Black Gold v. Yellow Metal: Macro-Strategy Perspective Reply

As if it were a segment in “Orange is the New Black,” the price correlation between Crude Oil (aka Black Gold) and the Yellow Metal continues to swing like a chandelier in a windy mansion. Below extract courtesy of Neil Azous, from today’s a.m. edition of Rareview Macro’s Sight Beyond Sight summarizes the current correlation in a crisp way…

Neil Azous, Rareview Macro LLC

There are two assets being watched closely right now – Brent Crude Oil and the Euro Exchange Rate.

Firstly, Brent Crude Oil is showing the largest negative risk-adjusted return in Commodities. This morning, the “barrel” has broken through yesterday’s low and overall has now retraced over 50% of the Iraq/ISIS move higher seen in June. Below is a regression analysis between Brent Crude Oil and Gold for three time periods related to Iraq/ISIS: Before, Height, and Current.

Gold was trading at its lower point on June 2nd and the correlation (i.e. red asterisk on chart) to Brent Crude Oil was negative. On June 19th, the correlation was the most positive when Brent Crude Oil was at its highest level. Today, the correlation is on the cusp of swinging back to negative territory. We highlight this because the same pattern has been seen before, with the height on March 14th and after the Ukraine-Russia crisis. And what happened next? Gold dropped by -10% over the next 45 days.

By the way, it was reported that assets in the SPDR Gold Trust (symbol: GLD) rose +1.4% to 796.39 metric tons in the two sessions through yesterday. To put that in context, that is the largest two-day gain since November 2011 and it is just one example of the new found retail length in Gold. The other was in CFTC futures positioning which professionals use to gain exposure.

Macro-Strategist Says: Funeral Services for Volatility Premature; Second Half Different than First Reply

Below excerpt courtesy of this a.m.’s edition of Rareview Macro’s “Sight Beyond Sight” macro-strategy newsletter.

Neil Azous, Rareview Macro LLC

“….We start the second half of 2014 well aware that over the last few years the second half of the year has had little resemblance to the first. Over the last three years, for example, we saw major changes from the first half to the second.

• 2013: Taper/no taper whipsaw in US Treasuries and Emerging Market Foreign Exchange
• 2012: Draghi “Do Whatever it Takes” and Japanese PM Abe’s Three Arrows
• 2011: EU debt crisis and US ratings downgrade

Therefore, we remain very open to the argument that something no one is thinking about could surprise the markets. We don’t know what that might be, and we not sure anyone else does either. By definition, it will be something way off the radar right now.

Someone asked us yesterday what our best fundamental reason is for continued US equity strength and low volatility.

Our answer is that conventional wisdom argues that the market is six months forward-looking. Six months from today is the first day of 2015. The consensus S&P 500 operating EPS for 2014 is $119 and with the last price ~1960 the P/E is ~16.5x. The EPS consensus for 2015 is $133. If the conventional wisdom is correct, in that the market is a discounting mechanism six months in advance, that means the P/E just dropped below 15 (i.e. SPX last price 1960 / 2015 EPS 133 = 14.7x) starting today. This does not take into consideration that consensus expectations are too high for next year or that this year could still be revised lower. Even so, the key point is that the argument that the market is overvalued just became weaker.

This is important to recognize as volatility is first and foremost driven by earnings. So unless there is meaningful deterioration at the corporate operating performance level, volatility can stay suppressed as investors remain very conditioned to geopolitical or exogenous shocks, and they don’t have much impact on the market.

Wall St Execs Do The Flip-Flop While Being Grilled In Washington; Payment For Order Flow Exposed Reply

Conflict of Interest is Of Interest to Senate Panel Members “just learning about” industry-rampant Payment For Order Flow Schemes . Market Structure To Be Re-Structured?

Excerpts below courtesy of The Wall Street Letter’s on the spot coverage of the U.S. Senate investigation of Wall Street’s affection for high-frequency trading aka HFT, and with specific focus on order routing and execution practices, particularly with regard to kick-back inspired payment for order flow schemes, “maker-taker” rebate schemes and likely conflict-of-interest issues within the context of brokers such as Charles Schwab and TD Ameritrade (among others) failing to ensure so-called “best execution,” a role that necessarily precludes receiving payment for directing customer orders to any counter-party other than the one offering the best available price for that sized order at that point in time.

Here’s the WSL story as of 8 pm EST on the first day of testimony from members of the securities industry; no surprise to note certain executives take the ‘walk backwards’ and no longer defending the practices that have enriched their business models:

Market participants commenting in front of Senate’s Permanent Subcommittee on Investigations hearing into ‘Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets’ noted that the SEC needs to re-examine or dismiss the maker taker rule and subsequent rebates as they’ve harmed consumer confidence and efforts to provide best execution.

Tom Farley, president of NYSE, noted to Senators Carl Levin, John McCain, and Ron Johnson that the maker taker model has led to a proliferation of sell-side broker dealers executing orders on exchanges that are offering induced rebates to create liquidity, rather than sending orders that offer the best execution.

Fretting About The Fed’s Plan to Impose Exit Fees On Bond Funds Reply

MarketsMuse Editor Note: Below excerpt from this a.m.’s edition of macro-strategy newsletter Sight Beyond Sight..

Neil Azous, Rareview Macro LLC

While commentators largely ignored the Financial Times article released yesterday it garnered a fair amount of attention by investors in our circle. The article stated that “Federal Reserve officials have discussed imposing exit fees on bond funds to avert a potential run by investors, underlining regulators’ concern about the vulnerability of the $10tn corporate bond market.”

Here is one interpretation on why this trial balloon was sent out. Please forgive our attempt at satire; we mean to inform, and hopefully amuse, not insult.

Rick at Blackrock:  Hi Lloyd. Our “Yellen Index” is flashing imminent Fed tightening. We can’t tell you the inputs but this is our internally used proprietary index and is made up of the economic statistics she most favors and right now it is saying the Fed should already be tightening.” (FT Article)

Lloyd at GS:  So what does that mean to me Rick? We are an M&A and asset management shop now.

Rick at Blackrock:  Whatever helps you sleep at night, Lloyd. I need a bid on a 16 billion corporate bond portfolio ASAP.

Lloyd at GS:  We are not in that business anymore due to new capital requirements, balance sheet constraints and regulation.

Rick at Blackrock:  Lloyd, we go back a long-time and we pay your firm nine figures per year. I need a bid now.

Lloyd at GS:  What do you think this is Rick? The 2004 interest cycle? Send over a list and we will work it on an agency basis.

Rick at Blackrock:  Screw you Lloyd. I am calling my friends at Bank of America.

One hour later and a repeat of the same call…

Risk OFF : A Macro Strategy Rare View From Rareview Macro Reply

Below extract courtesy of Neil Azous, founder of Rareview Macro LLC and publisher of Sight Beyond Sight, the macro-strategy newsletter.

Neil Azous, Rareview Macro LLC

Professionals Actually Sensitive to Weaker Risk Assets Over The Next Few Days

• Model Portfolio Trade: Short NASDAQ
• Partial Switch ofFunding Leg of Carry Trade Impacting Risk Assets
• China MSCI A-share inclusion update, CNY Observation, & Data Surprise
• Our Core Position – Short EUR/NOK – Gets Added Boost from Paid Forecaster
• Gold & Real Rates
• Eric Cantor

Model Portfolio

The model portfolio sold short 132 (~10mm) NASDAQ futures (symbol: NQM4) at 3788.25. This is the first time in a long while that we have added directional downside exposure. We are open to adding to this position but would also not hesitate to remove it quickly if it turns out to be wrong.

Trading Professionals Disgusted By Today’s Data: A Rareview Macro Musing Reply

Below extract from this a.m. edition of Rareview Macro’s Sight Beyond Sight…

“….The key objective we laid out at the end of April has, we are pleased to say, now materialized – don’t sell in May and go away,  as the S&P 500 will trade higher to a range of 1920-1950. What is needed now for our forecasts to be fulfilled completely is a trend change in the US Dollar and greater evidence that the CAPEX profile will accelerate.

On the margin this morning’s US employment data did two things:

Neil Azous, Rareview Macro LLC

1. It mitigated some degree of the concern at the Federal Reserve about the slack in the labor market.

2. It strengthened the intermediate-term argument that a trend change in the Euro-Dollar (EUR/USD) is underway following the actions announced by Mario Draghi at the European Central Bank (ECB) yesterday.
Many with a short-term mindset are focused on price levels or technicals that force people to adjust risk. The Euro exchange rate above 1.37 or Gold above 1258, are two obvious examples.

What we would highlight is that neither today’s data nor yesterday’s actions by the ECB portend to a correction in risk assets. This is primarily because both events do not strengthen the bear argument that the weak data in the first quarter has bled hard into the second quarter growth profile.

To access the entire newsletter, please visit Rareview Macro’s Sight Beyond Sight

The Anger Indicator: A Rareview Reply

Below extract courtesy of this a.m.’s edition of Rareview Macro’s Sight Beyond Sight..(Re-published with permission from Neil Azous)

Neil Azous, Rareview Macro LLC

Here is an aggregation of the various statistics either sent to us from subscribers or we came across during our readings this weekend.

1.  Japan Government Pension Fund (GPIG):  Apple (AAPL), Exxon and Microsoft have the heaviest weighting in the MSCI Kokusai Index; ~87% of GPIF’s foreign stock holdings follow this benchmark. (Source:  Eurofaultlines)

2.  As far as we can tell the degree of these inflows have not yet been widely observed by other paid forecasters on the Street. EM Portfolio Inflows Reach New High In May: Our EM portfolio flows tracker indicates that portfolio inflows to emerging economies continued their upward trend of the last several months, reaching the highest level since September 2012, when the Fed launched QE3 (Chart 1). In May, EMs are estimated to have received $45 billion in portfolio inflows from global investors, up from $28 billion in April and $27 billion in March. The May figure reflects $28 billion going into EM bond markets (portfolio debt flows,Chart 2) and $17 billion into EM stock markets (portfolio equity flows, Chart 3). (Source: Institute of International Finance) Report

3.  This week the S&P 500 will surpass the 1995-96 record for number of consecutive days in which the index has traded above its 200-day moving average.

4.  SPY closed above its upper Bollinger 5 days in a row through Friday. SPY has only closed above its upper Bollinger 4 days in a row 4 times since 2009. (Source: Fat Pitch)

5.  Relative Strength Indicators (RSI)

a.  The S&P 500 (SPY) 9-day RSI is over 70 = Overbought

b.  The NASDAQ (NDX) 9-day RSI is 74 and AAPL’s is 80 = Overbought

c.  The Transports (IYT) 9-day RSI is over 77 = Overbought

d.  The Semiconductors SOX) 9-day RSI is over 70 = Overbought

6.  Since 1950, the DJIA has lost -1.9% and SPX -2.1% in June. The last 20 years have been even weaker. Moreover, the SPX has been down in 11 of the last 16 mid-term elections Junes (Source: Stock Traders Almanac).

7.  The VIX has closed below 12 for five straight days, the longest streak at that level since 2007 (Source:  Volatility Trader)

Soothsayers Soliloquy “Sell In May…” Is Just Plain Silly in ZIRP Environment Reply

Excerpt below courtesy of  this a.m.’s Sight Beyond Sight notes to newsletter subscribers. Today’s edition from Rareview Macro LLC also includes the following talking point: “The True Pain Trade is Not SPX 1920-1950 but Beyond 1950”

Neil Azous, Rareview Macro LLC

Sell in May and Go Away?

Historically, we despise the advice to “sell in May and go away”. The main reason is that very few of the people who make that argument do not actually factor the following considerations into their analysis:

What index are they selling? There is a big difference between the Dow Jones and S&P 500, especially when you take into consideration the index rebalances over time.

When does the period actually begin and end? By that we mean there is a big difference between selling on May 1st and May 15th.

What happens if you just remove September from the equation? September is usually the weakest month of the year and the month that has the biggest impact on a risk-adjusted return basis, so if you take that out it makes a big difference.

What are the external factors? By that we mean was the market up or down going into May 1st. Or was the budget in deficit or surplus or are investor cash balances high or low? These factors all matter as well.

What are the real world implications? The analysis never takes into consideration taxes, transaction costs, where an investor would re-deploy the capital or what would happen if an investors circumstances change and they cannot buy back into the market in November.

All that said, we felt compelled this year to chime in with a couple of thoughts that we have not seen made in the market this time around, perhaps because most of the analysis has just focused on the period following the global financial crisis.

Batter Up: New Hedge Fund For Bitcoins Reply

  Below excerpt is hot of the press and courtesy of one of MarketsMuse’s favorite outlets: FINalternatives..

Coin Capital Management is this week launching a Bitcoin-focused hedge fund, which will buy and hold the leading crypto-currency in an institutional grade environment.

“We are pretty excited about Bitcoin…it is an exciting payment technology,” said Samuel Cahn, managing partner at the New York-based firm. “We are fully dedicated to holding Bitcoin, and we are the first ones to do so in an institutional grade hedge fund using the same types of checks and balances that investors have come to expect.”

For the rest of the reporting, please visit FINalternatives

Macro Muse: Expert Says: Short USTs, Yields Poised to Rise Reply

Courtesy of one of our reader’s sighting this a.m.’s comments from Rareview Macro LLC’s “Sight Beyond Sight”, we’re compelled to cite the original source:

Neil Azous, Rareview Macro LLC

“…For the first time in months the setup is compelling enough for us to short US Fixed Income.

Earlier this morning the model portfolio sold short enough 30-year bond futures (symbol: USM4) at 135-28 to risk $50,000 USD per basis point. The reference point or last yield on the 30-year cash bond is ~3.40%. The first target in cash yield terms is 3.48% and the second is 3.52%. A stop at 3.36% (closing basis) has been placed. This is a short-term tactical trade with a risk-reward profile of three to one (3:1)…”

For those who embrace the above outlook, our insightful reader who pointed out the above sighting caveats: You can increase your chances by using a non-leveraged short ETF like TBF or simply shorting the long ETF. Beware: shorting bonds ETFs will result in you having the pay the dividends, which can be substantial.

Below includes a snapshot of (3) inverse-bond ETFs that could be considered by those seeking to hedge against or exploit a pending spike in UST yields. *

Note: MarketsMuse DOES NOT OFFER OR RECOMMEND TRADE IDEAS, NOR DO WE ENDORSE ANY SPECIFIC ETF PRODUCT