JS Global Macro Notes

Global Macro Notes: "Not Today" (Or, Dancing With the Year 2000)

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How to describe this market?

Vin Diesel in the new "Fast Five" trailer has as good a line as any:

"Chances are, sooner or later, we're going to wind up behind bars or buried in a ditch somewhere. But not today..."

On Wednesday the bottom dropped out of the dollar. The VIX (as tracked by VXX) tumbled to brand new lows. "Risk on" surged with a euphoric vengeance, gold cracked $1500, and the spot price of Brent surged (recently above $124 a barrel).

As others have variously noted, crude oil has become "financialized."

But what happens to real world end users of crude (like China) if or when Brent hits $150 per barrel... $175... $200?

Read full notes here
 
Global Macro Notes: Pension Funds and the Zero Bubble

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In a zero interest rate environment, we can think about market participants in two groups:

* Those who are taking risk because they can.

* Those who are taking risk because they have to.

These are not the traditional buckets. Normally the dividing lines run retail versus institutional... investor versus trader... value versus growth or what have you.

Market participants can also be sorted by investment mandate.

Traditional money managers have "career risk" -- they live and die on beating their benchmarks, or at least not lagging them too much.

Hedge fund managers, meanwhile, have their performance objectives and high water marks. They want to do well so they can get paid.

But neither of those groups have do-or-die performance requirements, in the sense of "make X percent or you are dead."

It doesn't look so good lagging the S&P, of course. But if the S&P is dead flat and these guys finish up a little better or on par with flat, they will probably be okay.

Not so with pension funds. Pension funds have a target they MUST hit...

Read full notes here
 
Global Macro Notes: Commodity Carnage and Speculative Froth

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It had recently been argued there is a $20 per barrel "speculative premium" built into the price of oil. (Via Niels Jensen, citing Frank Veneroso of Veneroso Associates.)

If so, nearly half that premium was evaporated in a single trading session, via Thursday's commodity complex carnage. (Will cinco de mayo be remembered as a day of massacre for real asset bulls?)

Just about everything commodity related got smoked, with oil -- arguably the most important commodity in the world -- leading the record rout with a 1,000 basis point drop.

And as Bespoke has noted, silver's 4-day decline of 25%+ (still ongoing?) counts as the third worst sell-off of all time for the poor man's gold.

As my colleague Mike McD instant messaged near Thursday's close: "So what was that between 2:30 and 3:30 -- mass margin related liquidation? It looks an awful lot like someone getting blown out."

It is likely an elephant was brought to its knees by this move -- and quite possibly a whole herd of them.

Read full notes here
 
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Stock market bulls were rocked by global slowdown fears this week.

But for a true bearish wake-up call, consider this -- stock market historian Russell Napier thinks the "real bear market in the S&P is yet to come," and that the ultimate target could be S&P 400. As in, roughly 70% off current levels...

So what is the encapsulated case for a scenario in which the stock market winds up much, much lower -- as much as 70% lower?

Perhaps something like this:

Read full notes here
 
Global Macro Notes: The Bond King Gets Desperate

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Bill Gross (aka the bond king) is starting to get a little desperate.

Three months ago we asked, Did PIMCO call a bottom in Treasuries?

Since then USTs have gone up -- and yields have fallen substantially.

This made the bond king look bad - especially when it came out that PIMCO had a net short position (later clarified to be via swaps).

Either way, though, Gross has been pounding the table for how lousy Treasuries are.

As USTs went up, seemingly mocking the king, he pounded the table even harder. This week, he really started stretching it...

Read full notes here
 
Global Macro Notes: Long Bonds Cheering the Tea Party -- and Deflation

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One would imagine that, with America skidding into a high impact debt-ceiling / default wall like an 18 wheeler semi with burned up brakes, treasury bonds would fall in value (and yields rise) as horrified holders ran for the hills. The fact that Uncle Sam could lose his vaunted 'AAA' status even if a deal gets done should further underscore the "dump bonds" notion.

Nope. Bonds have rocketed higher instead -- registering a big, bold, high volume breakout on the charts. Yields at the long end of the curve, which move inversely to bond prices, have fittingly dropped to nine-month lows.

A few more rounds of this, and yields will be at pre-QE2 levels. In the face of a default threat -- and a big hike in the debt ceiling on any type of deal -- bonds are being bought. Why?

Because of austerity...

Read full notes here
 
Took a break from posting these for a while... starting up again:

Global Macro Notes: PMs Jump Up to Get Beat Down

In 1992, the rap group Brand Nubian released the single "Punks Jump Up to Get Beat Down."

One could imagine Ben Bernanke humming this chorus after today's whackage. The Beard spoke to congress, and commodities and precious metals took a hit.

Silver in particular, which appeared ready to run, was "beat down" hard. As of this writing (with markets still open), SLV has registered a very nasty outside reversal bar.

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Gold stocks are being tested too:

Read full commentary here
 
Quick addendum: Apparently someone sold a shitload of bonds today...

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A cascade of large trades rolled through the Treasury futures market Wednesday morning, sparking debate among traders as to whether the selling was an error or an investor selling out of a big position.

About 80,000 June-dated futures on the 10-year Treasury note were sold over a two-minute period beginning at 10:05 New York time, alongside about 47,000 "classic" bond futures and 52,000 contracts on the five-year note, according to traders.

Heavy selling separately hit silver and gold futures and the effect quickly spilled into currency markets, in what some traders speculated was trading triggered by algorithms monitoring fixed-income markets.

The trades came just as Federal Reserve Chairman Ben Bernanke began to speak in Washington, with the central banker's initial remarks seen as upbeat on the U.S. economic recovery before he outlined significant challenges that remain.

"It's very possible it was a fat finger, but it seems more like a very big asset allocation," said one interest-rate futures trader in Chicago.

http://online.wsj.com/article/SB100...53332515209056.html?mod=WSJ_hp_LEFTTopStories
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Internal commentary on today's precious metal carnage:

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Precious metals were hit hard today (Wed 2/29) on news that the Federal Reserve did not have immediate plans for more economic stimulus. Gold and silver are getting crushed, gold miners (GDX / GDXJ) are down heavy in sympathy, and there is no letup into the closing bell.

What is happening?

One possibility: This could be a very nasty "wash and rinse" as weak hands are shaken out of their positions. If that is the case, then key chart support points for precious metals stocks (and the metals themselves) should hold. Our risk points are behind those barriers. So if this decline turns out to be a test of resolve, we'll still be in.

Another possibility: The narrative is changing to reflect a slow growth "tired Goldilocks" type environment, in which sluggish recovery continues but inflationary winds are little but weak breezes. In this type of environment investors are better off holding consumer staples type stocks with dividend yields than precious metals.

Yet another possible factor: The Federal Reserve has sounded a hawkish tone even as Europe goes full "dove" with its extreme lending program [LTRO]. Europe has injected roughly a trillion dollars worth of liquidity into their financial system in the space of two months (via Reuters). The ECB is
opening up the taps" even as the Fed is closing them. This thematic shift could lead to a role-reversal between the $USD and the euro, where the dollar gets strong and the euro gets weak.

What happens next? Time will tell... but another possibility here is that the $US dollar could be ready for a comeback rally... in which case a short of the Australian dollar -- the premier "commodity currency" -- could be a worthwhile hedge against our long-exposure commodity positions.
 
Global Macro Notes: China, Brazil and Spain Flip the Script

What a difference a few data points can make.

A few trading sessions ago, the market was following a "global goldilocks" narrative:

* The European sovereign debt crisis appeared contained.
* Europe had unleashed its own version of "QE3" (aka "LTRO").
* The U.S. economy saw falling jobless rates and respectable growth.
* Corporate profit margins appeared robust, making stocks look "cheap."
* The big emerging market players - China mainly - were chugging along.

Then, in the space of a week, a series of jarring "wake-up calls" came along, leading to the market's worst dive in months (and bloodiest day of the year thus far)...

Read full commentary here
 
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