Wednesday, April 04, 2012

Choose your Poison

 Haven't we had one of these before? FOMC doesn't hint at QE3 so we trash everything as there will be no more free money? But no more free money because free money is not needed is not a reason to sell everything. Bonds - Ok that makes sense,  but equities? We are pretty sure that QE3 WOULD be back if needed but if you are beating up the QE trade then you buy usds, sell bonds and sell gold. But do you REALLY trash equities? US markets closed pretty stable and it had only been Asia pushing things lower but now Europe is trying its best to have a wobble "all by its own self " as if the FOMC wasn't enough, with the reason morphing into a Spanish event.

But what of this Spanish event. Is it real? Not yet in our eyes. Or is it just the soft underbelly of Europe to be next jabbed at by the Bond Vigilantes? Perhaps. Or is it just the cat that is being kicked, the kicker having been irked by lack of performance in short US and China growth trades? Perhaps.

But we do feel that leverage and short term specs are desperate for risk to sell off for a multitude of reasons and the scepticism that was present at the beginning of the year is still with us. The key point we believe most important to those players with strong hands (real money) is that the growth backdrop is good and improving in 2 out of 3 of the world's growth engines. The arguments for risk to sell off seem centred around theses that are either plain wrong in our eyes (china hard landing), or are not yet systemic - take your pick from the list of Eurowoes that the current Spain move is exemplifying and are as yet unproven (April/may seasonal data rollover). We also hear arguments that the rally has gone on "too long" (SPX did 55pc off its lows in 2009 with no more than a 7pc correction) and hear those arguing that one stock cannot make a market (AAPL). The trouble with this view is that for every potential risk that bears come up with, we can come up with a positive. So our "Big picture" remains that this still looks like a Wall of Worry. Add to that, positions are still not large in the medium term space i.e. real money and  long/short equity hedge funds look as though they are running only 35pc net long vs 60-65pc in every 5%+ correction we have had since 2009.

Our shorter term worry is that prices are today getting smaller and charts are being waved showing important lines. And we know from experience that lines on charts are the troll bridges of markets under which hide large ugly stops that will gobble up little bulls no matter how cheery their long term views.

21 comments:

Amplitudeinthehouse said...

Hello Polemic!!

Bob Dobalina said...

appthe growth backdrop is good and improving in 2 out of 3 of the world's growth engines.

What's the second "good and improving" growth engine?

Polemic said...

Ok guys .. stop making me have to think..

amplitude.. hello back, but there must be more buried depth in your greeting that i m missing


Bob.. depends what is your first is.. u go first...

Amplitudeinthehouse said...

Oh..Polemic, just an ordinary hello from Sydney,nothing else, Polemic.

redrut said...

Surely the fact the corporate amrgins are priced into the market for new historical highs is oen of the larger worries in the equity mkt.

This Spanish event isn't really as big as people are making it out to be.

www.1percentblog.com

Anonymous said...

Probably just a short-term bear raid, perhaps only a single bear. But are those bulls? or maybe now they are walruses? This is what it looks like when the market rally gets long in the tooth....

Bear v Walruses

Anonymous said...

you're out of your depth on china.

Charles Butler said...

I dunno, Pol.

Keep in mind that within the legal profession the property registrars are thought to be near autistic in their intimate knowledge and obsessively strict interpration of a very narrow field of law. Mariano Rajoy was one of them... and he appears to have drunk a certain amount of Kool-aid, wired up the belt and has now locked on to a target.

This has ugly written all over it.

Leftback said...

Speaking of charts with lines drawn across them, the IBEX closing in on a double bottom here. So it either bounces off that line... or look out below.

IBEX 6-month chart

Bob Dobalina said...

Polemic-- The first is clearly the US, no? But I guess I'm not certain that even it is "improving".

Charles Butler said...

Triple bottom, actually. Taking out the electron microscope to look at the 3 stocks that make up the Ibex 35 - the banks have another 4 or 5 percent to go to get to November lows. TEF blew right through them last week.

Garbanzos store well.

Leftback said...

Hope TMM aren't going drinking tonight with this chap. Sounds like he's going down the Scrubs.

Hope Not?

Regular readers may remember this chap paying a £200,000 bar bill in Liverpool. We grew up there and didn't think that was humanly possible.....

Polemic said...

Hi folks

Charles, thanks. we do bow to your inside expertise on Spain and so will look afresh as to whether Spain itself deserves a good kicking. But the secondary issue or rather the primary one right now is the secondary effect on other markets. Is the Spanish situation really going to go systemic across the whole of europe again. Its much like the point of QE3 or not in the US when Draghi hinted today that repeats were unlikely. Unlikely because will not be needed. We are convinced that if Spain did become infectious to the extent of the italian run there WOULD be another LTRO. So even if Spain does become the kicking boy for April and May then the contagion regional trade should not be played as a sure fire thing.

Hi Bob , yes we do think US has reached escape velocity, but of course nothing goes anywhere in a straight line and we do think that the other region that is freely running again without the starter motor is Asia. As we posted last week we think that China is in a much better position than certainly US markets give it credit for. As for those Aussie trade figures. As expected taken immediately to mean china demand is crashing but there are massive seasonals to the supply side in there and interesting what we feel are one of huge falls in Japanese demand for coking coal. Lets just get the next months data behind us.


Now then .. of course according to Mr Anonymous , we are totally "out of our depth" on China. This sort of comment is completely valueless, for if Mr Anon is Mr Big on China and know's best then we would have expected some reasoned argument. We have mail addresses listed and look forward to it if this is the case. Of course if mr anon just disagrees and wants to let everyone know he disagrees then it would have been just as polite to put up "you are a bunch of C&^%s", which would also probably be more accurate. Sadly working as mr anon doesn't even give us the chance, once we are proved completely clueless on China, to return back to him and congratulate him on his brilliance. I say "him" because for some reason I would be very surprised if Mr Anon is a Ms Anon.

LB - Once again another media discovered trading star is debunked and detained at Her Majesty's. How sad never mind..:-) At least thats proof to Nic that it wasn't me !

Leftback said...

Mr P.

Agreed 100% that there will eventually be another LTRO (inevitable) and another QE (probably a Twist, or even some MBS purchases if US housing goes down the crapper again quickly). What else can they do?

But, hang on a minute... b/c all that LTRO/TARP/QE (hereinafter referred to as banker bailing) is deeply unpopular and is being associated with inflation by the mass of the electorate who aren't actually in a position to be long Chipotle Mexican Grill and GropeOn, and so the Pols in Yoorp and Amurka will want to stay as far away from further central bank largesse as long as possible - until they are safely done with their respective General Erections.

Now in the mean time, Mr Market, Ms Goldbug and Mr Oilslick are just now getting this message and realizing that it is going to be a long summer without anyone p*ssing liquidity for them through a gigantic fire hose.

So, we are going to see a decline in risk taking. Credit spreads will widen again, and we are going to have a dull summer of dreary old macro data, interrupted by an occasional riot or two, and oooo maybe a seriously sizable correction in equities?

Charles Butler said...

Pol,

SX7 banks over the last couple of weeks say systemic, but not necessarily Spain as prime suspect - more like Italy, actually.

And in the red corner, the yield on the ES10 broke above the no-news Merkel burden-sharing range today. This was presumably on today's auction results. Still waiting for someone to notice that if you've got half your year's issuance covered in three months that maybe you can start getting picky about the yields you're willing to pay. Or maybe that's just me.

The bund fashionably bored with the whole thing.

Polemic said...

Charles yes agree, we were talking about the coverage already done this morning after the auction.

Other odd thing that didn't look "complete". Whilst the US went through today's equity dumpage eur/usd crept UP a little higher and aus/usd was unch and other "this is a europanic get me out of here" fx expectables were flat.

Martin T. said...

Polemic re Spain, i think the oicture is ugly because of thr dire situation of households's balance sheet. Private and corporate debt have gone through the proverbial rough and the housing bubble burst made it worse given a large part of Spanish GDP was based on construction.

I am much more Postive on Italy and Belgium than Spain and France. From a macro perspective Italy and Belgium share many common traits but that's another subject. Coming back to Spain, the main issue is that they need to find a new growth engine given it is not gowing to be Construction and that is going to take a long time.

Best,

Martin

Anonymous said...

Pol, re China, I'll just re-post my comment from the last week's post. Aussie exports dropped, with coal being down another 21% (on the top of 9% in Jan). Thermal coal is leading, which to me shouts "electricity". No electricity = no production, unless Chinese all of sudden invented some other means (or improved productivity hugely in the last two months).

That is very different picture from what the PMI numbers try to paint. The difference is that the PMI numbers are suspectible to massage, the export numbers are, as a colleague of mine say, "counting the ships". Which is much harder to massage.

cpmppi said...

Anon @ 9.19,

A few points:

1) This Cyclone season has been particularly active and prevented many ships entering/leaving ports.

2) Australian Export data are just as vulnerable to statistical/seasonal issues emanating from Chinese New Year as are Chinese ones. A brief comparison with prior years typically shows falls in Jan/Feb of 25-30% depending upon when New Year falls. To use the non-seasonaly adjusted numbers and cry "collapse" is naive.

3) TMM's China PMI model is based purely on external (non-Chinese) variables (including, for example, ISM, US Port data [ship counting...] etc.) that are not vulnerable to massaging. TMM then conduct a statistically rigorous dynamic seasonal adjustment process in order to account for the complexities we referred to in our earlier posts. The fact that our model is pretty consistent over 3m periods with the seasonally adjusted NBS PMI (i.e. removing monthly noise) strongly suggests that it is unlikely to be particularly vulnerable to "massaging" in any particularly significant way.

4) Trade data are both notoriously volatile and subject to large revisions in both directions over time as "counting the ships" is not quite as easy as it sounds.

5) In line with point 2), TMM expect Chinese Electricity Production [which is issued with something of a lag] will also show a rebound come the March data once the seasonal distortions are out of the way, and in line with our analysis of the momentum in Chinese Value-Added Industrial Production last week.

TMM love debate and discussion in the comments, but the current biases and denial of anything positive towards China, to the point of having to denounce all +ve data as corrupt and then wheeling out other countries' data instead (or worse, merely tell us that we are "out of our depth"), as either indicative of a lot of lazy analysis or a level of desperation against existing positioning. Let's have some rigour please.

Amplitudeinthehouse said...

The recently promoted senior trader on the desk that shall remain nameless....is frantically screaming out through the squawk box....if that barrier breaks my dear son....no Hollywood bright lights for you my boy....we're shipping you off to Sapporo to trade in snowmen.

Deadlyfrom80yds said...

Good perspective but a tad backward-looking.