Wednesday, September 30, 2009

Mysteries of blogger

Never really understood how Blogger stats work.  I have noticed this before - that when I stop posting, the number of subscribers goes up!  Either someone is trying to tell me something or its those damn ghosts in the machine again...

Anyways, if there is anyway that it was missed...I have moved the blog to its own website at  To subscribe simply click on the RSS icon in your browser navigation bar.

Sunday, September 27, 2009

Moving house - my very own website

Time has come to leave the nest - so long Blogger, thanks for all the help - you can find my new blog address at the following link:

(It's a work in don't expect too much...any feedback will be graciously accepted.)

Thursday, September 24, 2009

What was wrong with the FOMC minutes?

So the FOMC minutes were released, the market held firm until...well something spooked a steep sell-off into the close.

What happened?  It wasn't as if there was anything particularly pointed in the minutes.  More a summary of the timidity of the recovery and that policy will need to continue to be supportive.  (You can read it here.)  But there was something in there - I read it as a restatement of the 'exit policy'.

And there's the rub.  We have reached the point where the patient is going to leave rehab - that means no more intravenous drips, no more call button and, maybe to the positive, no more hospital food.  It doesn't mean that there won't be attentive nurses dropping by to offer some comfort but it is homecare for us now.

Consider the following charts of the Fed's open market operations that are designed to pump new money into the system.  First up the agencies where the Fed has committed to purchasing up to $200bn of agency debt and $1,250bn of agency MBS by the end of Q1 in 2010 (as opposed to the end of this year as previously foreshadowed):

In both cases, we are over half way towards to the final purchase volume, but with the slowing down of purchases, MBS acquisitions in particular will be at a markedly lower rate.

(Here I've simply assumed that the balance will be spread evenly across the period to the end of March.)

Now to the treasury purchases that to date at least seem to have had a disproportionately larger impact on risk markets (it'd be great to have a correlation analysis between these tenders and movements in the equities markets but it's beyond my time constraints).  Here we are at the tail end of the planned purchases:

With $10bn left in the kitty, that is to be spent by the end of October, this liquidity injection is all but over.

The Fed can't print money indefinitely.  It needs to engineer an exit strategy.  The withdrawal of the pump priming treasury POMO is designed to achieve exactly this.

Without the artificial bid, the markets need to stand on their own feet.  Given the economic backdrop that prevails, this is not consistent with the return of the raging bull.  Rather expect it to be a catalyst for a sell-off as the market seeks to find the 'new' floor.  If there isn't one - expect the Fed to step up again - with POMO part II.

Finally, out of curiosity I looked at the level of acceptances as against the volume of stock submitted through the Treasury POMO.  I wasn't hoping for much - but was interested to see whether there was a loose correlation with the March lows and recent activity:

It was inconclusive.  The volume of stock offered into the tenders has averaged around $20bn per tender (with pretty large volatility around this - which could be for any number of reasons).  At face value, there does seem to be lower levels of acceptance around the March lows.  And, interestingly, recent history has retraced to these types of levels.  Not sure it means much, but might be worth keeping an eye on.

Wednesday, September 23, 2009

New highs and key reversals

Some signs that last night mark's an important inflection point for the rally...the Nasdaq, S&P500 and Russell all tripped over in the last 90 minutes of the day...and marked out key reversals on a daily basis.

In my experience, key reversal's (in this case, a new high but a close lower than the low of the previous day) have good form.  They are particularly canny at picking a change in trend if they occur on a weekly basis (as was the case in stocks like MQG at the lows back in March) but let's not get ahead of ourselves.

The global risk trade rally is on its last legs - time to arc up the size of the short...

I've been working through the FOMC minutes - come back separately with why I think a relatively innocuous statement sparked a sell-off.

Tuesday, September 22, 2009

Sector rotation

It's school of squash and cluedo, trips to the zoo and other frivolities are the order of the day...

The volume of commentary calling for a correction (orderly or otherwise) is growing.  While on one hand it meaningless noise, it does add to a general sense of foreboding.  Longs are happy to sit on their hands, though the ripcord is never far from reach.

For mine, the Dec XJO puts I bought on this run up are still in play - on balance, I'm expecting a pullback to around the various moving averages around 4550.  I'll trade against the Mar XJO puts if we get some meaningful volatility heading into the new year.

One shape in the charts that has caught my eye are the defensives.  There is a general bid against some of these stocks that suggests that a rotation into these types of stocks could be in the offing.  That would fit with a retracement scenario where investors take profit but look to stay in the market.

Have a look at TCL for example.  It held the $4.00 level over recent weeks with rising volume and momentum divergence.  It is testing its longer term downtrend.  Think I'll look to pick some up over next week if it breaks higher (near term target $4.70)...


Thursday, September 17, 2009

A history of mean reversion

Following is a chart of the All Ordinaries from 1984 to the present with the 50 day and 200 day simple moving averages overlayed:

And here is a look at these same moving averages from a slightly different perspective - it's a chart mapping the percentage difference between the All Ordinaries and these moving averages over time:

A couple of conclusions from these charts:
1) By this measure, March of this year was an absolute bargain.
2) We have now reached the other end of the spectrum where the market is trading over 10% above the 200 day MA.  This doesn't happen often - and when it has (1987 pre-crash and then the post crash bounce and 1993 before interest rates got ratcheted up) the market has had some sort of pullback in the near term.
3) The flipside to this is that part of the 'mean reversion' is that the mean itself starts coming up to meet the market.

On the evidence of 1987, we could conclude that the market will probably correct from today's levels, but another crash is not in the making.  It is more likely that the market will trade broadly sideways for the forseeable future.

One big difference between 1987 and now that could change this dynamic is that interest rates were an effective policy tool back then.  Global interest rates plummeted post the crash and this kicked off a round of asset price inflation (that ultimately lead to our home grown property bubble).  Will this work this time?  Probably not - that is why central banks around the world are doing the QE two-step.  On the evidence of the repricing of risk assets this does seem to be working.  As we've noted before the real test is about to unfold as the QE is taken out of the system...

Finally, had a quick look at the (even) longer term.  Following is a chart of the All Ordinaries (in log format) from 1875:

And the difference between the monthly average above and the rolling 12 month simple average of this average (sorry but it was the best I could do).

Speaks for itself really...

It's mine I tell you...

I think I look a little like Bjorn in this...or is it Benny...never could tell which was which...