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Bob Janjuah On The Market: "Like Bulls In A China Shop"
From the exquisite stream of consciousness of Nomura's recent addition: Bob Janjuah, who luckily discovered he was far too smart to be held back by the D-grade bailed out banker-clowns at RBS (we can only hope Bob will next discover the carriage return button).
Bulls In A China Shop
Since our debut notes here at Nomura (see The Sceptical Strategists: Has anything changed? And Enjoy the rest of 2010) Kevin and I have been around the world seeing clients and it is now time to put pen to paper again. Kevin published his latest report on 29 November (see The Sceptical Strategists: Battle royal between the haves and have nots) and here I share my latest thinking, based in large part on what we have learnt during our travels. I am going to do this in reverse order, starting with our key trading and positioning recommendations, and then moving on to the major macro themes and
issues that we judge are currently occupying the investor community.
Trading and positioning recommendations
Following the same format as our first note, we review our previous views and also look forward:
1 – Short term, the “buy the rumour, sell the story” theme seems to have played out pretty well. The reflation trade peaked in the few days either side of the QE2 and mid-term election announcements. This is clear from the performance of FX, equity, credit, bond and emerging markets. Part of the disappointment came from the scale of the QE2 package, which was much less than some market participants were hoping for. Part of the disappointment came from the credibility issues concerning the doves on the FOMC, including Bernanke himself. In particular, some clients thought the FOMC doves were almost too desperate to justify QE2 after the fact – and the credibility issues of the FOMC were not helped by the release of the FOMC minutes last week. The other big issue and driver of disappointment – other than extreme positioning for the reflation trade into the announcements – were the problems in the eurozone. Not just the Irish situation, but also the broader based worries about eurozone credibility.
2 – Beyond the shorter term, we judged that there would be a brief “risk on” phase from late November through to early 2011. We are less sure now for two main reasons. One is the issue of eurozone credibility and bailouts. The market now appears to share our view – that the eurozone is facing not a liquidity crisis but rather a solvency crisis. And in this respect the market – since the Irish bailout – seems to be realising that the bailouts and linked austerity are neither credible nor beneficial to the eurozone as a whole. After all, the logical extension of the bailout route is to damage and put at risk the hard-won inflation credibility of the Bundesbank and ECB, faced with a booming Germany and a very weak periphery. The ECB is now perceived as so compromised that it is unclear how it can now raise rates if Germany continues to power ahead. At the same time, it must now also be clear that if Germany and the other core countries are now back-stopping all credit risk from eurozone peripheral sovereigns and their banking sectors, then the Bund must now be seen as a risk asset and its yield must reflect all the credit risk it (the Bund) is meant to back-stop. This is not a situation which Germany and the other core countries are likely to accept in the medium and long term because now Spain and possibly even Italy and Belgium may be dragged into the mire. We have long been fans of BTPs and Tremonti, but the Irish “solution” – in particular the lack of credibility – could undermine the whole eurozone, not just the four well defined peripheral nations. Our second major concern is price action, where the S&P500 index is our global risk proxy. During the run-up in the reflation trade earlier this month the S&P500 yet again failed at 1220. This was the point of failure back in April, which was followed by a near 20% fall. It failed again in November. It did exceed 1220 but we always look for key technical levels to be cleared, on a closing basis, for four consecutive days. The move above 1220 failed to last beyond three consecutive days. It may be premature to talk about a double-top in (Western) equities, but we think the risk is clear. Kevin and I still think that the trailing data from the US and Germany may continue to surprise slightly to the upside over the weeks ahead, and we may see enough out of the eurozone, after the negative market response to the Irish bailout, to (attempt to) placate the market's concerns (but it may be too little too late). In particular, the ECB may make further offers of help. Nonetheless, it now seems prudent to clarify the call over the rest of this year. For now, we see 1220 S&P as a formidable barrier and the burden of proof now is on the bulls and those who buy into a successful reflation trade. Given the current situation, we think that until we can clear 1220 S&P on a closing basis for four consecutive days, then 1220 S&P looks like a ceiling and risks becoming not just a double-top but also a potentially dangerous triple-top (if there is a little run-up over December). As such, unless we get this sort of clearance of 1220, then we think the risk reward does not favour a bullish outlook nor any joy for the reflationist camp. Over the next week or so, we see 1130 S&P as some form of floor. If this floor does not hold, then there could be a repeat move back down to low 1000s S&P. The implications are clear for the reflation trade, in FX (USD positive), bonds (front end UST positive), credit/euro periphery (wider) and EM (negative risk assets) – it will be “risk off” time. Between 1130 S&P and 1220, we are range trading the reflation trade so recommend light and liquid positioning until there is a break out one way or the other.
3 – Beyond 2010 and focusing on 2011, we remain negative on the reflation trade and favour a “risk off” stance to markets. We are concerned about global growth. We are concerned that policymakers are running out of credibility, ammunition and the support of their electorates. And we are concerned that policymaker interests around the world are now diverging. One of the great successes of our times was how, globally, all policymakers seemed to get on the same page in response to the 2008 crisis. It now seems to us that serious divergences have set in, both in Europe (Germany vs the periphery) and globally (the US vs EM). This is a worrying development. For asset allocation purposes we recommend caution with respect to risk assets, bullishness on USD and the front end of the US curve, and any long positions should we think be driven by one primary rule – favour strong balance sheet entities, whether looking at equity risk, credit risk, government risk, FX or EM. For avoidance of doubt, based on the Irish bailout and assuming that the bailout route is the preferred policy choice in the eurozone (for now), we no longer see Germany, the euro or bunds as safe havens.
Using balance sheets as an asset allocation driver may not result in absolute return success, but should allow relative return outperformance. One final point to add: in the context of asset allocation for 2011 and in the search for strong balance sheets, do not forget Japan. Japan has one of the safest and strongest private sector balance sheets around – including the banking sector, which has been in balance sheet repair/risk reduction mode for nearly rwo decades now. And the balance sheet strength of the consumer and non-financial big cap corporate sector is well understood. We would also stress that while weak growth, persistent budget deficits and high public sector debt levels may be long-term issues for Japan, for now and for the next few years at least Japan is not a sovereign credit risk to anyone in our view. Simply put, Japan funds itself, and the country's substantial foreign net asset position means that this self-funding is under no real risk for the next few years. The real issue rather is that if Japan has to repatriate capital from the world to fund itself, then this is a far bigger concern for the rest of the world. Why? Because the rest of the world has grown very used to relying on these “cheap” Japanese capital outflows to fund itself. Should these outflows from Japan reverse meaningfully, the cost of capital to the rest of the world would surely rise – a potentially significant negative for the risk on/reflation trade.
Major macro themes and issues
Based on our travels, we see the following as the key themes and issues in the macro space:
1 – Emerging policy divergence: There seems to be a divergence in policy between the strong balance sheet surplus nations and the weak balance sheet deficit nations. The surplus nations seem to have realised that the deficit nations have structural, not cyclical, problems which will require a long period of balance sheet repair and economic reform. As a result, the growth/trade dividend that the surplus nations enjoyed from funding the deficit nations now seems far less certain and therefore, the desire to keep providing cheap funding is, we think, weakening. The net result is that the cost of capital to the deficit nations is likely to rise. And it means that the surplus nations may have to address domestic overheating/inflation/asset bubble problems even at a time when growth in the deficit nations is still very weak.
2 – Asia/EM slowdown: We expect a voluntary slowdown/soft landing in Asia/EM, as this block – which has driven global growth for some time now – deals with domestic inflation and asset bubble concerns. The QE2 move by the Fed has not gone down well in the Asia/EM complex as it has turned a long-term imbalance problem into an immediate and acute short-term concern for Asia/EM. We saw no signs of any sort of meaningful currency adjustment in Asia – rather, domestic tools like higher rates, low lending volumes and higher reserve requirements have and will likely continue to be used to achieve a slowdown.
3 – European concerns: We see two key themes around Europe. On the one hand is Germany's impressive growth this year. And on the other are the extreme problems of the periphery. The common link is of course Germany and its willingness and ability to keep funding its deficit nation brothers. As we have said before, we see two possible outcomes for the eurozone: (1) it ends up as a “hard” bloc dominated by prudent German policy, a clean ECB, and where burden sharing/bondholder losses (sovereigns and banks) and a centralisation (federalisation) of sovereignty are a harsh reality; (2) it ends up as a “soft” bloc where Germany underpins all credit risk and funding needs for the entire bloc – sovereigns and banks – and where the ECB is significantly compromised. For us the right long-term choice is clearly the former, but the Irish bailout suggests the opposite is more likely – for now. If this were indeed the long-term outcome then Bunds and the euro would certainly not be safe havens nor good stores of value. We use the term “for now” because we struggle to see how Germany will accept higher bund yields (as it increasingly has to reflect eurozone credit risk, not just German prudence) and higher domestic inflation (to help the peripheral nations, relatively, deflate) for any material period of time. The real issues for us now are (1) how generous will Germany be as the Asia/EM growth slowdown hits the German growth story? and (2) how generous will Germany be if Spain and even nations like Italy and Belgium are dragged into the mire. We think burden sharing/debt restructuring in the eurozone – and in other weak balance sheet nations – particularly (on a case-by-case basis) for bank bondholders, even at the senior level, are going to be both necessary and likely. And we think 2011, not 2013, is going to be the year that this hits home. It is worth repeating that burden sharing is likely not just to be a eurozone issue.
4 – US policy limits: There seems to be a general perception among clients that “if QE2 does not work, the Fed will do more.” We are uncomfortable with this. Bernanke is already struggling to justify his current policies and this struggle is not just with the surplus nations. Within the US concerns seem to be growing, including within the FOMC and Washington, that current policy settings are not appropriate and that something different (more Austrian) needs to happen. One of the biggest risks we see for 2011 is that we might be faced with a double whammy of a global growth slowdown, driven by Asia/EM, at precisely the same time that the limits to “more policy” in the US are hit, both fiscally and on the monetary side. We have no doubt that if things get bad enough, with say unemployment heading back well over 10% and/or the S&P 500 at 30-40%, then there would be some sort of Fed/FOMC/Washington consensus around more monetary (QE3) and fiscal (new “New Deal”) policy, but we now see this as the main issue. Namely, the risk now is that in order to get meaningful additional policy stimuli, things are going to have to get a lot worse. In the interim, we think the biggest risk is to the credibility of Bernanke and his current policy setting, in an environment where the political will to allow him to do more is clearly under the microscope.
5 – Investor sentiment and positioning: Our view on the global investor base is that there exists a lot of concern, uncertainty and confusion. We do not think investors are ready or prepared for burden sharing, for a global growth slowdown, or for the realisation that we are close to the limits for more policy in the deficit nations, including the US. The eurozone is a real concern because more investors seem to be reaching the conclusion that the whole project and bailout policies are neither credible nor sustainable. There seems to be a tug-of-war going on between the unwillingness to accept bond holder losses/burden sharing, and the desire for credible, sustainable and clear solutions to the solvency problems in Europe/the deficit nations, as opposed to more debt/liquidity fixes. We think 2011 will resolve a lot of these issues, although they may drag on to 2012. If this is the case, we will probably just be storing up even bigger problems for later, because strong global growth seems elusive and unlikely to provide us with an escape route. Investors are increasingly seeing this, but do not yet seem ready to accept the solution.
As ever, we appreciate any feedback. And if you are wondering why the title "Bulls in a China shop", I hope that after reading the above, it makes sense: financial markets are very fragile right now, and any bullish risk-on phase seems to be based on very hopeful assumptions (“don't fight the Fed”; “beware animal spirits in the US”; “don't position against the US consumer”; “Germany owes us”; and lastly, “China will always grow at 10%”). We prefer to rely less on hope and more on hard reality and sensible and credible policies – even if they may mean more pain in the short term.
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CNBC just reported the jobs data is harshing their stock market buzz. No joke.
Hooray for Cpt. Spaulding, the African explorer (did someone call him snorer?), hooray, hooray, hooray.
Well done ZH. This be more like it. Leave that other bullshit to huffpoo and the stoned rollers.
Nowhere in this article does Nomura state the fact that the global economy is being exploded by the central bankers purposely, so all the rest about support lines, 'risk on/off' is all just more noise.
Time's Man of the Year 2.0!
Timothy Geithner= Best Treasury Secretary since Alexander Hamilton
Nothing is coming folks! No Great Depression 2.0! Got that?
The FED is here to stay.
Common Tyler - stop with this baiting alter-jackass thing. I know it's you - time to "</SARC>"
It was funny at first -- all those stereo-typical Keynesian dumb ass projections and statements -- but now it's getting to be a distraction.
This morning on CNBC I heard a guest pronounce the word 'chasm' like the 'ch' in the name Charles.
Maybe they were thinking about "jism" ...
No doubt a student of the John Kerry school of diction.
He was probably thinking of his date with Erin Burnett last nite.
Sharing burdens ... hmmm, as long as you are sharing / shouldering my burden, all's well. However, I'm not so big on sharing yours ...
No one will step forward for the give up unless it is forced upon them. And the strong are the ones with the force.
Asymetrical response will become increasingly more interesting to see.
Good Pettis article on Europe and sharing.
http://mpettis.com/
We are now at the "Do or Die" point for the bears.
They need to turn it down ASAP, otherwise its going to be a triple top breakout.
I'm watching the KRE. Pass or fail at $24? I'm ready to go long or short, either way on this one. The market should tell us within the next couple of days.
Hey Robo, Krispy Kreme sucks. And there are no bears, not actively shorting anyway...just the scam money printing and pumping at the FED.
Ireland Tuesday, the ECB can buy all it wants if the they dont pass the budget or you get something kooky like the IRA saying hello, I really dont see what the Fed can pull to keep things up.
@Robo
Who cares about KRE, the people want KKD! The top secret lab at KK has discovered the Holy Grail -- a sugar free donut cooked in Olestra. They're in merger talks with KMB as the new donuts have a lot of cross sales potential with the Depend line.
Depends will be needed in gross lot purchases with those olestra bad boys!
Real bears short the market by buying gold.
Implode-0-Meter on SPY blinking yellow:
Spot oil ramp up to push OIH...not working.
Gold bid pushing miners...is bearish.
Bank rally of yesterday...failing after one day.
Momentum stocks...being flogged.
Euro bounce...unsustainable.
China to raise rates on Monday...probably.
More folk out of work...duh.
Inventory build-n-stuff complete.
Market Credibility officially at zero.
the gold stocks lead the market, up 2% today, the Dow will play catch up on Monday.
Market reporting credibility, officially at Zero Hedge.
yup.........with notable exceptions, to wit: the idiot Robo & his side-kick, one HarryTheWanger
Well stated, Sir.
The horror! COMEX Au at 1405 - hammer of Thor where art thou? Bwah!
DO or Die for bears??? really??? You would think that the UE numbers are actually beating expectations not missing by over 100,0000. Get real Robo. It is Die or Get Killed for bulls
Ladies and Gents
I'm not putting the following link on as an advert. Honest. Just reading some of the mere brutal facts should get folks out there thinking in a big way. The sh*t is coming, man. Who's ready for it?? Hollywood has given us enough subtle warnings this decade!
http://www.stansberryresearch.com/pro/1011PSIENDVD/EPSILC05/pro=218966&s=221475&u=36071506&l=190654&r=Milo(On the above link, once the video appears, if you press the "back" button on your internet browser you'll get a grey message box come up. Just click the "Cancel" button and you'll get the transcript version.)
Porter Stansberry has been sued for stock market fraud by the SEC.
http://www.sec.gov/litigation/complaints/comp18090.htm
This:
...is just brilliant.
Meanwhile, Bass also warned that Japan may default in coming years. He said From 1989 to 2009, government debt grew 137%. But since Japan's interest rate is close to zero (so is the United States), it will be getting more difficult to pile on debt without incurring higher interest payments, and increasingly will need to go abroad for financing.
-Zero Hedge
Most of the debt owed domestically, easier politically to monetize than default.
I think this is the big diff between FA trader and technicial trader.
I am not seeing any bearishness in the chart, at best for bears it's in range.
I think SPX is going to 1300+
one more thing, hold GLD and DBA leap calls.
When a monetarist is calling out the sophistry going around the halls, you just might be in for a crash.
At least there is one chart they can't manipulate and that is the National Debt. The clock keeps ticking and it truly is the one source to look at if you honestly think this will end well. We are now approaching a National debt of 14 TRILLION dollars and nobody seems to care. Total obligations outstanding are 115 TRILLION dollars and some say that number is closer to 200 TRILLION. With revenue shrinking at an alarming rate and liabilities spiking to all time highs, the hands are spinning so fast they will soon fly off. For those of you naysayers, please enlighten me on how we will turn the clock back or even slow it down. The fact of the matter is we can't. Our economy now relies on this fiat injection just to pay the bills. So the presses will never stop and the clock will just keep ticking until we have buried ourselves so deep in a hole that the dirt will start falling back in and covering us up. Other countries are just sitting back and watching the Great America in self destruct mode and preparing to survive without us. This is what happens to a society that is controlled by greedy CRONIES and corrupt BANKSTERS that only care about themselves and the bonuses for their friends. They just continue to sit at their gambling tables and run into the bathroom and do another line of coke before they borrow another million from the house to keep them going for a few more hours. The only question I ever had was wheather this would end in a civil or uncivil manner? I'll go with the latter of the two because when people lose everything they all of a sudden start to pay attention. I feel really sorry to have raised kids in this country and am truly scared for their future. If I had known that America would turn into such an insolvent, greed induced junkie, I probably would have had second thoughts about raising a family and putting them in a situation they will have no control over.
http://www.usdebtclock.org/index.html
So NFLX on support at 187-189. Next one comes up at the 176 region and a major support at 165-167. Let's see what this stock is made of after the first sign of trouble (Comcast).
I'd be cautious about applying the recent lesson of "Just buy the f'n dip" to NFLX. That won't be a dip...it is a bubble that is popping.
Which one of the seven words didn't you understand?
;)
Al, two things. There's a gap below (173.04 to 181.07) to fill and it has a recent history of at least re-visiting the high from the previous peak after it breaks down. That means 184.74 is in Netflix future, maybe even today. After that I wouldn't trust it with the entire position, and i would definitely exit once the gap is entered.
This just in from China: One bloggers struggle against communist oppression of journalism (note tag line at 1:51 on Hillary):
http://www.youtube.com/watch?v=HaCChcQUJiM&feature=sub
"Within the US concerns seem to be growing, including within the FOMC and Washington, that current policy settings are not appropriate and that something different (more Austrian) needs to happen"
Really? Mr. Janjuah, considering we are in the midst of QE2, how do you come to the conclusion that FOMC and Washington want something more Austrian? Ron Paul is like a lone voice in the wilderness. The incoming Republican House freshmen are not in my opinion very Austrian. Hell, they proposed to reduce spending only to 2008 levels which were insane and unsustainable levels of government spending which had prompted former comptroller David Walker to make his famous film IOUSA. How are they going to be more Austrian? Just because they are a little bit less insane than the insane and out of control spenders of the current Congress?
Range trading between SPX 1220 and 1130. Geez, this guy stole my EOY trading strategy!
When will Fat Bernanke do his final black Swan dance on Ice?
I have been wondering about those " fucking dips ",(mostly HFT)
and I have been waiting for one fucking dip big enough (on low frequency mode)
to actually signal me some fundamental value or any real incentive to buy.
But so far my lazy money just sits in a 6% cash management account
while I am sitting on the beach and watching the Fat Bernanke do a Swan Lake.
For those of you already hit by Austerity,too bad you won't ever get to see this:
Swan Lake is a ballet by Tchaikovsky, and Fat Bernanke is the black Swan on Ice.
Speaking of "bulls in china shop".... Huffpost reports that BusinessWeek reports that Nigerian news reports that..wait for it.... arrest warrant to be issued thru Interpol for one Mr. DICK-HEAD CHENEY. Some bogus allegations of bribery or some such back in his Halliburton days. Can you imagine Nigeria squawking about "corruption"? Nevertheless......
Just to ADD TO what I considered the PERFECT COMMENT(by tahoebumsmith) in todays dialogue, all of you fucks out there worrying about your Krispe Kremes, Netflix's, and whether the S&P's going to "hang in there above 1200", are really screwed by someones second hand smoke! Get fucking real people! It's ALL smoke and mirrors, manipulated bullshit, from the "market", to the "Gubmint", to the "Bankstas", to the "media", to your local "insurance agent". THERE IS NOT, (read my lips), NOT ENOUGH FIAT DOLLARS IN THE WHOLE FUCKING UNIVERSE TO GET US OUT OF DEBT! TO PUT IT A LITTLE MORE REALISTICALLY, THERE AREN'T ENOUGH FUCKING TREES TO CUT DOWN TO MAKE PLAY MONEY ANYMORE! GOD, GOLD, GUN'S, AND GUTS. THE REST IS ALL TOTALLY BULLSHIT! thank you for your time..............
Yep, pretty much sums it all up! Its total BS, I feel embarassed to have to see whats actually going on daily in this destroyed country, as people talk about S&P support and to buy the dips. Like watching drunks on the aft decks of the Titanic partying to the free bar and string quartet.
Have to disagree with Januah. S&P going higher in a short time frame. 1300, even higher also possible.
Sorry Bob, the reflation trade did NOT peak either side of QE. It's still going, and will go on for a while. We all agree that the economy sucks, and, that we're doomed. Again, we're on the same page there. But just because you decided to exit the trade, doesn't mean it's over. Not yet.
GG
First rate Broadside by janjuah. Clear and informative. I've only been watching zh for 2 months so I'm still on a learning curve for some of the terms and abbreviations. That said, ZeroHedge is a great investigative financial news site. Actually, it is a great news site.