Friday 1 February 2013

Miscellanea

The objective of this post is to provide our readers with a quick update on the markets we have covered thus far, while waiting for our next major post, which will cover the precious metals market.

Stocks

The S&P 500 has advanced less than 4% since our post on the coming bear market, but judging from the bullish noises made by various pundits and commentators you’d tell it has doubled. CNBC has even put on their screens a “countdown window” measuring the distance between the current Dow level and the all time highs.
From a fundamental perspective, the recent data releases have confirmed what we’ve long been thinking: the global economy is at best growing at a very mild pace, but most likely it is in the first phases of a contraction. Europe is undoubtedly in a recession, no matter how desperately talking heads try to positively spin the data: the recent Markit PMIs were supposedly a success, since the pace of contraction eased a little…big deal! Not to mention the fact that France is falling fast into the grave Monsieur Hollande has been so busy digging since coming to power. European retail sales were also disastrous (no surprise here for those who understand the specular concepts of overconsumption during the boom periods and forced savings during the bust). China is showing a lacklustre “recovery” (we’d prefer to call it: “short-lived rebound artificially engineered by means of inflation”), as evidenced by the latest PMI readings. Japan continues to be stuck in a recession, with the only difference being that now companies face additional pressures on their margins, given that a weaker Yen has pushed up their input costs, while their output prices continue to fall amid strong competition and a lack of demand for their products: they can of course thank Shinzo Ape (no, it’s not a typo) for this one. The US economy is also sending more than a few warning signals (and we are not referring to the meaningless GDP) and is in desperate need of a recession to correct and liquidate all the malinvestments engendered by the Mad-Hatter-in-chief Bernanke. It seems likely to us that much of the positive surprises in data recently released are due to the already high and recently accelerating rate of inflation, which furthers the aforementioned malinvestments. Moreover, earnings and revenue growth have at least stalled, but our suspicion is that they’ve started reverting to the mean: after all, many companies have issued negative guidance, either for the year or the quarter.
Technically, the stock market remains very overbought and ripe for a correction. Bullish sentiment and complacency have reached new extremes and many sentiment and positioning measures are now well into their danger zones (e.g. NAAIM Survey, Investor Intelligence, AAII, Rydex Fund flows and positioning, Hulbert Survey etc.). In short: the retail investor is back, eagerly waiting to get fleeced again.
We’re willing to make a wager here: we think that the actual top is less than 5% away (i.e. we think the S&P won’t surpass 1575, much to the chagrin of CNBC). Timing-wise, the prediction is a more difficult one to make: we may be two weeks or two months away from a top. It will all depend on how the stock market behaves: given that it’s already very overbought, if it were to rise fast towards the all-time highs, it’d probably mean a top is in; however, if it were to correct a little and then resume it’s advance, then we’d be looking at a longer topping process that could drag out until March or April. In any case these are just exercises in futility: what really matters is that we are convinced a top is near and we’re committed to the short side, as this is were the best risk/return proposition lies. To all the bulls pressing us to buy we can only say: “After you, my dear Alphonse”.

Yen

This is were things really get interesting! The Yen is as oversold as it has ever been, with e.g. the EURJPY cross stretched more than 22% above it’s 200-day simple moving average, something almost unheard of for a major currency pair like the EURJPY, which only happened before during the 2008 panic, for strong fundamental reasons to boot. But we’ve discovered a little something that might turn the bears dreams into nightmares… We’ve already commented about the usual strategy employed by the BoJ (to say a lot and then do a little) and it appears that this time they’ve really surpassed themselves!
The details are as follows: the BoJ recently announced ¥13 trillion of monthly purchases of JGBs and T-Bills starting in 2014, but what has apparently gone unnoticed to the hordes of excited bears is that these purchases are gross (i.e. they include rollovers, that is purchases made to reinvest the proceeds of redeemed securities). Net purchases (which are made with newly printed money), on the other hand, won’t amount to more than ¥10 trillion per year, that is more than 10 times less than advertised (as a basis for comparison, consider that current monthly purchases amount to ¥3 trillion).
Now this is a remarkable sleight of hand! They’ve fooled pretty much everybody into thinking they’re going kamikaze, when in reality they’re going to print one tenth of what they claimed and one third of what they already print. We think that such an achievement might warrant an entry in the Urban Dictionary: “to pull off a Japanese”. Derren Brown stands in awe.
Of course market participants can continue to ignore reality for longer than it appears humanly possible, nonetheless with sentiment in the dumps, more and more stories pointing to the resurgence of the carry trade and extreme CoT readings we remain convinced that the Yen is going to revert to the mean and then some. It appears increasingly likely, though, that this will happen in concomitance with the decline of the stock market, exactly as in 2007: patience is advised.

Softs

Sugar is behaving in a rather bullish manner: after washing out some more weak hands with a new low on 23/01, it immediately reversed up on huge volume and then proceeded to play a new trick on bulls, staging a high-volume reversal to the downside on 29/01 and then going through a very volatile range on 30/01, before resuming its march higher over the next two days before closing the week on a mixed note. Price now sits right just below the 19c$ level and the 50-day simple moving average and both have acted as strong resistance in the past. We suspect however that an upside breakout is imminent, not least because the recent CoT reports showed commercials going net long for the first time since 2007. Sentiment remains subdued, increasing the likelihood of positive surprises.
Coffee on the other hand is showing weaker behaviour: after an initial follow-through from its break out level, it plunged right back to the 50-day moving average and then after a couple of days moved below it. It now stands again just below this key average, with favourable sentiment and CoT readings. We continue to remain bullish, but this latest development forces us to consider the possibility that the bottoming process is not yet finished and that as such further volatile spikes and corrections could occur.

6 comments:

  1. Great blog you've started here, enjoyed reading the first few posts.

    Interesting point on the BoJ purchasing including rollover/reinvestment, have not seen it reported that way elsewhere.

    ReplyDelete
    Replies
    1. Thanks for the nice comment.
      In fact it took me a while to figure it out...The devil is in the details of the announcement:I read it once but did not notice it.Basically they said they're going to buy Y13 trillion a month,but then said the size of the program is going to increase by Y10 trillion for the whole year,which perforce means that most of the buying is made to reinvest the proceeds of redeemed securities:hence very little new money is going to be really printed.
      Unfortunatley I now have to wait for the market to recognize that...My guess is that it'll take a stock market top for that to happen:too much euphoria right now for sound arguments to exert their influence.

      Delete
    2. After reading this post yesterday I went back to the original statements, read them, rather than the usual Zero Hedge sensationalism, and agree with your find. That said I wouldn't be game to step in and take a position in the Yen during the waterfall decline we are seeing.

      Delete
    3. There's no substitute for first-hand research and analysis:as an example after reviewing its inner workings,we've recently discovered that the "recession probabilities" indicator we displayed in our post on equities is deeply flawed and basically worthless...
      Well,in the end all fiat currencies are backed only by the confidence of the public,hence the risk of total sudden collapse is always present.That said,I doubt that record oversold readings,lopsided sentiment and the absence of a real fundamental catalyst will herald the end of the yen.I am hearing too much gloom and doom on it for my liking:all media and news outlets have jumped on the story and various bloggers(whose sense of timing is not exactly uncanny)have recently come out predicting nothing less than catastrophic scenarios.It's even more one-sided and extreme than in equities.A judicious use of options should eliminate or drastically reduce most risks,but in the end to each his own:we certainly do not encourage people to mimic our trades(which even when profitable usually deliver a fair amount of pain and suffering)!

      Delete
  2. Great - and heavy - post you've writted here.
    Are you still bullish on the Japanese Yen after such serious governor elected at BoJ this weekend ?

    ReplyDelete
  3. Thanks for the comment!It's not easy to answer your question in the brief space of a comment,however:
    1)Current data support the bullish case,as there has not yet been any real inflation of the money supply(this can of course change at a moment's notice,but it has not yet happened);
    2)The current and prospective macro backdrop supports the bullish case(for the reasons outlined in the yen post,mainly capital flows and contraction in bank's lending):
    3)The market has already discounted wild intervention,so it's highly debatable to what extent the current developments at the BoJ really constitute a "game changer";
    4)Japan really is its own place:I would not be surprised to see all the inflationary ambitions of Abe die a slow and painful death(I might even go as far as speculating that all that Abe really wants is to score another victory in elections for the upper house in July).Japan's bureaucracy is Moloch and it's not easy to successfully challenge it.Moreover quite a few people at the MoF and at the BoJ understand that the country is on the brink of disaster and that inflation can easily upset the apple cart;
    5)As evidenced by the recent action,it's clear there's quite a lot of hot air below other currencies against the Yen and this is confirmed by both sentiment and positioning;
    6)Speaking of that,I've never seen or heard of a turning point of a secular trend being correctly called by every man and his dog:this would be a first.I have lost the count of how many pundits/media/experts/gurus/bloggers etc. have declared the end of the Yen,whit shorting the Yen being repeatedly dubbed "the best trade idea of 2013":I do not know about you,but I'd feel quite uncomfortable if I were in trade with such company.
    Of course Japan is doomed and it will sooner or later explode,but I suspect it still has a few widows to make before.

    ReplyDelete