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Entries in China (7)


Too Many Cheerleaders?

After doing away with the extremes in my recent post, and advocating a continuing constructive market stance based on country and sector rotation, I thought that I needed to put a face on the anti-thesis of Hussman whom I, perhaps unfairly, stung a little bit. You will not find a more hardened advocate for the bull market than Jeffries' David Zervos and his (in)famous Spoos and Blues call, recently re-wamped into a Spoos and Qs variant. In one of his latest missive, he notes; 

With all that said, I feel just fine about our Spoos and Q’s call for 2014. Adding that to the trophy shelf with Spoos and Chartreuse, Spoos and Blues, Spoos and Duu's and Spoos and 2s feels pretty sweet! So, let's move on to 2015? Is it still a Spoos and Q’s world? Maybe, but there are probably better trades for this year. I suspect we have to pass the QE playbook, and the “No Hater” hats over to Europe. I outlined this idea back on 5-Dec-2014 in a commentary entitled BTDD. Here, once again, is the logic behind moving from a Spoos and Q’s world to what I would like to think of for 2015 as a "Dax and Dollars" world. 

Is this what is called resting on one's laurels? The notable difference between Zervos and the bears, though, is that the former has been right for so long that even a cynic like me would afford him a victory lap. But could it really be that easy, forever? 

Equities have been trading on a background of persistently higher volatility. This is consistent with uncertainty surrounding the timing and nature of Fed policy this year as well as the collapse in global energy and commodity prices. On the latter, it seems to me that we are balanced on a knife's edge between Albert Edward's version of the world where deflation crushes all things risk asset related, and a world in which the huge tax cut to consumers and non-energy producers, and the associated delay of rate hikes, sends the market into the stratosphere. Having recently alienated myself from extremes, I still think that the S&P 500 can do absolutely nothing for a year, even as other markets offer significant opportunities, but it will be a bumpy ride. 

Using my own private random news generator, however, the report (in Danish!) that retail investors in Denmark are warming to the stock market in record fashion, as well as the increasing fondness of Chinese retail investors for "penny stocks" indicate that the stock market euphoria is starting to spread. The market needs cheerleaders to move forward, but too of a good thing is just that. 

Portfolio notes:

One step forward, and one-and-a-half step back is pretty much the state of play at the moment. The key positions are doing alright, and earnings have been kind for now, but performance is underwhelming and risk is starting to feel too high for the reward. We still intend to build long-term EM positions further in coming months, but also plan to add to the gold allocation. 



Keep Rotating

Either weak energy prices, a break down in copper, low iron ore prices etc are a sign of a deflation crunch in the making that will lead to a flush in all things risk related (Albert Edwards style). Or we are in a extermely powerful Goldilocks situation where low headline inflation finally lets the real economy release higher, and the market goes on towards a final mid-to-late cycle tantrum. I think that this is now the key choice that everyone must make before proceeding to call their broker on Monday morning. 

In the Eurozone, margins are getting squeezed and companies are being forced to cut prices to maintain market share. You need to tread carefully on cyclicals here, but on the other hand, many UK/Eurozone retail have already been crushed (and I admit I am donning the kevlar in some of these names). In addition, the market is probably underestimating the impact of private QE and TLTROs at the ECB, which is odd, but a natural consequence of the extreme obsession with when the ECB pushes the button on QE. 

On the US I it seems to me that in a world where you have disinflation and real GDP growth humming at 3% with ZIRP added to the mix, you can probably get some pretty spectacular runs in consumer oriented stocks. I would not discount that even as the run in Spoos seem to defy logic. Basically, low global headline inflation is allowing CBs to double down even as growth is not calamitously negative and this does extend the "Goldilocks" feeling noted above. We need to understand, though, that the UK and US economies are really running the show in terms of growth here ... if they fail, I think we are buggered! The question I am really asking myself now in relation to the puke in oil is how long this can go one before we see real debt distress in one or more US energy HY bonds. And when that happens, will this test the much debated "lack of liquidity in the non-fin corporate debt market" story?

My mantra, though, remains, as it has throughout the year ... sector rotation, sector rotation, sector rotation ... the big story for me this year is not the rally in Spoos but the alpha that you have been able to pick up this year being long/short the right sectors. We are talking risk neutral/adjusted returns of 20-30% on some cross-trades! I would expect the same next year based on what I am seeing now. As for the the perennial debate on the when the crash is coming, why bother. Polemic has done a good job explaining the issues here anyway. A friendly word of advice though, ignore Zero Hedge and similar proselytes to the altar of the Black Swan. It can be a lonely and frustrating experience marrying yourself to such a creature, most of the time it isn't there at all! When the crash comes, you won't be short, and don't be the guy or girl who waits endlessly to be able to say; "I called it!"

A couple of final points on leading indicators and the market in general. Firstly, China's LEIs are tanking here, with narrow money growth looking very weak. This is worrying me. Low commodity prices may be "benign" in one scenario but when you couple it with near-deflation, low narrow money growth, an no FX reserve accumulation in China you lose one of the big liquidity pumps of the last decade. PBoC easing will help at the margin, but the fact that they have to do it even as they have announced the desire to scale down the credit fuelled growth isn't exactly encouraging. 

Secondly, flat yield curves are customarily negative inputs into most cyclical models, but I would honestly strip them out now. The market has basically been conducting a huge Operation Twist in the past year, everywhere! I am not sure this is such a negative signal. But if the Fed is bullied into an aggressive move next year and/or the short end in the US goes crazy in some taper tantrum 2.0 I would obviously need to revisit that view. 

Safe trading out there, the week after giving Thanks is usually a sporty one. So, play it cool and keep rotating.