Mr. Bond Decides to Die Another Day

An update on US fixed income instruments by TMM2 member 'Leftback'

This is another in our series of periodic updates on the status of our recent fixed income trades here at Falling Knife Capital Management. This weekend, our correspondent Leftback was relaxing in his homeland, which to his horror, has recently become the United Kingdom of Theresa May:UK Net Migration from where he reviewed a number of charts for US fixed income instruments and, as he reports here, despite the yammering in the mainstream media about inflation and “higher yields are coming”, recent trading has been peaceful, almost soporific - and the tone of many bond markets is now positive, almost bullish in fact, with traders taking every opportunity to “buy the dip”. Not many saw that coming, when we first mooted the idea of a tradable rally in bonds, back in early January Anatomy of a Bottom … or even in late January Buy The F/I Dip .

Avid readers of Macro Man will recall that in late November and December, we donned first the Kevlar gloves and then the full body armor in a bid to catch a variety of fixed income ETF instruments as they were reaching terminal velocity under the influence of the market’s often-invisible gravitational force.

In the process we became very long US fixed income [to the extent of 80% of the portfolio], with substantial positions in AGG, TLT, LQD as well as a closed end muni fund, IQI. Since then we have remained long all of these instruments, and have continued to monitor their performance, as well as the widely traded ETFs, MUB and BOND. As a side issue, we continue to monitor USDJPY, which became a proxy for risk assets in 2016, but has shown signs of weakness in 2017. In recent years, increased FX volatility (especially a stronger yen) has tended to precede moves to lower UST yields, and eventually we have seen declines in risk assets such as crude oil, other commodities such as copper and, yes, even US equities.

Suffice to say that fixed income trading has not been plain sailing in 2017. As is common for 007 in his line of work, BOND has been attacked by a series of would-be assassins in recent weeks. The long bond auctions and the February PPI and CPI data releases have all taken shots at BOND. Worst of all, the shadowy and sinister villain who inhabits the Eccles Building [The Woman who is known only as “Y”] has threatened BOND that each of her meetings with him are “live”, and that she will be seeing him in March. Y does tend to talk the talk a lot, though. One and all have tried to do their worst to BOND, in a seemingly non-stop succession of assaults, to the point where we would expect BOND to be not just on the ropes, but face-down down on the canvas, about to breathe his last, perhaps making a last call to Bill Gross to warn him to stock his yacht in Newport Beach and set sail into the sunset…

In fact, much to everyone’s surprise, BOND has refused to expire. BOND sits well above the December nadir, and rests on firm support provided by the 50 day moving average, having pulled back near to the 50dma on 2/1 and 2/15. The 20dma crossed over the 50dma some time ago, and BOND lies well above these levels this morning. Believe it or not, the 200dma is now in sight just 1% or so higher than Friday’s close. RSI is 65 and rising.


We know, of course, because we are constantly being told this by no less an authority than CNBC, (nicknamed “Tout TV” by the late great Alan Abelson), that “bonds are finished” and “yields are going higher”, but the fact is, punters, what you are looking at here are bullish chart indicators, and clearly, for the time being at least, 007 has decided to Die Another Day.

Don’t believe me? Check out the US curve, here: US Yield Data

Yields in the 5y are hovering below 2.00% and the 30y below 3.00%; even if one views this merely as movement within a trading range (which we do not), then the 10y seems to have been capped around 2.50%, and yields in the 30y around 3.10%. Those yields obviously compare favorably with the prevailing dividend yields currently associated with IWM, QQQ or SPY.

Here is a look at a 3-month chart, showing a series of higher lows and more recently higher highs in BOND:

After finding a bottom in December, the PIMCO ETF “BOND” eventually bounced and broke above the 20- and 50-day moving averages in the first few trading sessions of 2017 (1/2 – 1/5), but then pulled back, suffering a sharp reversal following the January long bond auctions. After a few days when BOND was clinging on to support, BOND finally closed on or very close to the 20 DMA on 1/19, dipped briefly below on 1/20, but then bounced back. The chart for BOND clearly shows a series of higher lows and higher highs over January, culminating in a short-term high on 1/12.

The subsequent price action in BOND was more challenging, although on the heels of a strong auction of US 3y on 2/7, BOND gapped open on 2/8 and rallied strongly into the rather weak auction of US 10y. Then came the series of assaults in mid-February, and subsequent trade saw a series of price dips (yield surges) early in the day followed by a slow steady slope higher in BOND (slow yield decline). Interesting…. it is almost as though there were a group of buyers waiting for each dip, and a fairly large group of shorts, slowly exiting the day trade, perhaps unconvinced that yields can break higher. No less a sage than Sir Jeff Gundlach has opined, no doubt with a wry smile, that Shorts May Get Squeezed Here. Gundlach Sees Yields Falling Below 2.25%

Price action in AGG has been broadly similar.


The trading trajectory for muni funds has also been strong with the technical picture softer of late, but still unequivocally positive for IQI and MUB since early December.


Our underlying rationale for entering the trades in medium-term US bonds can be summarized as follows: inflation is low, and it’s going to remain low. How so, with US equity markets seeming to make new all-time highs every five minutes and President Trump touting Yuuge Tax Cuts and to Make America’s (infrastructure) Great Again? We would argue that US wage inflation remains almost non-existent, the recent spike in oil prices will be transitory due to the continued global oil glut, and the “base effect” of last winter’s low oil prices is about to disappear from y/y inflation data. We therefore propose that the Fed is likely to hike only once this year, or at the most twice, and this bolsters our faith that the belly of the curve (5-7y) will not move beyond the 2% seen recently, and in fact may well move a lot lower than 1.5%. This explains the renewed bid for BOND.

Now what of the long end, where fear of the dread Duration doth reside? The most deeply oversold in December 2016 among the ETFs reviewed here were TLT and LQD, both vehicles expressing the market’s negative views late last year on longer duration debt. Despite plumbing the depths for longer than the shorter duration vehicles, and reaching a lower nadir following the US election, both US long duration IG and US Treasury bonds have actually found buyers since mid-December. The chart for LQD shows a fairly positive technical condition with LQD sitting on the 50dma. As Polemic once counseled us in the days of Team Macro Man Mark I, when the price of an instrument ceases falling on bad news, the market is telling you something. Just as markets top on good news, so they tend to turn upwards when bad news fails to depress prices further. Once there is no marginal trader left to sell, price will drift upwards and then all that remains is for shorts to cover….
Let’s look at the performance of long-term corporate bonds (LQD):



Below, that most-reviled of instruments, the Long Bond ETF, TLT:


TLT is less healthy but still well above the lows of December, despite an avalanche of bad news. Once again, the performance has been strong since early December. How can this be, when adding duration seems to be flying in the face of logic, the Fed and CNBC??? In a nutshell, we believe that the Fed isn’t actually going to reduce the size of the balance sheet significantly any time soon. Why do we believe this? We think this because Ben Bernanke, the architect of the policy, actually TOLD US SO. Many times, Big Ben informed the world that the Fed’s portfolio of USTs and MBS would simply be “held to maturity and allowed to run off” naturally, (a slow process that will take decades to complete). This balance sheet aspect of Fed policy affects the long end of the curve more than the short end, and we think this indicates that some degree of curve flattening will occur once more later in 2017, bringing the 10y perhaps to 2% or below and the 30y back to 2.5% or potentially much lower, as the prospects for the Trumpflation trades fade and an extremely large group of shorts are forced to cover. A full exposition of this position has been aired here: Trumpflation or Return of Deflation?

Similar views have been outlined in the past by Lacy Hunt, by Gary Shilling, and by others who remain firmly unconvinced that the bull market in bonds has in fact ended. Whether new lows in US yields remain to be experienced, or whether this moment merely represents a tradable bounce in US fixed income before the bear resumes (as Jeff Gundlach has suggested), we are not sure, and will remain agnostic for the time being. One of the best supporting arguments to be made concerning a move to lower yields in the US is that European and Japanese fixed income investors are starved for yield and remain desperate for both yield and safety. In this context, please note the recent move in bunds, and that the US-German spread remains wide. USTs therefore are very attractive, and this can be seen in the enthusiasm of foreign buyers at recent UST auctions.

One could go further, and suggest that the talk of higher bond yields on CNBC is just yet another example of “Fake News” from The Media, and punters should look at what happened to Swedish bonds* last night…





*Just kidding, folks. All is well in Scandy Land, at least until July 2017 and the next round of the Greek tragedy….?
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Nico G
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February 28, 2017 at 12:11 PM ×

http://ritholtz.com/2017/02/djia-13-days-1987/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

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IPA
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February 28, 2017 at 1:53 PM ×

We've discussed it here but let's refresh and update. Oh, and sell hotels and airlines, especially on lack of any details on tax reform in tonight's speech:

https://www.theguardian.com/travel/2017/feb/28/us-tourism-experiences-a-trump-slump

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Harry H
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February 28, 2017 at 3:38 PM ×

LB is quite correct in as much as the Fed will NOT allow rates to creep substantially higher.

What retail chumps fail to notice is a little $20 TRILLION (and growing) debt pile that uncle Sam is loathe to pay any real interest on. Now GDP growth won't erase that debt as the workforce are aging lazy f*cks who refuse to work 24x7 for slave wages. Also CEOs are too busy buying themselves hookers and blow to bother investing in companies - and who can blame them? So that just leaves Janet Y to monetize the lot, which she is gradually doing.

Back to markets. Equities are simply magnificent. Again retail chumps have failed to notice that achieving all time highs every day is considered bullish, and so have either shorted or stayed out of this rally (lol). Thank you chaps. Your margin calls afford me a v nice standard of living.

In summary, I expect: Equities to climb higher for another few years. Rates to do f*ck all except stay low. FX to dick about (no one even trades that shit anymore so we can ignore it). Commodities will do whatever the USD tells them to do (again no one gives a f*ck).

Thus concludes my analysis. Have a nice day.

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IPA
admin
February 28, 2017 at 5:59 PM ×

One would expect UPS and FDX to get some buying interest on the day when TGT admits it lost a war with AMZN. Nah... TGT also said they'll start to ship from the back of the store. I imagine that actually poses a threat to UPS and FDX as TGT can have their own local delivery van to offer free delivery. IYT is not happy.

Dow futures have been protected by 89 ema on 1h since b/o on Feb 3. Should that go I think the avalanche begins.

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IPA
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February 28, 2017 at 10:11 PM ×

Today's VIX close is:

a) highest daily close of 2017
b) first consecutive close above 50 dsma since 11/8/16
c) first close above daily upper BB since 11/4/16

100 dsma is @ 13.12 and 200 dsma is @ 13.78 and should VIX get above both in short order it is probably going to go much higher. Some resistance @ 14.72, after that it may fly to 18, 20.50, 21.50, and 23.

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Nico G
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February 28, 2017 at 11:37 PM ×

IPA normally this VIX setup produces a spike over 20 so things are lining up

dunno if the board here mentioned debt ceiling deadline in two weeks time which should precipitate clash with congress before tax cuts are even envisaged

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Harry H
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March 1, 2017 at 1:36 AM ×

IPA, Nico... you do realize that spooz are rallying as I type?

Dow 18k... this is the top!
Dow 18.5k... ok I'm shorting this...
Dow 19k... this is the blow-off top!!! I'm 100% short!
Dow 19.5k... right, this is really the very top guys! 150% short here!
Dow 20k... generational top here! Shorting this exponential rise 200% short!!!
Dow 20.5k... Ummm... Margin call.
Dow 21k... why do us shorts suck so much at trading?

PS Enjoy blowing your accounts. See you at Dow 30k.

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Nico G
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March 1, 2017 at 2:47 AM ×

Harrys bar,

do realise that if you were really trading this bull market you'd find no need to mock the ones who take the opposite side. You'd just enjoy making money for now. So fuck off and we speak again in October. You are asked to bring constructive material to this forum and that includes when you would get out of your paper trade so we keep a paper record. Noone here knows at what level you imaginarily bought the market. As far as trading is concerned you are fake news.

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IPA
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March 1, 2017 at 3:22 AM ×

Just in case anyone wants to read Trump's speech. Very few (err... no) details on tax reform or infrastructure plan. Here is the link:

https://www.bloomberg.com/politics/articles/2017-03-01/full-text-trump-s-first-address-to-congress-as-prepared-for-delivery

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Harry H
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March 1, 2017 at 8:31 AM ×

Nico... haha the only paper trader here is you pal. Sitting in your mom's basement pretending you're a trader with your little demo retail account. Even then you still lose every time you post a trade idea. LOL !!!!!!!!!!!!!!!

IPA... who gives a f*ck? Equities are going up and will continue to for the foreseeable future. With every central bank in the world supporting them why is this gonna end soon?

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Nico G
admin
March 1, 2017 at 9:11 AM ×

https://www.youtube.com/watch?v=3HUGeA2lur4

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Harry H
admin
March 1, 2017 at 11:33 AM ×

Nikkei up 355 points, Dax up 154 points, US indexes at all time highs.

Shorting equities - another Nico classic!

The "fade nico" trade has to be better than fade gartman, I can honestly say I've never seen anyone get markets so consistently wrong lol.

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Al
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March 1, 2017 at 11:33 AM ×

Good article Leftback.

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Al
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March 1, 2017 at 11:38 AM ×

I should also add "well played" LB. We saw your earlier comments that countered the prevailing wisdom and here you are.

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CV
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March 1, 2017 at 3:09 PM ×

Thanks for this LB!

I think the key story in Q1 so far has been the re-assertion of defensive equity sectors and the slightly flatter(!) yield curve. Financials are an exception here, but these dudes were always going to bonkers after the de-regulation comments.

As for Spoos, Dow etc. Well, its a freight train. I am not trying pick a top ... far from it. But an annualised return of 36% in the first two months of 2017 for the MSCI World is probably a tad too far, too fast.

Keep rotating stocks/sectors, though. If correlations increase we will all feel it I am sure ;), which is why I think high cash balances are prudent (call option on volatility and all that). But if the Spoos and Blues trade return, equities and bonds can go up together led by defensives ... rinse, repeat.

Claus

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Harry H
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March 1, 2017 at 3:14 PM × This comment has been removed by a blog administrator.
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dfdsfiol
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March 1, 2017 at 3:58 PM ×

Harry, bring something constructive to the table instead of your childish remarks and rants. You add no value here.

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Harry H
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March 1, 2017 at 4:02 PM × This comment has been removed by a blog administrator.
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dfdsfiol
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March 1, 2017 at 4:13 PM ×

Harry, nah mate. I don't trade listed products. I trade electricity congestion.

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Leftback
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March 1, 2017 at 4:45 PM ×

Bond yields are failing to make new highs here so far, so that the pattern of lower highs and lower lows remains in place within this recent range trade, superimposing a slow move lower on top of the choppy trade.

Equities may just now be entering the blow-off phase here… ?

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IPA
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March 1, 2017 at 4:47 PM ×

A bit surprised NVDA is not taking a beating this morning on BBY comments about gaming.

Between BBY and AEO the retail is a dark place to be in this am and probably for a while. Also, I don't care if Wilber Ross says Trump did not endorse BAT during the speech, the fact he did not shoot it down and spoke about uneven playing field on imports unnerved traders. Sell XRT some more. Target 35

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johno
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March 1, 2017 at 4:54 PM ×

So, Dudley interview was the big news. March odds 50% to 80%. And more interestingly, curve steepening. I'm still side-lined in rates. Consolidating markets - which this seems to be - are tough for me to trade. ISM was good and backlogs suggest strength to continue. Equity market up nicely. White House set expectations low in the days before, and Trump outperformed on tone, so really no surprise there. Not sure when markets are going to start judging Trump by results, but yesterday was never going to be that day (the steady price action despite the leaks suggested that). In any case, I think a good part of this market move can be attributed to global manufacturing pickup since November. But some has been retail driven lately.

BBG ran a story yesterday saying Bannon for BAT. I think that was known, but the article also put Priebus, Miller, Ross, and Navarro in the "for" camp. Kushner undecided. Cohn and Mnuchin against. I still see odds low-ish, but odds higher of some "reciprocal tax," of which Mnuchin spoke. Frankly, reciprocal tax seems similar to BAT to me, so dollar positive as long as it doesn't cause a global recession that prices out the US hikes (although, if the dollar doesn't move and we have taxes on imports passed to consumers, Fed will have a inflation versus growth dilemma where I'd expect them to choose growth arguing the inflation is one-off). I took off my dollar shorts (except USDTRY where I kept 2/3) last week when I saw the tone shift starting. Still, I thought it worth remarking that my thesis of Taiwan deliberately stepping away from intervention to avoid conflict with Trump was borne out in a Reuters article overnight, citing an anonymous central bank official. If we don't get border taxes or heavy tariff actions, and China growth holds up, we could see AXJ FX move surprisingly stronger, IMO.

Can't be bothered with trolls: https://www.psychologytoday.com/blog/your-online-secrets/201409/internet-trolls-are-narcissists-psychopaths-and-sadists

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NonAnon
admin
March 1, 2017 at 5:14 PM ×

I posted the the following mid-Feb last year:


=====================================
Taking a step back, my playbook for SPY (& US equities generally) remains the same as it has for several years:
- Mar '09 marked the start of a secular bull market;
- in Elliott Wave terms, Wave 1 was the April '11 highs;
- Wave 2 was the Aug/Sep '11 lows;
- Wave 3 was the subsequent rally to the July '15 highs (incidentally, wave iii of 3's relentlessness & total lack of pullbacks to afford entries was highly characteristic of a iii of 3; iv of 3 was of course the Oct' 14 V-shaped correction that reversed in days as it was the first pullback allowing in all those who'd missed out);
- Wave 4 is the current correction, possibly (but not certainly) all now done;
- Wave 5 will be new highs (>2250) peaking sometime around or beyond late Spring '17;
- that Wave 5 peak to be followed by a garden variety cyclical bear market triggered by the Fed's behind-the-curve tightening response to 'unexpectedly' strong inflation;
- that garden variety cyclical bear to be followed by another strong cyclical bull market (itself being the 3rd wave of the secular bull, and 3rd waves rip...) during which we're seen to reap the benefits of the many positive developments now occurring but which are being widely overlooked because so many rear-view mirror folk remain anchored to the '08 GFC;
- my expectation is the global consumer (esp. Asian consumption) will be the primary theme of this cyclical bull and it will run through the 2nd half of the 2020s.
=======================================


That playbook has served me fairly well - good enough for government work anyways. The EWs have cooperated and with SPY now around 2400 I'm happy to start stepping away and await further developments.


Thank you to these newly eager buyers - you can have mine.

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Nico G
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March 1, 2017 at 6:46 PM ×

nonanon

yeah that count has been doing the round in the Elliot sphere for a while (we probably read the same dude)

if you told me last year that we'd get that long awaited blow off 5 just when a second rate hike is nearly confirmed i would have called you loco. But that's what blow off is. Total disconnect on escape velocity. Nasdaq went vertical Q1 2000 just as the yield curve was inverting. Internet trolling was not invented yet, but friends who had entered the new economy cult insulted me when i got nervous and started doubting. I remember a certain -13% day later on. The curse of the bear is that you can never go 'i told you so' when people suffer. They'd hate you forever.

The blow off mission besides luring very late euphorica and unfortunate buyers, is to inflict maximum pain to top pickers (like myself). PA the stratospherical gain of 2016 has vanished at this point. Pretty spicy for 2 months. What it does produce though, is a total resolve to ride the next correction to the very very infernal bottom. There are so few bears around, that the only support on the way down will the the 'buy the -5% mantra' crowd, a tactic that has worked for a while. This will be the real test for the market because at that point, the 10Y yield will be over 3% and suddenly it will be bloody legitimate to sell and wait for earnings to be repriced.

until then, the top pickers are not looking smart amen.

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IPA
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March 1, 2017 at 8:04 PM ×

johno, agree, party time today, but I find it quite ludicrous when ISM's Holcomb puts out a comment about his private mfg survey translating into a 4.3% annualized GDP growth rate. ISM is so unpredictable, subject to revisions, and very often followed by disappointments like misses and lower reads in the following months. No reason for this lunacy on a whole economy growing that fast based on such volatile sector, especially in light of subdued retail sales in today's Beige Book. NY Fed is the the most bullish out there (to be revised lower, I am sure) and they are at 3% tops for Q1, with Atlanta Fed revising their 1Q2017 down to 1.8% this morning based on PCE.

Nico G, as long as you have a longer time horizon and not shorting spooz (the ultimate rotating machine) you should be ok, for now. I like to hear the other side brag, even if it's coming from minors. I listen to my children brag about their victory until it's time for me to buy them a new toy. Tables turn so quickly on everything in this modern time.

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Leftback
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March 1, 2017 at 8:30 PM ×

We are not seeing any evidence that bonds are in anything other than the trading range proposed by MM and others, for example the high yield in US10y today was 2.47%. For me, today is just another trip to the lower reaches of that range, and so we were out there buying the dip today in AGG, LQD and TLT.

The PCE wasn't exactly screaming "sell bonds" this morning. Almost all the hard data has been weak, while the soft survey data is strong, but really it is as full of hot air as the POTUS. Today was a gift for anyone who wants to get long fixed income.

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Nico G
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March 1, 2017 at 9:25 PM ×

IPA

i have the horizon needed on shorting a three digit size on spoos, 2228 average

it might take a 2019 recession and hopefully before but i do regret shorting a cult so early (ha, hindsight), it was much easier to operate on European banks, and much luckier to short China in June 2015

regarding Mr. Bond i am still dead on convinced US 10Y will slice though 3% this month, giving a Goldfinger to risky assets

the trading range in yield is nothing but a classic consolidation before trend resumes up. I would hope that i am wrong because i like LB and dont want him to lose, but i REALLY need to be right this time :D

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Whammer
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March 1, 2017 at 10:06 PM ×

@LB -- MM today, in his correspondence, posted a "chart so sexy it should be NSFW" where he suggested the reflation trade is likely to be back on. Calling for 10Y to go higher than 2.50. I can't see the charts in the emails myself, but it sounds like he is changing his mind.

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johno
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March 1, 2017 at 11:14 PM ×

Yep, MM's chart underlines what I'm saying. Without giving it away (out of respect for MM's IP), it suggests something's afoot in global growth. It happened to coincide with Trump's election, but I imagine it has at least as much (if not more) to do with China. The question is whether this is transient, related to the need for a smooth 19th National Congress, or whether there is more to it. GS's latest commodity pieces suggest the latter, but left me unconvinced. My working assumption is that Chinese growth will have slowed by 2018. IMO, the right time to take bitter medicine is right after you've secured maximum power for a five-year term. If Xi isn't going to do it in 2018, then China probably will go way past (if they haven't already) the point where they could have a soft-landing. I will note that the property cycle in China appears to have topped out in the tier-1 cities ... maybe an early sign.

I'm still unconvinced we're going to breakout to higher long rates. My going assumption is that the 10Y will chop around in a range until everyone is exhausted/bored and positioning is less. Then it'll move one way or the other. That's my negative five cents, anyway.

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Nico G
admin
March 2, 2017 at 2:04 AM ×

anyone mentioned Snapchat IPO tomorrow?

old monkeys in the business were convinced the market would not correct until GS & co stuff everyone with Snapchat shares - they were right. Remember Ali Baba 2,5 years ago

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IPA
admin
March 2, 2017 at 5:53 AM ×

Nico G, I hear you, not sure we get the cataclysm out of Snap. My kids use it and oddly enough the adults have started to like it. Reminds me Facebook. I can't believe you are thinking to hold your short until 2019 recession gets prices in. I don't have square balls like you :)

This Russia story is not going away. I continue to believe that the only person who will stop this rally is the one who started it. He or his cabinet (with his permission) will do something unexpected and top the tape. The animal spirits will stop like a broken clock. Really think it happens sooner than anyone expects. He is under the microscope and has way too many enemies.

Anyway, quite contrary to what some children here think, it's not a plan of mine to be short spooz. I short sectors/stocks that underperform or have a high chance of topping due to weakening fundamentals. The silly talk about a margin call has to simply stop as it makes no sense. Just because one's position goes against him does not mean one gets a margin call. I trade options on stocks but futures on commodities only. I rarely use more than 50% of my account to trade all of my positions at once. First, children need to learn the basics, then post here trying to talk to adults. Zero respect for you, imbeciles. I wish some of your posts don't get deleted so we can use your comments as a time stamp for a market top. Really feel sorry for MM to have to clean up your utter nonsense here.

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Nico G
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March 2, 2017 at 9:15 AM ×

IPA

I mentioned a 2019 recession, traditionally anticipated by markets 9 months before so next year. But this is the best best craziest scenario were nothing moves on the inflation/rate/CB front for the next 12 months. Which you can immediatly write off considering current dynamics.

The inflation pick up in Europe since last summer is alarming, from 0% to currently 1.8% which can get out of control pretty fast. Central banks in Europe and the US must act quickly they are blatantly behind the curve.

After 8 years of QE we have market in blow off top mode just when Fed has confirmed that a second rate hike is on the way. That noone sees it as monster bubble mode is beyond me. If you are long here and gamble that the Central Banks will not normalise (Harrys) and liquidate their ginormous balance sheets, you are betting on financial SUICIDE. You are not betting on anything healthy and sustainable, you are betting that central banks will let equity markets go parabolic while being about 300 to 400bps behind the curve hence with no ammo for the next crash.

It is important to see it this way. Who wants to bet on monetary suicide? Who gives a toss what Trump does or probably does not do at this point. This euphoria is ignoring CBs threat of normalisation. The Fed should raise by .50% in two weeks if they want to have a remote chance to curb equity enthusiasm without any crash. If they let current euphoria continue we have all seen how it ends. You run out of buyers and the thingy drops like a stone, deeper even considering all bears have been liquidated.

Anyone realised we are already at year end target on Spoos? that the new Trump admin has not even started to produce anything, instead you can read they 'did not expect healthcare to be that complicated' etc ?

If i am not short now, there will never be a better time in the next 3 years. The pattern was incomplete for so long both in terms of waves/sentiment and that academic need of blow off euphoria, all is happening now, a year target squeezed in two months on bear capitulation. And i have not even mentioned Greek agony and Dutch and French elections those next two months or any geopolitical risk (China, Russia etc). I hope this helps explaining where i stand.

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Nico G
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March 2, 2017 at 9:23 AM ×

PS: i forgot to mention that we now have a president who cheers every new market record on equities on social media (i follow him on FB) like it's a direct compliment to his greatness. This is so irresponsible from him and so dangerous.

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johno
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March 2, 2017 at 3:20 PM ×

Nico, Eurozone core inflation has been at 0.9% for 3 consecutive months. US core PCE hasn't accelerated for a year, printing around 1.7% YoY (and core PCE deflator was +1.2% in Q4). Average weekly earnings and ECI have not accelerated. I believe what you're talking about are base effects in headline inflation driven mostly by oil. Just as those were predictable, so is the fading of those effects.

Also, I would not bet on central banks doing the right thing for long-term financial/economic stability. They almost invariably do the opposite. I jest, but you have to wonder whether the central bankers are all closet socialist academics whose intent is the "suicide" of the system of which you write. They have so much resentment for their graduate students who went into finance and made so much more money than them. If the system blew up, then order would be restored and the academics/experts would be on top ... or so they think. In fact, they'll be hung by the anti-expert populists like Trump or Michael Gove.

Far, far, far likelier the Fed puts off the hike until May than they hike by 50 bps in March (which the market would fete).

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Leftback
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March 2, 2017 at 4:13 PM ×

The yield spike we see this week was arguably driven as much by the recent spike higher in German inflation rates (and a sell off of bunds) as by anything happening to US inflation or growth projections.

Regarding the Fed, we don't care much what they do as the Fed generally tends to push the front end of the curve around and we are more interested in the belly and the long end, which is driven by other factors. Right now it's looking very likely that they will hike 25bps in March, the reason being that the market has already made the move for them, so it is safe to hike (this has been the Fed's m.o. for as long as we can remember). The Fed follows the markets, not the other way around. Once the hike is in place, very little will happen at the front end, but we are likely to see some additional flattening of the curve that reflects the present over-optimistic US growth and inflation forecasts.

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Leftback
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March 2, 2017 at 4:30 PM ×

Brainard sealed the deal for March last night, note these comments indicate that the focus remains on moving rates away from the lower bound, and that the balance sheet will not be affected for the time being, and then will only shrink "in a gradual, predictable way", "on autopilot", much as Ben Bernanke had always suggested:

https://www.federalreserve.gov/newsevents/speech/brainard20170301a.htm

Brainard said, the economy is "closing in on full employment" and inflation is moving "gradually" back to target, and that "it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path". Brainard mentioned "increased focus on the balance sheet", and that it will need to be adjusted relative to the fed funds rate depending "on the degree to which they are substitutes". Might prefer fed funds rate as "sole active tool away from the effective lower bound". Once well away from lower bound, "balance sheet would be set on autopilot" to shrink "in a gradual, predictable way".

So there seems no reason here to sell the long end (unless we see REAL signs of inflation), therefore we are likely looking at an even shallower yield curve ahead. Now let's see what happens when a bubble in equity markets and a flattening yield curve (YC inversions have been abolished for the time being) meets The Trump Slump (aka the strong dollar and the usual seasonal slowdown in US GDP). This should be fun...

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IPA
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March 2, 2017 at 4:39 PM ×

Leftback, while I generally agree with your notion of market doing the work for Fed, it is important to point out that fed funds futures had no March hike priced in as of three trading sessions ago. Fedspeak delivered the hike message to market and market adjusted accordingly. Janet will solidify the March hike tomorrow and show the market she's still in charge. She initiated the message during her congress testimony by the way, market thought otherwise and was wrong. Have to admit it.

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NonAnon
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March 2, 2017 at 6:26 PM ×

US ISM consistent with spring global growth peak

"...The pattern of recent years has been that periodic slowdowns in the global economy have swiftly led to additional monetary policy stimulus, limiting and eventually reversing any damage to equities and other risk assets. Major central banks, however, may take a tougher line this year, reflecting low unemployment rates, high headline and rising core inflation, and a growing “populist” backlash against low / negative rates and neverending QE."

Ducks starting to line up for equities to take a rogering over summer - of course the Man Baby'll just call it Fake Spoos...

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IPA
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March 2, 2017 at 6:56 PM ×

Ladies, Gentlemen, and children,

CAT juicy gap fill going back to Election Day @ 84. Look for a horizontal break @ 92 and mid BB on weekly @ 93 as your guide. Look for scale-ins at 95 and 96 if you missed today's puke. Put your stop above 100. Scale out on the way down. Use put spreads as the premiums are crazy high now.

CAT smells a rat.

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Harry H
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March 2, 2017 at 9:15 PM × This comment has been removed by a blog administrator.
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Leftback
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March 2, 2017 at 9:21 PM ×

Peak animal spirits, expressed as the gap between soft surveys and hard data. What's interesting to LB is the parallel with April 2010, another moment where Hope briefly trumped Data and yields soared, before growth, stocks and yields all sank.

http://www.zerohedge.com/news/2017-03-01/peak-animal-spirits

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Harry H
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March 2, 2017 at 9:43 PM ×

So did any of you retards manage to get long stawks today?

If so, you might even make some money when this rally resumes.

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Nico G
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March 2, 2017 at 10:33 PM ×

johno

Interesting point on resentment between graduates. Those emotions run deep. Same happened at my Actuary institute. From 1995 class 25 guys are now technical directors at various insurance companies and resent the two guys who chose capital markets and either sit on 200,000 JPM vested shares today, or trade in the sun like yours truly.

but let's be serious. It is not about ruining a few of their colleagues gagne-pain most of whom have already banked bonuses and 2/20 anyway. We're talking about tanking the whole US financial system, the whole US economy, and the world capital markets. They NEED ammo when markets turn (which could have been today, national snapchat day)

Snapchat is the Akamai moment of 2000. For our young readers go do a little research on that one. 30 billions cap for a 1999 revenue of 4 millions. How hard is it to build another snapchat, what is so special about this business? doesn't matter it's up +44% on IPO day

Fed will mention their concern with such animal spirits. They need to raise 50bps this month. They'll go for 25bps. We bet a coin Johno?

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IPA
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March 3, 2017 at 1:43 AM ×

Something interesting happened today. First time since the last leg up in the indices (Feb 3 through now) - the afternoon ramp up did not occur. They sold hard into close. Not sure if it was CAT spooking everyone or Nico G could be definitely onto something here with SNAP. They started leaning against the high on SNAP at 2 pm and never took the foot of the sell pedal. But really, the wheels started to really come off the Dow as CAT fell out of bed at noon. Let's see if this takes on the life of its own. Harry, I gather you were buying the close. So let's take our score cards soon. I was selling some CAT and added on the retrace back up to 95. Last scaleout target 84. I know, the story could be old and nothing new to see, but who wants to have IRS, FDIC, and Commerce Dept raiding their headquarters? Dow component and part of the infrastructure "make America great" story. This one could stink like Enron. Harry, you know anything about Enron? Not holding my breath for your input, son.

Something after the bell caught my eye. COST is raising their membership fees, pronto. I never could understand the whole club shopping crowd. Anyway, their COSTs got away from them. In their name I guess. What a crappy story if you ask me. Your revenue grows at the fastest pace in years and then you crap the bottom line because you had no way to keep the costs down, thus depressing your margins. Your only hope is the increase in membership fees. Can you imagine what happens to that chain if BAT is imposed? Ouch!
$170 support (prior double top resistance) is holding it here afterhours. Let's see what the real gang thinks come 9:30 am US eastern tomorrow. XRT is gonna be upset.

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Nico G
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March 3, 2017 at 2:09 AM ×

http://www.marketwatch.com/story/stop-this-is-not-like-the-dot-com-bubble-its-much-worse-according-to-this-chart-2017-03-02?siteid=rss&rss=1

http://ibankcoin.com/flyblog/2017/03/02/snap-ripped-off-america/

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IPA
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March 3, 2017 at 4:42 AM ×

Copper head and shoulders on daily. Neckline @ 2.62 - 2.64 and 50 dsma is right there as well. Distance target projection takes it to 2.42
Second time I am taking a punt this year. Playing it via combination of futures and JJC puts. Stop above the right shoulder.

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Nico G
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March 3, 2017 at 5:20 AM ×

PAY TO PLAY

IB is introducing a daily fee when their 'worst case scenario' loss exceeds your account valuation. It allows those swine to make money much much before they need to liquidate anything.

They use 20% upside scenario for current short position. Starting March 9th they will charge 50 euro per day for the privilege of holding such position..

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Nico G
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March 3, 2017 at 5:59 AM ×

there is a special warning regarding short volatility (options). So all in all it seems that brokers are getting nervous out there considering the historical level of vol selling and complacency. The personal example on a short equities position is not relevant considering the scarcity of bearish bets vs. the record amount of longs

wonder how much percentage is assumed for their 'worst case loss' simulation for a long future position. 20% seems insufficient.

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hipper
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March 4, 2017 at 2:50 PM × This comment has been removed by the author.
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hipper
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March 4, 2017 at 2:57 PM ×

Nice article LB. I think whatever the Fed does basically mostly contributes to yield curve flattening which in turn gets us closer to recession. It's still hard to see where this sustainable inflation will be coming from since all demographic factors counter it. Of course we might get occasionally temporary blips for a couple of years due to raw materials, or perhaps from Trumponomics, border adjustment tax. But these are nothing sustainable.

http://www.zerohedge.com/news/2017-02-27/minimum-wage-massacre-wendys-unleashes-1000-robots-counter-higher-labor-costs

I think robots crushing low wage jobs is net effectively crushing for total economic demand despite the gain of a couple of high paying programmer or engineering jobs that are created with it. The programming guy doesn't need to buy a hundred washing machines, or a hundred gallons of milk or a hundred cars even if he could afford it, or he doesn't live in a hundred apartments at the same time etc.

I like these bond funds now more than equities, SBI, MUI, BBN to mention a few (in my view from less riskier to more riskier in terms of duration, coupon, leverage). I won't close out reflation theme continuing though, a few years of that based on unsustainable inflation conditions would be refreshing and maybe allow fixed income across the board to roll with a bit higher coupons for a while. I don't think USA is going to break up or California end up back to Mexico as many have suggested, as there is now no more reason for the deep state to break up the whole country to get rid of Trump as there are now more direct successful ways. *cough* Russia *cough*, the never ending swamp playbook since the dawn of man kind you can always count to double down on.

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tinmanwp
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March 9, 2017 at 1:17 AM ×

Even if the Fed goes nuts and raises 4 times this year, rates will still be extremely low. The question really is how far will the Fed raise rates before the next round of cuts: therein lies your potential downside, Mr Bond. Personally, I like your chances here.

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