STPLT Indicator

So much for the renewed attack on the weak EM. Despite wobbles in the morning in DM equities they never really succumbed to any supposed correlations. Serves us right for not trusting our own beliefs that the market is getting these correlations wrong and thinking they would do so again, even temporarily. So no pull back and we had to put back on the longs we had taken off.

We are left this morning hearing the siren call of one of or favourite indicators - The STPLTI. Standing for "Short Term Pushed Long Term Indicator", this indicator is usually a precursor to shallow pocketed investors being removed from the field on stretchers. We have seen it work perfectly in Europe, where speculative positions on the imminent demise of the Euro were bundled up into old suitcases, put in the attic and reclassified as "long term". Which is all well and good if you can afford to have your positions slowly dry and decay whilst you wait for Godot, but in the real world you normally need that cash for something else so harsh truths of cash management ultimately force you to retrieve the remnants, count the cost and start again.

The same has occurred in the gold market (just read Zero Hedge comments) and we would posit is happening right now in the Bitcoin market. But this morning it's the EM market that looks like Downton Abbey on Boxing day, huge trunks being stuffed with all the short term positional Christmas joy of EM demise to be shipped either home or up to the attics because it's over in the short term but will happen again.. Sometime.

TMM aren't immune to STPLT themselves and their own portfolios contain the dusty remnants of stocks that having once been sure fire things have basically become free options with pico-deltas (all that battery technology that didn't make it). But we are all too aware that in this world of short term return measures you need very deep pockets to ride out the "one day" trade. Which of course most people haven't got. So when we hear, as we are this morning, those folks short EM (who two weeks ago were looking for imminent collapse) saying that it's now a "long term trade 'innit", we look for things to start motoring higher and we go long stretcher bearers.

Do we detect a bit of this in Europe too? OMT legality has raised its head again in a big way. Wolfy in the FT and Euro permabear Evans-Pritchard are touting it as disaster but TMM think that OMT is much like a fire extinguisher. Even if they are ruled illegal it doesn't mean that your house will catch fire in the first place nor that you wouldn't use them anyway rather than burn to death (even if the German lodger does prefer self-immolation). Others would suggest though that if it were known that the fire extinguishers may not be used then it's open house for the arsonists.

So if that were the case, the most sensible thing to do would have been for the Germans to collude quietly with Euro central command and agree not to voice any of their debate. So even if they did decide that OMT is illegal, they just wouldn't tell anyone. Just like Reagan's Star Wars, it isn't the reality, it's the possibility that breaks the back of the aggressor.

So why are the Germans being so German about it? Perhaps it's just constitutional process that has a course to take and isn't designed to upset anyone, but like that giraffe being cut up in Copenhagen Zoo in front of the kids, it's a fact of life that has shocked those that don't like to see the messy bits of reality.

Maybe it's time to just go with the flow, rather than booking a lot of space at your local storage company and hoping all those now long term positions don't end up on "Storage Wars".



"Hey Barry, I've found a long DEM/ITL from 1998!"

Today's stuff.

Europe:

Last week's ECB press conference was notable for how hawkish it was relative to expectations. Which has TMM wondering if this is actually a glimpse of a deeper policy that would go a long way toward explaining the ECB’s inactivity. That is that the ECB recognizes that one of the key misalignments in the Euro area is productivity-adjusted labor cost differentials. Even after the recent crisis, Germany labor costs remain very competitive vs those of other Eurozone countries. As long as that persists, Germany will have a high trade balance and negative capital balance with its EU neighbours. In other words, German capital will continue to finance Germany exports.

Now, within a currency union, the smoothest way to normalise this gap is over time via differing inflation levels within the EU over time. In particular, if German labor cost inflation exceeds that for rest of EU for sufficient time, real labor cost differentials will shrink. To us, this appears to be the path the ECB is taking.

If this is the case then it is worth noting that since Germany is much smaller than half of the EU, this policy stance by definition would mean very low inflation in EU ex-Germany, and as a result low inflation prints for the Eurozone as a whole. In other words, the ECB WANTS low inflation prints for the Eurozone as a whole because it signifies that the labor cost differentials are narrowing. The ECB’s implicit acceptance of a long period of below target inflation (via its staff forecasts) is reflective of that. As a result, as long as inflation expectations remain anchored, TMM thinks the ECB is likely to continue its current policy of non-action. Whether inflation expectations will remain anchored, however, is a whole other story altogether. But the lack of action was the removal of one risk support.


US: The ISM print last week was obviously the big shocker, but TMM thinks that it overstated the drop, just as the previous prints near 57 probably overstated the real improvement. Weather remains a large factor clouding many recent data point and TMM thinks it will be some time before that is cleared up. On the bright side, barring a more severe mid-cycle slowdown, there isn’t a great deal of room for the ISM print to fall further from here. But it was the NFP that was the main headline. There was something in there for everyone. Poor headline for the bears and yet stunning households for the bulls. As usual the one that is touted most is the one that supports the following price action. As stocks shot up it was classed "Boomshakalaka"!

Momentum - This week has started though with a dramatic fade in momentum. The rate of rally in US markets into their close had us looking for a reasonable follow through in Asia, but overall it was pretty unimpressive and we were interested to see USD/TRY, USD/ZAR and gold all moving higher. The gold component particularly noticeable. So whilst we remain fundamental bulls for equities and EM the speed of the return of TRY and ZAR moves, as HF bullies give them another beating, combined with the rapid decline in DM equity market momentum has us trimming our longs and playing a turn down for the next couple of days giving us another dip to buy on, but whilst folks love to correlate everything (usually wrongly) in market slides we won't stand in the way today.

TMM also have a friendly bet that if mrkets do indeed start falling today the NFP corpse will be rewrapped in its "bad news" clothes and wheeled out as evidence.

Talking about dips to buy on, here is our favorite chart du jour. -



How exciting for all those lucky bitcoiners! Yet another dip to buy on! We've said it before. Railroads of the late 19C. The ideas are good but that doesn't mean you will make money owning the first iteration. One aside, with gold rallying and bitcoin dumping could we be seeing the "log cabin" switch taking place where large swathes of Montana are switching out of surefire Bitcoin back to surefire Gold? Of course not, but someone is bound to seriously suggest it (buy shares in gold coin retailers in mountainous States).

Oh and finally we just have to give credit to the genius "Gigawipf" who gave us the floppy disc orchestral version of Soft Cell's "Tainted Love" which we make today's "playing out" music.

NFP Number Generator

Team Macro Man proudly present their NFP number generator





Just input your min and max and the result will be as valid as anyone else's. Don't like the result? Just press the "gonna be" button again and it will give you another!

NekNominate Germany

Central banks are like a group of mothy wallets at the bar. Their drinks are running low and they are trying not to be the first to finish so as to avoid getting in the next round. The Fed has already said that as they got the last round, and the one before, they ain't stepping up again. Abe's out too having bought the 1.5 litres of 100 Proof sake which has turned out to be weaker than everyone had hoped. The moaning skinflints of the emerging markets, lecturing socialist drinking equality, can't afford a pot to piss in (let alone to buy the substance to fill it) and the rich Emerging Markets are doing alligator arm impressions and trying to hide their rolexes. So it would be rather honourable for Draghi to push his way to the front and declare that this round is on him.

But as ever it's the teetotal German, who everyone would rather wasn't in the bar at all, holding things up through a combination of moral lecturing and downright threats. But there has been talk from "sources" that the Germans may be willing to get off the wagon and share a sip of sweet sherry.

But TMM would like to go one step further. You may have heard of, or even participated in the Facebook craze of NekNomination which has seen young adults around the world formally participate and publish a form of self abuse that in the past we did quietly in private, namely mixing up the remnants of the cocktail cabinet (or worse) in a pint glass and drinking it.

TMM hereby "NekNominate" Germany to neck a pint unsterilised liquidity, film it and put it on youtube.

It's all EM is it? You sure?

It's all EM is it? Taking the two favourite stress indicators of ZAR and TRY as barometers of EM deficit country woes we can see how they linked to the fall in S+P500 futures. But once their job was done in tipping over DM equities they have delinked.

Here we have a cluttered chart of the last 20 days in S+P500 futures, ZAR/USD and TRY/USD.



And a clearer one with just the ZAR showing



If you think it's all EM there is an obvious trade there for you.

But perhaps this isn't all EM and once again a correlation makes a nice story while it fits, until it doesn't, at which point you need to go and find a new one.

Keep Calm and Carry On.

RBA leave rates on hold. Ok this was as expected but the hawkish swing within the statement with the suggestion of "stability" in rates was a big enough surprise to give AUD a rare lift. There must be some wag out there other than us wondering if the RBA is praying that the odd over-excited EM speculator doesn't decide that as AUS is an EM currency and push it further south than even the RBA would like. But in a way that trade has been done. AUD shorts were well and truly on the 2014 consensus shopping list and it was probably only a matter of time until that trade too took its turn around the back of the woodshed.

That US data was not a nice surprise for TMM and the resultant precipitous move down in US equities was not the most pleasant of rides. But, on a technical basis with S+P500 1775 pierced the technical move lower would have needed some pretty decent bounce elsewhere to counter it. Flag breaks and measured moves should have seen us near the highs of September.





Instead we had the ISM from Hell. Not only hell in the number it produced but also its reliance. Weather weather weather Etc. We never anticipated climate change having the added distortionary function of casting a veil of opacity over all our data. The outlook for this month's data is ... foggy.

UK data however continues to be encouraging with construction PMI topping estimates. We expect the normal barrage of "wrong type of good data" to come from some quarters, no doubt dragging up housing bubbles. Housing is such an emotive debate as in simple terms half the population want prices to go up as they own it, whilst the half that don't, don't so that they can. All arguments seem unwinnable so why bother.

If we hark back to our first post of the year, where we mentioning a wash-out needed to bring the bears back out of their caves, then we have been rewarded in spades. But we are the first to admit that we caught the knife far too early. Remarkably, our dalliance into EM has actually been the least of our pains (with sub-sahara Africa actually showing a profit). It's the DM sector that has hurt us most and so we should step back and have a look at how the land lies today.

A quick check on the EM barometers -




Stabilisation and even recovery with TRY and HUF up 1.5% each.

So the day starts calmly after momentum and fear gauges were running high yesterday (highest volume of stocks traded on NYSE yesterday since the Flash Crash). Now one of the products of fast moves in markets is to see short term players applying long term arguments to support their short term positions and the preponderance of EM tourists is interesting. As we know tourists need momentum as their attention spans are limited and carry is a killer in slow EM markets (don't be short a quiet market).

TMM imagine that their is bemusement in the camp of the goldbugs. Here we have EMs going to pot, US markets tanking and yet, their trusty crutch of Gold has done pretty much zip. (below is gold vs SPX)







Which leads us to believe that Gold is more concerned with continued tapering rather than asset meltdown. So this might suggest that markets are pricing slowdown in US markets and no slow down in tapering. But isn't that not what Yellen is about? Surely if growth turns then the Fed will respond (as we have said before). So in a bizarre twist perhaps the EM's are praying for a US slowdown!

Meanwhile debate over the responsibility of the Fed to act responsibly continues with a call for actions to be coordinated. Which To TMM appears pretty rich as you have a large group of countries calling for coordinated action from one of the very few countries that is willing to take any action, whilst they themselves do nothing. Echoes of "Benefits Street".

We are keeping calm and putting some carry on, but we are also fully prepared for another trip to the proctologist.

TMM Stop Loss Management

TMM stop-loss order management - Hi-tech stuff.



The sudden halt to the tanking of the markets has left us lucky to be alive.