Sunday, January 30, 2011
Well, well, well, its been an eventful few months and aside from the ongoing messy situations in Pakistan and North Korea it appears that Twitter and Facebook have accidentally put the entire Arab world in play. Mark Zuckerberg, what hast thou wrought? The Armchair Generals are back, and most amusingly of all given that they are
a) almost all on the sellside and therefore
b) their employers block all social media at the office
Its even harder to take them seriously given that the best on the ground coverage comes from stuff like this (note, translated):
All the people are in Liberation Square. Kebab business off the hook. - Abduls_Kebabs, Thu 12:36 via IPhone
Got overexcited and threw a kebab at the police. Felt good. Mubarak Resign! - Abduls_Kebabs, Thu 20:36 via IPhone
WTF my Kebab Stand is on fire! - Abduls_Kebabs, Fri 01:22 via IPhone
Ok fuck it I'm getting in on this Molotov cocktail thing. Next up - plasma TV 4 free. - Abduls_Kebabs, Fri 03:48 via IPhone
All TMM can say is that they are quickly getting into Twitter and Weibo - Reuters and Bloomberg just aren't fast enough anymore. Nemo is here and others may follow. With the madness raging on in Cairo TMM were a bit too busy at the end of the week trying to work out how to play this and getting trades done to post but here it is. Given that we are already on the long oil bandwagon that is more or less taken care of so our thoughts as to how things might evolve in rates and FX was more of interest. For some quite astute commentary on oil and the Suez Crisis, go here.
Firstly, how bad rioting resulting in government getting turfed out is really determined by 1) how long it goes on for and 2) who the viable alternatives are. In countries like Thailand the pluto-clepto-crat prime minister Thaksin getting booted doesn't really help political stability but it's not as if there aren't a number of viable alternatives. The kind of disaster zone that ensues when a dictator withdraws and there is a power vacuum has plenty of nasty precedents in places like Indonesia circa 1998 which really makes one worry about what is going on in Egypt. Egypt does have some civil society that could vaguely form a caretaker government in a lead up to elections but many places don't and also have the same simmering pot of political resentment. We are of course, referring to Saudi Arabia who as of late last week did not seem to be having much go on in CDS land which TMM find odd.
Centamin but TMM view the Saudi Riyal as a decent bet too. If the problem is food inflation and you have truly enormous FX reserves a one-off revaluation is a good way to cut inflation very quickly in the short term -- and when the political landscape is moving as fast as you can Tweet the short term is all you've got. Long SAR, long Saudi CDS would seem to be a good way to sleep well and get paid at this point.
In the interim, the broader picture is as such (according to what we've heard): if Saudi goes you simply can't own enough 5 delta oil calls and 5 delta spoos puts because it will completely screw up the oil market and likely spill over into Iraq, Jordan, you name it - banks aren't the only thing that can be TBTF. If Iran goes that isn't necessarily a bad thing - TMM are generally not pro-Islamic state - but you can bet that before Ahmadinejad goes he will angry up his proxies in Lebanon to try to create an external drama to distract the populace. At any sign of trouble in Iran getting short all things Israel does not seem that silly at all.
Thursday, January 27, 2011
Well well, Japan is downgraded to which TMM has one thing to say to those flipping out about this:
Which coincidentally is what the JGB mini futures investing public said – meanwhile as we write the Yen has moved about 90bps and the sovereign CDS spread is out 5bps on the move. Without getting too punchy TMM are to fade the spot traders and go with the JGB traders on this one and stick by our observation that sovereign CDS is a more blatantly rigged market than your average casino.
Moving onto something less “tabloid” there has been a continued slow boil of news headlines about Bulk Dry and how it’s almost back to the 08-09 lows. People often look at BDIY and assume that its some kind of proxy for commodities demand and that as a result it should move somewhat in line with commodity prices and particularly Chinese imports. As usual when one looks only at demand you’ve got half the story. The other half is below. White is the total in thousands of Deadweight Tons in service for bulk carriers and orange is the % of the total fleet on order and green is the level of BDIY.
As you can see the shipbuilders of the world got way, way ahead of themselves in 06-08 ordering vessels just as the world economy was going into cardiac arrest. The problem with this is unlike other products you order and get instantly (ebooks) or almost instantly (electronics) ships take a very, very long time to build. As a result, when you get inventory overhang in this industry its less like a mild hangover and more like jumping off a building and crashing through 20 sky light windows Wiley Coyote-style before you hit the bottom. And the bottom appears to be getting closer though a return to 6000 on BDIY is a very long way away indeed.
Which gets TMM onto another thing worthy of some further investigation and that is DnB NOR and perhaps Norwegian banks in general. You see, the shipping finance industry is incredibly concentrated and a relatively small numbers of banks are most acutely exposed to it. With headlines like this hitting the wires TMM have to wonder whether this outperformance in DnB NOR is warranted versus, say, Santander:
TMM think that DnB NOR via their JV DnB NORD may have been the best way to play the Baltic Banking bounce but this shipping problem does not appear at first glance to be in the price.
In the meantime, TMM would like to set up a poll as to what you should do with the glut of Capesize vessels:
- Moor them off Hong Kong to provide cheap housing and save on land reclamation costs.
- Lash a large number of them together to make a Mad Max version of Macau – which would look like Macau, just with more ultimate fighting.
- Moor them off Somalia to take advantage of low wages and proximity to Europe and India for light manufacturing.
Monday, January 24, 2011
You remember last week TMM were wondering what the motivation for the Soothsayer to break his cover was to go mainstream with his calls? We were wondering if he was going "Taleb" in making himself a public name by putting in a big call. Well, it would appear we were right to be suspicious as today all Bloomberg users have had a message that the so far free Soothsayer service will soon be charged at a price of thousands of dollars per year per user. Now it all makes sense! We bet he was hoping that the equity market would have tanked by now though.
On Friday we mentioned that we still see the picture for Eur/usd and equities to head higher and indeed Eur/Usd put in a new high in early far east time. Call it gut feel rather than proven, but we have always had a feeling that early far east new highs or lows without major news often mark turns. And when we add that to CFTC data back to flattish (well, small long) now, we get the feeling that the market has started to want to JBTFD rather than sell JSTFR. Finally. a soothsayer signal, probably one of the last free ones we are allowed to see, is showing a sell signal maturing on the daily charts today.
TMM have been steadfastly calling Eur/Usd higher but now think there are reasons for it to at least pause. EUR/CHF and EUR/AUD and the trusty XAU/EUR all showing signs of Eur weakness returning.
Whilst we mull over things during an otherwise quiet day, our attention was attracted to the performance of everyone's favourite trade of the year, namely Long Oil. We know that short term corrections in Macro trades are almost a welcome sign of overall health. You only have to look at the bullish palladium calls of last Feb, as an example. May and June looked disastrous, but by year end the macro view prevailed. But the price action in oil over the past few days has us concerned that a move sub 88.10 on the front WTI contract leaves fresh air below, which could well be painful as it's an obvious stop loss level. But our question remains - is anyone out there actually bearish crude? If so, would love to hear from you in the comments section.
Friday, January 21, 2011
That was a tussle indeed yesterday. Just as the bears thought they had the bulls in a headlock and were already looking forward to winning the championship, the bulls broke loose and are looking fresh compared to the tired bears. We could be talking about equities or Eur/usd, the fights were so similar. We are standing by for them both to move higher...
But in the meantime the buy side invited TMM to take a tour through their Sell-side Menagerie... This is what they were shown.
Golden Saxum Obsequiousa
Smartly turned out with identical plumage making it very hard to tell them apart. Live in a hostile environment where the days can be 24hr long, but are genetically perfected to thrive in it. Rarely stray from the rest of their flock, probably just as well because other species rarely tolerate their company. Amass a thick store of fat in January or February to help them buy villas throughout the year.
Swarm creatures that work diligently cutting out other's thoughts or news items and pasting them into their own streams of unconsciousness. The items they choose are rarely selected on relevance or merit but tend to be cut from a source deemed more knowledgeable. It can be amusing to feed one of these creatures an artificial item and see how far it spreads amongst the community. Whole swarms can be effectively poisoned by feeding just one member an item containing a hidden word banned by HR or Compliance filters.
Normally found in buildings long after dark, furiously modelling solutions to problems that you really, really don't have. Gets very nervous outside of its environment and though you want to get closer to it as you think it looks cute, it's completely useless, verging on dangerous, in normal social situations. AVOID or leave in a dark box.
Appears to have little solution to anything other than meeting for eating. Spends most of its time eating, or proposing eating or fine tuning the arrangements for the next eating event. The rest of its time is spent filling in expense claims. Mostly harmless but make sure you don't get between one of them and its dinner. Normal habitat is distinguished by a "relationship management" sign at its entrance.
Yes this little fella is just as suited to the sell-side environment as he is as to the buy side. His tenacity and fervour make him a love or hate type of critter.
Smooth and sophisticated, but don't be fooled by appearances. Spends most of its day in a glass office lazing around having earned its territory by killing any young male foolish enough to challenge it. Will only venture forth if summoned by one of its juniors when there is a chance of a large kill. Will happily toy with its victim before deftly removing all of its arms and legs and then the shirt off its back. Will then return to its lair to fill in its Aston Martin spec.
Hardworking and diligent and able to lift above its weight, but massively let down by its environment. You do so admire its work ethic and ability but ... you know what? If it moved out of that sh1t environment and offered a less crappy product you really would deal with it.
No one quite knows how this breed ever came into existence, let alone why their numbers appear to be on the increase. An exceedingly dull animal that, once it's on your trail, you just can't shake off. Will constantly bother you for minute details about your private life before deigning to allow you to deal with its institution. Just when you think you have shaken the thing off it will turn up again asking for your mother's inside leg measurement on some pretext that it's current Know Your Client policy under FSA/SEC directive xyz.. at which point you will fall into a coma. VERY DANGEROUS.
Laughs all the way to the bank. Well, someone in your organisation tied you to dealing with this critter as he nets and manages all your company's positions and collateral. It doesn't make it any more pleasant though, when you see him tearing the flesh out of your tom/next rolls whilst guffawing with mirth.
Every time you deal with with this creature you just have this clawing doubt about how much it has nibbled out of your price. Has a habit of storing away points on any trade and although it tries to bury them, it's bloody obvious what's going on and no amount of cute back talk is going to make you believe otherwise.
This cunning creature will repeat back to you exactly what you have said to it, only in its own words. This is to give you positive reinforcement of your own ideas to the point of putting the trade on. It will never contradict or present the other side of your argument because, of course, it can't actually think for itself. It's just an illusion of intelligence.
These creatures use a cunning method to hunt their prey. They just hang around patiently and wait for the prey to come to them, before they just chip it down their throats. Their method involves trying to keep you in conversation on the phone for as long as possible in the belief that at some point you are going to HAVE to do a deal and when you do ... voila! There they are conveniently on the end of the line. Can be worth the engagement if the conversation is worthwhile and you have the odd couple of hours to kill, but more often than not it will involve a diatribe about their favourite sporting team's achievements.
Whereas most creatures are symmetrical and balanced in their views, this creature is hugely biased with all its views only ever on the one hand, never on the other. Preferred habitat is a commision-based equity brokerage. Its familiar calls are "earnings beats", "buy buy buy " or "..outperforms in the long run". Recent sub-species have evolved in the commodity markets with a new colony firmly established in "God's Country, mate".
Our old friend. Will adopt an air of knowledge and authority on any current global issue as if it had completed a PhD in the subject, when really it is typing to you with one hand and Googling like mad with the other. Is also normally the last salesman to start commenting on anything vaguely complex, and thus a perfect counter-indicator for risk aversion events driven by esoteric parts of the financial system.
Thursday, January 20, 2011
Is it just us or does it feel to you that there is a hell of a lot of tension in the wires at the moment as the tug of war between good and evil sees every force available thrown into either argument? The interpretation of Good and Evil of course depends on whether you are a bull or bear in your chosen market, but it looks as though our two favourite concerns of the Euro and equities are the main battlegrounds of such conflicts.
First lets look at EURUSD. For the bears we have had the influences of the US equity market followed by a heavy fall in Asia. The normal response is to see the Euro get hit along with all the normal FX candidates (looking at you AUD) and so it was when we came in to London time. But since then it has been the bulls gaining ground as it has reground its way back towards yesterdays highs. The Tug continues.
And as for those equity moves? Well it seems to us that yesterday was more about trying to find an excuse to sell a new highs or lighten positions rather than occurring on any really concrete catalyst. It was most interesting to see the great Soothsayer himself breaking cover onto the mainstream news-wires to put in a "Big Call" to then be held aloft by bears, many of whom who have never heard of him, as their new totem. Even Bloomberg TV is running pieces on his "Big Call". Is the Soothsayer selling out or just trying to step up his PR in Taleb style? Anyway, from speaking to quite a few people, it seems a lot of equity longs were lifted last week. But meanwhile, Credit is still performing well due to dealers being short and the SPX VWAP since 3rd Jan is 1278 (i.e. - there isn't any pain) while yesterday's futures volumes running at ~50% above 15day average seems like a lot of risk was either taken off yesterday or shorts were added at (so far) poor levels.
Today just looks as though its going to be like playing the decider.
As the tussle in equity markets appears to be ground zero we thought today would be a good day to elaborate upon the TMM call for Emerging Markets to under-perform Developed Markets in 2011. Whilst the DM over EM argument is becoming almost mainstream in western markets we feel that it is certainly NOT considered the trade in the East, so there can still be a world of pain to come.
As the “Asian inflation” story goes tabloid its worth delving into just where we can expect this trade to go. EM inflation tends to be driven more by food which is a volatile component of CPI to say the least, see China’s food CPI vs non-food CPI below. As a result of the fact that food price shocks tend to be exogenous (bad weather, pests, etc) CBs quite reasonably tend to ignore it and focus on “core” CPI – CPI ex-food (and energy, depending on where you are) to avoid chasing their tails. The result is that food prices have to bleed into general price levels before you get much of a response. And that bleed is well and truly underway judging by China’s core CPI print which is up to the heady days of 2008 again.
The problem with this kind of inflation scare type of trade is that unless you are a commodity and particularly a softs specialist it can go away as quickly as it came, just like in 2008 when broader deflationary forces and more planting quickly overwhelmed a short term squeeze in agriculture.So naturally the question is how does one tell the difference between the real thing and the phantom food inflation that comes as quickly as it goes? TMM’s worry right now is that much of what goes into food inflation and non-core CPI is going to be far from a passing problem like in 2007-2008. The reason is below: normally when agricultural products get “squeezed” they spike up, people plant a lot more and that is reflected in futures contracts a year out. As such, when the spike is temporary and not structural the orange line (spot rough rice) is high and the white line (the fair value spread between the front and 5th rice contract) is also high. That isn’t happening now, indicating that higher prices we are seeing are likely to stick around. Rough Rice is below and doesn’t look like its coming back anytime soon...
Nor does wheat...
Soy doesn’t look like its over…
Which to TMM looks like it has pretty dire implications for CPIs in a lot of EM markets. China’s core (non-food) CPI is already at 08 highs (green below) and policy is finally catching up in 2 yr SHIBOR swaps (orange). The problem is that excluding the price controls on vegetables put in place last month food is still moving a lot faster and housing costs just printed 6% YoY. As a result, PEs of the market are coming off and coming off hard (Shanghai A Shares forward PE in white). Buying low PE stuff only works if you think the cycle is going to turn – if you want to know how low valuations can go in a strongly inflationary environment ask your parents or someone who remembers the 1970s. It was an unalloyed bad time for equity investors. TMM’s concern is that if we are early into a rate hike cycle this is going to get much, much worse before it gets better.
And for those of you who want to know what India looks like it is way worse. TMM’s India “Fed model” chart is below (inverse PE of Sensex – 1 year swap rates). If rates surprise on the upside it hard to see this market being more expensive at any time in the last few years to onshore rates.
But we hope to have a update on India for you soon after a recent visit.
In the meantime ladies and gentlemen, lets take ouur seats for todays Bull vs Bear cage fight.
One last thing, after yesterday's foray into the Menagerie, we will soon be addressing the balance and visiting the "Sell Side House".
Wednesday, January 19, 2011
TMM have just been led through the client managerie by some sell side friends... This is what they were shown.
Screams, demands attention, throws toys out of its pram and is convinced it is 10 years older than it is. Normally lives on a hedge fund execution desk. The pram is rocked by senior Hedge Fund PMs.
Used to live on an execution desk but has now been given its own money to manage - hooting and hollering, throwing its own excrement around and demanding even more attention.
Big Hedge Fund Boss that can devour a whole market in one attack.
Work directly for the Deum Fundi and consider they have a more professional persona than the Horribilis petulenca. Clean morsels from the teeth of the Deum and shelter under it immune from attack from the rest of the market. However should the Deum Fundi die they need to find a new one quickly as they will find they are alone in a hostile environment.
Sage old Portfolio Manager willingly discusses ideas, themes and positions and trades in a relaxed manner.
Sage old PM willingly discusses ideas, themes and positions and trades in a relaxed manner, but will then trade the opposite way to the views it had just been expressing when made a price.
Sits there unobserved just watching for a complex market arbitrage. When it exists it will dart out a tongue, grab the price, blend back into the background and vanish as it waits for the next opportunity.
Meanus Reversioni Explodo
It thought The Arb worked so regularly, it over indulged and exploded.
Asks multiple complex option prices until someone inevitably makes a mistake in pricing, falls into their trap and is held to the price.
All slowly travelling the same way in a herd, can be seen a mile off, consistently trying to avoid the crocodiles when they traverse the markets. Pure size and volume means they will ultimately get there even if the carnivores take a few on the way.
Brokers are convinced they have held its sole attention all the way through the trade, yet it still manages to give 7 other brokers at the same time and cover its tracks with black ink, leaving red ink at the banks.
Passive bond pension fund. Clings to its benchmark and finally moves once everyone else has already left the scene
Real money funds. Unstoppable slow moving mass. You do not want to be in their way.
Tiny corporate client flapping its wings in a high pitch hum, expecting top coverage as they are now in the "wholesale market" rather than speaking to one of the bank’s branches in the sticks.
Climb all over your option products, want to know how they work, strip them to bits, nick the juicy bits and then sh1t on your windscreen.
Finance director. Looks way down upon everyone else so far below it. How could they possibly understand the complexities of tax issues it faces at its lofty level?
Did you not know it was the king of the Jungle once? Will roar and growl just like it used to but with its glory days behind it, the small fund or treasury it is at now really doesn't give it the teeth or claws to do any damage.
Everyone's pretend mate as long as they give it tidbits of information and "special treat" rates. Will be constantly yapping trivia and mateyness but will nip you on the ankle or piss on your leg given half a chance. Normal habitat is agency brokerages.
A blood sucker. Asks a price but instead of paying the offer leaves a bid mid market to try and save paying a spread. The market inevitably moves away, leaving it blaming the broker for not getting them in rather than itself for not sacrificing a potential tick for the risk.
Spends its time parading its own intellectual splendour, views and knowledge rather than listening to anything anyone else has to say. Will parade for hours yet never put on an actual trade.
Blindly follows what only one US Ex-investment bank says. Nothing else matters
Blindly follows the biggest expense account. Nothing else matters.
Voldemorti et al
Run large FX reserves. Enough said.
The perfect client. Intelligent, wise, fair, sensible and good company. You and us of course!
Tuesday, January 18, 2011
As we have mentioned the 3rd week of Jan is when a turn to the start of year favourite trades often occurs and tying in a US holiday adds greater weight. We were looking for the Euro negative consensus trade to start to unwind after the auctions and so far so good, but more on that later. The equity story isn’t quiet so clear though. Our ideal scenario would have been for a flat lining for the first two weeks that would now accelerate, but the steady climb we have seen so far means that any turn to further strength would have to be stratospheric to effectively mark a change. But as things are currently set technically, it is more likely we see a dip. We have strong soothsayer turn signals that matured on Friday’s close and we have even had a perfect catalyst added to the mixture in Steve Jobs taking medical leave- This has not been received well by the market or holders of AAPL but TMM wish Steve all the best and a speedy recovery – not least of all because he appears to have orphaned a number of hedge funds. In the interim we are taking out an ad in the local paper:
5 Tiger Cubs Available For Adoption
So there are two big antagonists in our short term view on equities. The techs and AAPL vs our background beliefs and a relief rally in Europe.
Now, more on that Europe function. As we have often mentioned this year, the desperation to stay short of Europe is palpable through the interpretations and biases applied to any Euro related headlines with the negatives lept upon and any positives gently put to one side. The core issues the market has been focusing on up until now have been the auctions and the expansion and scope of the EFSF. Well it looks as though Spain have already managed to complete 60% of their funding needs ‘til April and that any EFSF decision will not come before March. That means we have 6 weeks of waiting and we can’t believe the market can sit still on their hands, or shorts, for that long without looking for other functions to trade in the interim, similarly to last summer when the European STFU policy shifted attention away to the US.
So TMM have spent the weekend thinking a bit more about the Euro and are increasingly of the opinion that even after the fluffy bunny took a bite out of the shorts last week, that the Drachmark has a great deal more upside, and wouldn't be surprised to see it pushing 1.40 over the coming weeks. And here is why...
While the recent talks related to expanding the EFSF and changing its remit aren't necessarily game-changers, it seems that sentiment is still very much in the camp of "they'll never come out with anything" or "the Germans won't agree to it" etc etc. Indeed, the tone of many of the trader wraps and IBs TMM received towards the end of last week and the beginning of this week was one of little expectation of any anything concrete materialising. The interesting thing is that despite early attempts to trash the currency and bonds this week that we've actually moved sideways, perhaps helped by the A-Team reassessing their issuance and bank strategy. TMM was impressed to see the ECB rip the faces off bond shorts in the days before last week's Portuguese, Spanish and Italian auctions, resulting in the Portuguese getting away paper at lower yields than last November. While used to then seeing them say something utterly stupid, or pull back from a policy, this week the Spanish (and today, the Belgians) decided to cancel auctions and replace them with syndications. This is an interesting strategy that, if managed well (i.e. - unlike Greece's syndication attempts last year), results in certainty of yield for both the sovereign and for investors - yesterday's Spanish syndication, while paying a slight yield premium, is clear evidence of the success of such a policy. Additionally, one of the chief Eurostriches, Zorro (a.k.a. Zapatero) began to talk about a renewed recapitalisation of the unlisted banking sector in Spain and as we have already mentioned, Spain has now already covered 60% of the debt maturing in April (the chart below shows the upcoming debt maturities, courtesy of the nice folk at Deutsche Bank):
But there are other reasons why TMM like the Euro. Last Thursday, Baron Von Trichet (presumably as a result of the Bundeathstar being aimed squarely at him) did his best to warn the market that inflation, while not yet alarming, was increasingly inconsistent with the ECB's mandate and, notably, reminded European rates traders of the July 2008 hike. Now, TMM remembers the preannouncement of that July 2008 hike very vividly, mainly as a result of the P&L decimation that arose as Non-Inversion Notes blew up the European rates market, and feel that many European rates traders will have similarly remembered that standing in the way of the train is not a particularly pleasant thing to do. As a result, Euribor has taken something of a hit, and TMM reckon it will remain a sell on rallies for the reason that if the ECB is starting to talk about rate hikes, we have a long way to move given that the extraordinary liquidity provision has only just been priced out (i.e. - EONIA to rise to the 1% refinancing rate) by July (see below chart of forward EONIA, courtesy of TMM's mates at Nomura).
As regular readers will recall, TMM still expect the Fed to remain on hold all year given the still large output gap, and therefore US rates markets still have room to rally, and over the past couple of weeks it is notable that the US vs. EU rates correlation has fallen sharply as RV trades have been put on between countries that are likely to see rate hikes and those that aren't. As a result, TMM expect the recent widening trend of 2yr EU vs. US rates to continue, providing support for EURUSD. Adding that to the calming in peripheral bond & CDS markets and falling financial volatility (see VIX), TMM's EURUSD model (based upon these variables - see chart below: white line - model, orange line EURUSD) which, while far from perfect, has provided a reasonably good guide to trading the Euro over the past 6months, reckons that the pair should be closer to 1.38 than 1.34.
Given that the underlying variables are all moving in the same direction, call us heretics if you like, but we like EURUSD higher yet...
Finally, before we go, a quick newsflash: After today’s UK CPI figures we have had this update on BoE monetary policy...
UPDATE: TMM think it is time that Mervyn King got the sack.
RTRS - ZIMBABWE DECEMBER INFLATION FALLS TO 3.2% Y/Y FROM 4.2%
...compare and contrast with....
*U.K. DEC. CPI INFLATION 3.7%; MEDIAN FORECAST 3.4%