Three Bearish Charts for Equities

Posted on March 29, 2013 by Dutch_Book

First off let let the record show that equities are by no means my area of expertise, but I thought this was worth sharing and too long for twitter.

This week three of my favorite correlations for US equities in different risk areas ended up significantly disconnected from the levels where the SPX is currently trading. Because of this I decided to enter into a short term risk reversal on Thursday.

Economic risk: SPX has lined up very well initial jobless claims for the past 5+ years but has recently overshot by quite a bit

High quality risk: the BAML Global Financial Stress Index, which attempts to measure stress in areas such as solvency and liquidity, price momentum, and short term volatility. This is the first time it has broken significantly below equities in over two years.

Low quality risk: the Markit CDX North America High Yield Index tracks CDS for 100 non investment grade debt issuers. This has been an extremely tight relationship and was the straw that broke the camel’s back for me.

It might be worth keeping an eye out for a minor correction.

Bassmasters, It’s A Fishing Show

Posted on October 4, 2012 by Dutch_Book

Feel free to chalk this up as an obnoxious victory lap, but I thought this was worth a look. As I pointed out over a year ago Kyle Bass seems to have become victim of the great widow maker macro trade of the century. The exceptional quant team at Nomura, which has produced some of my favorite charts, decided to highlight some problems with the short JGB trade.

The odd thing for a sell side desk is that in the process they chose to flame one of their own clients.

Keep in mind this is based in cash bond investing and not the strategy of rolling derivative short JGBs Hayman has employed, which has produced returns closer to -90% over the past two years.

Moral of the story: macro tourism doesn’t pay.

Vote Early, Vote Often

Posted on October 3, 2012 by Dutch_Book

Bricklin Dwyer at BNP was kind enough to send out a game (surely no drinking is intended) to help keep the incessant political rhetoric at tonight’s debate interesting.

I will certainly be playing at home.

Cheers

Is Japan Becoming The US?

Posted on August 23, 2012 by Dutch_Book

Since 2007 I have heard no less than 1000 versions of this question: “Is the US becoming Japan?” Countless pieces of sell side and buy side analysis have been published on the topic, and a few Japanese economists such as Richard Koo who intricately understand the effects of widespread public and private balance sheet deleveraging have gained a cult following.

I have been a huge advocate of Koo over the past few years as the Japanese treatment of their economic collapse has proven the best example (thanks to better data than the Great Depression etc.) for modern economists to examine deleveraging. However due to a reasonable level of monetary easing and a far more accommodative banking system it seems that the US has been able to enjoy what Ray Dalio and the team at Bridgewater have deemed a “beautiful deleveraging” where enough printing has occurred to balance the deflationary forces of debt reduction and austerity in a manner in which there is positive growth, a falling debt/income ratio and nominal GDP growth above nominal interest rates.

Nevertheless people continue to return to the Japanese crisis for answers on an asset basis, because it is the most recent true crisis in a developed market from which to learn. Over time, surely enough, assets have moved outside of the boundaries prescribed by this analog. First it was currency flows, then equities, then widespread economic growth measured by GDP and GDI disconnected entirely from the Japan thesis. One outlier remained, rates have stayed stubbornly low and this is where I end up yelling at people.

The thing with rates is when one is comparing JGBs to USTs everyone who doesn’t understand real rates or long term trends, does it backwards. The current bull market in USTs started almost ten years before the similar one in JGBs.

Yesterday an equity focused hedge fund PM from the emerging market nation know as Florida brought this chart to my attention.

The obvious problem is that it is comparing a midmarket shift to that of a pre peak market, Japanese yields in their era of a liquid global market topped out in 1990. I will cut him some slack though because he understands companies in ways I find confusing.

The bull market in USTs started in 1981 and from a much higher point in nominal yields. It has continued up to this day. I personally think it is carving out a bottom right now but that’s a stance that has made many far more competent stewards of capital before me look foolish. What is interesting though Is that few seem to ask, the question is the “Japan becoming the US?” JGBs lagged 9 years against UST from a year before their peak look staggeringly similar. (Note this analog ends with 10y USTs hitting a bottom at 353 bps in June 2003)

Over this time period it looks like Japanese rates became US rates and note the other way around. As seen below real rates in Japan (red) have been significantly higher each of the past five years in the US (blues).

If the long term trend in the US means anything JGBs have another decade at least to put in a bottom on yields. The question people should be asking is “Is Japan Becoming the US?”

(lagged 108 months extended to present day)

Under the Bridge

Posted on August 1, 2012 by Dutch_Book

Felix Salmon decided to respond to my criticism of his inaccurate post by calling me a troll and characterizing me as one of Wall Street’s “many overconfident frat boys with overstuffed paychecks”

Here is a tip: If you are going to take issue with someone’s lack of civility it helps to avoid sweeping generalizations and calling them a boy. Your crowning achievement is writing a blog chief, get over yourself.

Now let’s run down the rebuttal, which he titled “How Pimco works” even though both articles make it abundantly clear this is an area in which he has no expertise. Felix doesn’t know how much Bill Gross was paid last year, how his pay is administered, or how it is determined. I have no idea what Bill Gross made last year, that’s why I don’t write blog posts about his pay package. Yet he proclaims “Is there a formula governing Gross’s remuneration, based on some combination of Pimco revenues, Pimco profits, and the performance of the funds he manages? I’m sure there is.” That’s conjecture backed up by nothing at all. I will gladly bet Felix that Bill Gross’s pay is not established by some black box formula. Saying that he is sure of it is misleading his readers for no reason but vanity.

Next on the example set by Gross “If they would risk getting fired after turning in such dismal performance, then it would be downright hypocritical — and bad for the cohesion of the senior management team — were Gross to accept a $200 million paycheck in such a bad year” this sentence gets to the crux of his misunderstanding. Unless you’re at a leveraged shop you don’t get paid on performance. You get paid for asset gathering. Nobody gets fired when their funds are getting massive inflows. PIMCO and Gross in particular had a great year, but for some reason the opposite ends up in the article. Also Felix has zero insight into the inner workings of the firm’s management team so judging effects of hypothetical events or their cohesion is laughable.

The next paragraph gets some things right. There is without question a move toward fee compression in the asset management space. The pools of capital that allocate to PIMCO should be diligent in their attempts to maximize management skill and minimize fees paid for that skill. I didn’t argue to the contrary on this matter, but saying that every client should worry about how much the CEO of their service provider made last year is ridiculous. You would run out of time in the day if that was the case just trying to keep track of how much your barber made, or whenever you went to Starbucks for a coffee you’d need to worry about Howard Schultz’s pay package.

Felix then goes on to argue about whether the 200 million figure was probable. I have no idea. I never claimed that’s what he made. I simply quoted his article which had that figure which was presented by another reporter. He doesn’t know either.

On to El-Erian, Felix then goes rambling quoting me in three word blurbs. If you read the original article is still clear he mischaracterized how Harvard and HMC’s portfolios are constructed. The reason that “Mohamed was having a heart attack” was that his hand was forced in investing a liquidity sensitive portfolio in an illiquid fashion. Of course he should have worried about this; it was a terrible position to be placed in with his mandate. I was there and dealing with him from the opposite side at the time on this very issue I can assure you he was. However, my only problem was with Felix’s assertion that he “was having a hard enough time on the liquidity-management front when he was in the office every day” because he didn’t have a hard time. He did it exceptionally well; there is no evidence to the contrary.

It goes on, after he asked this very question as an open ended mystery a day earlier “How did Blackrock grow so big? In large part by buying a lot of index funds” No, it didn’t buy funds. It bought an asset manager, the largest one on earth. Those things are not the same.

Then just tossed out there as fact “And also, in part, by being a public company.” No evidence whatsoever to support this. Of the top 15 asset managers in the world only Blackrock is public. The other 14 are insurance companies, subsidiaries of banks, or private firms. So the concept that one might need to go public just to compete with Blackrock is founded on nothing.

Both posts make it quite clear that there were broad misrepresentations of how asset managers operate especially the one in question. So if telling someone they are wrong and having a number of people that we both respect, including those that actually work in this field, agree with me is “trolling” then I guess I’ll keep it up.

That’s a Preposterously Long Series of Clown Questions Bro

Posted on July 31, 2012 by Dutch_Book

I felt the need to point out this particularly ridiculous post because unlike the journalists that are normally recognized as complete hacks that do not understand what they are writing about (Louise Story, Gretchen Morgenson, Matt Taibbi, David Weidner etc) Felix usually does at least have some conceptual framework, however misguided, about the topic he is addressing.

Not today. He decided to just unleash a storm of bullshit on some possible pay figures at PIMCO. Let’s just go down the list.

“Gross, who’s already a multibillionaire and really doesn’t need the money, would have had to be utterly tone-deaf to pay himself $200 million in 2011”

First and most obviously, Gross doesn’t pay himself so that’s silly. Gross gets paid by the parent company that bought his firm and they are paid based on their firm’s overall profit. As Felix recognizes elsewhere in this post non leveraged buy sides get paid based on management fees on their AUM not performance. Gross had a bad year performance wise but brought a few hundred billion in the front door so he gets paid for that. Tone deaf to whom? He gets paid based on the performance of his unit and they did well. He doesn’t have to answer to congress or a goofball parade of Occupy Wall Streeters.

He continues with “It’s hard to see how he could justify extracting $200 million from Pimco’s investors or three times the record $68.5 million that Lloyd Blankfein was paid in 200”

This sentence is a total nightmare. Justify extracting from PIMCO’s investors? They have one investor Allianz SE the firm that owns them entirely and also chooses his pay package. So his increase in AUM certainly justified the pay package to them no matter what the number is. If he is talking about investors in PIMCO’s funds then they all pay an agreed upon and transparent management fee up front. Nothing gets extracted, but asset managers don’t go around refunding those fees if they have a year of underperformance. Then you have the “record” set by Lloyd Blankfein. A record of what exactly? The most a CEO at a publicly traded investment bank made in a particular year? Shocker: Bill Gross isn’t the CEO of an investment bank. At Goldman over the past decade star traders like Pierre-Henri Flamand and Morgan Sze made multiples of what Blankfein did and comparable figures to Gross’s rumored number. That is entirely an apples to oranges comparison though because buy siders that actually run portfolios north of 200 billion are paid at this level (or far better if you’re running even a tenth of that size at a leveraged shop)

Next in line “El-Erian was having a hard enough time on the liquidity-management front when he was in the office every day”

This isn’t true and I’m sure that Felix knows it. Larry Summers forced HMC to invest Harvard’s operating cash flow along with the endowment. Both El-Erian and Meyer before him made it abundantly clear that investing money that would be used in a 1-3 year time frame was inappropriate to piggyback an endowment that had embraced the longest possible investment timeframe in order to exploit some illiquidity premium. This is not El-Erian having a hard time with anything; it’s just him explaining to school officials that their allocation was innapropirate. This allocation was made by Harvard officials not by Harvard Management.

“How much time does El-Erian spend appearing on television, writing op-eds, and otherwise cultivating the media? Is that all part of some Pimco marketing push? To what degree does it distract from his day job?”

Answers: A lot of time. Yes. None, bringing in assets is his day job, this is part of that.

Next “Finally, and most interestingly, how did Larry Fink manage to amass twice Pimco’s assets under management despite the fact that Bill Gross, the greatest bond investor of all time, had a more than 15-year headstart on him?”

He bought Barclays Global Investors which at the time was the largest asset manager in the world from a bank that wanted to recapitalize. That’s a good way to get there. Larry Fink decided that passive management though a lower margin game was worth being in for it’s scale and stability.

“What is the story of Blackrock vs Pimco, and how is it likely to play out in future?”

There’s no fucking story.

“In order for Pimco to effectively compete with Blackrock, will it too have to go public?”

No. How is that even a question? They are a wholly owned subsidiary of a firm that is significantly larger than Blackrock which allows them tremendously cheap financing if they need it. Allianz’s insurance assets also provides them with 23% of their AUM. Does JP Morgan Asset Management, SSgA, or Deutsche Bank Asset Management (all well over a trillion in AUM) need to spin off and IPO to compete with Blackrock?

An astounding amount of clown questions bro.

NFPreview Charts

Posted on April 5, 2012 by Dutch_Book

Updated a few of my favorite domestic employment charts to help everyone prepare for NFP tomorrow.

The best indicator ADP vs. NFP.

NFP vs. inverted 4wma initial claims

One of my favorites: initial claims in in green, continuing claims in red, unemployment rate in blue

52 week moving average of non-seasonally adjusted initial claims

Constant vigilance!

Posted on March 21, 2012 by Dutch_Book

The nice thing about week that, outside of housing, is rather light on data is that it lends itself to reviewing cross asset relationships that might otherwise get overlooked. A such, a few sellside analysts (myself included) have been whipping up some rather clever charts. Here’s a look at what I’ve been checking out since the weekend.

George Goncalves points to European risk premium as the driving force in the recent divergence between USTs and generally strong economic data. If Europe continues to muddle along this could force yields to more “normal” levels.

Continue reading →

Why I’m not looking for a weak NFP number

Posted on February 27, 2012 by Dutch_Book

After a blowout number last month, and one that did not exactly jibe with ADP many on the bearish side are expecting a lag on the BLS data will point to a rather weak number for the February employment situation. Here’s ADP v NFP since 2001.

As that chart shows NFP is actually great deal more noisy than ADP and what you can’t tell from that chart is that it’s much more prone to revisions.

This lead me to look into some other correlations (outside of tax receipts which factors heaviest into most sell side models) after kicking around a few things a rather obvious relationship stuck out. Over the past 35 years each time the 4 week moving average on initial claims broke under 375k then NFP trended above 250k. Here’s a chart of that relationship with claims inverted.

This points to rather strong job creation in the medium term which on a month to month basis should show up in strong readings. That said NFP as previously mentioned is a noisy metric. I would change my tune completely if ADP came in under 150, but for the time being I think it’s far better to position for strong data points on both readings.

Monday Morning Charts

Posted on February 13, 2012 by Dutch_Book

I came across a few charts last week that I thought were worth sharing.

The one that really stood out to me was from Hajime Kitano at JP Morgan. It shows that the Fed’s estimate for the unemployment rate as of January 2010 has been right on point. The problem is, after a minor tick up in the UE rate at the beginning of 2011 the Fed shifted their estimates to a far more bearish stance and are now drastically overestimating the rate for the next two years. With a breakeven rate of unemployment around 400k on claims as I have been advocating on twitter this disconnect looks to be further exacerbated in coming months.