour, the days of fun long lunches were gone, replaced by formal events with clients involving a methodical business conversation with a glaze of social pretence.

I was once on a business trip to New York and foolishly agreed to allowing my wife to accompany me, with the express purpose of a shopping trip, whilst I plied my financial wares. It all went swimmingly until my New York host, knowing my wife, insisted that she join us for drinks before dinner with one of our prestige clients. Now Mrs P is not of the financial world and can be described as wonderfully cynical towards the pretences of business practices, preferring a no bullshit approach to relationships, so when the maitre d’ of the China Grill informed us that our table was ready, instead of excusing herself she eagerly took up the client offer to join us for the meal. Now at this point you are thinking ‘well why should she not?". But my concerns were confirmed when Mrs P’s brutal honesty left my colleague and I stunned when, whilst we were discussing macro economic effects of Bank of Japan policy, she started laughing. When the client enquired as to her mirth she replied “I’ve always thought that P traveled around the world going to important meetings and dinners, when all he does is take you out and pretends to be your best friend”. The 10 seconds of stunned silence were luckily broken by the client erupting in uncontrollable laughter and the two becoming great friends, but wow, can you imagine that always being the case? Yet the client risk was not the issue. Since then my career, in her eyes, was classed as fun, and as such I owed her for the pleasure of my 5.15am starts and 14 hr days.

But today is different. I am out of the 'day to day' rat race of corporate phoney schmooze and I choose my company without fear or favour of the corporate overlord. I am my own man. So today’s lunch, up a mountain in the Italian Alps, ran on with the conversation driven by interests and wine rather than corporate pretence.

One of the subjects discussed was inflation. Inflation is a strange beast, so strange that I sometimes consider it to belong in the realms of Dungeons and Dragons, a game reserved for branding geeks as geeks, yet probably played by more than are willing to admit. If I were to pick the creature inflation were to be it would be the Cockatrice. In our student games we had invisible cockatrices that were only visible to certain character types and whose weapon was a stare that turned the victim to stone. In the case of inflation cockatrice those who can see it are you, me and anyone else who has to manage a household budget, whilst those that it appears completely transparent to are central bankers and whoever compiles the historical reports that central bankers rely upon.

So here’s my concern. The Fed have done nothing and have downgraded their inflation expectations just when core inflation is running hot and we are about to experience the base effects of rising oil prices together with a host of other commodities. Meanwhile the ECB have unleashed a bazooka of stimulus and accompanied it with a series of inflation expectations running out to years that are as flat as a pancake. Now if these forecasts are spot on then fine, policy suits, but my new fear is that confidence in Central Bank actions is not the problem, but the forecasts on which they are based.

Why should I question the forecasts? I would love to now include a raft of alternative analysis but I can’t. Put it down to gut feel and a concern that none of what I would consider obvious inputs are being reflected in future forecasts. My concern is that the land of forecasting is based in an academia of old rules that rely on past data and will not be responsive enough to what I would consider inflation cockatrices in the room.

The Fed has added the final ingredient to the ECB and BoJ’s brew of a monetary primordial soup nurturing the rapid evolution of a T. Rex of an equity rally. They are getting behind the curve and cannot see the cockatrice before them. If I am wrong and they have seen it then I can only deduce that it’s too late as they have been turned to stone.

Now down to trading this. The first casualty is the sad slaying of the last of the ’sure fire' trades of 2016 - the poor ‘Long Dollar’ (supporting my theory that no ‘trade of the year’ publication should be scribed before the end of March). Commodities get a double lift through low rates and a falling USD giving them a headlining rally in USD terms. Emerging Markets are supported through reduced pressure of higher USD funding costs, a falling USD and commodity rallies that many EM countries are dependent upon. With that as a background I cannot think of a more perfect environment in which equities should rally. Granted, earnings going up would be a big help, but this is countered by corporates currently issuing huge amounts of debt at very low coupon. I would much rather buy the issuer, i.e. their stock, than the person who buy's their debt.

Which indices to buy? My favourite DM market that encompasses all of the above interests is the UK’s FTSE and indeed I have been looking for it to break the 6220 top that it has twice flirted with and rejected despite the US markets punching new highs. Yes GBP/USD rallying is a factor holding it back for competitive terms and more importantly international valuation terms.Yes too, Brexit fears overhang the pure UK components, but I am still anticipating an upwards breach.


Onwards and upwards. Inflation is coming and the central banks will be slow to respond.

Tuesday, 15 March 2016

Gone skiing again.


Sorry for the lack of posts this week, I'm fortunate enough to have the opportunity to go skiing again. So I have. A more sedate affair than the Austrian trip as Mrs P is with me this time. We are in Italy, in the three little know valleys of Champoluc, Gressoney and Alagna abutting the southern side of the Monte Rosa Massif a vast high terrain of wonderful off piste adventure married with unspoilt Italian mountain refuges and villages. As one of my party noted "not only is it stunning skiing but the coffee up the mountain is cheaper than at a Starbucks in Hertford". There, the old Polemic coffee PPP style index so often used to indicate the necessity of continued Greek pricing adjustment is wheeled out again. 1 Euro for an Alpine coffee in Italy, take note Kefalonia.

I would like to be able to comment on perceived changes to local demand and business but I would imagine that the place being near empty has more to do with it being late in the season and out of school holidays than a collapse in European disposable income. Or it could just be that the likes of Ischgl, where it was so packed when I visited a month ago that the poor girls had to dance on the tables and bars, have soaked up the flash cash.

So I apologise for the fact I won't be commenting on FOMC, or Chinese Tobin tax proposals, or even joining the hoards of 'well it will all end in disaster one day, even it's not today' army in a spume of commentary. Instead I will be supping Bombardinos, lamenting that my thighs don't work as they did 10 years ago and that these damn ski trousers don't do up anymore.

Back next week




Thursday, 10 March 2016

ECB - It's impressive.

Despite having last posted about the growing influence algorithmic momentum trading has on volatility and recommending buying volatility, I really can’t claim proof of theory based upon Thursday’s ECB led market gyrations but one does have to wonder how much was heightened by robots.

The original sell off in Eur/Usd was a formulaic  'lower Euro rates =  lower Euro’ which would have fitted with basic algo programming but the turn from 1.0850 lows back and up through the 1.1000 magnet, that Eur/usd finds hard to move far away from, was blamed on the ‘no more deposit cuts’ comment. At which point the market claimed to interpret this as the ECB running out of ammo meaning we are at the end of CB effectiveness and so we have to run for the hills.

Gold ran for the log cabins, equities did a U-turn and rates were, well, wild. But though the narrative was convenient it didn’t fit all assets. If this was the end of CB effectiveness leading to the end of the world then no one had told the oil market and Dr Copper, though wobbly, was not tanking. Other risk indicators such as AUD/JPY retraced a bit but nothing in comparison to the falls elsewhere.

It was at best looking confused, which isn’t surprising as ECB policy announcements are not your average +/-25bp affairs and the devil is in the detail. Unfortunately detail isn’t something the markets like doing in the first minutes after an ECB announcement and with our algo friends chasing moves (and really struggling to translate complicated ECB transmission pathway wording into algo language), you only need the pack to set off in the wrong direction for the algos to drive them miles away from their final destination.

Though there are no prescribed further deposit rate cuts, Dr. Aghi has opened up a huge new highway in buying corporate bonds which could well lead to the road of equity purchases. This in its own right is a new Draghi Put and ’should' be exceptionally bullish for European equities.

The move of focus from cutting the deposit rate also implies the de-emphasis on using Euro FX rates as a channel of easing and allows the Fed room to hike. no deposit rate cuts it means fx channel of easing is no longer focus so allows the fed to hike. This may well also lead to currencies remaining more range bound with longer term volatility easing, even if our algo friends keep gamma high. With transference of FX drivers away from ECB,  the Fed Factor will pick up and though European stocks will always be effected by exchange rates, they will no longer be responding to the same overall input implying that Eur/Usd and Estoxx correlations may well loosen.

There is complexity in the TLTRO announcement but the addition of lending incentives is very important. If a bank can lend over a threshold they can replace their senior bonds with TLTRO money. So if they have been under pressure with their credit widening, CDS pushing higher and their senior bonds suffering they can buy back their bonds at the lower prices with TLTRO money which means they have just monetised their Debt Valuation Adjustment (DVA being the profit that GAAP rules makes them post against falls in the value of their debt). Voila! A capital gain.

This is massively positive for Eurozone banks but it feels as though not everyone seems to think so and I’m wondering how long it will take markets to work this out. Do you remeber what happened after Dec 2012 LTRO? Back then we wrote a post singing its praises as a major turning point but the markets hated it and sold off heavily until the Italians issued bonds and everyone bought. Well this could be one of those moments.

On this basis I am looking for a sizeable rally in european stocks and risk in general, even if many in the market won't be happy until we have the recession they are demanding and pricing for.

Now finally for light hearted relief, for those folks who just love overlaying the present chart with a pattern from somewhere in the past to infer what the future entails, try this. It's the intraday Dow today.



And what happens next ?



Well obviously a T-wave repolarisation of the ventricles. Who needs charts of 1929, 1987, 2000 or 2008 when you have an ECG to follow. The heart beat of the market.


Wednesday, 9 March 2016

Algo isolation driving markets bonkers.


The world of finance can be blinded by its own feedback. It’s like sitting in a hall of mirrors where all the other people you are looking at for clues are actually you.

The most basic of markets works on the physical supply and demand of the good as dictated by the producer and the consumer. The addition of intermediaries, speculators and investors is like plumbing in a huge storage tank in the pipe that runs between producer and consumer. This tank fills up and runs down as expectations of future supply and demand are anticipated by those wishing to hedge or make profit. In the simplest example it’s oil storage in the oil market. It’s the warehouse where the physical is stored against futures. Yet it is also represented in the complexity of interest rate swaps and the most bizarre of speculative financial products.

But the volume taken into that tank will still eventually have to end up with the consumer of the good. The tank is only storage. Buying commodity futures? You'll need to sell them back at some point or physically deliver. The long term true supply and demand rests with producer and end consumer.

The world of finance is effectively that tank on strapped to the supply and demand pipe of everything tradable with a forward value, representing expectation of future demand. If everything traded spot with no storage facility there would be no financial market. Without the dimension of time finance vanishes (so it is probably a good thing that time is regulated!).

But the tank of financial markets can get so complex that those acting in the dankest murkiest parts furthest from the supply and demand pipes find it hard to see what is going on and instead look for indicators from others nearby. The markets since January have, I would strongly suggest, been more driven by the price of other financial instruments than they have by changes in the underlying economy. Oil falling and rallying by 35% has not been because of a 35% change in physical supply and demand but on the expectation of what may happen. The moves in equity prices oscillating -20%/+10% have not reflected actual changes in profitability of companies but rather expectations based on moves in credit, oil and interest rates. The sharp move up in metals hasn’t been caused by smelters suddenly consuming masses more, but the change in expectation driving those who had borrowed to short to buy back to cover and those anticipating future demand rises to buy and store.

All the while the new driving force in the markets, algorithmic driven funds, look at the price actions around them in the finance tank and follow the trends. This whips up more moves in the finance world which leads to the algos noticing that the real world data is having smaller impacts relative to the actions of prices around them. They then rebalance the weightings of real world factors and focus more and more on price correlations. This drives the disconnect between finance and economic reality so far that the tank of finance is in danger of spawning off as its own budding universe of introspection and self importance leaving reality far behind.

Is this not what we are seeing? The year of 2016 has been relatively shock free as far as new issues go yet markets have been bonkers. It’s been like driving a car with loose steering linkages, with the steering wheel being swung hard left and right to just keep going in a straight line.

Algorithmic trading is one thing, but applying algos to investing with the new game of robo-advisory will no doubt result in an 'algo squared' situation where the algo robo-advisors see algo-trading systems doing well and allocate more money to them. It is building a nasty bubble, not a bubble in price but a bubble in price volatility as the amplitude of oscillations in the market is driven by the rise of the robots. This is not exactly what those calling for computer driven trading wanted when they insisted that computers would tame the excess of of human trader emotions.

So buy volatility. Not for the classic reason that you think the markets will dump, but for the purist reason that the recent bonkers price moves will probably get worse. Meanwhile the real world will drift along minding its own business and wondering what all the fuss is about.

Tuesday, 8 March 2016

Sports star style substance abuse statement.

I have just watched Sharapova perform at another of those 'Sports star owns up to taking banned drugs' press conferences. They are cringeworthy affairs marrying admission, regret, embarrassment and apology designed to garner what little sympathy is left before being hauled up before the regulatory commission to have their fate decided.  Perhaps this sort of press statement will set a trend in the real world , something like this -


"I received a letter today, delivered by hand by 13 police officers in riot gear smashing in my front door accompanied by dogs, informing me that I had failed a drugs test. For which I take full responsibility.

I had been buying a homeopathic plant extract from the ice-cream van man after he recommended it to ease my sinus congestion. However I later found out that the free medication that came with my exceedingly expensive "Mr Whippy 99, just say double flake and I’ll know what you mean”, had another name of 'Charlie ', which I thought was a perfume, though the bulk of it was ground up worming tablets.

I have been advised that I will not be allowed to compete in the Australian Open, British Open or French Open (on the grounds that I have never played tennis) and the only Open I will be lucky to attend will be Ford Open Prison, but that will be unlikely due to the amount of medication found in my possession. I have also been advised that the only centre court I'll be seeing will be at the Old Bailey.

I feel betrayed by 'Ice Cream Dan’ and foolish for not noticing that the sinus powder was producing distinctive side effects that could not be put down to just becoming articulate in a gabbled way, interesting, entertaining and slightly less hungry.

I regret everything that I have done and can only apologise to my fans and those who have done everything to get me this far.

As the inflatable boy said to the inflatable headmaster in the inflatable school when he brought in a pin to ‘show and tell’, "I have not only let you down, I have let the whole school down but more importantly, I have let myself down".

Monday, 7 March 2016

Guide to trading 2016 markets


A simple guide to trading 2016 markets

- Pick a theme
- Trade to theme
- Re-peddle theme armed with price move to justify it.
- Algorithmic momentum trading models join in and the price accelerates.
- Assumption theme is correct because price is doing what would be expected if theme correct.
- Look for macro/stats/correlations/overlaying charts from history to support theme of theme.
- Pushes price further.
- Pick up ruler and pencil and extrapolate a line as to where price will go at this rate of change.
- Use ruler, price momentum, theme and theme of theme to rubber-stamp 100% validity of forecast.
- Use price extrapolation to show just how bad/good the theme will get, even though price is meant to follow theme, not the other way around.

- Price stops moving

- Price starts to reverse.
- It's just position covering don't worry.
- Momentum algos are tripped the other way and accelerate the reversal.
- Question validity of move and push short term positions to long term because the theme is not dead, it's only resting.
- Start to hear facts raised that have been there all along (but previously ignored) to question theme.
- See more algos reverse the price as momentum gains.
- Have your really, really certain position lose so much money you have to close it even though you know the theme is not dead.
- Try not to look at theme as you are out of your position and the world is nuts.
- Blame someone else.
- Find new theme and repeat.
- Original theme starts to do what you knew it would but you miss it.

Sunday, 6 March 2016

The four peaks.

Friday saw lift off for the metals and oil leaving Brent oil up on the year. Yes, higher than the close of Dec 31st. Sorry to labour it but considering where we have been, what has been said and the last week's EIA storage data, that really is one hell of an achievement. Falls in US production finally being seen are cited as the reason for the rally but let’s be honest, it’s speculators. Why speculators? Because global supply and demand swings have have not swung 35% either way since December as the price of Brent has. Speculative long positions from Hedge Funds appears to be running pretty high and that break in the chart neckline shown in the last few posts has seen spectacular lift off on Friday. The same happened with copper. Much as with equities, so far this has been blamed on short covering but as discussed before, this can have a self feeding inflation loop that could quickly drive the switch to real longs. Which leads on to asking, "if inflation does start to rise what are the chances of it being blamed on ‘just short inflation positions being covered’"?  The great 'just' word again. But if this is just short covering by leveraged accounts it will just delay any inevitable slow down in the path towards reducing global supply as drowning commodity suppliers will be able to offload some of the weight of their hedging to Hedge Funds at higher prices, buying themselves a few more months of survival.

One popular theme being bandied around a lot recently is the theory of Abundance. I posted my own thoughts on that last July (also worth a reread with respect to China playing a blinder with regards to commodities). But the proliferation of articles citing Abundance at just the time that commodities are starting to rally and recession fears wain leads me to coin the phrase ‘Peak Abundance’. We are probably at it. Remember, there’s always too much of what you don’t want right up to the point that you want it. Just go and look for a phillips head screwdriver in that tool box that was full of them when you wanted a flat headed one and you’ll see what I mean. They’ll all have vanished.

Equities pinging 2000 in SPX and 6200 in FTSE saw some ‘bigfigurutis' kick in and rejection of these levels was noticeable on the close. FTSE was the one that really didn’t do as much as I thought it would on Friday. China had rallied overnight (OK, blamed on state intervention, but 3% up beats 3% down anyday), my favourite FX play of long Aud/jpy was motoring, cable had fallen back a bit and copper and oil were skyrocketing, so I really expected FTSE to take out its recent highs above 6200 with ease and crack on significantly. But it didn’t, damn. Whilst we are talking of UK linked things GBP is looking pretty perky despite the popular doom calls of 2 weeks ago during 'Peak GBP bearish'

One of the key figures for me last week was the non-manufacturing ISM figure on Thursday. A break below 52 would have been most troublesome as it would have shown services were following recent manufacturing ISMs but coming in above 53 was just fine and a green light to play the growth trades. The Non Farm Payrolls were once again a mix. Lovely headline, shame about the wage data. NFP’s came out as a ‘Corbyn’ - Lot’s of jobs, not much pay.

Post NFP commentary did seem to focus on the weaknesses with the cry to sell stocks picking up again. No doubt the falling close has many prepared for a Monday sell off. The technicals would also support such if you are a fan of bollinger bands and a raft of other momentum signals suggesting an overbought environment. BUT and here is the big but..

Positioning as reported in the BAML flow data is suggesting, nay, crying out that despite the 12% rallies we have seen in DM equities from the base and the rampant rise in EM and Credit, cash levels are ‘at mountainous levels’.  Peak Cash. And their bull bear index is showing levels of bear sentiment comparable to the lows of 2011.

To hear that this is still the case after recent market rallies is astonishing and trumps any short term oscillator technobabble. There are going to be a lot of folks still chasing performance benchmarks and though it may well be safest to be in cash as the world is indeed not looking pretty, we know that the quickest way to remove yourself from the fund management gene pool is to miss your benchmark by a country mile. Your only hope is that all your peer group did the same. Maybe those figures are the result of them all having joined a fund manager's trade union with the rallying cry of "One short - All short”. Or, it’s a giant game of chicken that is going to end with the chickens getting hit by a thundering herd.

One other question to ask is 'if there is an abundance of cash knocking around, even if it is used to buy equities, what happens to the cash that is given to the seller of those equities?'. It only becomes someone elses cash position until they spend it on something else.

The path of most pain is upwards and it's double pain if youve just reshorted thinking that a nice round number is the top. I remain long of risk assets but am fully aware that Monday could be nasty for a turn lower on technical reasons and Thursday could be a kick in the markets kidney’s from Draghi as he rations the meds (meant as Medications, though equally apt as the Mediterraneans). Peak ECB Hope

Thursday, 3 March 2016

What a difference a month makes


What a difference a month makes



What a difference a month makes
Twenty-nine little days
Brought back so many buyers
Where there used to be pain

While last month was all doom, dear
Today stocks on a zoom, dear
My call strikes are through, dear
Since I said to you ‘Mine'

What a difference a month makes
There's no recession before me
Credit and oil not so stormy
Since that February base, the bulls have a case.

It's heaven when you find a rampant rally in SPU
What a difference a month made
And the difference in skew

What a difference a month makes
There's no recession before me
Deflation calls not so stormy
Since that February base, the bulls have a case.

It's heaven when you find that economies grew
What a difference a month made
And the difference in view


Wednesday, 2 March 2016

Metals - The path to inflation.


Many folk are debating whether the bounce in stocks is just a bounce or if a base is in. Many more are also in fevered debate over the intricacies of whether there are hints of slowdowns in deflation in country data. Meanwhile an elephant is lumbering around the room unnoticed, helping itself to their sandwiches. Metals. The rise in the price of metals has been continuing quietly for a while now, but for those of you who haven't been watching here's a charty catch up 




Iron



Nickel 



Zinc

And finally my friend Dr. Copper who has not disappointed in accelerating upwards through the resistance levels previously highlighted. 




Oh, and lets throw in Oil while we are at it for chart comparison purposes  


The moves in many started last year and a few of them only blinked in the great February sell off that was portending global doom. Country specific responses have been quietly on the move too. Whilst we were all focused on European banks, recessionary fears and the path of US interest rates the likes of Peru have shrugged off all of the things that would normally see it cratering and has been rallying strongly since January leaving it handsomely up on the year. Below is the Peruvian (coppertastic) market ETF - 'EPU'. there are a few Developed Markets that would give their eye teeth for a 15% up performance on the year. (In fact the whole of Latam is going great guns).



Metals are clearly telling us that this is more than a dead cat bounce in the growth story. Price rises in commodities have always been the root of all evil, when inflation was evil, but it is not now - inflation is the holy grail. So follow metals closely.

Commodity prices have always had a feedback loop that reinforces their direction. Prices start to rise on real demand and those rises push up inflation. What do you buy when you expect inflation? Commodities. And off we go in a 2005+ price push sucking in speculators and inflation hedgers.

In a negative interest rate world metals get another boost. the cost of holding them vs cash is dramatically reduced. Whilst many see gold as the escape route from negative yielding cash don't forget that any old metal will do. we are escaping negative rates not the end of the world in this scenario and so the requirement to carry your total wealth sewn into the lining of your coat or buried in your garden is bypassed. Whether you buy an ounce of gold or a ton of nickel is immaterial.

The transmission of Negative Interest Rate Policy is mostly discussed in the context of 'encouraging' banks to lend and companies to borrow and spend which will ultimately lead to inflation. But that isn't the only route. In a negative interest rate world metals get another boost as the cost of holding them vs cash is dramatically reduced. Whilst many see gold as the escape route from negative yielding cash, don't forget that any old metal will do. As we are escaping negative rates, rather than the end of the world, the requirement to carry your total wealth sewn into the lining of your coat or buried in your garden is also negated. Whether you buy an ounce of gold or a ton of nickel is immaterial.

So I would suggest that the direct path to inflation will be through the rising price of raw materials and as soon as that is sniffed speculative flows will bring it on all the faster.

It is also worth noting that the prices above are in USD terms. In the UK or Europe where the USD has been rallying, the inflationary impact is even sharper. With so much riding on the next ECB meeting with regards to policy easing, the risk for disappointment is only hightened.

Tuesday, 1 March 2016

Birthday present based growth policy.

As today the first day of the Meteorological Spring is here today, here's a little financial options ditty for you, bearing in mind that wings are low delta options as well as flight devices.

Spring has sprung and stocks have riz
I wonder where the black swan is
They say the swan is on the wing
But that's absurd
The wing is on black swan.

Today I have another birthday, though they are fairly irrelevant now as one really doesn't want to count them anymore and the sort of things you are given as presents are never life changing as far as comparative wealth goes. When you were a child, birthdays and Christmases were like Goldman Sachs bonus days. They were 99% of your annual income. Nowadays, though delightful to recieve kind gifts, they fit into a limited set of catagories.

1) It's an essential you would have bought for yourself anyway and so just dissolves into the piles of everyday life - clothing mostly.
2) It's a thing for doing something you don't do.
3) You can drink it or eat it - always a result.
4) It's something you really wanted but it was far too expensive for you to buy, so your partner has bought you something very similar, but not quite right, with money out of the joint account anyway. Which is an emotional gordian knot.
5) It's brilliant, brilliant present, WOW.

[For sake of disclosure and not to appear a whinging old git, I hereby declare that I have received a catagory 5 present this year and for further disclosure it was a piece of offspring designed and made garden furniture]

But unfortunately most of the world's presents are confined to drawers, boxes, garages, charity boxes and bins. Although you may think this is gender biased, with me refering to boys' toys of torches, tools, mini remote controlled drones, wires and things for taking the foil off wine bottles (does anyone use those in private?), I only have to look in our cupboards to realise that flavoured cooking oil and hand creams are the gift currency of wives and my wife must be very well liked. I have just counted 16 different bottles of flavoured olive, rapeseed, sesame, [insert name of any nut here] oil in one cupboard alone.

But there is a point to all this. All the rubbish we give each other contributes to the economy. It may not be efficient and it may be wasteful but then so are many of the policies, both fiscal and monetary, that are devised for stumulating growth. And growth is what we need because we have all borrowed or leant to each other on the future to pay for the now.  We need to know that the value of the future is enough to balance us up.  We are effectively stuck in our own Ponzi scheme and the solutions being proposed are more and more absurd. Here, your honour, I call NIRP as witness for the prosecution.

I have long thought the world needs to invent/ discover/ become entranced with a so far unknown product that we all desire, takes lots of man hours to produce and would work our socks off to aquire. TV's, cars and smart phones have practically run their course as consumer essential global stimulants. If we are desperate for growth then the Keynsian idea of digging holes and filling them in again could be applied to goods in general and idea of Birthday gifts could be extended. I am of course being flippant with this suggestion but if the world was to introduce more present giving days to the year then the demand for unneccesary consumption would rocket as otherwise unwanted goods are purchased and given as drawer stuffing rubbish to others. Just look at the boost Christmas gives to western economies. If birthdays were introduced monthly instead of annually and present giving enforced, 12 times a year you would have to buy presents (we could set a minimum value) to all immediate family thus increasing demand. It's a form of compulsory money circulation and manufacturers, retailers, recyclers, (and chest of drawer makers) would flourish. A side effect would be that it would be a disincentive to having copious amounts of children. A form of negative child benefit as parenets are forced to fill their already overflowing homes with more pink plastic bleeping rubbish.

Just a thought.

Right, I'm off to do my birthday bit for the French economy by consuming too much of their most famous of Bordeaux exports.