notes-investingLog

unknown date (imported from another file)

Greece: I don't know much about it but blogs i have read say that there is much suffering and sadness there.

Alexis Tsipras: Smart guy, well informed, rational. Politically left. His strategy is to be a tough negotiator with the E.U. with the goal of getting better terms on the bailout. I haven't read enough about his longer term domestic strategy.

Tsipras's strategy is to convince his people that he can negotiate a better deal than his domestic opposition. Imo this makes sense; imo if his party takes power, the EU will make at least some further concessions so that he can save face, whereas the opposition has already agreed to a deal and so has little leverage.

Merkel: (later note written on June 4: i think the following is incorrect) is in a bind because she has already sacrificed herself politically for the greater good, e.g. it gone against the will of its own people by giving Greece more money than they wanted, and suffered in recent elections. I haven't looked into it further than that but i'm guessing she has little further power to force Germany to act against the will of its people.

The EU: in a bind because there is pressure towards a run on the banks. If this pressure increases i predict the EU will guarantee the banks supernationally. Also, it is becoming widely discussed that some economists don't think a common currency is possible without fiscal union; however the EU voters recently rejected a proposal to form a slightly tighter union, even less tight than a fiscal union.

Scenarios:

• Probable: Tsipras and Merkel play brinkmanship and everyone gets scared. Tsipras's party does not win. Bailout goes forward as planned. No runs on any banks. False alarm.
• Probable: Tsipras and Merkel play brinkmanship and everyone gets scared. Tsipras's party wins. Tsipras and Merkel play further brinkmanship and everyone gets more scared. Bailout renegotiated and both Tsipras and Merkel save face. No runs on any banks. False alarm.
• Slightly improbable: Tsipras and Merkel play brinkmanship and everyone gets scared. There is almost run on the banks, or maybe a localized run on banks. The EU guarantees some banks. Same outcome as before but now everyone is mad at the EU for helping banks; also, economic growth slows due to further worries about bank solvency.
• Unlikely: Tsipras and Merkel play brinkmanship and everyone gets scared. There is a run on some banks. Greece abandons the Euro. Greece suffers even more as a result. The EU backstops all non-Greek banks. The Euro currency is strengthed in the short term but weakened in the long term.
• Unlikely: Tsipras and Merkel play brinkmanship and everyone gets scared. Tsipras's party wins. Merkel and he fail to come to an agreement. Greece abandons the Euro. Greece suffers even more as a result. There is a run on the Greek banks. There is a run on some EU banks. The EU backstops all non-Greek banks. The Euro currency is strengthed in the short term but weakened in the long term.
• Unlikely: Tsipras and Merkel play brinkmanship and everyone gets scared. Tsipras's party wins. Merkel and he fail to come to an agreement. Greece abandons the Euro. Greece suffers even more as a result in the short term, but within a few years does better. The EU is weakened as a result because leaving becomes a viable alternative. However, there is some time, and this is the result of something good rather than something threatening, so no systemic collapse results.
• Very unlikely: There is a run on banks throughout the EU, perhaps excepting fiscally responsible countries like Germany. It is not contained. The European financial system collapses. The world enters a second depression. It isn't "too bad" for most of the world (e.g. recession not depression) but it's really bad in Europe.
• Very very unlikely: There is a run on banks throughout the EU, perhaps excepting fiscally responsible countries like Germany. It is not contained. The European financial system collapses. EU bonds become worthless and EU governments suddenly have no money and cannot pay their employees, including the military. There is a run on U.S. banks. The U.S. financial system collapses. US bonds become worthless and US governments suddenly have no money and cannot pay their employees, including the military. Political chaos. Some countries elect far left governments, some elect far right, some stay moderate. Attempts to build a revolutionary new society next door to dictators attempting to build war machines. Anyone with any money hires bodyguards or they risk being killed by mobs. Anyone who used to be in power must hide and cannot talk to anyone who wasn't without risk of being killed. The non-Western countries probably escape unscathed but hard to say. Potential world war.

Prognosis: Both a run on the banks that is not successfully stopped, or a Greek exit ("Grexit"), is improbable, however because of the magnitude of the possible effect this still leads to a significantly sized negative expected value for the financial markets.

unknown date (imported from another file)

dow/gold ratio

http://home.earthlink.net/~intelligentbear/com-dow-au.htm

to me this says that the price of gold in 2008 was right..

IAU was between about 7.15 and 9.91 in 2008

ratio of IAU over SPY:

octave:1> 9.91/129.16 ans = 0.076727 octave:2> 7.15/96.83 ans = 0.073841

so about .0757 is the (arith) midpoint

today spy is about 136.02

.0757*136.02

10.297

So IAU should be about 10.3 .. unless SPY goes up, then it can go higher

IAU current IV is 15.38

unknown date (imported from another file)

log: today i made my second careless order execution error.

the first one was a few days ago, when i entered a limit order and a rel order on the same security. they were in an OCA group -- the REL order had a higher limit and i was hoping that if my limit was too low, the REL would kick in. Well, the limit order filled, which triggered the REL order before it could be cancelled.

Today i accidentally entered a large order, which was supposed to be a limit buy sitting on the bid, as a sell instead of a buy. So it hit the bid and i effectively paid the spread to undo it.

(later additions):

Another time, again, i mixed up BUY and SELL. The worst kind of dyslexia!

Once i made a currency trade that was much too large. The trade was EUR/JPY, and i used the same position size that i had previously used on EUR/USD (which size was also too big, but not as much). Well, i guess EUR/JPY is less liquid than EUR/USD so i guess the magnitude of its moves may be greater. Anyway, i made the trade, and then i checked on it a minute later: "Wow, i'm up $4000? I guess the market happened to move extra much last minute" (note: anyone with a brain would have realized the position size was too large at this point (assuming that $4000 is a lot of money to that person) and reduced the size; of course, anyone with a brain would have looked at recent price movements and calculated the magnitude of their gain or loss before entering into the trade). Then i checked again in another minute: "OH MY GOSH I'M DOWN $25,000?!?". Luckily, the market had moved very little, and it soon went back to the price where i had made the trade, allowing me to reduce the size without taking a loss (i didn't sit there with my finger on the trigger, i set a limit). But this was a close call (and it was even risky of me to wait for it to return to the original price); it could easily have briefly spiked up instead and i would have lost all of my money in an instant.

unknown date (imported from another file)

so far i've tried three seat-of-the-pants day-trading manuvers. each time i lost money, because the market was eerily one step ahead. the manuvers were: put in market orders to sell off my stock before the opening bell after the weekend results of the greek elections (i got the direction right in the long term, but the market reacted on friday before the election and on tuesday after it, on monday after it it went the other way, so there was no need to pay the spread on market orders, so i lost a little bit by rushing). the second one was buying a share of a japan index fund in early morning hours after good news in japan -- the price did go up a little that day, but not as much as the spread i paid to buy in the early morning!. The third was betting that SPY would be pinned when it was near 130 on expiration friday. i did oscillate around 130 a few times, and the first time i bet on that it made money, but the second time i bet on it it went thru 130 and closed below it (also i lost even more money when i had another problem mixing up the BUY and the SELL button -- the worst kind of dyslexia!). the second time also i put in a stop sell order at 129.55 which turned out to be near the day's low -- in fact a few times i stopped out and bought back in, always near the high or the low of that oscillation, not to my favor. i'm guessing these things were not a coincidence. lesson: the market is one-step-ahead of seat-of-the-pants trading.

may 26

so, how did my recent predictions turn out? to recap, around the beginning of this month, i looked at recent total returns in index funds for the S&P 500, emerging markets, europe, japan, and china. I saw that the S&P 500 and emerging markets had done extremely well since the beginning of this year (~+10%) whereas the others had not, and i predicted that the S&P 500 would "fall to Earth", that is, fall more than halfway to the European index was, whereas emerging markets would not (or would fall but not that fast; or would fall but then would rise again before the S&P 5000). In the long term, i predicted that although it would fall, eventually the S&P 500 would go up a little (over a few years, not necessarily this year), and emerging markets would go up a lot. i thought there was also a decent chance that i was wrong and that the S&P 500 would go up a lot.

i predicted that inflation and interest rates would rise over the next few years

a few days later, i heard about the Greek election results over the weekend and predicted that the markets would fall that Monday

what i did in response to this was:

• buy a bunch of emerging market equities -- i bought lots of DGS, a small-cap high-dividend emerging markets ETF. This is because i think that emerging markets grow faster than developed,
• buy a few S&P December 2014 (SPY) calls
• buy a bunch of emerging market junk bonds. Junk because i thought junk bonds have a higher expected return than normal bonds (a higher risk premium), and also because i expect inflation to rise so i didnt want to put money in a normal low-rate high-quality bond because given my inflation expectations, they have negative real yield; and TIPs are offering negative real yield, and i just couldn't stand to accept that. i bought bonds because i expected the market to go down in the short term and i didn't want to lose too much money. i figured that the market would go down not because there is anything wrong with the economy, but rather, because stocks are overvalued. i i also bought some floating rate debt such as BKLN. i was a little worried about julk because i feel it's overbought. i figured, well, if it goes down a little, that'll be cancelled out by the increased yield.
• also bought emerging market sovereign debt bonds, on the assumption that they're as good as the developed countries at this point
• sold some out-of-the-mony SPY puts (at 117), because i figured i would like to buy there anyway if things went down that much
• over the weekend after i heard about the Greek election, i put in market sell day orders on a bunch of stuff, and limit sell orders for the pre-open early hours trading
• i saw that SCIF and GREK and IRE fell a lot in single days so i figured they were bargains and bought them. When the JPM thing came out i sold a put on it.
• i bought some closed-end funds (CEFs) that had a high discount and high yield and low expense rate
• i bought some SLBT, a US small cap low beta fund
• a week or so later, i bought some long-term puts on DGS, almost 1 put lot for each 100 shares of DGS

results:

the SLBT and much of the other stuff i bought was very illiquid and i paid a lot in spread, even though i carefully looked at the associated IV tickers and used limit and REL orders (the limits i entered at what i thought was a fair price never executed, so i had to offer more spread before they would execute).

what the markets did:

the S&P 500 did fall, but emerging markets and Europe fell even more. The markets did fall seemingly in response to Greece, but not on Monday; they fell a few days later in the week. The SPY calls i had bought fell in value and the PUTs i had sold increased. The CEFs fell in value just like other equities, even though they were "already at a discount", because their IVs were falling too. One of the CEFs fell a lot, i later found out because it uses leverage. SLBT fell as much as SPY. The emerging market junk bonds fell about 1/3 as much as the emerging market equities. Some junk ETFs fell much more than others. After i bought the puts on DGS, DGS continued to fall and i assumed i would be protected by my puts, but the put rise in price was less than the DGS fall. The fall in the junk bonds was greater than the increased yield they gave.

what i did wrong:

• i expected markets to fall in short term and rise in the long term, so i bought stuff like junk bonds, low beta and dividend equities, and long-term calls. This was wrong because these things also fall (a lot) with the market (they have positive beta), just not as much as the market (in the case of the low beta or dividend small caps, it is just about as much, because the extra beta from being small cap makes up for the low beta-ness). I told myself that "in the long term i expect they'll go up", but if i had just waited until after they fell i could have gotten them a lot more cheaply. The mistake here is that, if you think the market price of an asset will fall, then from your perspective it has a negative expected return, and you shouldn't buy it -- just leaving your money in cash is better (unless you think inflation is even greater than the expected fall, e.g. unless it's still your best option). Just because an asset is "safer" doesn't mean that it's better than nothing if your expectation is negative -- that just means a small negative number instead of a big one, when you could have had a zero. The time for "safe" assets is when you expect the asset's price to rise, but either you want to preserve your money in case of an unexpected fall (why would you do this when there is a higher expected return elsewhere? because if there IS a fall you can sell your safe assets and snap up riskier assets on the cheap -- it's "dry powder"), or you think the riskier assets are relatively overpriced so the safer ones are a better value.
• i "reached for yield" even though was worried that junk was overbought partially because i refused to accept a negative real return. The market is not about what you want, it's about reality. The reality was that negative real return was the best thing being offered, i should have just accepted that.
• i thought that CEFs with a high discount wouldn't fall much because they were already discounted. If the market goes down, and the CEF holds equities, then it's IV falls, and so if the discount remains constant the CEF market price will fall.
• i bought stocks (SCIF, GREK, IRE) that had been falling for months just because they went down a lot on one day. That doesn't mean they're suddenly a bargain. Whose known what the proper value of these stocks is (actually, for IRE we have the listed book value at least, which in this case was about 3x the purchase price, but even that is misleading because IRE is low partially on concern of growing bad mortgages in Ireland, and so people are speculating that the real book value has been declining since IRE last updated its book value).
• i thought that you can make money telling the market when you'd buy ahead of time via selling a put, and i thought you could invest for the long term at low risk by buying a call, and these statements are technically correct but they don't tell the whole story. If you think a stock will go down in the short term and up in the long term, then if you sell a put on it or buy a call on it, those puts and calls will still become more/less expensive while the stock goes down. You would do a lot better to wait until after it's gone down and then sell the put and buy the call. So options don't save you from having to time the initial purchase in line with your predictions.
• i thought that matching the number of contracts of the a long term call option with the number of DGS shares i had would fully hedge me against falls in DGS. Actually, you have to multiply the number of contracts by the delta of that contract. In this case the delta was about .5 so i was only half-hedged.
• i should have been more cautious in speculating that emerging markets would not go down, or not go down as much, even as the SPY did. In the recent past they've had a beta greater than 1 --- even though i think they "should" decouple that doesn't mean the market is going to suddenly change its mind and agree with me, and it would be unlikely for the beta to suddenly shift from >1 to <0. Similarly, just because i think that emerging market sovereign debt is as good as US debt doesn't mean that anything is about to agree with me, so i shouldn't have assumed that sovereign bonds wouldn't go down much in a downturn; the market treats them like junk. More likely is what actually happened; i think (i dont quite remember) DGS went down less than SPY. Like i said with junk, a small negative number is still worse than zero, so expected this, i shouldn't have invested.
• i put more than half my (trading) portfolio into this stuff (i have another account where i don't play games and keep savings in safe things that i rarely touch, but that's not the trading portfolio -- i keep them separate in case a press the wrong button, or sell something short that goes way up or something like that which causes me to accidentally lose everything in the trading account. the backup "safe" account is at Schwab, which doesn't have a monthly fee, so it doesn't cost me anything to have the backup)

what i should have done:

• Given that i thought the market was going to go down, i should not have sold calls or bought puts on it. i should not have bought julk bonds or low-beta equities. i should not have bought CEFs. Buying DGS and emerging junk was okay because i thought maybe emerging would go up if SPY went down. Once it became apparent that that was not the case, i should have sold them.
• i should have bought puts on the market so that i would have had a net short position. I was worried about this because i figure, "in the long term the market goes up, don't bet against that", but my honest expectations were that it would go down. The only reason to bet the other direction would be if, after taking into account that the market can usually outwit me and that anything i think is usually wrong, my a posteriori expectation were that the market would go up, not down.
• i should have sold my stuff in response to the greek election, but not as a big ol' market order. it wasn't that urgent, and i paid a lot in spreads that could have been avoided. Also, the market often reacts to news in a contrarian fashion (e.g. going up immediately upon hearing bad news)
• i later found that if you are using Interactive Brokers, the order execution algorithms seem to do better than just sessing a limit or rel order the night before based on the previous day's closing price (and also better than sitting there and trading manually, at least for me, although maybe someone who actually knows how to trade could do better manually). I've much better luck with the JEFFALGO Adaptive and JEFFALGO Post, both with the "passive" setting, or with the JEFFALGO VWAP.
• i shouldn't have bought "bargains" like SCIF and GREK, securities for which i don't have a great way to fundamentally value them, until after they started going up again. Yes, this means that other investors and not me will capture the huge bounce at the bottom. But that's their payment for guessing exactly where the bottom will be. There's plenty of people who know more about India and Greece who can guess this better than me. If i just hop in with no basis for knowing either that the present price is good, or that the situation is improving, my expected loss on the way down is larger than the expected gain on the way up.
• i'm not sure IRE was really a bad buy. given the ongoing euro crises, maybe i should have waited longer.

my current predictions:

markets still haven't fallen as much as i expected them to -- the U.S. market fell, but not as much as the European market, and probably not as much as india or china either. So the distance between S&P 500 and the rest of the indices has probably increased, not decreased. i don't believe that the US economy is really as "decoupled" as all that -- in fact i think the reason that the US financial market indices are often taken as the "global beta" are because a lot of preeminent global multinationals are US-traded large caps, so people who want global exposure can get a lot of it by buying US large caps -- but this means that if everything but the US slows down domestically, those large-caps' profits should suffer. otoh the dollar has gained substantially against the Euro, which should have the effect of raising the price difference between the S&P 500 and the European indices, so maybe it's partially just explained by that -- should calculate how much this effect was.

People are still excited about earnings, but the news now is that India, China, and Europe are slowing down. This is a huge "perfect storm". The US and Japan's growth is increasing but those two can't carry the world on their back -- if the world slows, i expect the US and Japan to slow, i don't expect the US and Japan to remain constant and bring the rest of the world up. Japan's indices have been falling more than the US's.

dunno how i feel about non-China, non-India emerging markets. Brazil is apparently slowing too and Argentina is having bank problems. All this slowdown is sure to be transmitted to other small countries that otherwise would be set to explode.

a bad exit from Greece is unlikely but the magnitude of the negative expected if it should happen is large. i didn't appreciate this until i read about the possibility of bank runs. My view is that most political crises dont actually affect the real world (and commerce) as much as people seem to expect, but one exception is bank runs (or any positive feedback loop in the financial markets). The economy can't do well if its physical subtrate is affected, and the economy's body is based on money in the same way that the human body is made of water. Just like even Einstein wouldn't get much work done if you deprived him of water for 1.5 days, a bank run will seriously hurt commerce imo. So even the distant possibility of a bank run is serious.

Therefore overall this is a large negative component to expected value. i think the market price should be lower than it is in order to reflect this -- the current market price seems to be reflected the consensus for the median outcome, but returns are based on means (specifically, the geometric mean of returns), so i think the market price should be lower.

i think people like to focus on the median outcome but they need to focus more on the mean. It's better to invest in a startup with a 90% chance of losing all your money and a 10% chance of making 20x than it is to invest in a bond, even though the most likely outcome is losing all the money that you invested (i'm assuming you don't actually invest ALL your money into the startup). Similarly, it's worse to invest in stocks when the most likely outcome is making a fair bit of money, but there's a significant chance of losing a ton.

Maybe they focus on the median because it is a robust statistic?

a factor i don't understand is monetary policy. a lot of people seem to think the central banks will just print money no matter what so the stock market will continue going up no matter what. they doesn't ring true to me but i'm not very confident because i don't understand it well.

also, gold: gold has been showing a relatively (for gold) high beta, and going down recently along with SPY (but not always). a log chart of gold vs. the level of the Dow shows that it seems to be overvalued right now. so i'm betting it will go down in value (my target is somewhere around 12.90, so i'll probably buy it at 13.23 or so). But maybe gold bugs will buy in a crisis, causing it to shoot up. so i'm bearish on gold, but more confidently, bullish on gold volatility. However, since i first started thinking this gold volatility has not increased, so maybe i'm wrong.

also, i note that the EUR/USD has been falling more consistently than SPY in response to Greek news, after the 6% or so SPY drop that is. As has GREK. I expect SPY to fall further but not sure what i think about EUR/USD -- i expect the situation there to get "worse", since the "best" outcome seems to involve euro inflation and euro bonds, but i can't say if that translates into EUR/USD going down because i don't know how to fundamentally value it, so i can't tell if that expectation has already been "priced in". Maybe selling EUR/USD (e.g. trading Euros for Dollars) is a good idea right now but i'm not sure. I don't think shorting GREK is safe because it has already fallen so much and so rapidly, who knows if it is about to bounce -- in the long term i still think (hope) GREK may go up from where it is now.

also, i note that the "MOM" ETF has been doing well recently (since around Mother's Day, actually!). i bought some of it and i expect it to continue to do well.

may 26

news

the following suggests that Syriza might be willing to renegotiate the agreement after all:

" Speaking to Skai TV on Friday, SYRIZA MP Yiannis Dragasakis said that his party, which is leading in opinion polls, has no intention of rejecting the bailout but plans to repudiate it politically. He said this would mean that measures such as those lowering wages and scrapping collective contracts would be withdrawn. Any other policies that deepen the recession would be frozen, said the economist. He added, however, that a SYRIZA government would negotiate further changes with Greece’s partners. ... Two leading PASOK members, Anna Diamantopoulou and Costas Skandalidis, suggested that their party should be prepared to cooperate with SYRIZA to form a government after the June 17 elections. Skandalidis said that many in SYRIZA understand the responsibility they could face after the polls. “Maybe the transitional program that Mr Dragasakis will draw up in order to ensure Mr Tsipras is grounded in reality will also lead to a change in the party line,” he said. "

-- http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_25/05/2012_443963

This would be an about-face from Tsipras's position (according to his opponent's representation of his position) on May 14, in which Tsipras supposed refused to commit Syriza to a unity government with any party that wanted to renegotiate the bailout rather than reject it flat-out:

http://www.theaustralian.com.au/news/world/greece-in-final-bid-to-avert-eu-exile/story-e6frg6so-1226354269753

The EU may wait until at least after the new Greek government comes in: http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_26/05/2012_444052

Today a new poll puts New Democracy ahead in Greece: http://www.reuters.com/article/2012/05/26/us-greece-election-poll-idUSBRE84P06J20120526

Over the last few days polls have differed, with a little more than half of them putting Syriza ahead. So basically the story is that they are neck and neck. My view: Alex Tsipras is travelling recently. Syriza will do better when he comes home and hits the ground again. They can also pick up more votes by moderating their platform. So my expectation is for them to win.

commentary

My median outcome / central scenario is that things muddle along and that the U.S. economy grows a little less than 2% this year. The EU is in for a tough time but its politicians will do what it takes to keep it together (not sure if "keep it together" == "Greece stays in Euro"; lots of economists and hedge fund guys seem to think that is infeasible in the long term and that Greece will exit by the end of this year -- otoh about 4/5 of Greeks want to stay in the Euro and only 2/3s want to reject austerity -- and also the structure of politics means that in a sense it's the job of EU politicians to cheerlead for the unity of the EU and to express love for each other's countries, which makes it less likely for them to execute a breakup even if their voters would like one -- so i dunno what's going to happen there and i'm keeping an eye on http://www.intrade.com/v4/markets/contract/?contractId=713737). There value of the EU will drop (from what it was before the crises, i'm not very confident that it will drop further now -- but i think it will).

However, there are so many things that can go wrong. Just in the next few weeks even:

• Another Spanish bank going down
• Bank run in Greece
• Tsipras wins and he and and Merkel miscalculate in their brinkmanship and Greece exits the Euro
• No Greek unity government forms after the June 17 election
• Ireland rejecting the fiscal referendum

and less probable:

• bank run in spain or italy (seems unlikely now but the mainstream media has picked up the story so we the positive feedback loop has started it's main phase)
• random horrible thing
• US banks are more exposed to Europe than we think
• more nuclear problems in Japan

So overall my prediction is negative, although the median prediction is positive.

However, for the stock market, i think it should go down. I think current levels would be appropriate for an economy growing 2% with few risks. But not only are there all those things above, but also China and India and Europe appear to be slowing down. I feel that given the slowdown alone, stocks should fall. Given the slowdown and the risks, they should fall more.

political commentary

i think that instead of bailouts going to banks or governments, they should go to individuals with below-median income. This may be difficult in Greece, where it is said that there is a lot of corruption and lying about taxes, but in the US you could just have the IRS identify ppl who file taxes but who have been below the median for the past few years and then give them money.

This should have the same or greater stimulative effect on the economy as giving money to banks or governments, seems more fair, and doesn't have as much moral hazard. The bet is that the negative effect of a periodic financial collapse (because now no one is bailing out the banks) will be made up for by the direct stimulus and by the removal of moral hazard.

May 27

random thoughts

A/D indicator-like analysis:

http://finance.yahoo.com/echarts?s=RSP+Interactive#symbol=rsp;range=1m;compare=spy;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

RSP has fallen further than SPY; i dont conclude anything from this, as large-caps tend to have a smaller beta and hence in general RSP should overshoot SPY. Over the past week, when you might be wondering if the market has hit a bottom, we see:

http://finance.yahoo.com/echarts?s=RSP+Interactive#symbol=rsp;range=5d;compare=spy;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

again, both rose, so this doesn't say much. If RSP had gone in one direction and SPY in another, that might be an indicator.

may 28

news

Spain, Italian bond yields rose a bit.

a slim majority of Europeans, including in Greece and Germany but not France, claim to think the EU will break apart:

https://www.ipsos-na.com/news-polls/pressrelease.aspx?id=5643

but about 60% would vote to keep the Euro:

https://www.ipsos-na.com/news-polls/pressrelease.aspx?id=5640

this debate convinced some people that the European experiment has not (yet?) failed:

Europe Debate

Friday, May 25, 2012

Niall Ferguson & Josef Joffe vs Peter Mandelson & Daniel Cohn-Bendit

Be it resolved the European experiment has failed. Pre-Debate

Pro: 44% Con: 38%

Undecided: 18% Post-Debate (Preliminary)

Pro: 45% Con: 55% See All Debates

http://www.munkdebates.com/home.aspx

"One survey in To Vima newspaper found that 65 percent want Greece to remain in the eurozone even if it has to implement the bailout agreement as it stands, while 24 percent said they would prefer to exit the euro rather than implement austerity policies." (comment: remember though that some commentators such as Bill Gross say that substantial bank withdrawals may force an exit regardless of what happens at the polls: http://www.cnbc.com/id/47554313 )

http://www.pewglobal.org/2012/05/29/european-unity-on-the-rocks/

observations

The FTSE has fallen about 6% YTD. SPY has risen about 3.5% YTD. If the SPY were to fall to match, that would be a 9.5% percent fall, to 119.55. Presumably the SPY does deserve to be at least a bit higher than the FTSE since the U.S. isn't Europe. Giving Europe an additional 2% loss, we have 122.19. Giving them another 2% we have 124.8%. Of course, if SPY actually falls then the FTSE will probably be falling also, so even if SPY fell to 119 then the FTSE would probably fall lower.

analysis/rant

bit of a rant:

so recently i've been reading a lot about investing and learning about the state of the economy. i didn't realize that finance was still on life support! The U.S. has been out of the recession for awhile, so that's not what i mean. But the Fed and the ECB have been intervening and sometime even printing money continuously since 2008 in various ways. The Fed had QE and QE2 and Operation Twist (Operation Twist is noninflationary but still..), and the EU's had the LTROs. Real rates on TIPs are negative, which should tell you something.

And we're not out of the woods yet! The EU might seriously break apart. They have an inherent structural problem; when the economy is going badly for some countries and well for others, monetary policy cannot be different for both of them (e.g. the unluckly economy can't print money without essentially implicitly taxing everyone in the lucky economy). The same dynamic obtains to government debt; EU countries really shouldn't run up more debt than they can afford, because they can't just print money as a "soft default" (well imo no government should run up more debt than they can afford, but that's a more controversial claim). But of course governments will do things even if they shouldn't, so this causes a crises.

We see this now in Greece, which like many other governments spends more than it can afford to. There is a lot of suffering in Greece right now, which is essentially in a depression. They can't print money to pay their debts and so the only answers for them are (a) leave the Euro and print money, (b) default, (c) get someone to give them money. Of course they'd prefer (c), and the way the mechanics of the EU financial system is currently arranged, 'someone' is implicitly Germany. The problem is that German voters don't want to give money to Greeks unless they see it spent well (as they perceive that), whereas the Greeks don't want to be told what to do by the Germans.

The problem is exacerbated by the fact that, like canaries in the coal mine, the Greek banks have ran out of money first (this is to be expected because the business of lending out deposits = leverage, and leveraged businesses fail first in a crisis), and it is thought that an outright failure of the Greek banks would be very bad for the Greek economy, therefore the EU is giving a lot of money to the Greek banks. At the same time, in order to buy time for Greece, the EU lent Greece money, and of course it wants to be paid back. Now Greece is asking for more money, the EU is seeing that the Greek government is spending more money than it is taking in, and they want to be paid back someday, so they are telling Greek to reduce spending, which involves firing people. So the Greek government is being told to fire people in order that money may be given to it and to the Greek banks. Which many Greek people see as a conspiracy of 1%ers to take money from them and give it to other 1%ers.

So (a) seems to many people like the more likely answer. However, if this happens, Greek will redenominate money into its new currency, which means that Greek individuals who left money in Greek bank accounts will have their money taken from them and will be given a less valuable chunk of money in exchange -- essentially their money will be implicitly taxed by their government, who will use the proceeds to make up for its budget shortfall.

Greeks who transfer their money out of the country might manage to avoid the redenomination and hence avoid much of their money suddenly disappearing.

If that can happen once, everyone will assume it can happen again, and then people with assets in banks in other Euro countries which are having problems may perceive risk in holding them there and might transfer those assets to German banks, and if a lot of people did that it would be a run on the banks. Which is the one thing the markets can't survive intact.

The thing is that each time there's a run on the banks, Germany ends up paying for it unless they stop the EU from helping the country in which there is a run, in which case said country might decide to leave the Euro and print their its currency. So, if any country is going to be cut off, it's in Germany's interest to do it as soon as possible.

So basically it seems to come down to: Does Germany want to give away tons of money to the rest of Europe? My read is that they would, but only if they feel it is being well-spent. But the other countries don't want to take orders from Germany, especially when the orders are things like 'fire people' (and Germany doesn't have any power over them besides witholding money). The other countries claim that Germany has the wrong idea about how to run an economy, as evidenced by the economic trouble they are having, which may be ameliorated if Germany would allow more money to be printed; Germany won't listen because their economy has done better than everyone else's, evidence that they are better at running an economy than their neighbors.

Given that, my read is that Germans would consider giving the money without reforms to be like pouring it down the drain, and may not do it. Otoh they really like the EU so maybe they will. My view is that the German voters would prefer not to give the money, but not so strongly that they will disempower Merkel, and Merkel will do what it takes to preserve the EU -- the only question is whether Merkel thinks the EU will be stronger with or without Greece. Markets appear to think "with" but that may be short-termism.

Many of the other countries are deeply indebted and may not be able to survive without defaulting or printing money if Germany doesn't give them money. So the speculation is that they might leave so that they can print money.

Because of the possiblity of this, outside institutions are no longer thinking of the financial risks of the Eurozone as a single entity, but rather are considering the strength and weaknesses of the financial systems of each country (http://www.ft.com/intl/cms/s/0/73c76b8a-a5b4-11e1-a3b4-00144feabdc0.html#axzz1voa0CRxn, http://seekingalpha.com/article/597691-the-revolt-against-the-euro).

The US banks seem to have limited exposure to Europe but everything is so complicated that no one is really sure ( , http://ftalphaville.ft.com/blog/2011/11/04/725511/the-epistemology-of-us-banks-european-exposure/ , http://ftalphaville.ft.com/blog/2012/04/19/966221/eurozone-credit-contagion-in-8-easy-steps/.

---

http://seekingalpha.com/article/620361-world-markets-weekend-review-a-modest-improvement?source=yahoo

predictions

I predict EUR/USD will fall further. Most of the scenarios in which the EU doesn't break apart involve more inflation. However i don't have a way to fundamentally value EUR/USD so i may be way off, beware.

As noted above, i think the most likely outcome is for stock markets to rise, but the possible magnitude of a fall is bad enough that i think the geometric expectation is negative. Recall that it's not just Europe; the U.S. financial system is still on life support (liquidity injections and negative real bond yields) and there are concerns about India and China's real economy.

At the end of April, SPY's P/E ration was around 14 and the price was around 140. I think that's too high for a situation with this much risk -- as noted there is a significant outside chance that the situation in Europe will turn out badly, and even if not there's a good chance that it'll get worse before it gets better. Maybe 11.5 would be ok (honestly a 9 would make me more comfortable but i guess one must not be greedy)? So that would be about 115. This is close to the 119 i got above from the guess that SPY 'should' be more tightly coupled to the FTSE. Kinda handwavy, though, and not too much different from the current 13.2, so i dunno if one should bet much money on this number.

So i think any price for SPY above 119 is too high. However the fact that SPY is not already there provides some evidence that i am wrong, since markets are smarter than me. So let's say 124.

May 29

news

The European repo curve has inverted!

http://ftalphaville.ft.com/blog/2012/05/29/1019971/the-eurepo-curve-spells-trouble/

especially over the next 21 days, and continuing out for 3 weeks

observations

Germany's spent more money on Greece in the past year than it's spent on itself!

http://www.forbes.com/sites/haydnshaughnessy/2012/05/29/germans-looking-to-spain-add-up-cost-of-supporting-greece/

links

http://www.minyanville.com/business-news/markets/articles/central-bank-Europe-bank-California-european/5/29/2012/id/41292

May 30

news

Nikkei and then FTSE and then SPY went down over 1%. Syriza retakes lead in polls. ECB refuses to participate in monetizing Spain's debt resulting from Bankia bailout. Spain and Italy's bond yields edge higher. Spain's is in the high 6%s, which is getting into the consensus 'danger zone'. SPY more than 1.5% above it's recent low.

Articles in the news about institutional investors permanently reducing their allocation for equities over the last year and over the rest of this year and about a trend towards funds with managerial discretion to go all-cash in scary times, which of course in the aggregate increases positive feedback and hence volatility in the market.

analysis

Some scenarios for Europe:

• Fiscal union
• (partial) break-up extending beyond Greece
• Fiscal austerity but with lots of money-printing and/or transfers

What 'should' Europe do? Well fiscal union seems best to me but i don't think they want that -- over 60% across the board in the Pew survey said they don't want the EU telling their government what to do.

In the absence of fiscal union, the pro-EU folks would like to 'muddle along' until they can convince everyone for fiscal union in a few more decades. But that appears to be unsustainable as long as some countries can essentially take money from others by having larger government deficits and then demanding money-printing (i'm not claiming that there are any countries which are doing this on purpose, e.g. i don't think anyone is trying to steal from their neighbor; it's just a side-effect of the mechanics of the system). The obvious solution to this is to disallow it legally (fiscal union), but the next best thing is to give incentives for it not to be done. Hence 'fiscal austerity but with lots of money-printing'. Start a tradition; you obey the dictate to run low deficits; then you stay in the union and the EU prints money to help you when times are tough; but if you are stubborn then then EU doesn't help you out when times are tough. The only way to make such a tradition credible is by example; so to go down this path we would see: (a) Greece, which has stubbornly refused to lower its deficit, has help cut off; (b) Ireland, which has done what the EU asked of it, is coddled, no matter what the cost; (c) Spain will be forced to cut more as it needs more help.

This appears to be what Merkel is going for, perhaps subconsciously, and it appeared to be working with the 'austerity' push earlier this year. However the anti-austerity push these days puts it in danger; as does the reluctance on the ECB's part to print money.

So i think that what Merkel and the other leaders 'should' be doing is (a) be explicit and upfront about how such a tradition is absolutely necessary to preserve the EU (b) demand GREATER fiscal austerity from national governments; but at the same time (c) print a boatload of money.

Printing a boatload of money requires a dual mandate for the ECB, which has its downsides; to which i suggest that the duality of the mandate be temporary and auto-expiring (and would require another treaty change to renew). Give it, say, 3 years.

There is still the issue that a single currency does not allow for differing monetary policy in the different countries. What if the net situation of the EU as a whole is such that it is best served by a strong Euro, but some countries are best served by a weak Euro? With a fiscal union, this would be solved by a strong Euro, plus transfers of wealth from countries that are doing well to those that are suffering. In the above proposal, the solution would have to be either (a) an overly expansionist monetary policy, such that even the weakest country is not suffering through a local depression, or (b) voluntary fiscal transfers. Both would seem to be a significant source of future strain, and (b) cannot be react to new situations sufficiently quickly. However i think these strains would be less than the current strains, hence this is a 'lower energy state' than the status quo. I would think that the overly expansionist monetary policy, although suboptimal for the EU in the aggregate, may actually be preferable for the survival of the Euro because it avoids the need for a strong country to be seen telling a weak country what to do. Otoh it's unclear how the tradition described above could be given credibility without this form of explicit shaming.

As other commentators have noted, however, there are other 'external' threats to this outcome that the EU leadership can't control; (a) Greece or Spain could leave the EU and do better outside of it; (b) (less threatening) Ireland could follow the programme to a T but at the same time vote down pro-austerity treaties, making its character in the morality neither 'good' or 'evil' but a bit of a Puck; (c) 'da Markets' could move faster than the politicians (esp. because to implement (c), print a boatload of money, requires the ECB to be given a dual mandate, which requires a treaty change, which takes forever).

Do we seem to be heading towards this outcome (fiscal austerity but with lots of money-printing and/or transfers)? Well, we did last year when 'austerity' was popular among the leadership but now it no longer seems to be popular. In addition, as commentators have noted, for this to work Germany would have to either support a dual mandate, or more direct fiscal transfers, or both. It is not clear that they do (although my guess is that they would if the argument above were put to them, namely, this is a quid pro quo to incentive fiscal discipline, at the same time preventing undue suffering of their neighbors). Still, there is strong will in all quarters to keep the Euro together, and i can't think of another way for it to happen -- however surely someone smarter can think of something better.

June 1

news

The May U.S. jobs report came in way under expectations. The expectations were somewhere around 115000, and the report said 69000. It also revised April's jobs numbers down from 115000 to 77000.

European stocks were also down across the board. DAX fell 3.4%. CAC 40 fell 2.21%. German May manufactoring PMI (over 50 means expansion) was reported at 45.2.

SPY dropped to 128.16.

VIX rose 10.8% to 26.66 (ominous number!).

EUR/USD is up to 1.2365.

Mario Draghi basically told the EU legislature that something has to be done. He seemed to recommend a "banking union".

" Friday, June 1, 4:01 AM Eurozone May Manufacturing PMI comes in at a final 45.1, just above the 45.0 flash reading but down from 45.9 in April. It's near a three-year low as weakness spreads from non-core to core nations." -- http://seekingalpha.com/currents/post/346261

analysis

SPY is now below it's 200-day moving average. Seems to me that this means that the momentum-fans among the chartists, including the momentum-based tactical asset allocation crowd, may decide that this is a bear market or at least a 'risk-off' time when it's bad to be in stocks. Given this, i am surprised that the market didn't fall even further at the end.

Indeed that's what this chartist things: http://seekingalpha.com/article/631931-without-steps-in-europe-markets-could-fall-fast?source=yahoo

However he warns about "headline risk" and says "this market is looking to rally" if policymakers unveil a credible plan.

Given the level of fear that i see in the financial media, i am surprised that VIX isn't higher. My interpretation is that people share my feeling that (a) if push comes to shove, EU leadership will take action, (b) financial markets get in a tizzy too easily, and (c) the possibility of a bank crises has been anticipated and all of the financial workforce has been planning for that the last few years. However, i also think that others are underestimating the tail risk.

The story seems to be breaking through to the non-financial media now. As http://www.bespokeinvest.com/thinkbig/2012/5/31/the-drudge-headline-indicator.html notes, this may mean that the 'crisis' is now under control. However, in this case i worry that it may increase the chance of a run on Spanish banks.

It makes sense that EUR/USD rose since the strength of the U.S. economy went down. However, i still think that the amount of potential future European money-printing in the next few years is greater than U.S. Also, i expect that if things get worse, more people will buy U.S. bonds.

I don't understand why people are buying German bonds, btw, if the cause of risk is EU debt and coherency. If the EU falls, Germany will have problems later. If the EU survives, it may be because Germany is propping it up. US bonds seem to me to make more sense. What am i missing? Exchange-rate risk? Perhaps European institutions have to hold EU-denominated bonds?

I think a bad sign for Europe is the phenomenon that in the past week, various EU bigwigs said things that were reported in the media, only to have some other EU bigwig contradict it in the media (e.g. Barroso, Monti, and i think Rompuy all recently publically suggested plans that are based on Germany giving money to others, raising the market's hopes that some sort of compromise has been reached, only to have them shot down within the hour by German PR reps who reiterate their previously known opposition). This indicates either that these people aren't sitting down and talking to each other enough, or that they are but they are at such an impasse that they have stopped cooperating and are trying to force the other side to comply via the pressure of bad publicity; or, possibly, and much worse, that they think it's going to be a train wreck and they are trying to get on record as having suggested that something be done but been blocked by others.

The recent bad data from the U.S. market does not confirm my "the US stock market should not be so decoupled from Europe's" thesis. Rather, it adds new information: the recent U.S. expansion may be ending. This means that the U.S. cannot be expected to keep expanding as much of the rest of the world contracts. Instead, we seem to be heading into a worldwide recession. The U.S., Europe, China, India seem to all be contracting at the same time. Simultaneously, the EU is having a potential banking crises (and something of a sovereign debt crisis), which, along with Greece, is forcing a related political crisis. And the U.S. and Japan are both fiscally overextended. It's kind of a perfect storm. I don't see how bulls can imagine anymore that the S&P 500 belongs at its recent highs in the 1400s -- instead perhaps they will think it belongs at its recent highs in the 1320s (otoh some policymakers say the fall could just be a short-term fluctuation; "It could be that these weaker numbers could also be part of the seasonal adjustment pattern in the data," Sandra Pianalto, president of the Federal Reserve Bank of Cleveland," --http://online.wsj.com/article/SB10001424052702304821304577440703183248764.html). Since it is still pretty near that, i don't think even they would be surprised if it falls further, especially since we don't get any more Greek polls until the Greek election, and the last poll had Syriza winning.

There is now an outside chance of the EU breaking apart, AND an outside chance of a global depression. I'm getting a little scared.

The median outcome (or "central scenario" as others like to call it) may have just shifted from mild growth to a mild contraction in the U.S. and Europe.

Yields are so low that TLT (the main long-duration U.S. bond ETF) is now fluctuating like a stock in response to macro news. I would not recommend TLT to anyone who wants to buy bonds instead of stocks because they don't like the risk that comes with stocks. Rather, right now i think that TLT is sort of like shorting SPY; it can either be a short-term bet or a long-term hedge against global recession or depression.

Until recently, i thought STIP was something "safe" to do with one's money in exchange for a small interest rate but that doesn't seem to be working out so well today!

http://www.cnbc.com/id/47645265 claims that QE3 will make the market go back up.

i don't have a handle on how much effect an extension of Operation Twist would have. I don't have a handle on the probabilities. I also wonder if maybe the U.S. wouldn't do that right now out of consideration for Europe, who desperately needs EUR/USD to fall -- in the long term the survival of the EU is more important to the U.S. than more jobs in the next two years. Not sure if U.S. policymakers think about that though. http://www.businessweek.com/news/2012-06-01/fed-will-likely-weigh-rosengren-s-call-for-stimulus?r=bloomberg suggests that they think that problems in Europe are a good reason for more stimulus, not less.

Morgan Stanley thinks 80%: http://www.bloomberg.com/news/2012-06-01/fed-stimulus-odds-climb-to-80-after-jobs-morgan-stanley.html

http://www.ritholtz.com/blog/2012/03/window-dressing-or-something-more/ thinks the impact would be huge.

However all trader commentators that i've read seem to be basically saying that Fed intervention is bad idea that just hides underlying problems. Nevertheless they seem to think it's likely.

Apparently in the recent past, announcements of increased Fed intervention always led to an immediate, huge stock market rally... except in 2008: http://www.ibtimes.com/articles/347951/20120601/does-lackluster-data-mean-qe3-not-yet.htm

predictions

in order of declining certainty, i predict that VIX will rise, SPY will fall, EUR/USD will fall, and U.S. long-term bonds will rise.

i still predict that gold will decline but i am still very unsure. i still think gold volatility will rise (because i think the recent pattern of sharp falls and sharp rises in gold, will continue).

i would not recommend that anyone hold stocks right now, but if you must, i like VQT.

My uncertaintly about the Fed adds a lot of uncertaintly to these predictions.

political rant

The idea of a "banking union" seems to be attractive to the EU elite but i don't think these people grasp how many voters think that everything is a big conspiracy of bankers stealing everyone else's money (i don't think this, i think "the bankers" are muddling along like everyone else, and are trying their best to be useful to society like everyone else). The idea that the EU adds "a banking union" before adding more democratic procedure is i think a really unwise thing to do -- this will be used as evidence for the contention that the EU is in the hands of a conspiracy of rich people.

The solution is direct fiscal transfer and possibly money printing -- but not a banking union.

But then, i think that the U.S. should have let the TBTF banks fail in 2008. Apparently i am an outlier -- almost no one in the financial media even talks about this w/r/t the EU -- i've only seen one person even consider the scenario where Spanish banks are allowed to fail, and that was one scenario out of 4, briefly discussed. Otoh Mario Draghi carefully said only that SOLVENT banks would be kept alive. This is more to my taste, although i still think the question of whether an instituition has "a liquidity problem" or "a solvency problem" is not something that can be objectively determined (before the fact), and hence having a regulator make these guesses is not a good idea (we've see what happens when they guess liquidity when in fact the problem is solvency in Greece and with Bankia).

The U.S. media is still paying a lot of attention to the elections later this year and seem to think the Euro crisis is important mainly because of whether Obama or Romney will win, although the economic situation is beginning to dominate the mainstream news too. I think it's pretty important who the U.S. president is, but that is dwarfed in importance by even a small possibility of the EU breaking apart.

other links

http://www.ibtimes.com/articles/347966/20120601/wall-street-week-ahead-time-for-some-more-stimulus.htm

http://blogs.barrons.com/incomeinvesting/2012/06/01/handicapping-qe3-bet-on-mbs-purchases/?mod=BOL_hpp_blog_ii

https://mninews.deutsche-boerse.com/index.php/weak-data-fed-easing-oddsbut-falling-yields-stir-skeptcsm?q=content/weak-data-fed-easing-oddsbut-falling-yields-stir-skeptcsm

" Here are some of the scheduled speeches for next week (subject to last-minute changes, of course):

    Sunday: Minneapolis Fed President Narayana Kocherlakota gets the honor of being the first Fed speaker post-jobs report.

    Tuesday: Chicago Fed’s Charles Evans, and Dallas Fed’s Richard Fisher.

    Wednesday: Dennis Lockhart (Atlanta Fed) and John Williams (San Francisco Fed).

    Thursday: Bernanke, Lockhard, Fisher, and Kocherlakota.

    Friday: Kocherlakota.

"

this is pretty scary: http://www.realclearmarkets.com/articles/2012/06/01/will_markets_wake_up_to_the_folly_of_monetary_intervention_99695.html

interesting article arguing that Spain's politicians are being unwise by openly advocating for ECB help with Spanish bonds: http://www.bloomberg.com/news/2012-06-01/rajoy-s-plea-for-ecb-aid-backfires-as-yields-jump.html

another scary article: http://www.project-syndicate.org/commentary/the-big-easing

interesting argument for stimulus: http://blogs.reuters.com/felix-salmon/2012/06/01/americas-jobs-crisis/ (my comment #1: he says the Fed isn't doing his job but doesn't he mean the U.S. government) (my comment #2: obviously the reason we don't do that is because the government is going to direct the funds to some sort of boondoggle and thereby waste them --- if we could guarantee that the government would just take a ton of money and invest it in a small cap ETF, or even better, in early-stage startups, that might make sense)

June 2

news

PM of Spain calls for fiscal union!: http://www.reuters.com/article/2012/06/02/us-spain-economy-europe-idUSBRE85107V20120602

The Bundesbank apparently doesn't support a banking union without fiscal union: http://www.bloomberg.com/news/2012-06-02/bundesbank-tells-faz-too-early-to-set-up-eu-wide-banking-union-.html

Merkel hardens her opposition to eurobonds; "under no circumstances": http://www.businessweek.com/news/2012-06-02/merkel-rejects-debt-sharing-as-obama-urges-end-to-crisis-cloud?r=bloomberg

analysis

Wow! i dunno if the PM of Spain was already openly in favor of fiscal union or not but if so, i didn't know about it. I'm guessing Italy's PM will be for fiscal union because he's an economist and to me (and other economists that i have heard, e.g. Krugman) the idea makes economic sense. The above article says that France is opposed, though. And even if PMs want it, the legislatures are sure to give it a tough time.

I will consider us as having backed away from the cliff if the President of France, Hollande, open supports fiscal union, and if there are no signals that any of the largest EU economy's legislatures are opposed.

I consider that unlikely in the next few weeks, however.

Merkel's "under no circumstances" line scares me. My hypothesis is that in the end, Germany would bail out the EU. Honestly, i don't know anything about Merkel or German politics and that was just on the basis of a very vague sense that she's a huge of the EU project. However, she's also a tough negotiator and this is what she would say even if my hypothesis is correct. People say that Europe needs a Marshall plan, well remember, the Marshall plan was after a depression, and after Europe lost a war, when it was in no position to disagree with what the donor nation, the U.S. told them to do. The weaker nations in Europe are still very much in a position (or at least they think they are) to refuse to take orders from Germany; hence, Germany has good reasons to suspect that any aid it provides will not be well spent.

My earlier analysis about the second-most-stable option of a 'morality play' in which nations that adhere to austerity are rewarded and others punished suggests that, now that Ireland has passed the austerity pact, it will be rewarded by Germany with another bailout. I don't know if Spain has been austere but a web page i read says it has, in which case the theory suggests that it too will be swiftly rewarded with a German bailout, contrasting with pain for Greece if they repudiate the memorandum.

If Merkel refuses to do help Ireland and Spain soon (how soon is 'soon'? If i were her i would do this immediately, but perhaps she wants to wait until after the Greek elections so as to organize the three potential bailouts in an optimally fair way}, then i guess the script of the 'morality play' hypothesis is not being followed.

predictions

Unchanged. Outlook: cloudy, possibly stormy.

political rant

There appears to be a general unwillingness for politicans to accept the reality of the business cycle, and that there must be recessions sometimes -- there may be an argument for growth in addition to austerity in fiscal planning but so far the main argument of the pro-growth faction seems to be 'because there's a recession'. Also, imo present-day political structures are not conducive to short-term sacrifice for long-term gain. Also, in an Econ 101 textbook i saw there is a chart that plainly shows that the maximal growth rate of economies slows as they mature. Therefore it should not be surprising that in the big Western economies, growth gets slower and slower. Yet this phenomenon seems to be being misinterpreted as evidence of too much austerity.

Extrapolating from these dynamics, one might predict that governments in mature economies will always try to borrow more during recessions yet not enough during (most) recoveries, because the recoveries will, on average, seem to be 'too little' due to the maturation of the economy. I postulate that thoughts along these lines is what makes bond buyers skeptical of the credit worthiness of governments. The governments tell us that they will reduce debt-to-GDP in the future when times are better. But the U.S. (the case i am most familiar with) has been in a recovery for years, yet debt-to-GDP has been increasing because it is thought that the recovery is not good enough. Now, there are some economists, such as Bernanke and Krugman, who agree that the recovery is not good enough, so i'm not saying that it is; but from an investor's point of view the models that predict that the recovery are not good enough are complex and have many assumptions, and the fact that debt-to-GDP is rising is less complex, so the conservative thing to do is not to believe that the Western governments will ever lower debt-to-GDP unless and until it has been proved otherwise.

A solution would be structural constraints that prevent governments from printing too much money and taking on too much debt. Which is what the austerity camp of the EU wants. If this were put into place, i predict that the current recession would deepen but the long-term outlook would improve (and the EU could preceed to a stable fiscal union, ending the current crisis). However, it seems to me that France does not agree with me, so this won't happen.

Also, a pet peeve of mine: the media always says that 'the markets demand this or that'. Markets don't demand anything. Markets only predict.

This use of language where markets are said to 'demand' things causes various problems. First, it implies that maybe the 'demands' of 'the markets' could be taken into account when making decisions. What the market 'wants' is not a good way to determine which political decision should be made (because, again, markets don't 'want' anything. They only predict). Now, perhaps some market-like mechanism for decision-making could be imagined, but present-day financial markets are not it.

A second problem is that people get annoyed at 'the markets' for being so 'demanding'. Then they try to regulate the markets to make them less 'demanding'. You cannot make the markets less demanding, because they already aren't demanding anything at all. The most you can do is make them less good at predicting things, which is silly because that's what they're good for.

June 3

news

no announcement from the Fed yet of any sudden action.

analysis

It occurs to me that my assumption that Merkel would bail out the EU if push comes to shove (i already thought this, but today i saw this article which explains it: http://www.irishtimes.com/newspaper/opinion/2012/0602/1224317132627.html) may be wrong. I don't really know anything about what Germans think of this.

Also, if the U.S. stock market crashes, America (and hence Obama) is going to be unhappy, but Obama would have a tough time making Germany care if the stock market tanks. Neither German households nor German pension funds invest in equities very much:

U.S. pension funds are almost 50% equities, German are about 5%. --

"Only 9.4 percent of the German population owned shares of mutual funds in the first half of 2010, vs. 44 percent of households in the U.S. in 2009. At the end of 2009 stock investments represented 3.9 percent of the financial assets of German households, the lowest level since at least 1991. Instead of stocks, Germans have 28 percent of their assets invested in life insurance products, 18 percent in cash and short-term deposits, and 20 percent in bank deposits." -- http://www.businessweek.com/globalbiz/content/sep2010/gb20100929_689994.htm

Also, i want to note that on other blogs i've seen an important point being made -- the spectre of bank runs is not because people are worried that their banks will be insolvent, but rather, because they worry that their governments may forcibly redenominate the currency in their accounts (once a real bank run starts, the solvency concern is there too, but this is second-order). Therefore, the plans being talked about for EU-wide deposit insurance must also include some form of redenomination insurance in order to be effective. I agree, this is crucial.

interesting idea: "We argued that analysts failed to appreciate the danger to equity valuations resulting from the markedly improved productivity introduced by the IT revolution. If young companies could rapidly get up to relevant mass and importance, established companies' competitive advantage could quickly be competed away. In an environment of a less durable competitive advantage, companies should logically sport lower rather than higher price-to-earnings and other valuation multiples. Since 2000 those valuation metrics have been noticeably reduced, but in the aggregate they remain near their historic highs but for the bubble period that began in the second half of the 1990s." -- http://seekingalpha.com/article/633341-are-we-losing-confidence-in-government-rescues?source=yahoo

political rant

There is some fear that the motion to impose losses on bank bondholders will make the crisis worse, and it will. But it's absolutely crucial in the long-term. I think that a Dodd-Frank-style resolution procedure that guarantees stockholder loss during "bail-ins" also sounds crucial, although i'd like to learn more about that topic from knowledgable experts before i decide to support it or not.

links

http://www.irisheconomy.ie/

Ray Dalio, fabled hedge-fund manager, says the U.S. has done a "beautiful" job delevering, but sees a 30% chance Europe will stumble badly: http://online.barrons.com/article/SB50001424053111904370004577390023566415282.html#articleTabs_article%3D1

on what the Fed might do: http://seekingalpha.com/article/632881-and-from-mayday-to-mayans?source=yahoo (also, note the eerie Mayan situation; i realized this myself a little earlier today, before reading this)

June 4

analysis

"10:31 PM The strong correlation between Treasury yields and European stock prices tells Scott Grannis the 1.5% 10-year rate is more a function of foreign demand for safe paper than an indicator of imminent U.S. recession. Every post-war recession has been preceded by a sharp rise in the real Fed Funds rate and a flat or inverted yield curve, neither of which is occurring now. [U.S. Economy] 6 Comments " -- http://seekingalpha.com/currents/post/350901

" Monday 1:01 PM More from Hussman: While the sell-off in stocks gives the S&P a bit more value in his models - a 5.5% annual return over the next decade - bear markets usually don't end until the market offers 10%, and secular bears don't end until prospective returns hit 20%!. Just getting to 10% would require an S&P in the mid-800s. 8 Comments " -- http://seekingalpha.com/symbol/spy

" Credit rating agency Standard and Poor's said on Monday that it sees "at least" a one-in-three chance of Greece exiting ..." -- Credit rating agency Standard and Poor's said on Monday that it sees "at least" a one-in-three chance of Greece exiting ...

June 5

news

G-7 political leaders had a conference call today with each other and with G-7 central bankers. A US service index (May ISM services) showed growth. The stock market went up.

" 5:12 PM Interesting stuff - the TIPS curve has inverted, the 1-year yield moving from -2.5% to zero in 4 months, meaning the market is now pricing in 0% inflation over the next year vs. 2.5% just weeks ago. Inflation expectations haven't collapsed like this since 2009. Might this chart be making the rounds with the Fed staff? [U.S. Economy] 4 Comments " -- http://seekingalpha.com/currents/post/353161

" 2:55 PM About $580M pulled out of the largest VIX ETF (VXX) since the market began heading down in late March gives strength to the idea the fund is less about speculation, more about hedging. "If history is any guide, a spike in VIX would result in significant redemptions of VIX products," said Barclays' Maneesh Deshpande back in April. Correct. 2 Comments " -- http://seekingalpha.com/currents/post/352761

" 12:17 PM Coordinated central bank action is "a lock," says Brown Brothers' Andrew Hofer. A better idea than QE, posits Larry McDonald?, would be an expansion of the dollar swap program from November. The LTROs, he says, have masked the level of funding stress for EU banks, making typical indicators like 90 day Euribor - currently near a 3-year low - no longer a decent gauge. [Global & FX, U.S. Economy] 1 Comment " -- http://seekingalpha.com/currents/post/352291

" 11:09 AM Spain is in a situation of "extreme difficulty," says PM Rajoy, speaking to Parliament. Europe must help with the country's liquidity issues, he says, dropping a big hint by mentioning how helpful the ECB's August 2011 bond purchases were. Madrid gives up gains of about 1.5% as he speaks, now +0.3%. [Global & FX, Breaking News] 7 Comments "

" 9:50 AM Brazil's May services PMI dives to 49.7 from 54.4 previously. It's the lowest level since July 2009 and follows the manufacturing PMI also sliding below the 50 level. "Sluggishness in the industrial sector is spreading to services," says HSBC's Andres Loes. [Global & FX] Comment! "

" 9:08 AM The sharp lending slowdown in China looks to have reversed, with the big 4 banks loaning ¥253B for May after pumping out just ¥34B through the month's first 20 days. It's especially interesting combined with another story suggesting Beijing is fast-tracking infrastructure projects, whether they're really needed or not. [Global & FX] Comment! "

"U.S. President Barrack Obama, new French President Francois Hollande and Italy's technocrat Prime Minister Mario Monti arranged a conference call with Merkel to persuade her to lift her veto on using Europe's available bailout funds to help rescue its banks.

The version reported in the Italian press stated the leaders tried three times in the course of the call. The first time was friendly and she answered "No," in English. The second time they were still polite but pressed her and she replied "Nein," in German. The third time they spoke with more urgency and a certain amount of tension and once again it was "Nein."" --

http://www.upi.com/Top_News/Analysis/Walker/2012/06/04/Walkers-World-Merkel-says-nein/UPI-85411338806062/?spt=hs&or=an?dailybrief

http://business-standard.com/india/news/angela-merkel-open-to-pooling-debtconditions/476428/

links

historical P/E ratios (PE ratios):

http://seekingalpha.com/article/639161-stocks-are-not-cheap-or-expensive-but-are-priced-just-right-but-they-still-have-significant-risk?source=yahoo

btw here's where you can get an up-to-date PE 10 ratio: http://www.multpl.com/

http://www.businessweek.com/articles/2012-06-04/bad-news-piles-up-for-chinas-economy

argues that yield curves are not saying that U.S. money supply is too tight: http://scottgrannis.blogspot.com/2012/06/why-recession-is-not-likely-and-fed-has.html

this article explains (fear of default-based) liquidity traps: http://ftalphaville.ft.com/blog/2011/08/11/650656/when-a-government-bond-becomes-a-giffen-good/

This article explains Bill Gross's view that a liquidity-trap-like situation can be caused by super low interest rates as well as by fear of default: http://ftalphaville.ft.com/blog/2012/01/04/817281/the-gross-paranormal-a-k-a-the-time-depreciation-of-money/

This article explains Bill Gross's view of the world (as of Jan), a view which so far is being borne out: http://www.pimco.com/EN/Insights/Pages/Towards-the-Paranormal-Jan-2012.aspx

i still don't understand why a bank would buy a negative-nominal-yield government bond instead of just having cash, though.

here's one explanation for negative Bund yields:

" But even more ominously, negative yields may be a sign that many investors are betting on a break-up of the euro area. The end of the single currency could have a silver lining for some investors, if assets acquired in euros were redenominated in a new German currency that would be likely to gain in value against its peers. "

-- http://blogs.wsj.com/eurocrisis/2012/06/01/negative-german-yields-highlight-euro-zone-woes/

12/06/10

news

Spain (pre-)requested a bailout on Saturday. Broad outlines of a deal were apparently reached; the bailout would be a super-senior loan to the Spanish government, and it would possibly have macroeconomic conditions and would definitely have conditions relating to Spain's financial sector, but the additional auterity conditions would be minimal because Spain has already been pursuing austerity.

" Highlighting the domestic pressure she is under to take a tough line with struggling euro zone members, an Emnid poll for Bild am Sonntag newspaper showed 66 percent of Germans are opposed to supporting Spanish banks with German money.

However, the poll, conducted before the euro zone finance ministers agreed to help Spain, also showed only 26 percent said they were worried about the stability of the euro. " -- http://www.reuters.com/article/2012/06/10/eurozone-germany-pact-idUSL5E8HA0ZQ20120610

political rant

this seems on-target: " Specifically, over the past 15 years, the global financial system - encouraged by misguided policy and short-sighted monetary interventions - has lost its function of directing scarce capital toward projects that enhance the world's standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.

What is central here is that the government policy environment has encouraged this result. This environment includes financial sector deregulation that was coupled with a government backstop, repeated monetary distortions, refusal to restructure bad debt, and a preference for policy cowardice that included bailouts and opaque accounting. Deregulation and lower taxes will not fix this problem, nor will larger "stimulus packages." The right solutions are to encourage debt restructuring (and to impose it when necessary), to strengthen capital requirements and regulation of risk taken by traditional lending institutions that benefit from fiscal and monetary backstops, to remove fiscal and monetary backstops and ensure resolution authority over institutions engaging in more speculative financial activities, and to discontinue reckless monetary interventions that encourage financial speculation and transitory "wealth" effects without any meaningful link to lending or economic activity. " --- http://www.hussmanfunds.com/wmc/wmc120611.htm

12/06/11

news

"

2:40 AM Italy faces more scrutiny, not less, following Spain's bank bailout. Italy has over €2T of debt, more as a share of GDP than any advanced economy after Greece and Japan, and is now a guarantor for 22% of Spain's bailout funds. But is also has a relatively healthy banking system, a jobless rate less than half of Spain's 24%, and is on track to rein in its budget deficit. [Global & FX] 5 Comments

"

"

4:20 AM Italy's Q1 economic contraction confirmed at -0.8% Q/Q. Year-on-year revised to -1.4% from -1.3%. [Global & FX] Comment! "

" 6:56 AM Not only does troubled Italy guarantee and provide the capital for a nice chunk of European bailout funds, but so does Spain - meaning the country is backstopping (and paying some of) its own rescue. Cool. [Global & FX] 2 Comments "

" 7:34 AM "Whoever gives money never gives it away for free," says EU Competition Commissioner Joaquin Alumina, joining German finmin Schaeuble in contradicting Spanish insistence this weekend's bailout agreement comes with no strings. "There will of course be (Troika) supervision," says Schaeuble. [Global & FX] 1 Comment "

"

9:32 AM The devil's in the details and they haven't been worked out yet, says the European Commission of the Spanish bank bailout. Two things are pretty certain: The Spanish government will be subject to Troika monitoring, and the bailout loan will subordinate ordinary holders of Spanish debt (confirmed by a EU spokesperson). [Global & FX] Comment! "

Markets down .5%. Spain and Italian bond yields rose slightly.

"

8:49 AM Good news for equity investors, Citi's Panic/Euphoria model sinks into panic territory, indicating, says Tobias Levkovich, a 96% chance of the S&P being higher 12 months from now. 5 Comments "

"

8:30 AM India may be the first of the BRICs to lose its investment grade rating, warns S&P, citing the usual suspects: Slowing growth, rising deficits (trade and government), and shaky leadership. The higher borrowing costs implied in a ratings downgrade is just what its struggling economy does not need. [Global & FX] Comment! "

"The bottom line is that there is no Armageddon yet looming for China. But there are some signs of a slowdown that could actually have deflationary components. And after the boom China has experienced for the past 20 years the type of slowdown that is envisioned by Michael Pettis, with any deflationary aspects at all, might be viewed by some as Armageddon." -- http://econintersect.com/b2evolution/blog2.php/2012/06/11/could-deflation-come-to-china

Cypress is considering asking for a bailout.

weekly data from china was bad but better than expected. Also, did i ever note that China cut interest rates?

links

"There is no dearth of riskier, cyclically exposed investment instruments such as common stocks on today's planet. And while many are warning about the economic risks of tumbling over the "fiscal cliff" of expiring tax breaks and stimulus measures after Dec. 31, few note the corollary "risk" that it would also mean a steep drop in Treasury issuance. " -- http://online.barrons.com/article/SB50001424053111904470204577446371761637272.html

however others think this would be good for stocks:

" Mandatory federal spending will rise significantly in 2014. Citi notes that the bond markets would react unfavorably to this. As such, it expects leaders to make significant shifts toward fiscal restraint in 2013. As fiscal uncertainty recedes, so should risk premiums and stocks should rise. " -- http://www.businessinsider.com/citi-raging-bull-thesis-2011-12#us-fiscal-problems-will-move-closer-to-a-resolution-and-equity-risk-premiums-should-come-down-1

Venizelos's quote seems the most insightful regarding the Spainish bailout and what it means for the Greek negotiating position; too bad he seems to be so unpopular in his country: “They are preparing a firewall to deal with whatever happens in Greece,” said Venizelos, the former finance minister who negotiated the country’s debt deal with creditors and saw his party’s popularity plummet as a result." -- http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_510_11/06/2012_446458

june 12

news

not much. apparently this afternoon some non-voting fed director said they were in favor of stimulus, but i think they were already on record as in favor.

The ECB backed a European Commission proposal to guarantee deposits ("banking union"). German is still opposed.

" German view of the future € skeptical

More than two thirds of all Germans argue for a survey that Greece leave the euro zone. This emerges from a survey that the polling organization YouGov? released on Wednesday. Thus, 69 percent of respondents say that Greece should withdraw from the euro-zone. Only 17 percent of Germans are to remain.

Very skeptical about the Germans see the future of the European Union and its common currency. Only a narrow majority of Germans (52 percent) would vote in a referendum in favor of staying in the EU. 29 percent would opt for the survey needed to leave the EU.

Approximately every fifth German (21 percent) expects that the euro over the next ten years will not survive and that the EU Member States to reintroduce their old currency. With their Euro-skepticism, the Germans are after the poll, behind Great Britain and Finland third. " -- http://translate.google.com/translate?sl=de&tl=en&js=n&prev=_t&hl=en&ie=UTF-8&layout=2&eotf=1&u=http%3A%2F%2Fwww.welt.de%2F&act=url

Tsirpas keeps reiterating his position; he wants to stay in the EU but insists on renegotiating the bailout.

greek bank withdrawals are between .6 billion and .9 billion per day.

SPY went up ~1%.

analysis

"There seems to be a direct correlation between vacation spots in sunny climates and non-payment of obligations (Spain, Greece, California, etc…)." -- http://www.optionpit.com/blog/did-iv-spx-confirm-rally-today

i've also heard it noted that the world's most economically productive cities tend to be in places which do not have a temperate climate. Is there a general theory encompassing this which is backed by research?

http://www.optionpit.com/blog/did-iv-spx-confirm-rally-today claims that VIX IV is actually up at various strikes and this indicates that today's rally probably won't last.

however i note that http://www.cboe.com/data/mktstat2.aspx shows that there were almost as many VIX puts bought as calls, which is unusual recently. (but also i think it may be triple witching week which i am not very familiar with).

it is curious to me that the market has been going up and up recently. Some competing explanations:

• it's just fluctuation, it'll go back down before the end of the week b/c no one wants to hold long positions before the Greek election
  • mb
• due to QE, nothing bad can ever happen, and stocks are cheap, so it won't go down too much in the absence of hard data that European finance has fallen apart
  • prima facie ridiculous; the market should go down given bad news
  • what more evidence is needed besides a Spanish bailout and rising Spanish and Italian yields and Greek deposit outflows and an inverted European repo yield curve?
• the Spanish bailout fixed everything, or at least indicated that the political will exists to fix it later
  • possibly, although i'm not a believer
• the market did drop due to the crisis but it has now bottomed out
  • possibly, but it doesn't seem like much of a drop to me
• sentiment is so negative that most medium-term active traders are now bears instead of bulls -- therefore, as Friday approaches, the bears will want to close their shorts over the weekend to avoid being overly exposed to the Greek election. The market is rising ahead of this. In other words, if people's central tendency is to be short rather than long, then uncertainty should cause the market to rise, not fall. Another way to put this is that Mr. Market is calling the bears' bluff: "Oh, you think i should go down out of fear of the Greek election? Really? If you think that then why do you want to close the short this week? I bet you were hoping for an easy trade -- you thought i'd crash out of fear, then you'd close your short, buy cheap stocks, and short VIX, because you thought i was going to overreact, right? You were going to close the trade out before the weekend because you didn't want to actually take any risk. Well, I call your bluff -- i'm not fearful, i'm cool, and i know as well as you do that the politicians will probably work it out in the end. I'll still incorporate new information, but i'm not going down unless Syriza actually wins, and maybe not even then, so if you don't want to lose money now you must hold your position through the weekend. If Syriza wins (or maybe only if Greece actually exits) you'll make a lot of money, otherwise, you'll lose a lot -- or you can fold now and take a medium-sized loss. If your pessimistic outlook is correct then your expected return is still maximized by holding through the weekend, but i'm not giving you a chance of substantial return if you're not willing to take a substantial risk. Your call."
  • it seems unlikely that people's central tendency has shifted to bearishness without causing a larger drop in the stock market. We're still over 200 MA for pete's sakes. But mb the 'call your bluff' behavior can happen even if the "central tendency" is still positive.

None of these sound very plausible aside from the 'it's just fluctuation'. But that doesn't sound so certain either. The last one sounds somewhat plausible. So i guess it's most likely one of those two.

But mostly, I'm stumped.

links

http://seekingalpha.com/article/654961-betting-on-bankers?source=yahoo says stocks are undervalued but he's scared.

http://seekingalpha.com/article/655331-even-after-the-recent-pullback-the-market-looks-expensive?source=yahoo says stocks are not undervalued. his PE 10 ratio and dividend yield match http://www.multpl.com/shiller-pe/ ; http://www.multpl.com/s-p-500-dividend-yield/ ; i think others say that mutual fund cash is slightly above 5% (http://www.cnbc.com/id/47779870?utm_source=twitterfeed&utm_medium=twitter)?

june 13

news

not muchOO. Retail sales fell 0.2% in May as expected. markets fell a little.

" The Labor Department reported the Producer Price Index (an indication of inflation at the wholesale level) for May fell by -1.0%, which was below the consensus estimate for a rise of -0.6%.

Next up, the Commerce Department reported that Retail Sales were down -0.2% in the month of May, which was in line with the consensus for -0.2%. When you strip out the sales of autos, sales were down -0.4%, which was below the consensus for a reading of +0.0% and last month's level of +0.1%. And when you take out autos and gasoline, sales were off by -0.1%. " -- http://seekingalpha.com/article/656511-daily-state-of-the-markets-either-hope-trumps-fear-or?source=yahoo

" Japan's core machinery orders climbed 5.7 percent MoM? in April, after a 2.8 percent decline the previous month."

"

5:04 AM Eurozone industrial production -0.8% M/M in April and -2.3% Y/Y, nothing to write home about but still better than the expected -1.2% M/M and -2.7% Y/Y. March figures revised to -0.1% M/M and -1.5% Y/Y. The largest decreases were in Portugal, Italy and, notably, Germany (-2% M/M). (.pdf) [Breaking News, Global & FX, Top Stories] Comment! "

" Europe needs a fiscal and banking union if it is to survive “the worst crisis” since the European Union’s creation, Spanish Prime Minister Mariano Rajoy said in an open letter to leaders on Wednesday. "

euro continues to rise against the dollar and the yen.

analysis

apparently earnings estimates have started to drop, which is a bearish indicator: http://seekingalpha.com/article/656491-what-are-analyst-based-market-timing-signals-saying?source=yahoo

" While wages and salaries quadrupled over the past 30 years; the value of all U.S. stocks has soared almost 18 times to $17.7 trillion today. One way of comparing wages and salaries with stock prices is that in 1982 the market value of all U.S. stocks compared to wages and salaries was 0.6 to 1. That means that all wages and salaries were more than the value of all U.S. stocks. Today, the value of all U.S. stocks at close to $18 trillion is more 2.6 times the amount of all wages and salaries. In other words, while wages have gone up over four times, the value of stocks have gone up more than four times for each of the four-fold gain in wages." -- http://seekingalpha.com/article/655931-stocks-edging-closer-to-financial-cliff?source=yahoo

rebuttal: "I always find your views interesting and I frequently learn things from them. However, in this case, I think you forgot that since the US has the largest capital markets in the world, a lot of money coming into those markets is coming from foreigners investing their money into the US capital markets. Also, in addition to foreign investment in US markets, corporations have been very profitable and they have also been investing much of their profits in the US capital markets as well.

I think a better comparison base is US GDP rather than wages, but that also discounts foreign investment in US markets, which is substantial. " -- -- http://seekingalpha.com/article/655931-stocks-edging-closer-to-financial-cliff?source=yahoo

predictions

unchanged; i continue to predict that SPY will fall, TLT will rise, EUR/USD will fall, EUR/JPY will fall, VIX will rise. On balance, this predictions have been wrong since the times when i first made them.

links

http://www.marketwatch.com/story/reflation-returns-as-melt-up-takes-hold-2012-06-13?siteid=yhoof2 thinks that "the market did drop due to the crisis but it has now bottomed out" is the right one.

political rant

" Look what happens when you let banks fail. Iceland's central bank has raised its key rate by 25 bps to 5.75%. "The economic recovery is broadly based, and the growth in domestic demand is robust. Signs of recovery in the labour and real estate markets are steadily growing stronger," the bank said. Iceland is a bit of a pin-up for letting its banks fail and suffering economic collapse before recovering smartly. But then Iceland is tiny. " -- http://seekingalpha.com/article/656171-wall-street-breakfast-must-know-news?source=yahoo

i contend that the following state of affairs is suboptimal: " Fiscal and banking crises are often linked because in modern economics the state and banking are joined together. Banks purchase government debt, supporting the state, and governments guarantee the liabilities of banks. When one party is weakened, so is the other. " -- http://online.wsj.com/article/SB10001424052702303768104577458301368089854.html

random theorizing

what would the effect of a financial transaction tax be? it would be similar to an increase in bid-ask spreads (transaction costs). what is the effect of increasing and decreasing transaction costs or spreads? i'm sure there has been some research on this but i don't know what it is.

my guess would be the following:

the financial markets are a cognitive system whose only function is prediction. Trading strategies based on predictive return drivers are computations within the mind of Mr. Market. These have the effect of moving price changes backwards in time, e.g. if it can be predicted that price will fall in the future, then it will fall right now. Therefore the activity of these trading strategies should decrease market 'irrationality' and act as market-making e.g. the magnitude of price changes due to bubbles and effects due not to changed fundamentals but rather to capital flows should be decreased.

So volatility as a whole should be decreased by these strategies. But it should increase at short time scales, because as you fall within the timescale of the operation of these strategies they cause additional price changes. So the operation of trading strategies should increase volatility at short time scales but this should be more than offset by decrease at longer time scales.

If transaction costs were zero then yet more strategies would be devised to counter the volatility at the short timescales, moving the increase in volatility to ever-shorter timescales, limited perhaps by the speed of human cognition and electronic communication (huh -- similar to how uncertainty only reigns on the micro timescale in quantum physics -- possible connection to theory of wave function collapse as a result of a Hamiltonian theory of physical computation, e.g. there is some real predictive computation process which predicts and therefore reduces uncertainty by physically minimizing action, but due to computational costs its operation is limited at small spatial or temporal scales?).

However in the presence of transaction costs we hit a limit to the operation of this process at a larger temporal scale, causing the max volatility to happen at a larger temporal scale than it otherwise would, decreasing volatility on timescales less than this, and increasing volatility over long timescales.

The increase in volatility over long timescales makes fundamental investing more risky, increasing the cost of capital.

Therefore i would predict that a financial transaction tax would decrease volatility at short time scales, increase volatility at long timescales, and increase the cost of capital due to increased risk aversion from the increased long timescale volatility (in addition to the tiny increase caused by the tax itself).

14 june

news

" 8:26 AM Stocks in Athens are 7.5% higher today as "secret polls" supposedly show New Democracy in the lead [bayle: by 3%] heading into this weekend's elections. Athens is off about 90% over the last 5 years and trading at early 1990 levels - it's not an index, it's a call option. "

Central banks leaked that they are considering doing something early next week depending on the Greek election. The UK announced a liquidity operation for banks. SPY went up 1%.

Italian bond yields fell slightly. Spanish bond yields rose, they are almost at 7% now.

A journalist went to Greece and talked to random ppl and reported: 1) Not one person thought Greece would exit (the reason appears to be because it doesn't want to exit) 2) They don't blame the financial structure of the Eurozone, they blame corruptness in their own government (so they don't think a new currency would solve the problem). Most of them aren't mad at Merkel, they see her as just doing her job.

-- http://www.businessinsider.com/greece-surprises-2012-6

This suggests that there hasn't been/won't be a run on Greek banks because Greeks don't think an exit is imminent.

Also, i've been watching Google Trend indicators and traffic for terms like "bank run" have been falling this week.

http://www.businessweek.com/news/2012-06-14/truckers-as-leading-indicator-show-stable-u-dot-s-dot-economic-growth

this news is from yesterday but i didn't see it until now: Greece has enough money to last until July 20:

http://www.rte.ie/news/2012/0613/greece-has-money-to-pay-bills-until-july-20.html

analysis

what would be necessary to trigger a capital flight crises out of Euros (note: the author says he considers this very unlikely):

http://www.zerohedge.com/news/orderly-eur-decline-capital-flight-crisis-4-easy-steps

predictions

The secret polls tell us that is it now slightly less likely that Syriza will win -- but the market reaction seems to have accounted for that already. In fact the market's been climbing over the past two weeks. Unless markets crash tomorrow (Friday before the election), at this point i'm not sure how much more the market will rise if New Democracy wins (esp. since they will have to form a weak coalition and negotiate with Germany based on that el pronto), but i'm guessing it will still fall if Syriza wins. So my median outlook is positive, but my mean outlook is negative.

Re: central bank liquidity -- not sure if this will really make the markets stay up if Syriza wins. Perhaps it will cushion or slow the fall if it loses. But then i don't understand that stuff much.

my predictions pretty much match -- except that i think that the first scenario is only a little more likely than the third, but i think the markets have priced it like it's a lot more likely (and except for a quibble with their terminology -- Syriza is also a pro-EU government, it just wants to take a firm line on negotiations).

links

" For your definitive documented "X is not Y" atlasing needs.

1. “Spain is not Greece.” Elena Salgado, Spanish Finance minister, Feb. 2010

2. “Portugal is not Greece.” The Economist, 22nd April 2010.

3. “Ireland is not in ‘Greek Territory.’” Irish Finance Minister Brian Lenihan.

4. “Greece is not Ireland.” George Papaconstantinou, Greek Finance minister, 8th November, 2010.

5. “Spain is neither Ireland nor Portugal.” Elena Salgado, Spanish Finance minister, 16 November 2010.

6. “Neither Spain nor Portugal is Ireland.” Angel Gurria, Secretary-general OECD, 18th November, 2010.

7. "Spain is not Uganda" Rajoy to Guindos... Last weekend!

8. "Italy is not Spain" Ed Parker, Fitch MD, 12 June 201 " -- http://www.zerohedge.com/news/definitive-lesson-new-normal-european-geography (06/14/2012)

political rant

Advice to Mr. Tsipras: Please don't bet anything of great value on the proposition that you can out-negotiate someone who (a) is an experienced negotiator, and (b) is among a handful of the most powerful people in the entire world.

(i don't think Mr. Tsipras needs this advice however, as he appears to be an experienced negotiator himself)

15 June

news

SPY went up almost 1%. Bond prices went up too (across the board -- both safe haven and peripheral, although spanish yields went down only a little bit, about .61%, compared to italian and german and going down about 3.3% and US 3.9%).

Egan-Jones downgraded France to BBB+.

this is not reassuring: http://www.bloomberg.com/news/2012-06-14/ecb-tells-court-releasing-greek-swap-files-would-inflame-markets.html

Zerohedge points out that Mario Draghi worked at Goldman Sachs and wonders if there could be a connection.

http://stockcharts.com/freecharts/gallery.html?$NYA200R

http://stockcharts.com/h-sc/ui?s=%24SPXA200R

SPY is up about 1% over 5 days.

analysis

It appears that Egan-Jones actually downgrades sovereigns when they are beginning to become more risky, as opposed to the big three agencies, which appear to only downgrade them after the market prices clearly reflect a consensus that they are risky -- e.g. Egan-Jones downgrades before the additional risk has been priced in, the big three after. E.g. all of the big three still have Spain above junk, whereas Egan-Jones has had it at junk for awhile. (http://online.wsj.com/article/BT-CO-20120613-714632.html). S&P still has Spain at BBB+.

Otoh perhaps all of them downgrade at the same rate, but the absolute meanings of their scale is different (even if they say it's the same) -- to figure this out we'd have to do a quantitative comparison.

By S&P's count, U.S. debt is only 83% of GDP (http://www.distressedvolatility.com/2012/06/30-year-treasury-yield-tested-2008.html) -- i had heard it was over 100% by some other counts.

links

http://thepriceofeverything.typepad.com/files/your-diy-euro-zone-bulletin.pdf

a bear case (thesis: the last two decades saw an artificially inflated U.S. economy, and the current growth rate is actually above the natural growth rate, unrealized by central planners who take growth rates in the recent past at face value, when actually they should be discounted): http://www.realclearmarkets.com/articles/2012/06/15/true_recovery_pushed_further_into_the_future_99720.html

a shorter-term bearish case: http://seekingalpha.com/article/662411-the-market-has-more-to-worry-about-than-europe?source=yahoo

a shorter-term bullish technical case: http://finance.yahoo.com/news/p-500-etf-forming-bullish-173747092.html

a shorter-term bearish technical case: http://seekingalpha.com/article/662601-the-world-markets-teeter-ahead-of-greek-vote?source=yahoo

political rant

According to http://www.chicagotribune.com/business/sns-rt-us-spain-banks-bondholdersbre85e0lm-20120615,0,2031552.story , 62% of Spanish bank subordinated debt is held by consumers. What the heck?!? I have a sinking feeling that perhaps this was sold to people as a non-risky investment because it is a "bond".

Apparently this is said to make it difficult for the bank failures to be allowed to wipe out subordinated bond holders.

Apparently the ECB does not even allow European national governments at failed institutions to wipe out senior bond holders even if they want to! http://www.chicagotribune.com/business/sns-rt-us-spain-banks-bondholdersbre85e0lm-20120615,0,2031552.story

We really need a system where equity and bondholders are wiped out when institutions fail before any taxpayer money at all is used. Such a system could be named "capitalism". However, i don't think that subordinate debt should be marketed to consumers as anything other than risky junk bond. I think each individual should be free to make risky investmentments if they are identified as such, and i don't think sophisticated investors (or anyone who claims to be a sophisticated investor and opts to be treated that way) should have their hands held, but if Spanish consumers were sold these bonds and told they were safe, that should not have been allowed.

16 June

news

"10:00 AM The next time some pezzonovante talks about cutting off aid to Greece, find him and give him a smack. Of the €410B in "aid" to Greece over the past 2 years, JPMorgan estimates only about €15B has gone into the economy, the rest doing a 180 and going to creditors. German and French banks were the main beneficiaries of the first bailouts, now it's the ECB and the IMF. [Global & FX] 10 Comments "

Greek "Cash withdrawals from bank accounts exceeded 2 billion euros on Wednesday and Thursday"

"Meanwhile, [Greek] bank customers are reporting that lenders are delaying withdrawals of large amounts, asking for a period of two to three days, while it has become particularly difficult to open an account abroad: Besides the usual bureaucratic obstacles, the time of response by foreign banks has grown considerably when it comes to new accounts." -- http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_16/06/2012_447336

http://www.businessinsider.com/what-athens-is-like-right-now-2012-6

"Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawals, no bill payments, nothing. Just locked out overnight." -- http://www.businessinsider.com/it-starts-the-governments-plan-to-steal-your-money-2012-6

" In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being relieved of their funds without so much as administrative notification." -- http://www.businessinsider.com/it-starts-the-governments-plan-to-steal-your-money-2012-6

Rich people from troubled countries are buying central London real estate:

" The flight of money from other countries was seen as one factor pushing up central London house prices, according to Knight Frank, a real estate agency dealing in high-end property.

While it looks very much that the surge in Greek buyers has fallen off sharply since the beginning of the year — those who had the funds to buy have done so — we are now seeing a noticeable uptick in interest from France, Italy, Spain and even German-based purchasers looking at the prime London market,” the company said in its Prime Central London Index report. "

analysis

The Skyscraper Index contrarian indicator says sell China: http://humblestudentofthemarkets.blogspot.com/2012/06/ultimate-contrarian-sell-signal-for.html

17 June

Greek conservatives, New Democracy (pro-bailout) won the Greek election by 3% (but there's a 15% bonus for the winner in terms on parliamentary seats, ugh, first-past-the-post voting system properties, anyhow..). They are planning to form a government with Pasok, the old liberal opposition party, which is also pro-bailout. Syriza, the anti-bailout party, got second place, only 3% behind New Democracy, and with ~15% lead among voters of age less than 55.

" 4:36 AM Spain's 10-year bond yield up 22 bps to 7.08%, a euro-era record. Italy at 6.12%. [Global & FX] 1 Comment

4:31 AM That was short-lived. Optimism following Greece's election results managed to lift Asian markets, while European markets are now giving back initial gains, and U.S. futures are trading down: Dow -0.2%, S&P -0.1%, Nasdaq flat. 1 Comment "

" 3:11 AM Japan’s exports and industrial production are expected to increase moderately in the coming months, the Bank of Japan said today in its monthly report (.pdf). Domestic demand will be supported by post-quake fiscal programs. Business investment and profits will stay on a moderate uptrend and consumer spending will remain firm. [Global & FX] Comment!

3:06 AM By the end of the month, U.S. and EU officials will weigh in on whether to pursue a free-trade agreement. Such a deal could potentially jump-start growth in both regions while completely sidestepping the austerity vs. stimulus debate. (more) [U.S. Economy, Global & FX] 2 Comments "

" 5:11 AM The Fed will unveil a $600B QE3 program after its meeting on Wednesday, SocGen? analysts predict. The Fed will also lower its 2012 growth outlook from 2.7%, and may extend and expand its Operation Twist program. [U.S. Economy] 3 Comments "

" 6:02 AM Greece's New Democracy party is attempting to form a coalition after winning 129 seats in the 300-seat parliament, although the socialist Pasok group hasn't decided whether to join a government or just offer parliamentary support. Together, the two broadly pro-bailout parties hold 162 seats, providing a relatively comfortable majority of 24. [Global & FX, Top Stories] Comment! "

" 5:48 AM President Francois Hollande's socialist bloc yesterday won 314 out of the 577 seats available in elections for France's lower house of parliament, meaning that Hollande won't have to rely on parties such as the hard left Leftist Front to get his program through. The program includes cutting the budget deficit to 3% from 4.5%. [Global & FX] Comment! "

" 6:25 AM U.S. stock futures reverse early gains as Spain takes center stage. S&P -0.1%, Dow -0.1%. [U.S. Economy] Comment! "

" 6:29 AM Bad loans held by Spanish banks hit an 18-year high in April, data from the Bank of Spain shows, with 8.72% of loans over three months in arrears. The total number of nonperforming loans is 10 times the level of 2007, the peak of the property boom. The data explains why 10-year yields are surging. [Global & FX, Top Stories] 8 Comments "

" 7:52 AM Investors used to routine double-digit profit gains at Canadian banks may need to prepare for at least a flattening in growth trends. "What we're seeing here is the early indication of (a) domestic consumer lending slowdown," says Barclays' John Aiken. "Loan growth simply will not be the big tailwind (as it's been) for the Big Six in the last decade," says portfolio manager Todd Johnson. [Financials] Comment! "

" 7:39 AM An Italian grocer is arrested attempting to smuggle 50 kg of gold into Switzerland. He was stopped in his car at a routine border crossing, and the metal - worth about $2.5M - was found underneath the driver's seat. [Global & FX] 1 Comment "

" 8:09 AM The Spanish 2-year yield rises 38 bps to 5.37%, more than 300 bps above the 2012 lows and threatening to take out the level from before the LTROs started. It's almost unimaginable, as the LTROs gave the banks all the near-free 3-year money they could handle in order for them to buy the government's 2-year paper. [Global & FX] Comment! "

" 8:23 AM Fitch cuts its outlook on India to negative from stable, due to "heightened" risks over the country's growth potential in the medium-to-long term. "Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms," says Fitch. (see rate decision) [Global & FX] Comment! "

" 8:33 AM Europe hits session lows, the Stoxx 50 -1% as Spanish government debt goes bidless, the 2-year note +46 bps to 5.46%, the 10-year +32 bps to 7.19%. Madrid and Milan equity indexes lead the decline, each down more than 2%. S&P futures -0.5%. Remember JPMorgan's call for a 2% gain in the S&P upon a New Democracy victory? Well, there's still a chance. 7 Comments "

" 9:05 AM Spanish banks may reportedly need to set aside €150B ($189B) in provisions for bad loans, an independent assessment will show when it is released this week. That's well above an IMF estimate of €40-€80B and includes provisions for retail mortgages. It's a fair guess that the speculation is a factor, along with bad-loan figures, in the rout of Spanish bonds today. [Global & FX, Top Stories] Comment! "

" 10:28 AM Fitch will not place all eurozone sovereigns on Rating Watch Negative as the weekend election reduces the risk of a near-term Greek default and euro-exit (what about the medium term? long term?). "The crisis in Greece and the eurozone remains intense." [Global & FX] 1 Comment "

" 10:37 AM The eurozone is urged to find ways to break the feedback loop between banks and sovereigns, reads a part of the G-20 draft communique leaked to Reuters. Also spotted is a line about "all necessary measures." That thud you heard was the sound of a writer's forehead hitting the desk. [Global & FX, Breaking News] Comment! "

" 10:39 AM Germany sends signals that while the substance of Greece's austerity program is non-negotiable, it might give the country more time to meet its fiscal targets. "We're ready to talk about the timeframe," and "It is clear to us that Greece should not be over-strained," are a couple of quotes. Think of it as a reward for voting for the right party. [Global & FX] 1 Comment "

" 11:27 AM Merkel: "Nein." She says see cannot accept any loosening of the reform package after the Greek election, and sees no need to talk about new aid to the country on top of what is already in place. Europe dives anew just ahead of the bell. Stoxx 50 -1.4%, Italy and Spain -3%. [Global & FX, Breaking News] 2 Comments "

" 11:20 AM Years of "official" policy in Beijing restricting further aluminum production capacity have failed to halt its growth as Western provinces have their own pet projects and goals in mind. The resulting staggering overcapacity and shortages of bauxite - the key mineral to producing the metal - is expected to cause a wave of bankruptcies across the industry. [Global & FX] Comment! "

upward momentum in: http://www.google.com/trends/?q=corrida&ctab=0&geo=es&geor=all&date=mtd&sort=0

(later in the day it's flat though)

downward momentum in: http://www.google.com/trends/?q=%CE%BA%CE%B1%CF%84%CE%B1%CE%B8%CE%AD%CF%83%CE%B5%CE%B9%CF%82&ctab=0&geo=all&date=ytd&sort=0 http://www.google.com/trends/?q=bank+run&ctab=0&geo=all&date=mtd&sort=0

spanish bond yields jumped 4% to 7.15800. Italian 2.6% to 6.05.

at the close SPY was up 0.14% and the Dow was down 0.2%

in Greece, "Deposit outflows revert to normal after election" -- http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_18/06/2012_447802

Zerohedge says that Italy's public request to the EU to lower its spreads will only raise them further: http://www.zerohedge.com/news/italy-hints-subordination-did-rome-just-request-semi-bailout

analysis

huh, Merkel isn't quite going by my playbook of creating a morality play and rewarding 'good' countries. i guess she sees renegotiating a bailout in any form just months after it is agreed 'bad'. Or, she may see the writing on the wall and doesn't want to throw good money after bad (calculating that Greece will leave in any case). Or, perhaps she is planning to give a lot away but needs to negotiate strongly, and is letting the other comments by the other officials convey the other message.

" 12:15 PM If you wanted to make up a perfect scenario where Greece is pushed out of the eurozone, you couldn't do any better than the current set of Troika policies, says Athens University professor Vanis Varoufakis. Spain: The government borrows at 7% to shore up banks borrowing from the ECB at 1% to lend to the government at 7%. "Not even the sickest of minds could make this up." [Global & FX] Comment! "

" 9:54 AM More on the 5.3% cash balance held by portfolio managers: It's the 3rd highest read on record and cash levels in this area have proven to be a decent buy signal in the past. (h/t ukarlewitz) [Quick Ideas] Comment! "

" Likelihood of Grexit Still 50-75%: Citi ‎"

CDS scale: http://blogs.barrons.com/incomeinvesting/2012/06/18/keeping-things-in-perspective-cds-style/

a long piece on how Spain's situation is pretty bad: http://www.economonitor.com/edwardhugh/2012/06/16/rescue-me/

there is a Fed meeting over the next two days.

zerohedge also points out that earnings estimates seem to have turned the corner: http://www.zerohedge.com/news/three-charts-your-stockbroker-wont-want-you-see

predictions

may be a good day to bet on http://www.intrade.com/v4/markets/contract/?contractId=713737 ? it went down to 30%, which seems too low to me. they don't take U.S. credit cards though so i'm not going to bother.

i still predict downward movement on all fronts (except upward movement in volatility) but with the Greek election over i'm not sure about the timing. Hedge fund guys' blogs who agree with this worldview say by the end of this year, or possibly the end of next year. They know better than me, so maybe it'll be that long. It could certainly be shorter, with Italian and especially Spanish yields rising i think there is still a high possibility for a crisis and accompanying market crash within a month.

12/06/19

news

we're in the middle of a 2-day Fed meeting.

rumor that ECB may resume direct EU sovereign bond purchases.

italian bond yields down 2.7% (relative) to 5.9%. Spanish down 1.6% to 7%. German up 8.4% to 1.5%. US up 3.9% to 1.6%. France up 1.5% to 2.7%.

SPY up 1.6%. Euro up.

Yesterday AMJ announced that they were suspending share creation, but still had share destruction, so they were effectively turning into a half-CEF with only a premium possible. Today it shot up over 1.6% -- however currently it is only at fair value.

analysis

"Buffett is quoted saying that the total market cap vs GNP is one of his preferred valuation metrics....preferred buying range (70-80%)," "current reading of 89%" --

http://pragcap.com/buffetts-favorite-valuation-metric-says

presumably the market is soaring b/c:

• Greek election is over
• rumor that ECB may resume direct EU sovereign bond purchases.
• expectations for Fed liquidity boost

12/06/20

news

the Fed extended Operation Twist and took no further action.

analysis

Italian and German bond yields dropped about .25% (absolute) and 2.5-4.2% (relative). US bond yields rose 2%. German bond yields rose 5.4%. (relative).

Merkel said that EU purchases of sovereign bonds were 'a possibility'.

Share of World GDP from 1-2008 AD

12/06/21

news

Spain's bank audit results annonced; results better than expected, only $60 billion needed for bailout instead of the expected $100 billion. Bad economic data out of Europe and the US. Moody's US bank downgrades, which have been expected for weeks, are to be announced this evening. Germany still doesn't want the ECB to directly buy peripheral sovereign bonds. Downgrades are slightly worse than expected.

SPY dropped 2.2%.

12/06/22

news

" 9:34 AM Fitch pours cold water on yesterday's audit firm assessment (somehow spun as good news) that Spain's banks could need €51-€62B in additional capital, saying the stress test's assumption of just a 6% capital level appears low. Fitch's base-case estimate of losses is €230B vs. just €170-€190B by Wyman and Berger. [Global & FX, Financials] Comment! "

" In its statement yesterday, the ECB Governing Council expanded the pool of securities eligible as collateral with a lower threshold.

Residential mortgage-backed securities and loans to small and medium-sized enterprises rated at least BBB- at Standard & Poor’s will now be accepted with a valuation haircut, or risk premium, of 26 percent, the ECB said. The previous minimum rating on such securities was A-.

Auto loan, leasing and consumer finance asset-backed securities and those backed by commercial mortgages with a second-best rating of at least A- at Standard & Poor’s will now be eligible with a haircut of 16 percent, the ECB said.

Commercial mortgage-backed securities with a second-best rating of at least BBB- from S&P would face a haircut of 32 percent, according to the statement. ". The Bundesbank isn't happy. --- http://www.bloomberg.com/news/2012-06-22/ecb-loosens-collateral-rules-for-banks-to-ease-access-to-funds.html

" German Chancellor Angela Merkel resisted pressure on Friday for common euro zone bonds or a more flexible use of Europe's rescue funds but agreed with leaders of France, Italy and Spain on a 130 billion euros ($156 billion) package to revive growth. " -- http://www.reuters.com/article/2012/06/22/us-eurozone-meeting-idUSBRE85L0SD20120622

" French President Francois Hollande voiced impatience with Berlin's reluctance, saying it should not take 10 years to create jointly underwritten euro bonds.

He said greater solidarity was needed among member states before they abandon more sovereignty to EU institutions.

"I consider euro bonds to be an option ... but not in 10 years," Hollande said in a direct challenge to Merkel. "There can be no transfer of sovereignty if there is not an improvement in solidarity."

The German position essentially amounts to the reverse. Merkel argues that members of the 17-nation currency union must transfer control over national budget and economic policies to Brussels before Germany would consider common debt issuance.

Without progress on bank sector integration or other financial stability measures, France is not ready to commit to ratifying an EU budget discipline pact agreed earlier this year, French diplomatic sources said. " -- http://www.reuters.com/article/2012/06/22/us-eurozone-meeting-idUSBRE85L0SD20120622

SPY went up .7%.

political rant

i advocate bail-ins that wipe out senior debt holders, rather than full rescues, for failing banks. I also don't think that most consumers should be sold bank junk bonds as if they were safe, because this makes bail-ins more difficult. But i also don't think the government should ban consumers from purchasing such speculative products. How to resolve this contradiction?

I have two proposals. First, "driver's licenses" for risky financial products. Unlike the RIA licensing regime in the U.S., speculative driver's licenses would be designed to be cheap enough that almost everyone (at least, everyone who could afford an automobile driving school course) could afford to get one, and would not subject the holders to any additional regulation or legal liability. Their sole purpose is to ensure that you learn the very basics of finance and that you be made to sit in a room face-to-face with an actual human who makes you appreciate that you could lose all your money.

Second, a government-given 'risk level' to classes of investments. Stocks and junk bonds would be 'risky'; corporate bonds, less so. Bank stock is more risky than non-bank stock, etc. The government would not be allowed to rate its own debt (e.g. an "unrated" level). A simple color-coding scheme. Instruments too new to be rated are assigned the maximum risk level until they are rated. Riskier assets are not allowed to be purchased until you have your speculator's driver's license.

There is a big danger in these proposals -- namely, that this system will be abused by the government and industry to (a) subject investment drivers' license holders to additional regulation over and above non-license holders, (b) make the cost of investment drivers' licenses too high for the average person, (c) put additional restrictions on risky products, (d) classify risky assets as less risky to achieve policy objectives or for corruption.

12/06/25

news

this is depressing: http://www.guardian.co.uk/business/2012/jun/22/mario-monti-week-save-eurozone

Monti is openly saying that if they can't agree by the summit at the end of this week, it may already be too late. Monti and Berlusconi seems to be openly predicting parliamentary strife that may lead to the end of Monti's government.

He seems to be strongly supporting fiscal integration, saying that an agreement on that goal should be reached at next weekend's meeting, and a blueprint needs to come within a few months. That sounds about right to me.

"The Supreme Court is set to rule this week on the constitutionality of the Patient Protection & Affordable Care Act, and could provide a verdict today"

Italian bond yields rose 3.6% relative, above 6% absolute again. Spanish bond yields rose 4% relative to 6.6% absolute. German yields fell 7% relative. Us fell 3.7% relative.

5 minutes before 4pm, it is disclosed that fiscal integration is on this weekend's agenda after all: http://www.ft.com/intl/cms/s/0/0da7179e-bee4-11e1-bebe-00144feabdc0.html#axzz1ypjZwh6r

SPY fell 1.6%.

analysis

https://twitter.com/ukarlewitz/status/217021506386006016/photo/1

" 3:39 AM The BIS Annual Report (.pdf) is full of uplifting statistics. Take this one, for example: It would take 20 straight years of surpluses greater than 2% of GDP to bring debt/GDP ratios back to pre-crisis levels across most advanced economies. [Global & FX] Comment! "

re: the ECB accepting near-junk collateral, this seems a little wild to me. It might not be a bad idea, but it's pretty scary that they feel that they need to do this.

i don't see how the French and German positions noted in Friday's news will be resolved anytime soon. Seems like Germany will not mutualize debt unless the crises gets worse (or unless they are worn down over a long period of time), and that France will not go for fiscal union quickly. My guess is that eventually both will happen but not this weekend.

i dunno what game Monti is playing by publically saying that this weekend is the last chance. Merkel has already publically said not to expect too much from this weekend. Seems to me that Merkel, not Monti, will determine what happens this weekend, so doesn't Monti's comments raise Italian bond yields if not much happens over the weekend? As noted earlier, i feel like all of this arguing in public is a bad sign, because it shows that the parties either can't communicate with each other, or are treating each other as opponents rather than allies, or that they privately predict disaster and want to get on record as having forseen and tried to stop it.

on second thought (i wrote the previous paragraph before the news came out that fiscal integration is on this weekend's agenda), Italy and Spain and Germany seem to be for fiscal integration (and of course Brussels would be). This could turn the tables on France so that France is now the holdout. This would be notable progress. Rumor is that Hollande is pro-EU, and on Friday he even said that he'd be up for fiscal integration but only after more stimulus. so in that case him and Merkel would strike some sort of deal in which there are a number of steps of closer fiscal union followed by more German stimulus, starting out with a small amount of stimulus to allow Hollande to save face. Even the grouchy German central bank guy said he thinks Spain and Italy have been making progress.

another scary bit: "Other proposals from Monti, such as stripping some forms of public investment from budget deficit calculations". Aren't those kinds of machinations on the part of Greece exactly what got everyone into this mess in the first place? Monti surely has had that thought also. His suggesting this despite, shows desperation.

" The Guardian also highlighted the ... and you are never going to believe this ... lack of detail behind Friday's pro-growth announcement from Euro leaders:

    One of the keys to next week's summit will be the precise terms of the growth package. The €130bn would appear to represent a sum that might be raised or redirected from existing funds, rather than any commitment of new money. Nicholas Spiro, of Spiro Sovereign Strategy, said: 'The pact has a shuffling of the deckchairs feel to it.'"

more news about earnings estimates potentially falling: http://www.bloomberg.com/news/2012-06-24/euro-crisis-hits-profits-globally-as-p-g-cuts-forecast.html

predictions

i still think the stock markets will fall and VIX will rise, but i'm now more sanguine about the EU staying (mostly) together now that fiscal integration appears to be on the table. Wouldn't it be great if at the end of this weekend summit France, Germany, Spain, and Italy announce that they all agree in principal to fiscal integration? Still, apparently the timescale of that process is long, and in the meantime i bet there will be a full-blown banking crisis. But maybe not -- if the parties move forcefully towards fiscal integration, that could hold off speculation. But... is this outcome really that likely? I'd like to think so, because my personal opinion would be that fiscal integration would be good for the European people, but honestly i don't think it's realistic -- i think if everyone suddenly agreed to fiscal integration, the Euroskeptics would come out in force, and at least one of the governments of France, Germany, Spain, Italy would fall to Euroskeptics. This might not kill the EU but it might mean that the skeptical country would be ejected from the currency union. If the skeptical country were France or Germany it might kill the EU. If it were Spain or Italy it might devastate that country's economy, causing an EU-wide banking crisis.

In addition there is the substantial possibility that the countries will not move substantially closer to agreeing to fiscal union this weekend -- realistically, that (not moving much closer to agreeing) seems like the most likely outcome.

so my outlook is still negative but there's a ray of hope.

12/06/26

analysis

"Thirty years ago, the average forward P/E of the lowest dividend payers was 1.8 times that of the highest dividend payers.

The current P/E of low payers — 14 — represents just 96% of the average — 14.66 — for the high-dividend payers. " -- http://www.investmentnews.com/article/20120624/REG/306249977

"

SPY, IVE 11:18 AM Asset class correlations, rather than the VIX, have recently done a better job warning of upcoming turbulence, writes Nicholas Colas. Right now, S&P industry correlations are running at 88%, up from 75% in February, he says - "a very visible warning flare" for now, but a contrarian buy signal once it gets into the mid-90s (like last fall). 2 Comments " more on that: http://www.zerohedge.com/news/vix-correlation-and-building-better-mousetrap

"

10:59 AM More on State Street: despite the rise, the main index remains well below the neutral level of 100. Institutions began purchasing equities in mid-June at "a pace not seen for almost two years," with the buying "relatively broad-based." The appetite for stocks is strongest among the Europeans, which may say more about the their euro concerns than about hopes of high returns. [U.S. Economy] Comment! "

"

10:18 AM June State Street Investor Confidence Index: 93.5, up from May's 86.5, hitting its highest level this year. Regional breakdown: North America +5.7 to 93.8, Europe +4.5 to 102.5, Asia-Pacific +1 to 90.4. [U.S. Economy] 1 Comment "

"

2:54 PM Germany is downgraded to A+ from AA- by Egan-Jones. "Germany is likely to be outvoted (on the issue of eurobonds) by other ECB members and therefore will have greater prospective exposure." [Global & FX, Breaking News] 1 Comment

"

10:09 AM More on Consumer Confidence: It's the 4th decline in a row for the index, which now stands at its lowest level since January (expectations at lowest level since November). "The failure of Bernanke's 'wealth effect,'" says Not Jim Cramer, noting the divergence since QE began between consumer confidence and stock prices. [U.S. Economy] 13 Comments "

"

10:00 AM June Consumer Confidence: 62.0 vs. 63.0 expected, 64.4 (revised from 64.9) prior. Expectations 72.3 vs. 77.3 prior. Present Situation 46.6 vs. 44.9 prior. [U.S. Economy, Breaking News] Comment! "

"

10:01 AM May. Richmond Fed Mfg. Survey: -7, to 3 (above 0 = growth). Shipments -2 to -2, new orders -13 to -12, jobs -8 to 8. [U.S. Economy] Comment! "

"

9:43 AM China scraps much talked-about plans to let local governments directly issue bonds over worries it could aggravate an already-problematic debt problem. Unable to raise funds in the bond market, localities for years have set up thousands of opaque financing vehicles whose debt now totals about 27% of Chinese GDP. [Global & FX] Comment! "

" "I don't see total debt liability as long as I live," Merkel was quoted as telling members of parliament from the Free Democrats (FDP), junior partners in her centre-right coalition, by sources who took part in the meeting. "

SPY up about .5%. Bond yields up across the board (including safe havens).

analysis

one thing i read said the commonly predicted central scenario for this weekend's EU meeting will be a banking union in 2013.

this article seems to predict a future drop in Spanish equities: " The European bailout for Spain's banks will push them to sell an empire of stakes in the nation's top companies, ending a cozy culture of corporate-banking links and prompting a wider shake-up in ownership of the company landscape....But as Spain's economic crisis draws out, with unemployment climbing above 24 percent and a recession seen lasting through this year, investors still feel that anything they can buy today can be had even cheaper tomorrow.

"People are aware that sales are taking place, and they are watching. But the overriding emotion on Spanish assets right now is not 'I have got to hurry or I will lose it,'" the banking source said. " -- http://www.reuters.com/article/2012/06/26/us-spain-banks-stakes-idUSBRE85P18D20120626

" The American Chemistry Council's chief economist Kevin Swift created a 'Chemical Activity Barometer' which tracks chemical production and prices, hours worked at producers, and manufacturing output among other factors. As indicated in today's Bloomberg Chart-of-the-Day, this indicator, based on its 'earliness in the supply chain' provides a signal that "the outlook for the economy is slowing during the next six to nine months" since 96% of manufactured goods are derived in part from materials produced by the US chemical industry. Three-month declines of 3% or more have preceded all but one recession since 1947 and it is currently down over 2.5% from its highs in March suggesting sub-par growth is coming." -- http://www.zerohedge.com/news/supply-chain-slowdown-signals-us-economic-slump-ahead

Useful guide to banking union Summit result scenarios: http://www.zerohedge.com/news/eu-summit-scenario-matrix

predictions

My technical UVXY model is negative but i disagree and predict volatility will go up because of world events. However, i am not very confident, because there may be a volatility crush after this weekend's meeting even if the result is neither good nor bad.

holdings

i should log more about my holdings.

right now i hold some VXX however i'm selling it when it jumps and replacing it with XVZ and VXZ, because although i think things will get worse before they get better, i don't really have a good idea when, and VXX has a more contango than these others. My guess is that if there is a problem it will be a long-term one, and VXZ is sort of like a lower-frequency, lower magnitude version of VXX. I don't understand XVZ as well but it seems to me that is designed to minimize contango at the expense of magnitude, while still going up slightly on long-term ViX? spikes.

i bought a few gold volatility calls.

i keep buying more MOM and MOM keeps going up.

i bought some more BOND.

my volatilty compounding pair trading strategy has lost me $300 over time, but i am still improving it and hope i can get it right.

12/06/27

news

scary uptick: http://www.google.com/trends/?q=corrida&ctab=0&geo=es&geor=all&date=mtd&sort=0 (ah, the next day it went back down! shew!)

this is a good sign: http://www.reuters.com/article/2012/06/23/us-france-germany-eu-idUSBRE85M0FJ20120623

" 4:10 PM Market recap: Stocks finished broadly higher after strong reports on pending home sales and durable goods orders, even as statements out of Europe dimmed hopes for meaningful results from the upcoming summit. Energy stocks dominated the day's top gainers as crude oil rode past $80, but natural gas lost most of its early pop. NYSE advancers topped decliners five to two. 1 Comment "

ECB contemplating a .25% rate cut on July 5.

China equities keep falling.

SPY up .9%. US bonds also up (eg yields down). EU bond yields rose across the board.

analysis

interesting interviews with Schäuble and Soros:

• http://www.spiegel.de/international/europe/finance-minister-schaeuble-euro-crisis-means-eu-structures-must-change-a-840640-2.html
• http://www.spiegel.de/international/europe/george-soros-says-germany-must-change-course-on-euro-crisis-a-841061.html

the most interesting part to me (not just because of its relation to investing, but for its relation to my other goals of improving democratic processes by better voting systems, more transparency, and stronger anti-corruption measures) was:

" SPIEGEL: You believe that the Germans will vote on a new constitution within the next five years?

Schäuble: A few months ago, I would have said: In five years? Never! But now I'm not so sure. Do you want to know why?

SPIEGEL: Yes, please.

Schäuble: Many in Germany said that (former US President) Ronald Reagan was crazy when he stood at the Brandenburg Gate in 1987 and said: "Mr. Gorbachev, tear down this wall!" And then it happened two years later. At the time, I too didn't believe that German partition would soon come to an end. In the spring of 1989, I had just become the new interior minister in Bonn. The new US ambassador introduced himself to me and predicted that the Wall could come down in the next three years. I replied: "I would have doubted that a few months ago, but now I would say that with a little luck, it'll happen in the next 10 years." And how long did it really take? Less than half a year. "

http://theshortsideoflong.blogspot.com/2012/06/global-business-activity-contracting.html

http://voxeu.org/index.php?q=node/7955

election year seasonality says buy on May 29, hold until at least Aug following the election year: http://www.crossingwallstreet.com/archives/2012/06/good-time-in-the-election-cycle.html

individual US investors are still 71% in stocks but they have reduced direct purchaes of stocks and increased purchases of balanced "target date" funds by enough to make up the difference (so they have about the same proportion in stocks as before, but indirectly) blogs.wsj.com/totalreturn/2012/06/27/are-individual-investors-fleeing-stocks-nope/

http://vixandmore.blogspot.com/2012/06/huge-gap-between-vix-iv-and-hv-but-is.html

http://vixandmore.blogspot.com/2012/06/euro-volatility-and-risk.html

http://www.optionpit.com/blog/how-vix-can-stay-flat-rally

basically, VIX is saying that, like the previous month, despite looming macro uncertainties, the markets won't crash until at least August.

personally, however, i get suspicious whenever IV is below historical volatility.

Today my technical UVXY model is indeterminate but turning up (e.g. it is giving different results on different timescales; on the most forward looking timescale it is positive, however it is negative on two other timescales).

http://www.valueplays.net/2012/06/22/spurt-of-pessimism-unwarranted/

" 2) Look for quality and yield

In a market where stocks are responding to news rather than fundamentals, Subramanian said there are two key themes that investors should watch: quality and yield.

Dividend stocks will have legs for the next couple of decades, since there is a "strong supply-demand imbalance for yield-oriented investments".

Supply on the bond side is limited since the Fed is keeping interest rate low for some time. And the S&P's payout ratio is also at an all-time low.

On the demand side, baby boomers are retiring with the proportion of retirees in the U.S. set to double over the next 20 years.

"A large and growing investor base is shifting from more of the capital-appreciation stories to the yield-oriented investments," said Subramanian.

With this in mind, Subramanian recommends shifting focus to stocks that have yield and the ability to grow their dividend rather than stock up on stocks that have the highest yield like utilities and telecom, but are expensive. Consumer staple stocks for instance pay out about 60 percent in dividend and have drive power to actually increase those dividends, while many utilities stocks pay out 90 percent of their earnings leaving little room for growth. "

armchair theorizing

why is professional bearish sentiment considered a contrarian bullish indicator? ( http://finance.yahoo.com/news/two-most-important-things-learned-224548516.html ) Surely these pros know that it's good to be buying when others are selling, and would correct for this, negating the relevance of the indicator?

My theory is that it's actually not a bullish indicator, it just seems that way with short data sets. The pros are bearish because tail risk is making geometric expected returns negative. Short data sets say this is a bullish indicator because the median return is positive; we do not have enough samples yet to have experienced the tail. To take the present case, it's pretty unlikely that Spain or Italy or Germany will leave the EU, but if that does happen, it'll be a doozy. If you look at a bunch of cases like this, most of the time the unlikely thing will not happen and you would have made money by betting on that. Only if the sample size is really large do you get to see the full downside that has been priced in.

Also, it's possible that sometimes the people who are computing these things are computing expected returns, rather than expected log returns (mean vs. geometric mean), in which case they may be underestimating the negative value of the downside.

holdings

i increased the size of my AMJ/MLPI pairs trade in expectation of a premium in AMJ developing due to no new share creation.

12/6/29

news

real progress at the EU summit. They agreed to:

• not have Spain's debt to the EU (the bailout debt) be senior to private debt
• sometimes not demand anything more from countries being bailed out than previous EU suggestions/requirements, if those previous requirements were already being followed.
  • this is a big deal in Germany, which reads it as an invitation for other countries to take German money: http://translate.googleusercontent.com/translate_c?act=url&hl=en&ie=UTF8&prev=_t&rurl=translate.google.com&sl=de&tl=en&twu=1&u=http://www.welt.de/politik/deutschland/article107612788/Europa-greift-nach-unserem-Geld.html&usg=ALkJrhh5u41Q1IIBGEhQoymHKC7ehtjDKQ
• create a EU-level bank supervisor by the end of this year
• after the bank supervisor is created, bail out banks directly, rather than via sovereigns (buying of bank bonds is already authorized, so perhaps they will do this sooner?)
• create a roadmap for a closer union
• something nice will be done for Ireland soon
• some sort of other summit in October

here's a chart: http://chart.ly/fh9c8pn

not sure if the not-having-debt-be-senior thing is just for Spain or if it's for all future cases: https://twitter.com/lindayueh/statuses/218633543151136770

there was a small negative surprise in German employment numbers.

gold rose.

SPY rose over 2%. EWP (Spain) rose 7%. GREK rose 9.3%. EZU rose 6%! VIX fell to 17.08!. Spanish and Italian yields fell to the levels of a few weeks ago. Huge drop in Italian CDS expense: http://chart.ly/apaigs9

analysis

woah: " 3:32 PM A provision in the just-passed transportation bill will allow corporate pension plans to use the average interest rate over the past 25 years (high) as opposed to the last 2 years (low) towards calculating future returns. At a stroke, under-funded plans at companies like GM and F just became less so (and reported profits should benefit as well). [U.S. Economy] 5 Comments "

" 2:58 PM Amidst the hubbub from Europe is a talk from FRBNY President Dudley in which his language has taken a dovish turn from that of a few weeks ago. "Employment growth ... has slowed considerably of late as the economy has lost forward momentum." Of the new policy statement language hinting at further action - "I will let those words speak for themselves." [U.S. Economy] 2 Comments "

" In this bizarro world, in which beggars have practically convinced themselves, and certainly the S&P500, they are now choosers, the latest escalation is actually biting the hand that feeds you. Below is today's front page of Italian Libero. It is self-explanatory."

-- http://www.zerohedge.com/news/italys-revenge-vaffanmerkel

here's the bearish case for the agreement:

http://www.theatlantic.com/business/archive/2012/06/europes-latest-bank-deal-is-still-a-flop/259168/#

here's what is imo a balanced view:

http://www.dailyfx.com/forex/fundamental/forecast/weekly/eur/2012/06/30/Euro_and_Risk_Traders_May_Prove_More_Skeptical_than_the_EU_Anticipated.html

my take is that the EU deal is real progress but it's not enough. Particularly encouraging is the non-seniority of the bailout funds (although the preceding link notes that in the case of a future debt restructuring, the public bodies would likely grab seniority anyways). However, i would be more assured by a date for EU fiscal union (even if it's a few years in the future, although a decade would be a bit long), and/or a committment of more German money to bailout funds (random articles i've seen have said that about $2 trillion would be a good backstop, whereas now there's something like $600 billion authorized, possibly less raised, i'm not sure).

as for Greece, i think this actually makes Greece more likely to leave, not less, because it appears that things are following my morality play script, which calls for a soft fiscal union enforced by norms until one can be enacted enforced by laws, which means rewarding countries that make acceptable progress towards austerity and punishing those that do not. Italy is running a primary surplus currently and Spain was running one until 2008, and both are currently being run by politicians who have been pushing austerity somewhat. Greece is not in a similar position. There is only so much largesse to go around, and more for Spain means less for Greece.

In reaction, equities rose by quite a bit, EUR/USD rose quite a bit, and bonds fell, but not by so much. Spanish and Italian bonds fell significantly but they are only back to where they were a few weeks ago (Spanish bonds fell 8% relative but are still at 6.3% yields).

Next week there is an ECB meeting. Some analysts expect the ECB to do something like buy bank bonds. Some analysts expect it to lower interest rates from 1% to .75%.

in the longer term it is unclear if even Germany would support a fiscal union; if this persists, it seems to me like it torpedo the whole Euro project: http://translate.googleusercontent.com/translate_c?act=url&hl=en&ie=UTF8&prev=_t&rurl=translate.google.com&sl=de&tl=en&twu=1&u=http://www.welt.de/politik/deutschland/article107611878/Deutsche-sehen-Vereinigte-Staaten-Europas-skeptisch.html&usg=ALkJrhiLZoxc_PsmOhIAiWKc_8oT5xI1tg

Also, i don't have a good handle on if there are German constitutional barriers to bailouts and integration. It seems clear that fiscal union would require a referendum (but is it clear that even that would suffice?); the question is, do the ESM and the Fiscal Pact require a referendum?

http://www.bloomberg.com/news/2012-06-30/germany-s-esm-role-eu-fiscal-pact-challenged-in-court.html

if so this could cause the markets to fall -- i assume the German citizens would do what is imo the best thing, which is approve these things, but the uncertaintly could force the markets to fall in the meantime. If the German citizens did not approve it, then that could be it for the Eurozone. This article thinks it is almost certain that the 2/3s parliamentary vote is sufficient for the ESM but does not seem so sanguine about the fiscl pact:

http://www.dw.de/dw/article/0,,16062254,00.html

Also the Court seems to be demanding a very laborious procedure for treaty negotiations; it seems to want parliament to be presented with drafts of treaties before the treaties are final:

"The court called upon the government to present the Bundestag and Bundesrat – in written form – even drafts of planned laws and results of initial debates within the EU, and documents produced by EU institutions and other EU countries." -- http://www.osw.waw.pl/en/publikacje/ceweekly/2012-06-27/federal-constitutional-court-becoming-increasingly-important-actor-ge

i think that might be a good idea but it will generate an impedence mismatch with the other EU countries, causing slowness and anger at Germany.

this is also interesting:

"

    The Federal Constitutional Court of Germany is emerging as an increasingly important actor in Germany's European policy; one that protects the souvereign powers of the Bundestag. Consequently, suggestions are being made more and more frequently (including by the finance minister Wolfgang Schauble, and former SPD finance minister Peer Steinbruck) calling for an amendment in the German constitution and the introduction of provisions which would transfer the souvereign powers to EU institutions to a greater extent than is currently the case. A new constitution would have to be approved in a referendum. Both proponents of a further transfer of the souvereign powers to the EU level and the detractors of this solution are in favour of the idea that a referendum should be held on it. Chancellor Merkel is distancing herself from the plan of holding a referendum in the immediate future. According to Merkel, the present German constitution guarantees sufficient freedom in introducing necessary reforms in the EU." -- http://www.osw.waw.pl/en/publikacje/ceweekly/2012-06-27/federal-constitutional-court-becoming-increasingly-important-actor-ge

why is Merkel against an immediate referendum? Is she worried that it will lose? Or is she just trying to keep her party focused on its agenda?

predictions

The rise in EZU and EWP and GREK seem extreme to me given how much happened; i expect they will fall a bit on Monday or Tuesday. The Eurozone and the US and China still seem to be entering a recession; this does reduce the chance of a catastrophic breakup of the Eurozone, but does not push it back from "unlikely" back to "unthinkable", but there is plenty of time for more banks to fail and for Italy and Spain to not be able to afford their interest payments before October. I expect VIX will rise again at least a little. I expect EUR will fall again at least a bit.

After this, i'm not quite sure what will happen in the mid term. Certainly this agreement has made things slightly better for the Eurozone, over the next week markets may go higher to take that into account. But i expect trouble again before October. The hedge fund guys predicting major trouble by the end of the calendar year seem on target. Given my agreement with that, i can't foreclose the possiblity that there would be trouble in the next few weeks even, or the possibility that risk assets will shoot up for months.

i do think that VIX can't stay at 17 for more than a month or so.

eventually i expect France to come under some pressure (again).

i still expect SPY to drop by fall, but i'm not sure when it will do so.

holdings

yesterday i bought some slightly OTM September VIX calls (oops!). my rationale being that VIX and VXZ have contango because they are transmitting the negative theta in the options to the ETF, so if i want something more than one month ahead and i want the asymmetric return profile of an OTM call then i should just buy the VIX options myself, and that this is better than buying VXX or VXZ or calls on VXX or calls on VXZ.

last night as soon as early trading opened i sold my VXX and some of my bonds and bought SAN (Santander, a Spanish bank), EWP, and IRE. I sold them all over the day and bought back my bonds and VXX for less (except for AGG, which i lost money on, interestingly; it only fell a few days worth, i was expecting more). so for once that actually worked. i still lost a ton of money, of course, because prices for things i sold had dropped before i sold them (or, what actually happened was that i had to hit the bid to sell them and cross a large spread at 4AM EST; i'm guessing the entity on the other side of those trades were mostly bots, because they didn't seem to have priced in the news at the open).

i bought some more VXZ. i sold EUR/USD.

MOM fell.

last night i watched currencies after the announcment and tried to trade EUR/USD a bit. i lost money, of course -- my predictions were correct but not my timing. however it did seem to be somewhat predictable. This strengthens my conviction that i'll be able to write an algorithm to do it if i ever have time to (even if i can't do it myself -- i bet i can write a program that is better than me at this sort of thing).

as i've noted elsewhere, it's interesting that being right on direction is insufficient to make money; you also must specify at least three more numbers; (1) either the time or the price at which to enter the trade, (2) the time or the price at which to exit it, and (3) the position size. And of course, then there's also the added complexity of order execution, and of knowing the language of Mr. Market (is your invest thesis equivalent to a long, a short, a call, a put, or something else?). So far i've been okay on direction but bad on the rest.

as for order execution, i think i now have an okay understanding how to best use IB's order types and algos to execute orders on stocks even if i'm not there all day and even if the stock is illiquid (basically; use JEFFALGO VWAP, or, for really illiquid things like MOM when you are not in a hurry but are buying or selling a position over multiple weeks, a REL order; if you are sitting there in the middle of the day and want the thing to execute now (usually a bad idea but not always; usually whenever you think it would be a good time of day to trade turns out to be the worst choice due to the market outsmarting you, so usually JEFFALGO VWAP is best because it distributes evenly until the end of the day; the exception is when e.g. there is an event that should cause a rally and you are selling VXX, which for some reasons tends to fall over the course of the day rather than falling all at once at the open like most things), then use JEFFALGO POST; if you are trying to trade after hours (don't do this unless you are responding to after-hours news or unless you have a firm price in mind) then use limit orders). Still haven't found a good way to execute orders on options with a large spread when i'm not sitting there. The best i've found is Balance Impact and Risk. The problem with this is that if i set it the night before, it generally executes early in the day -- if i have more than 1 unit i'd prefer to space it out over the day like with a JEFFALGO VWAP.

armchair theorizing

if you have a mid-term (weeks to days) market hypothesis, unless you are a fulltimer, many people have probably figured this out before you. So you are probably already near the end of the movement. You might still be early compared to the general public, but you should prepare to get out quickly if the trade goes your way, rather than holding on for bigger gains, on the assumption that you got in relatively late.

unrelated: for some reason the fundamental timescale of contrarian forces in the market tends to be on a daily basis. During a day, sometimes the market rallies, and rallies and rallies and maybe pulls back a little but not much, or maybe rallies some more. And then sometimes the next day the market opens sharply lower to retrace some of its gains. Right at the open, even when it seems to be a simple, 'oops, i guess i overreacted' retracement. when i see this, I dunno why this didn't happen before the end of the day before. i'm guessing there must be some entites in the market which do analysis and decisionmaking when the market is closed and then put it into practice the next morning.

in general, there seem to be five main time periods in every stock market's day: pre-open, open and first hour or so after the open, mid-day, last hour or so before the close and close, evening. Most volume is in the open and first hour, and the last hour and the close. Often there will be a single polarity of movement during the first hour and during the last hour, although they may be different from each other. i don't know why.

in the forex markets, there also seems to be time of day effects. it seems like "the big stuff" happens when New York is online. Each country's currency seems to be more in demand when their equity markets are open (although not always, e.g. after the EU summit good news at night, EUR/USD rose immediately, faded a little for awhile including as the European markets opened, but then rose significantly more when New York came online the next morning). The equity markets seem to have their own personalities. E.g. recently w/rt/ the Euro crises, the Asian stock markets seem to overreact to each bit of Euro news. When a country's economic prospects improve or its equities go up, its currency goes up.

political rant

i think the deal is less of a change from the status quo than is thought, and i think that it's good as far as it goes, in fact, it seems to be very obvious, common-sense things that shouldn't be very controversial -- i don't think the Germans should be dismayed by it. Let's examine each piece.

• no debt seniority for Europe: obviously, if there is debt seniority, this blunts the impact of any rescue because the private investors are scared away. so debt seniority was, in retrospect, a dumb idea.
• sometimes not placing extra demands on countries seeking aid: in theory it would be nice to have extra demands so as to deter countries from overspending, but this causes so much friction that it isn't worth it. Germany seems to worry that this change will make other countries too willing to overspend. I think the morality play will be effective (at least, as effective as the Troika threat -- but neither will be as effective as fiscal union) as long as the existing rules are demanded. The only danger here is a slippery slope, and i'm confident that Germany won't slide too far down that slope.
• EU-level bank supervisor: sure, why not, this is incremental progress towards a full union
• bail out banks directly rather than via soverigns after the EU-level supervisor is created: well i don't think banks should be bailed-out at all, but if you're going to bail them out, and if Europe has had the chance to regulate them, then why not bail them out directly.
• roadmap for closer union: yes, this is the main thing needed

12/07/1

news

" Finland will block the euro zone's permanent bailout fund from buying government bonds in the open market, the Finnish government said on Monday, while The Netherlands also indicated opposition to the bond-buying idea "

Confirmation of some good housing data. Slightly bad industrial numbers from various places in the world. Worse unemployment numbers in Europe.

Bond yields went down across the board (actually, as of night, up and spanish yields are both up a tiny bit). Stocks went up, 1% in Europe, .25% SPY.

analysis

this guy seems good:

http://seekingalpha.com/article/694361-weighing-the-week-ahead-time-for-some-fireworks?source=yahoo

he is pretty bullish, at least in the long-term.

he cites this guy, who is also bullish:

http://macrofugue.com/the-real-cult-of-equity

making the argument: "There has been a resurgence in recession calls after the past few months' soft data. This is likely wrong. None of the key recession-casting inputs (ISM: PMI 53.5, Real Retail Sales +3.5% y/y, Fixed Private Investment +10% y/y, Auto Sales +17.4%) signal US recession.

No great private imbalances exist. There is no over-investment. No great over-confidence in sentiment exists. Marginal investment opportunities are fatter & juicier than at any other time in modern history. With this back-drop, from where does a recession emerge?"

Apparently the Swiss National Bank is intervening big-time to keep its currency peg vs. the Euro (since the Euro is weakening, it is trying to print CHF to keep the exchange rate down), but apparently it is sterilizing half of its intervention, raising the question of whether perhaps it is unwilling to hold the peg indefinitely (despite many resolute speeches from them saying that they are): http://www.zerohedge.com/news/swiss-national-bank-faking-it

"The long-term importance of the dependency ratio (which at its most base represents the ratio of economically inactive compared to economically active individuals) is at the heart of many of our fiscal problems (and policy decisions). Not only have they and will they become a larger and larger burden on the tax-paying public but as a voting block will be more and more likely to vote the more socialist wealth-transfer-friendly way in any election (just as we see extreme examples in Europe). The following chart provides some significant food for thought along these lines as by 2016, for the first time ever, developed world economies will have a higher dependency ratio than emerging economies and it rises dramatically. How this will affect budget deficits (food stamps) and/or civil unrest is anyone's guess but for sure, it seems given all the bluster, that we are far from prepared for this shift.": http://www.zerohedge.com/news/global-demographic-dependency-debacle

interesting piece on private credit creation:

http://www.voxeu.org/article/other-deleveraging-what-economists-need-know-about-modern-money-creation-process

holdings

as noted, i bought back VXX on Friday after it fell, which turned out to be a big mistake because it fell some more today :) . i had anticipated a bit of a pullback and indeed there was a pullback in the morning, and VIX rose in the morning, but VXX fell regardless due to contango. in the afternoon SPY rose.

i sold some of my VXX and bought OTM September VIX calls, and i offset some more VXX by selling UVXY short.

my synthetic volatility compounding still isn't working too well, so i'm trying a vanilla version to see if it works better.

MOM went up.

TLT and LTPZ went up, esp. in the morning, and i sold them a little bit then.

i sold some MLPI to rebalance my AMJ pair. The pair did well today. AMJ's premium shot up from less than 1% to around 2.5% in the past few days. In the middle of today it was even higher.

i sold XVZ sort of by accident, because on Friday i had setup limit order trades to sell all the volatility products, but only that one hit the limit.

i'm not sure that i'm a believer in its idea of going short on the front-month when it's heavily contangoed (? am i understanding that right or did i get it backwards?). Wouldn't a scheme like that be innately momentum-based? But volatility mean-reverts. I figured if i want to speculate on volatility, now that i have an account that can buy options and i'm slowly learning how to do it, i should just buy calls directly rather than dealing with these ETFs. However, i don't really understand XVZ and i think there must be something i'm missing; Bill Luby, the author of the excellent vixandmore.com, sometimes says he is long XVZ: http://vixandmore.blogspot.com/search/label/XVZ . so i'm still planning to buy it. it has impressive backtests: http://seekingalpha.com/article/673291-the-search-for-antifragility-in-volatility-investing-a-vix-etp-search?source=yahoo and in the real world at least it hasn't gone down much during it's short life, unlike other, contango-exposed volatility products.

12/7/3

analysis

my UVXY model is negative.

12/7/4

news

http://www.businessweek.com/news/2012-07-04/finland-contests-seniority-clause-in-spain-s-bank-bailout

" 2:58 AM Bank shareholders have no idea what kind of liability they're facing from the Libor probe. Barclays, for example, dropped 16% the day after being blindsided by a $451.4M regulatory fine. More than a dozen banks are being probed, are providing minimal disclosures and are probably failing to put enough funds in reserve for potential fines. [Financials, Global & FX] Comment! "

" 2:25 AM China's Beige Book, a new private survey of around 2,000 executives and bankers, shows retail sales and manufacturing strengthened last quarter, property sales increased, and 80% of retailers expect higher sales in six months, suggesting an economic pick-up not fully captured in China's official statistics. [Global & FX] 1 Comment "

" 3:49 AM Some eurozone officials admit it may have been overambitious to set an end-of-year deadline for creating a new eurozone banking supervisor. Even under the best of circumstances, getting the overseer up and running could take 9-12 months. [Financials, Global & FX] Comment! "

" 4:08 AM China could be preparing for a fresh round of policy easing, analysts say, with Chinese authorities said to be considering cuts to the reserve requirement ratio. [Global & FX, Financials] 1 Comment "

long-term news

a quick google search on when the Chinese Yuan will become fully convertible (at which time it could begin to become a reserve currency):

• http://www.bloomberg.com/news/2012-04-25/hong-kong-peg-architect-says-convertible-yuan-long-way-off-.html
• http://news.xinhuanet.com/english/china/2012-05/17/c_131593840.htm

Looks to me like it'll be a long time. i don't know the official definition of convertibility but the Chinese official in the second article seems to be saying that capital controls will remain for a long time. Imo a currency with significant capital controls in its home country would have a hard time becoming a major reserve currency.

analysis

"

political rant

" 4:38 PM Student loans have surpassed credit cards and auto loans as the 2nd largest form of consumer debt, notes Credit Suisse. Where mortgages, credit cards, and auto delinquency rates are declining, student loan delinquencies are on the rise in what frighteningly looks to be a structural, not cyclical phenomenon. (via David Schawel) [U.S. Economy] 2 Comments "

i think schools should offer needy students cheap education, not loans.

12/7/6

news

" 10:34 AM No aid from the ESM can be given to banks without the guarantee of the sovereign, says a senior EU official, squashing post-summit ideas the rescue fund could directly bail out lenders. "This is very much not the case," he says, scratching his head at how markets ever got such an idea. [Global & FX] 2 Comments "

9:31 AM A check of Fed Fund futures as far out as they trade on the CME shows the June 2015 contract at 99.485 compared to the near-month (July 2012) contract at 99.83. It means traders have priced in just 35 bps of Fed tightening over the next 3 years. Who said Japan's experience won't happen here? [U.S. Economy] 1 Comment

" 8:57 AM Finland is busily denying finmin Jutta Urpilainen's remarks suggest the country would consider leaving the euro rather than paying the debts of other member states. "Finland will not hang itself to the euro at any cost and we are prepared for all scenarios," she said in a newspaper interview. [Global & FX] 1 Comment "

" 8:30 AM June Nonfarm Payrolls: +80K vs. consensus +100K, prior +77K (revised from 69K). Unemployment rate 8.2% vs. consensus 8.2%, 8.2% previous. [U.S. Economy, Breaking News, Top Stories] 50 Comments "

" 11:53 AM Gold falls 1.3% to $1,588, the entirety of the decline coming in the minutes following the jobs report. In a little more than a day since a gold bull's dream - 3 major central banks loosening monetary policy and weak U.S. data giving at least a bit more impetus towards further Fed ease - the metal is off 2.1%. Silver is down 4.6% during the same time frame. [Commodities, On the Move] 2 Comments "

" 7:19 AM The German 2-year Schatz yield sinks into negative territory for the 1st time since the panicky days of early June, as Spanish and Italian yields surge higher following the ECB rate cut yesterday. Markets were clearly hoping for something beyond the widely anticipated 25 basis point move. Spanish 2-years +38 bps to 4.99%. Italy +12 bps to 3.84%. [Global & FX] 3 Comments "

" 7:42 AM The SNB's foreign currency reserves climbed nearly 20% in June to CHF 364.9B as the bank frantically bought up every euro in sight to hold down the franc's value. At this pace, the SNB's reserves will top the country's annual economic output this fall. "(It) isn't a problem for the SNB yet," says a strategist. [Global & FX] Comment! "

" 6:28 AM Yields on Spain's 10-year bonds jump 21 bps to 6.99% as the triple-play central bank easing yesterday leaves markets wanting more. The surge, in addition to a 1.4% fall in the IBEX 35, comes as data shows that Spanish industrial output fell 6.1% in May, which was better than consensus of 8.5%. [On the Move, Global & FX] 3 Comments "

" 5:24 AM After a seven-hour session, Italy's cabinet yesterday approved €4.5B ($5.58B) in spending cuts for 2012 as it aims to keep markets and the EU sweet. However, the measures, which aim to slash the country's bloated public sector, face strong opposition at home and risk weakening support for technocrat PM Mario Monti in Parliament. [Global & FX] Comment! "

" 4:39 AM France's budget deficit widens 1.8% Y/Y in the first five months of 2012 to €69.6B. The data follows recent government announcements that it will seek to raise €7.2B in extra taxes this year as part of an attempt to limit the deficit to 4.5% of GDP. [Global & FX] 1 Comment "

" 4:18 AM Greece's new government abandons election pledges to obtain an easing of the country's bailout conditions after the Troika, which has been in the country this week, made it clear that Greece would get no such thing. Finmin Yannis Stournaras says the coalition would need to get its reform program back on track before receiving any changes to the terms. [Global & FX] 1 Comment "

"But there are signs that a sector already burdened by billions of euros of underperforming loans is reaching a saturation point. "Spanish banks were net sellers of Spanish debt over the last two months. That to me is a clear sign that banks have already reached a level where they feel uncomfortable holding more debt," said Luca Cazzulani, deputy head of fixed income for UniCredit?. " -- http://www.brecorder.com/money-a-banking/198/1209925/

Italian bond yields around 6%, Spanish around 7%.

analysis

http://vixandmore.blogspot.com/2012/07/economic-data-cliff.html

political rant

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_06/07/2012_450863

not sure if i agree or not but this is interesting:

http://www.slate.com/articles/business/small_business/2012/07/the_small_business_problem_why_greece_italy_and_spain_have_too_many_small_firms_.html

(note the replies in the comments too, some of which provide interesting rebuttals)

Levitt agrees with me about simplicity!: " Is it possible to run a complex world in a simpler way? I think you certainly can. And you certainly can run a complex world that makes it even more complex. And I think that Dodd-Frank and probably the Volcker Rule are the essence of complexity. They just don’t substitute for what Glass-Steagall gave us.

How do you respond to the idea that the way to avoid complexity with the banks is to ask for more capital and less leverage? That is certainly a step in that direction. But you cannot simply say the banks need more capital without saying that maybe a better answer is to tone down these institutions, break them up, have them sell off certain divisions, change the level of complexity. Without that, there simply is not enough capital to provide protection against the kind of events we have had in recent weeks.

I’ve been reading Why Are There So Many Banking Crises? by economist Jean-Charles Rochet. He says that politicians lack the courage to step up and get in the way of normal greed in finance. Where is the courage in our politicians to do this? There is no courage. I don’t know of a single member of Congress who is willing to resist the seductions of money and campaign contributions and the kind of flattery that comes from those who have special interests. " -- Tom Keene Talks to Arthur Levitt By Tom Keene on May 31, 2012

12/7/8

news

wow, the Troika really seems to be taking a hard line with Greece:

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_08/07/2012_451140

i wonder if they think this is the best thing to do or, (my guess), they would like to reward Greece's new government but they can't because they simply don't have any more money to throw around (bearing in mind that they are now trying to save as much money as possible for Spain and Italy)? Or (i think this one is unlikely) are they actively trying to push Greece out?

" A Metron Analysis opinion poll published by weekly newspaper Ependytis on Saturday showed Greeks are equally split on whether the country should stick to the bailout terms or ditch them.

The poll showed 48 percent were in favour of sticking with the bailout and efforts to improve it, while another 48 percent felt it should be renounced for having failed." -- http://in.reuters.com/article/2012/07/07/greece-bailout-idINL6E8I72F420120707

meanwhile, "The poll by the Emnid institute found that 49 percent of Germans would be in favour of a Greek exit while 43 percent said they want Greece to stay in "

12/7/10

news

"Estimates of how long they [the German constitutional court] might take to make a decision on the injunction go up to end of july." -- http://www.guardian.co.uk/discussion/comment-permalink/17066315

"There is increasing evidence that the court will take weeks rather than days to reach an agreement on injunction. Should it grant the temporary injunction it will take months before Germany can ratify the ESM treaty." -- http://www.ft.com/intl/cms/s/0/205f322e-ca68-11e1-89f8-00144feabdc0.html#axzz20D375Jrf

however later in the day even longer estimates are put forth:

"Germany's constitutional court will likely take its time before ruling on whether the workings of Europe's new last-resort lending mechanism are compatible with the law. The decision may be delayed until the autumn. " -- http://www.dw.de/dw/article/0,,16085007,00.html

The German financial minister still seems to be saying something different from the rest of the guys: http://www.guardian.co.uk/business/2012/jul/10/eurozone-crisis-spain-banks-bailout

however perhaps they are all agreeing and all saying that for now, Spain is liable, but if and when a federal bank supervisor is set up, it won't be liable for future loans past that time.

"

7:14 AM Some good news from the EU periphery - Italian industrial production rose 0.8% in May vs. expectations for a decline of 0.2%. The annualized rate of decline was just 6.9% vs. expectations for 8.6%. Previously flat European stocks are up 1.5% since the report. Coincidence? [Global & FX] Comment! "

" 2:40 AM The eurozone will speed delivery of as much as €100B ($123B) in Spanish bank aid, with an initial €30B to be lent by the end of July. The goal is to eventually use the eurozone bailout fund to recapitalize Spanish banks directly rather than saddling Spain's government with debts. Eurozone finmins also agreed to give Spain an extra year to bring its budget deficit back in line. [Global & FX, Top Stories] 4 Comments "

" Greek Finance Minister Yannis Stournaras said euro-area governments vowed to prevent Greece from defaulting next month while reviewing the nation’s eligibility for more aid amid a worsening recession. " -- http://www.bloomberg.com/news/2012-07-10/greece-expects-euro-region-help-for-august-funding-needs.html

" Italy Bank Deposits Rose 2.1% [in May], Bank of Italy Says ‎ Bloomberg - 9 hours ago Italian bank deposits of private sector rose 2.1% in May from yr earlier, fourth consecutive monthly increase, BOI says in report today. * Loans rose 0.7% yoy in ..."

http://www.businessweek.com/news/2012-07-10/ecb-says-eu-bank-crisis-plans-risk-harming-deposit-guarantees

"

1:53 AM Chinese import growth decelerated sharply in June, slowing to 6.3% Y/Y vs. consensus of 12.7%. Export growth outpaced expectations at 11.3% vs. 9.9% consensus. Economists say the import slowdown is temporary, with recent policy easing likely to drive a Q4 pick-up. Comment! "

" Italian Prime Minister Mario Monti suggested that Italy may need to tap into the European Stability Mechanism to buy Italian bonds and keep a lid on rising yields." -- http://blogs.barrons.com/incomeinvesting/2012/07/10/ten-year-treasury-yield-dips-to-1-50/

analysis

" 7:15 AM Vietnam's stock market may be ready to stage a turnaround after a 27% fall last year. Analysts point to aggressive rate cutting and government stimulus measures that are gaining traction. The market is also cheap, trading at 9x earnings vs. a historical range of 8-35. By year-end, the index could rise to 460 from today's 405, and could see 30-40% upside next year. [Global & FX, Quick Ideas] Comment! "

"

10:10 AM Appointed Italian PM Monti says he won't stay on after elections in 2013, possibly opening the door for deposed, but still powerful Berlusconi to return. Speaking at a press conference, Monti also says he is confident Italy won't need a bailout, but doesn't rule out the country tapping the ESM. [Global & FX] Comment! "

" Monday 1:34 PM Giving the bulls hope for a continued run higher are the small caps (IWM) outperforming the S&P 500 (SPY) for the last month (+5.9% vs. +3.2%). Relative strength in small caps typically leads the broader market higher, says technical analyst Tarquin Coe. 1 Comment "

"

9:42 AM Merrill Lynch quietly tells its clients to prepare for a fundamental geopolitical shift in which western (mostly American) dominance crumbles with nothing ready to take its place. Ideas: Buy ETFs to guard against inflation and higher taxes set to be unleashed by desperate governments. Abandon the idea Treasurys are a special risk-free asset class, and look at the paper of places like Australia and Singapore. 5 Comments "

" This month, the US broker is quietly circulating a memo which tells its affluent clients to reposition themselves — and their portfolios — for a fundamental geopolitical shift.

During much of the late 20th century, the broker says, the world was shaped by American-dominated institutions..., during the financial crisis of 2007 and 2008...the focus moved from the G7 to the G20, which includes emerging markets such as China....But now the G20 is looking impotent too....The net result then, is that nobody is in charge; it is an unstable “G-zero” world, to use the phrase posited by Ian Bremmer, the political consultant.

Merrill Lynch is trying to tell its clients how to respond (other than panicking and burying gold in the ground). It suggests, for example, investors should put money into companies, not governments, since the former are more reliable, transparent and growth-orientated. It calls for a rethink of the traditional binary distinction between “developed” and “emerging markets” countries; the latter includes some countries (such as Ghana and Indonesia) which are likely to flourish for structural reasons, but others which are not.

It recommends buying exchange-traded funds (ETFs), to guard against the inflation and sky-high taxes that it fears will be unleashed by desperate governments. And the US broker says it is time to abandon the idea that treasuries are a special asset class, let alone “risk-free”; this no longer makes sense in a G-zero world. “Unlike old US-centric portfolios that called for nearly half of bond allocations being dedicated to US treasuries and municipals, [our] current models consider all bonds “global”,” Merrill Lynch says. Hence that interest in Australian sovereign debt or Singaporean bank bonds." -- http://www.cnbc.com/id/48129124

this guy agrees with me that the reason VIX is so low and equities are so high is that QE is priced in: http://seekingalpha.com/article/712441-what-does-low-volatility-tell-us?source=yahoo

more on the Global Market Index:

http://seekingalpha.com/article/711981-the-global-market-index-s-ex-ante-risk-premium?source=yahoo

interesting to me, this article suggests that Sharpe 0.2 is the number to be expected, not 0.7 as some have said.

my UVXY model is negative.

12/7/11

FOMC June minutes showed that a few members wanted easing, several did not unless the recovery worsened.

news

according to this, Merkel does not have the authority to promise direct bailouts of banks by the ESM:

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100018565/merkel-breaks-german-law-on-esm-rescue/

Spain announces austerity plan. protests in Spain. Some violence (purportedly firecrackers and rocks and cans were thrown and police, and rubber bullets and batons were wielded at protestors. 7 demonstrators arrested, 6 taken to hospital, 2 police taken to hospital.

Bond yields fell across the board. Spain down 3.4% relative to 6.6% absolute.

Negotition on how much Spain's retail investors who bought junior bank bonds will be hit. Apparently they are trading at a large discount.

analysis

"

9:40 AM A fascinating FRBNY study shows nearly all of the S&P 500's return since 1994 has been earned in the 24 hours prior to scheduled FOMC announcements (which occur just 8 times per year!). Going further, excluding the 3-day window before and after scheduled FOMC announcements yields a flat S&P over the last 28 years. 5 Comments "

http://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.html

http://libertystreeteconomics.typepad.com/.a/6a01348793456c970c0177432bf020970d-popup

wow!!!

my UVXY model is negative.

holdings

despite my model being negative, i am long VXX.

12/7/13 --

news

" Teachers threaten reaction to evaluations

The union representing Greek public school teachers said on Friday that it would resist efforts by the government to impose an evaluation system for teachers in primary and secondary education.

In a letter to the Education Ministry, the Teachers’ Federation (DOE) said that any effort to evaluate staff and impose a penalty system would be seen as “an act of war,” and that its would organize protest action at the start of the new school year in September. " -- http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_13/07/2012_452031

analysis

http://blogs.reuters.com/christopher-papagianis/2012/07/12/more-to-the-financial-crisis-than-just-subprime/

" Two days ago we noted with muted disgust that Europe has legislated to scrap the use of rating agencies, who were everyone's best friend during the up-phase in the global ponzi, but now that deleveraging is accelerating and ratings downgrades are coming, are like the drunk guest who refuses to leave the insolvent party at 4 am. Sure enough, the time has come to enact rules to kick them out. But wait, there is much more. Moments ago Reuters reported that the European Central Bank is discussing a medium-term plan (as in indefinite) to scrap rating rules on euro zone sovereign bonds and instead set their value when used as collateral in lending operations on its own internal assessment, central bank sources said. You read that right: the ECB itself will decide what the collateral value is of pieces of paper it accepts, in exchange for other pieces of paper with the faces of famous dead people on one side (even if technically the whole operation takes place electronically). And to think that for some odd reason allowing drug addicts to write their own prescriptions is illegal. Apparently all is fair in love and breaking all rules of sinking monetary systems. " -- http://www.zerohedge.com/news/ponzi-comes-full-circle-ecb-will-rate-sovereign-bonds-it-accepts-collateral

12/7/15

analysis

http://seekingalpha.com/article/720911-2012-you-can-bet-on-volatility?source=yahoo

http://www.forbes.com/sites/tomaspray/2012/07/15/bear-flag-or-bear-trap/?partner=yahootix

12/7/16

news

The German Constitutional Court will announce its decision on whether to issue an injunction against the ESM on September 16. Apparently the idea is that they are taking extra long to think about it, but that the injunction will have the character of a final decision, since once the treaty is signed it can't be legally withdrawn.

analysis

my uvxy indicator is still negative, but less so.

http://seekingalpha.com/article/723291-despite-problems-bullish-trends-in-place -- Chris Ciovacco

--

12/7/17

news

8:55 AM Some sentiment numbers for the contrarians to chew over: 81% of clients are bearish on the euro for the next 6 months, according to JPMorgan (euro chart). Corn bulls rise to 95%, according to Jake Bernstein's Daily Sentiment Index (corn chart). Bond bulls are at 87% (bond chart). (h/t Thomas Thornton)

armchair theorizing

Why in the world is volatility so low even though there is so much fear?

I've been wondering about this for weeks and i just thought of something, although it's kind of an anticlimactic non-answer.

What do we know about volatility?

We also know that volatility is mean-reverting (see http://en.wikipedia.org/wiki/Volatility_clustering , also http://en.wikipedia.org/wiki/Stochastic_volatility ).

Volatility is correlated to asset price correlations and to market drops. I suspect the reason that it is correlated to market drops because the market tends to rise slowly but fall quickly. Because of this correlation, VIX, the volatility index, and is described as the "fear index". So we think that volatility has to do with fear. Strenghening that association, VIX futures go up when people buy a ton of SPY puts to insure their portfolio against a large downturn.

Which makes the present time period confusing; there is a lot of negative sentiment, and there is a relatively low investment in equities, and a relatively large investment in cash by funds. At the same time, the VIX index is low, and indeed, historical volatility is low; the market rarely moves 1% on most days recently.

So, we have fear, but we do not have volatility. Clearly, volatility may be correlated with fear, but it is not only fear. But it is something, because it mean-reverts. What else is it? Put another way: how could it be that in this fearful time, the market tends to consistently have small swings, while at other times, it has had consistency larger swings?

The last question begs the non-answer that i am about to give. The market is composed of a million people and a millon computers each running their own algorithms (strategies) in response to market events. The market moves in response to new outside information, but it also moves when Mr. Market has a thought, that is, when the combined effect of all of the algorithms run by all market participants causes a discrete-ish change in regime. Mr. Market's thought process is quasi-continuous so in addition to each 'big' thought is the end result of lots of 'little' thoughts, which are the smaller market fluctuations seen all the time, and there is not really a firm distinction between 'big' and 'little' thoughts.

So, different regimes have different amounts of volatility during the 'little' thoughts. It's as simple as that. Just because we are in a fearful regime doesn't mean that the volatility within this regime will be greater. And the effect of that on volatility may outweight the effect of people buying put options combined with the fact that markets fall faster than they rise, causing low volatility even when people are buying insurance.

So when can be expect volatility to go up? When the regime shifts (e.g. when Mr. Market's mind completes a 'big' thought). First of all, this regime seems to have unusually low volatility for recent years so it's a good bet that the next regime will happen to have higher volatility. Second, during regime transitions themselves we might expect volatility to spike; during a regime transition we expect that all sorts of models which have been working for the last few weeks will suddenly stop working, all sorts of latent strategies will have their preconditions triggered, etc.

During a transition, i picture basements full of computers, each computer running an automated trading strategy, each strategy with various conditions set for it to engage. Each regime is characterized by a certain subset of these strategies that tend to be engaged. So, a major regime transition means that a large subset of these computers that are currently active will go to sleep, and a large subset which are currently asleep will wake up. But there are probably strategies that (whether they know it or not) are themselves keyed to activate during regime shifts. In addition, during the regime shift, one expects a lot of motion on parameter space until the system quasi-converges to a new stable regime. Combining these two, one expects that during the regime shift, a lot of computers in a lot of basements will suddenly (spookily) light up, green lights starting to flicker, disk drives spinning up, etc (just in my dramatic imagination; of course in real life many of these strategies are running in people's heads, and others are in virtualized machines on servers on racks which are constantly on and never asleep); a number of strategies will be transiently activated during the shift which will shut down when the transition is complete. All this motion is parameter space and in the space of which strategies are active is likely to correspond to some motion in price-space, so one would expect that prices may move dramatically during a regime shift.

(this model doesn't predict WHEN an endogenously-triggered regime shift will occur, however -- however i have a theory -- during the Olympics, London trading will be slightly disrupted, especially prop-trading -- this will lead to at least some significant shift in which strategies are online/active, if only due to the strategies in the heads of prop traders who can't get to work -- if my theory that regimes can be characterized by the subsets of strategies which are active is correct, this shift in activity in London is by definition a small regime shift, and it may be large enough to trigger a regime shift).

(of course, recently volatility has been low also because the market has been in an uptrend; but it seemed relatively low even during the May fall)

--

12/7/18

news

" 3:50 AM The ECB's Mario Draghi uses the word "evolving" to describe the region's approach to forcing losses on senior bondholders of troubled eurozone banks. (previously) 2 Comments "

" 2:14 PM The Fed Beige Book doesn't sound like the sort of report suggesting the need for further monetary easing. Stocks remain as they were before the 2 ET release, up, but slightly off session highs. the S&P 500 +0.6%, Nasdaq +1.1%. The 10-year Treasury remains near its historic low yield, -3 bps on the day to 1.48%. Comment!

2:10 PM More on Fed Beige Book: All District housing markets were largely positive, rental markets continue to strengthen. Retails sales increased slightly in all Districts, except Boston and Cleveland (steady) and New York (softened). Travel and tourism reported as strong, with robust occupancy rates and revenue/room. Manufacturing is expanding, but at a more modest pace. Comment!

2:04 PM Fed Beige Book: The majority of Fed districts saw "modest to moderate" expansion (the last report just used the label "moderate"). The New York, Philadelphia, and Cleveland regions saw weaker activity. 1 Comment

12:52 PM Bernanke Q&A: The Chairman admits to a "theoretical limit" on QE, noting if the Fed owns too much Treasury and agency debt, it would "greatly reduce market functioning." The Fed has yet to hit that point, he adds. There's always stocks! 4 Comments "

" Spanish bank deposits stable in May despite Bankia ‎ Reuters - 7 hours ago MADRID, July 18 (Reuters) - Deposits in the battered Spanishbanking sector held steady in May, Bank of Spain data showed onWednesday, weathering a 23.5 ... "

" Spanish Bank Deposits Down 5.75% On Year in May; Bad Loans Up‎ "

" Crumbs! Germany has just sold more than €4bn of two-year debt at negative yields. "

--

12/7/18

news

The rest of the EU is not allowing Greece's new government to save face:

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_19/07/2012_452798

http://in.reuters.com/article/2012/07/19/us-greece-troika-idINBRE86I0XU20120719

Germany's parlimaent voted overwhelmingly to dispense the bailout to Spain.

analysis

It is surprising to me that the EU is not allowing Greece's new government to save face. I thought they would, to encourage the Greeks after narrowly electing a pro-Europe faction. Either this isn't following my morality play script, or it is but Greece has already taken on the character of the bad guy. My best guess is that the script is still in play but not quite being followed; in the shadow of Spain, EU officials simply don't have the time or the money to put on airs for Greece, and so their plan is to reward Greece but only when it actually makes cuts, ignoring political symbolism.

12/7/19

analysis

http://www.realclearmarkets.com/articles/2012/07/20/strange_curves_what_explains_all_the_negative_yields_99780.html

http://soberlook.com/2012/07/vix-near-lows-shows-mispricing-of.html

http://seekingalpha.com/article/735661-bank-of-america-s-future-depends-on-this

http://macromon.wordpress.com/2012/07/19/why-are-equities-so-bid/

12/7/22

analysis

Very interesting idea: when debtors as a class (including sovereign debtors and banks) pay down debt (deleverage), interest rates are driven down, increasing the net present value of the remaining debt, possibly more than the debt was decreased by paying it down!:

 “The more the debtors pay, the more they owe.” Debtors slowly pay down their debts and reduce the principle owed.  This would reduce the NPV of their debts in a normal environment.  But in a falling-interest-rate environment, the NPV of outstanding debt is rising due to the falling interest rate at a pace much faster than it is falling due to debtors’ payments. " -- http://www.zerohedge.com/news/guest-post-falling-interest-rates-destroy-capital

12/7/23

analysis

http://www.hussmanfunds.com/wmc/wmc120723.htm

my UVXY model is negative.

some neat things i've learned

• expected log value (which is = to expected value when it is a small part of ur portfolio)
• sharpe
• marginal sharpe, only cov with portfolio/beta matters
• Empirical properties of asset returns: stylized facts and statistical issues (2001) by Rama Cont personal.fmipa.itb.ac.id/khreshna/files/2011/02/cont2001.pdf

12/7/25

analysis

http://blogs.barrons.com/incomeinvesting/2012/07/24/u-s-ranks-14th-in-blackrock-sovereign-risk-index/

my UVXY model has flipped signs and is now positive.

armchair theorizing

when to speculate:

• speculate with currencies when some macro outcome seems almost inevitable
• speculate with equities when some price seems crazy
• don't plan to lose more than about 2% of your total trading capital per trade

how to speculate with currencies on a timescale of months:

• look for fundamental drivers (e.g. the EU crisis; e.g. the Fed printing money)
• find a case where you think one of these drivers will very likely move in a certain direction over some timescale (e.g. the EU crisis will get worse; the Fed will print money)
• from this, choose a polarity on a pair. Forget about a fundamental value that the pair wants to be at, and assume that the pair will go in a direction determined by your polarity.
• set a stop limit
• determine how much you can afford to lose and compute your order size from this
• entry/exit: if the pair has recently moved a lot in your direction wait until the pair has gone the other way a little bit
• set REL (limit) orders at a constant distance above/below your pair to "double down" if it moves against you (but this is important: don't actually 'double down'; each of these orders should be the same size)

(actually you should use currency options but i havent done that yet)

how to speculate using options:

• determine direction
• determine at which price you want to close the trade
• blur this a little by spreading it out around nearby strikes
• determine the amount you want to lose if you are wrong
• determine by when you think the price will surely reach your target. double this duration.
• buy options whose strike prices are your closing prices (call or put depending on direction) and whose duration are as in the previous line.
  • don't buy them all at once, spread out the time, and keep some dry powder; set limits in your head on the underlying price as above
• if the price hits the strikes, sell the options. if it never does, you'll lose their entire price
• if your outlook changes, change your holdings (use combo orders for this), otherwise leave it alone until the price hits the strikes (or they expire worthless)

-- NOTE: THE ABOVE IS INCORRECT -- FOR THE SPECULATOR BETTING ON DIRECTION WHO PLANS TO HOLD AN OPTION PAST ITS DATE OF EXPIRATION, OPTIONS ARE FOR CONTROLLING RISK, NOT FOR SPECULATING ON DIRECTION. Putting risk considerations aside, options which are held past their date of expiration Used speculatively, speculate on volatility, not direction. is that right?

-- NOTE: IF THE PRICE HITS THE TARGET JUST AT EXPIRATION, THE OPTION WLL EXPIRE WORTHLESS -- you lose all your money unless the option hits the target SOON

how to invest at any old time (except if you think it's right before a crash or downturn):

• buy VQT, low beta ETFs, buy emerging market ETFs
• buy high yield bonds, unless you think they are 'overbought' -- or if you think inflation might go up, buy bank loan ETFs
• if interest rates are high, buy bonds. If you think inflation might go up, buy TIPs instead

how to invest in beta:

• wait until a market crash
• wait until you think the market 'shouldnt' fall anymore
• wait a little while so that the crash seems to have ended, at least in the short term
• buy high beta ETFs
• buy USCI

when to buy gold:

• wait until it crashes and starts rising a bit, then buy it

when to buy volatility:

• when it is below 20 or so and you think things are scary

how to buy volatility:

• if things are scary in the next week, buy UVXY calls
• if things are scary in the next few weeks, buy VXX calls
• if things are scary in the next couple of months, buy VIX future calls
• if things are scary in a longer time frame, buy XVZ
• if you aren't sure, do a mixture of these, but be careful not to buy too much of the short term ones. Assume that you will lose all the money you spend on the calls if the event doesn't happen or is insufficiently scary.

when to sell volatility:

• whenever you are holding it and the buy conditions don't obtain, sell your position
• when it is above 26 or so and it seems to have stopped going up so much, or whenever you think things are not super scary

how to sell volatility:

• if volatility is high, sell vertical call spreads on UVXY
• otherwise short UVXY but buy OTM calls on it to protect yourself

12/7/26

news

Merkel's on holiday. Oh, i think i forgot to write here, a few days ago a bunch of Spain's autonomous regions asked for a bailout, and equites dropped sharply. Spain's interest rates are now 7.4% and Italy is 6.4%.

" The German Bundestag voted Thursday to approve the $122 billion banking bailout, but only if the Spanish government accepted full liability for the loans. "There will be no direct bank financing," said Volker Kauder, head of the Christian Democratic delegation in the Bundestag. "

analysis

" 3:29 AM There's a 90% chance that Greece will drop out of the eurozone in the next 12-18 months, according to Citi analysts who had previously estimated a 50-75% chance. It will most likely happen in the next 2-3 quarters, leading to "prolonged economic weakness and financial market strains in periphery countries, spilling over into renewed recession for the euro area as a whole this year and the next." [Global & FX] 1 Comment

My UVXY indicator is now strongly positive.

http://www.alsosprachanalyst.com/economy/chart-rubbish-indicator-points-to-sharp-slowdown-in-us-economic-activities.html

http://www.schaeffersresearch.com/commentary/content/blogs/is+the+vix+still+a+leading+indicator/outsidethebox_blog.aspx?single=true&blogid=112090

holdings

i noticed that UVXY calls seem to be overpriced when VIX spikes, and my UVXY indicator is strongly positive, so i set up some automated limits to try to buy a small amount of UVXY calls tomorrow morning.

i decided i am finally comfortable with trading currencies and tripled my negative EUR/USD position (that is, i'm bullish on the dollar).