1993-1995 analog? "Check". And now WHAT on the KRW?

On Jan 14 I posted on Twitter that KRW, MXN would be targets of the Japanese monetary sloppiness. It has started already.

So...

I'll change this/update this post later with more info as right now it is 11h30pm and I'm still at the office.

** I do not believe there'll be "1997 Asian Crisis" as many things are different structurally, but it seems to me there's a rationale for a gradual policy induced, activity pushed, devaluation of the Korean Won.

----------------------------------------------------------------------------------------

Is the South Korean Won a short?
Versus who?

I think so. USD anyone? Or other security/currency?

In mid 1990s many east asian currencies (remember the Asian Tigers?) were somehow pegged to the USD.

Good paper from 1999 with lots of details, interesting read.

Joseph Whitt [macro econ from the Atlanta Fed] - The Role of External Shocks in the Asian Financial Crisis

At the time policy changes pushed the USD higher versus the JPY and, while these smaller asian nations, with business models based on increasing exports and investments, were roaring. Investment and capital flows were inwards and in large amounts, their currencies went up in value versus others and versus the USD, which was stronger versus a strong tech-competitor, the Japanese Yen.

So where was SK then?

Exports as a percentage of GDP back then was like that and is now like this:

So if you do a little math, simple, to say, "When, outside of GDP drop (2008?), was the necessary change in Exports so low to make the yearly surplus go to 0% of GDP?". Find below. Of course that Imports could also drop, but with such a strong currency imports are likely to actually increase while exports decrease. That's a crush on Trade balance.

So... chart below: never! was the necessary change in Exports relative to Imports, due to their massive share of GDP (very open economy, huh?), so low for trade capital to get to 0.

So let's look at what happened back then with Exports... and what precipitaded the slow down, then reduction in capital flows:

And then what happened to the trade surplus... Back then the Surplus was actually a deficit, but with a rising KRW it got worse and worse.

So far the Trade Balance has been healthy and just some slow down in that as domestic activity has slowed down too curbing imports:

And that's why economic activity has slowed and there's little growth:

And inflation, helped by a stronger currency, has been so low...

Basically I expect rate cuts from the Bank of Korea due to basic things:
- reduced yields in local currency that will perhaps stop capital inflow into korean securities / bonds: less carry
- stimulate domestic activity through lower yields for corporates / investments

The BOK should soon start being more aggressive on currency interventions like so many other central banks have been: Fed, SNB, BOJ, Brazilian CB (Bacen), others, others..

In this case... a massive trigger for the BOK to act faster or with more intensity, either cutting rates or changing FX Swap position regulation for local banks or whatever is that South Korea has a export-mix which is very similar to Japan, whose currency has depreciated remarkably in the past few months: tech products, robots, TVs, vehicles. While importing raw materials, crude oil, foodstuffs.

Terms of Trade:

So... basically this is an objective start. Their current account has been explosive because 1/ Trade Balance continues very strong due to reduction in Imports and 2/ safe-haven flows into a country where rule of law applies, where productivity growth is good, where inflation is controlled and the financial system seems alright (or not?).

I need to elaborate on risk-reward, carry, etc, but I haven't had much time as I am focused in energy commodities right now. But this came to mind.

A few more charts. I'll update this post sometime this week with Current Account #s and whatnots.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

To a great Twenty-Thirteen

Twitter, which I've used more and more often, left me no choice.
I needed more room to write a longer post here at these silly blog pages.

So 2012 was a fantastic year. I didn't write much here (or anywhere).

But... 2012 was great fun!
I made some friends in the markets. Some sent me e-mails, some were met through Twitter or the DeMark (which I'm learning...) Chat on Bloomberg.


The world is changing in terms of how people interact and build communities, etc.

Quite interesting to see a variety of people, from different backgrounds, managing different amounts of money, from different sources, in different markets and all of them exchanging information, charts, research pieces. An older, more experienced guy I know asked me "Why do you do that? What do you gain? Why do you write on twitter or on the blog?".

The answer is rather simple for me.
It costs me very little. Time? Yes. Exposure which can be negative if I am proven wrong? Well. Shit happens. Managing money was never supposed to be easy.
And the feedback is fun and useful. And the personal reward of getting to know some interesting characters is tremendous. It's fun.

So...
For those who've made themselves present this year: let's rock and roll in 2013.
We live through very challenging times. I strongly believe it'll become even more challenging. Perhaps in 10 years! But helping each other out certainly pays. At least for the laughs!

Let me finish 2012 with wishes of health and fun for everybody. The rest is secondary.

So, to a kick-ass 2013.

Mute - Atrophied
http://www.youtube.com/watch?v=C0rjjVdSWks

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

How Hard Is It to Make Money?

Find below links to a few very interesting pieces.
They basically touch topics such as:

1) value-destruction in the money management industry,
2) our belief that we are better than what reality actually states (that, on average, we kinda suck),
3) people rely much more on trust than they rely on logical reasoning and facts.


Here is a link to a December 2011 letter by Absolute Return Partners' Niels Jensen on wealth destruction in our industry:
Niels Jensen - Absolute Return Partners - The Facts They Don't Want You To Know (Dec2011)

Here is a link to a FT Alphaville article about Niels' piece: 05 Dec 2012 - FT Alphaville - Spot The Dog let off the Leash

Daniel Kahneman - Mad Money on trust / logical reasoning x action

A Foolish Interview with Michael Mauboussin (chief investment strategist at Legg Mason Capital Management and adjunct professor of finance at the Columbia Business School) touching a mix of these topics.

Here is a screenshot of "Hedge Fund Market Wizards" (Jack Schwager). Chapter 10, interview with Martin Taylor, EM money manager.

So what am I doing in this cloudy Sunday afternoon? It certainly IS cloudy or I wouldn't be writing a blog entry on such a dangerous topic considering the beach is a few blocks away.

Why dangerous?

Because I am putting my neck on the line. A lot of money managers still think too highly of themselves, their methods and their image even if not having superb risk-adjusted returns. In my defense I am only stating facts. Not comparing myself to any manager or stating that I am any successful. I am just letting the lady reader know that I am aware of how hard it is to make money at all times and that the road to good risk-adjusted returns is deeply challenging.

I'd ask the reader to first check out all the pieces mentioned above before continuing reading. They state the facts and findings and I just want to add a little personal touch, in a blunt kind of way. And that is the dangerous point.

Again, bear with me if I sound confusing as I usually am. These topics touch sensible and interconnected matters.

Managing money is difficult. Beating benchmarks is difficult. Remaining alive for many years is difficult.

From Niels' piece:

"Using data from 1980 to 2008, the authors calculated the compound annual return for the average hedge fund to be 13.8%, easily outperforming more traditional asset classes over the period in question. This number makes hedge fund managers look like superstars when compared to traditional fund managers and is used by the hedge fund industry as one of the key reasons why everyone should invest in hedge funds.
Now to the naked reality. The best performance in the hedge fund industry came in the early years when assets under management were much smaller. The authors adjusted for this by calculating dollar-weighted returns instead; i.e. more recent returns when assets under management have been much bigger carry a higher weight than more distant returns when assets under management were negligible. The dollar-weighted number is thus a much better proxy for actual profits earned by investors in hedge funds. For the whole period 1980-2008 that number is 6.1% as opposed to the 13.8% headline number. Hardly blowing your socks off!"

I am writing about this because I strongly believe that the investment industry in Brazil is at a cross-roads.

Two major trends seem to have lost a lot of its power: the fall in nominal and real interest rates and the cheapness in relative (versus other countries) equity valuation. These 2 strong trends that had been ongoing since the late 90s/early 2000s after Lula was elected president and the volatility of inflation and its level has decreased were the fuel for another super trend which was the rise of the local currency, the BRL, versus the dollar

The multi-strategy and long-biased equity industry have had these 3 tail winds in the past 10 years and now I see them coming to a pause, especially considering the amount of securities available versus the amount of liquid funds searching for yield and the much lower nominal yields.

Brazilians aren't used to such low nominal interest rates and there will be a flood of capital into a rather young investment management industry. Managers have little experience in allocating capital into different markets. For example, during the period of 2010-2011 the multi-strategy (Multimercado) industry didn't show great performance. Coincidence or not the Ibovespa peaked in 3Q10, there was a change in leadership on the brazilian Central Bank, more government interventions in the FX market and there was a change in legislation that enabled funds to allocate some of their capital into off-shore vehicles which are used to place bets in foreign markets, such as in equity index, commodities, interest rate and currency futures. When did the local industry got back on its feet and performed very well? It might be a coincidence, but right when a new interest rate easing cycle begun in August 2011. In 2012 many funds have shown superb performances which, last I checked, had a 95%+ correlation with January 2014 DI (interest rate) futures. Should we dismiss these results because most of the funds seem to have been riding the bet on declining yields? Absolutely not. Absolutely no. A lot of merit goes into that. But I think this is certainly something that the local investor should keep an eye out for.

A few money managers in the country that had most of their performance derived from very concentrated bets had raised a LOT of capital recently and I think it will be very tough to deliver performance in the future unless they find different drivers than the ones from 2002 until recently.

Now comes the tough part which is really differentiating yourself from the crowd. The stage when you will have to look for opportunities in different niches. The stage when leverage on working-strategies of the past (leveraged beta) might not work. Just like it happened with the bull market in bonds and equities from 1982 in the US. In Brazil we had a commodities boom that worked in the past 10 years and macro stabilization (monetary and fiscal policy normalization, political goodwill increased considerably).

So.... how will the brazilian industry perform from here relative to the CDI (local benchmark, not an absolute return industry which is much fairer with the clients than the US absolute return industry) with a high concentration of assets under a few large managers (for the size of the local pool of securities) that grew very fast in the very recent past and with, I might be wrong on this, these 3 majors trends pausing?

Out of curiosity I would really like to see the performance breakdown of the top multi-strategy funds in the past 5 years. I think this should be the main question asset-allocators need addressed when deciding where to invest from now on.

...... to the next topic:

So, the whole idea for this entry originated today in a tweet from a colleague I met... through Twitter. I was looking for people who used DeMark technical indicators and some of my followers on twitter suggested his feed.

We exchanged a few messages about markets and when I went to NYC in September for a global macro conference we met for a chat over a few beers. Today he's online mentioning he trades off of technical indicators and that his employer wouldn't acknowledge that, meaning he pays for his chart-tools off of his own pocket, while using it to trade the company's money.

Where do I want to get? His tweet was just a cue into the pieces I mentioned above.

Money managers derive their returns from different investing or trading approaches. Some are well regarded. Others aren't.

Be them simple or not. You will get Fund Presentations with detailed descriptions of what their investment process consists of:
- what their macro backdrop is and how they got there
- how ideas are sourced and screened
- how market-timing is triggered- what their risk-management policy is
- how hedging is picked, if at all, etc

If equity long-biased Manager A picks the 5 bullet-points above and slap them on a nicely-done Powerpoint presentation I dare to say he has a better chance of raising funds or maintaining his client base after a few quarters or years of underperformance. Now if I tell you Manager A is married, has 2 kids, a PhD in physics from an Ivy League school and a beautifully architected office in a top-class neighborhood you should agree with me that the odds of fund raising or maintaining his client base after sub-par performance are even higher.

Martin Taylor points out the fact that Mark Mobius, a highly regarded "investment guru" in Emerging Markets for Franklin Templeton has underperformed the MSCI EM index for years but still manages billions of dollars in such strategy. How come? I'll leave it for Martin to opine: "The world of investment advisers is heavily influenced by media image so they suck their clients into this stuff.".

If I tell you that my Twitter friend trades off of DeMark technical indicators, spending 95% of his time analyzing charts, support lines and Sequential Countdown signals (then spends the remaining 5% of his time reading about actual fundamentals just for fun) I have a strong conviction that you would prefer Manager A. At least before letting you know what my friend's performance is relative to Mr. A's.

Does this make any sense? Empirical evidence from Kahneman and Niels' report cited above shows that this behavior is a reality.

Simple:

People care a lot more than they should about how their money managers look on paper (what they say their investment process is, what their resumes are, how wealthy they already are) than they care about their managers' returns against simple benchmarks.

People usually trust managers who appear to be very sophisticated. Managers who appear knowledgeable about macro economic matters, policy and companies' fundamentals will often have an advantage over a blunt guy who says he uses charts and strong risk management or 'law of large numbers" (ie: selling option premium systematically over time in a variety of a-priori uncorrelated markets which is simply the same as buying a diversified book of bonds. Same final pay-out structure: paid par, positive carry, risk of default) to derive his returns from.

We're here to make money. And, above all, we're here not to lose money.

Sorry for such a messy post. Got tired of writing midway (it's been 3 hours on it), but wanted to put something out despite its form.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. Email: theintriguedtrader AT gmail dot com

Daniel Kahneman - Mad Money

As I am very agnostic about models, theories, etc, I find this piece superb. I believe history is one of the best guides out there for us investors. So... I strongly recommend reading "Thinking: Fast and Slow" by Daniel Kahneman.



As I've said at the very first piece of this blog. "The Tail Chaser" was started so that I could a/ organize my investing thoughts through writing and 2/ making it public so it would feel awkward to actually write bullshit or non-sense. It is discouraging to write things up and then doing the opposite.


I believe that a very simple way for you NOT to make irrational decisions, in investing, is through publicly exposing your trades and the reasons backing them trades. Doing that you quickly think twice before acting. You don't want to feel stupid. You don't want to say "Buy" and then actually sell.

So this blog serves as discipline.




Now to Daniel's article.

Mad money

Alasdair Palmer

Nobel prize winner Daniel Kahneman on the irrationality of our financial system – and the difficulty of fixing it

 

Daniel Kahneman is a very modest man — amazingly so for someone who has won the Nobel prize in economics. When I met him in the lobby of a London hotel, he never used his very great intelligence in the way that some very distinguished economists do, to bully or to intimidate. ‘But then I am not an economist,’ he says with a mischievous smile. ‘I am a psychologist.’

Prof. Kahneman smiles a great deal. His eyes sparkle behind his large spectacles. His cheeriness is infectious, but it is also disconcerting, given that he is not optimistic about humankind. He thinks, for instance, that it will be ‘miraculous’ if we manage to do anything to stop global warming. ‘Let’s suppose that the scientific consensus is correct: global warming is happening, and it will have some catastrophic consequences. By the time it becomes obvious to everyone that it’s a danger, it will probably be too late to do anything that will be effective in combating it. As a species, our brains have just not evolved to deal with threats whose effects will be felt in what, for us, counts as the remote future. We respond to them by ignoring them.’

But surely, I protest, if global warming is really happening, we can be persuaded by reasons and arguments to take it seriously, and to do what’s necessary now to diminish the effects that will come later? Kahneman smiles indulgently. Those eyes sparkle. ‘The way scientists try to convince people is hopeless,’ he states with a broad grin, ‘because they present evidence, figures, tables, arguments, and so on. But that’s not how to convince people. People aren’t convinced by arguments. They don’t believe conclusions because they believe in the arguments that they read in favour of them. They’re convinced because they read or hear the conclusions coming from people they trust. You trust someone and you believe what they say. That’s how ideas are communicated. The arguments come later.’

But he is sensitive to arguments, tables, evidence, figures, etc — so why shouldn’t the rest of us be? Again he smiles. ‘I am the same as everyone else. If I ask myself, &"Why do I believe global warming is happening?”, the answer isn’t that I have gone through all the arguments and analysed the evidence — because I haven’t. I believe the experts from the National Academy of Sciences. We all have to rely on experts.’

He elaborates: ‘If you accept that view of belief, then you have to change the way science is communicated to the public. You have to recognise that people will accept scientific conclusions from people that they trust, not from anybody. Arguments and evidence are much less important than trust.’

Kahneman takes a very dim view of human rationality. Studying the way that people actually make decisions — as opposed to the way we would like to make them — led him to reject an idea that is central to the way that most of us see ourselves. We think we can be relied on to make rational decisions that will advance our own best interests. Economists have made our rationality the focal point of their work: the mathematical proofs of the efficiency of the market, so central to current economic thought, depend on the assumption that individuals will make rational choices.

But in a series of very careful experiments conducted on hundreds of people with Amos Tversky, Kahneman showed that it just isn’t true. We’re not reliably rational — in fact we can, in many circumstances, be relied on not to do what will most effectively advance our own interests. 

This is not because we’re too moral or too nice to be selfish. It’s because we’re too stupid. We make silly mistakes in thinking about probabilities and risks. We think that the only factors that are going to make any difference are those things that happen to spring easily into our minds at the particular moment we’re making a decision. We are swayed by considerations that are utterly irrelevant to the matters we are trying to make decisions about: for instance, a sudden cool breeze on a hot day will lead an interviewer to think more favourably about the candidate he happens to be interviewing at that moment, and if you ask a judge to write down a high number before he enters court to sentence someone, he will end up handing down a longer sentence than if you had asked him to write down a low number, or none at all. 

More fundamentally, we all tend to be wildly over-optimistic. Many of our institutions are, in Kahneman’s view, monuments to our irrational optimism. Take the finance industry, a large portion of whose business consists in taking people’s money and investing it for them. Many of us entrust a portion of our savings to someone in a finance company who promises to provide us with an above average return. It isn’t only individuals who do this: institutions such as pension funds and charities do so as well. Finance companies charge fees for taking your money and investing it for you — but they almost always fail to keep their promise to provide better returns. They frequently lose money for their investors.

So why do so many of us entrust them with our money? ‘It is not a rational decision,’ says Kahneman. He thinks the explanation is partly that we’re over-­optimistic about the skills of professional investors, and partly that we’re too intimidated by the process of professional investing to figure out it doesn’t work, and too worried by the prospect that, if we invest our money ourselves and we don’t do well, we will have no one else to blame. 

Kahneman was once asked by a finance firm to help its executives allocate bonuses more accurately. The firm wanted to be sure that it was awarding the biggest bonuses to the people who were best at investing: they picked the stocks that performed best, and so made most money for investors. Kahneman analysed data going back eight years on each fund manager — and found that, over that period, not one of them achieved better results than would have been achieved by chance. You would have done just as well as the professional investors, and sometimes better, had you decided what to invest in by rolling dice or flipping a coin. 

To Kahneman, it was obvious that the firm was rewarding luck as if it were skill. His research should have led the firm to stop paying bonuses, or at least to a radical reassessment of how they were paid. In fact, it had no effect at all: the firm’s managers thanked him and then ignored everything he had said. Both the executives and the fund managers continued in exactly the same way, as if nothing had happened. And so did their investors.

Should we conclude, I ask him, that the whole finance industry is based on a con trick? Kahneman hesitates. ‘Well….  They believe in what they’re doing. And they know about taxes and accounting and balance sheets. They have solid knowledge to that extent.’ He smiles. ‘It just doesn’t help them pick stocks that will do well.’ 

So the correct conclusion is that professional investors are not insincere. They are deluded. ‘Over-confidence is the phenomenon, much more than trying to con people,’ responds Kahneman diplomatically. ‘Professional investors actually believe that they are very good value for money.’ But they are, almost every one of them, wrong about that. As we are to believe we will do better by entrusting our money to them. But believe it we do — and our conviction is amazingly resilient in the face of overwhelming evidence that it is false. 

Overall, Kahneman’s research into the way we all tend to fall short of being reliably rational ought to have caused the economics profession to reappraise one of its fundamental assumptions: the assumption that we all make rational decisions, all the time. But despite his Nobel prize, Prof. Kahneman’s work has had almost no effect on the bulk of the profession. He has got used to being praised and then ignored. 

‘The reality is,’ he says, for the first time with an expression closer to a frown than a smile, ‘that it is impossible to do conventional economics if you incorporate irrationality. The maths becomes too complicated.’ 

Incorporating irrationality into economics would also have the consequence that much of the theoretical edifice that economists have built up over the past 60 years is useless, at least as an explanation of how the actual economy works, and thus for predicting how it will behave. Few of those who have made careers constructing that edifice want to admit that it is wrong at the most basic level. So the vast majority of economists have sailed serenely on, assuming the rationality of the decisions made by the people in the marketplace, and assuring us all of the ‘efficiency’ of the results.

With hindsight, the irrationality of individual decisions was very obvious in the build-up to the crash of 2008, when banks were providing huge loans to people who had no chance of paying them back, and when many people working for the finance industry did not understand the inherent risks in many of the products they bought and sold. Alan Greenspan — the former head of the Federal Reserve, and responsible for setting the US interest rates at a level that blew the bubble ever bigger — admitted that he had been ‘shocked’ to discover that banks and finance houses did not act rationally in their own self-interest. ‘I thought Greenspan was being extraordinarily naive when he said that,’ Prof. Kahneman comments. Naive or not, Mr Greenspan was doing no more than give voice to how most economists thought then, and how most of them think continue to think now. And it shows the extent to which Kahneman’s work has yet to penetrate orthodox thinking on economics.

But in a way, that fact is simply further evidence of that he is right about the ubiquity of irrationality. ‘We’re all prone to make some very simple errors when we try to work out what to do,’ Prof. Kahneman stresses. ‘And we continue to make those mistakes even when they are pointed out to us.’ So what’s the answer? ‘I don’t have one. I don’t have a recipe for avoiding the errors we’re all prone to, and I don’t think there is one. It’s the way we are. I make the same mistakes. I try not to. But I do. I’m no different to anyone else.’

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

Where IS the rebound?

Haven't posted in a long time.

I will try to write a quick one, so bear with me if the ideas don't fully combine into cohesion.

Technically:
- On the SPX we're at high RSI levels on the daily, weekly and monthly charts.
- On the SPX daily MACD, Stochastics look bearish to me.
- On the SPX daily the RSI trendline has been broken and from a very high RSI level.
- On the SPX Bollinger we're still very close to the upper-bands on daily, weekly and monthly basis
- Implied volatility is very low in Equities and FX
- Credit spreads (corporate and sovereign CDS!) are very, very low.
- Realized volatility has been very, very low.


Now fundamentally:
- When we had QE1, QE2, OpTwist 1 SPX earnings growth was on average healthier. Right now we're looking at 3Q12 YoY being negative
- When we had QE1, QE2 and OpTwist 1 markets were oversold, multiples were compressed (higher earnings and lower asset prices)
- Top-line revenue has missed in the last 2Q12 earnings season 64% miss / 36% beat, while bottom-line actually beat ~62% x 38% miss or so (can't remember). Trailing trend doesn't look too sharp.
- European austerity wasn't as deep as it is running right now.
- Chinese growth was better than it is right now.
- There was no US Fiscal Cliff, as large as it seems right now, being expected.


My thought process here expected better economic indicators for August and September considering the rally started in late July after Super Mario's bumblebee speech, FOMC's very dovish posture, BOJ's attitude and all the easing that already occurred in many regions/countries, but so far I am not really convinced the rebound is firmly in place that warrants buying at current market levels.

Let's go through a few economic indicators now instead of focusing on market price signals:
- recently released Dutch producer confidence hit fresh new lows. This is a very open economy, trading hub in Europe. Like Belgium whose confidence numbers are struggly to leave recent bottoms.
- French composite PMI made new lows, bringing the Eurozone composite downward with periphery's PMIs even though we saw a large uptick in the German data.
- The German PMI rebounded sharply, but curiously enough, the IFO made fresh new lows, including its expectations component.
- US Jobless Claims 4wk average is at 7-week highs.
- US Emergency + Extended Benefits, YTD, are down around 1.4mln while 2012's NFP additions total some 1.014m. So far not a lot of income growth can get out of that.
- The latest US Industrial Production, Core Retail Sales and Employment #s were very poor.
- Markit US PMI was lower than the previous even tho we saw a major rebound in financial assets and reduction in risk-premia, etc.
- The Chinese Markit PMI budged only 0.2 and is still in deeply negative territory. Output reduction was barely offset by important New Orders and New Export Orders which showed better readings.
- Yes, Taiwanese Industrial Production in August was pretty strong, better than expected. That's a plus as this is a very open and cyclical economy.
- But grobal growth has still to improve. August exports in Brazil, South Korea, Eurozone, China and many other spots are yet to show strong signals of a rebound.


OMT in Europe, QE3 in US, greater easing by the BOJ, etc helped a great deal bringing markets to current levels.

What I am now afraid is that pushing it higher will cost more, much more than market expect unless there's a pullback or a longer period of consolidation that will leave time for economic growth to show its teeth.

But I wonder how fragile charts look and how brave will be dip-buyers in case markets fall another 2-3%.

I can easily spot a 2-3% drop in equity prices making people uneasy and actually bringing all the squeezed-out bears out there.
I can easily see a much larger drop in risk-asset prices if the next ISM comes lower than expected and below 50 or the US Non Farm Payrolls come in below 50k, with weekly Jobless Claims climbing above 400k or so.

There isn't fiscal ammunition in Europe to actually turn around much of their depressive economic state and in a balance sheet recession downward spirals are very dangerous.

Food for thoughts.
Only had 15 minutes to write this as I am now heading to a spanish bar for a few drinks. And am late already.

Sorry for not being able to update trades/portfolio, but that won't be possible in the foreseable future as time has been as scarce as deposits in spanish banks.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

No left tail for a while

Two weeks ago we had:
- Markets nervous because if Spain and/or Italy had to access the EFSF/ESM for help there would be limited firepower as they’re too big for the previously available funds.
- History has shown that when the limit and scope of help is defined a magnet is created and markets would push prices to the worst-case boundaries as has been the case in the past 3 years in the Euromess, followed by some kind of intervention

What has changed:
- Now Italy and/or Spain will, if markets force them to, apply for the rehab programs (EFSF/ESM)…
- Which will force them to adhere to conditionalities…
- Which a/ don’t seem to be too dramatic (or away from what’s priced in…) and
- b/ which are pre-requisites for Germans to accept the ECB’s posture of using much larger (possibly unlimited?) firepower alongside the already committed capital of EFSF/ESM buying bonds IF NEEDED

For now (the next 3 minutes I guarantee) the price action in banks + ITA+ESP bonds has been very good (equities up, bonds bull steepening), meaning there is some time before doubts arise.
As was the case in 1Q09 in the US… without limits in firepower (TARP/Maiden Lane, TALF, QE1) we’re possibly looking at a game changer here, at least for some time…

Triggers for markets to actually reverse course and go down in the near term are:
A/ global activity being MUCH worse than expected (as a lot of it is already priced in if you just look at other equity indexes other than the SPX or the DAX)
B/ the conditions under which Italy/Spain would be put under were too severe (unlikely in my humble opinion), cutting into economic activity too drastically and offsetting any improvement in bond yields and credit transmission…

To watch are the same variables: Target2 Claims, Deposit Flights and banks’ equities and credit. These are the ‘convertibility premia’ Super Mario pulled as excuses to get the bond buying within his mandate.

To a good weekend.
TIT

A must write-about theme: bytes

Just reminding myself how the world economy is changing.

I must share my views about this.