Big Trouble in Little China .. (and at least a cold in Europe)?



(The post was meant to be published yesterday night, so apologies if some comments might sounds outdated already)

Here at the Jack Burton School of TradingTM we are wondering if the market is missing a piece of information or if is, at least, underestimating a risk.

Looking at the Treasuries yield going lower? Or maybe the Bund?

What if the recent price action (today in particular) is not driven by US "political" battles, but by China?

“I have a very positive attitude about this”: common feeling among many market participants.

Most of the Street is looking at China as not much of a problem, at least until fall. What we fear is that China is slowing down (as some data is showing) and the slowdown is already enough to create problems for the rest of the world, especially where the effect of the wall of liquidity/credit impulse/investments coming out of China has been stronger.


What have you been drinking??

Let`s try to put pieces together (apart from the obvious ones such as Chinese stocks), to name a few: Commodities, Canadian real estate, Australian real estate. We see them as some sort of canary in a coal mine (We can`t really count on Japanese stocks as BOJ has been buying them like crazy).


To confirm that China is indeed the problem we would monitor price action in European assets. If they start (or keep) under-performing US assets, we think what looks like a potential fade now, will have the capability to transform itself into something bigger.

Source: Cornerstone Macro

Given how European risky assets have performed since the beginning of the year and how consensus that view is now, we think European equities could be in for a bad surprise and another consensus trade, Italian BTPs, could become a bitter pill to swallow for those who recently closed their shorts after the French elections (if we are looking in the right direction=East). Europe's growth is heavily dependent on China (exports to China & HK % GDP (20163Q): Germany 2.5%, Europe 1.3%, not to mention investments) and if something is truly happening there we will feel it in this part of the Old World.
BTP could still go up at the beginning as Rates are bid and the market might discount a more dovish ECB, but we don't believe it could go up much more from here. In our humble opinion the ECB would step in only after a proper risk off move, which at a certain point (as in February 2016) would drive BTP lower. Moreover, the market is not pricing anymore the risk of early elections in Italy (look this space..and don`t forget the banking system!).

So, in the end, if we just focus on the US “noise” this move could potentially transform itself into a juicy dip for risky assets. But what if the market is looking in the wrong direction? This will probably all transform into another dip meant to be bought, but in case is not remember:

“It`s all in the reflexes”. 


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johno
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May 18, 2017 at 5:34 PM ×

Agree that China is key to global risk rally, but my latest read is positive. PBOC finally stepped with liquidity a couple days ago, and thermal coal, iron ore, and steel futures all seem to have stabilized or started going up. I'd watch those.

Re Brazil, I am no expert. I'd avoided BRL because appreciation seemed capped and everything hinged on Temer not getting caught up in the corruption probe. Now that he is, it's looking very dicey. The prospect of stabilizing the fiscal situation with reforms underpinned the Brazilian markets. It was and is key. Problem is these reforms are politically hard to sell to an electorate, so you need them done by a President elected by the sitting congress. As things were, the markets were turning a blind eye to a material watering down of the pension reform. Now that pension reform may be dead, all together. What I think you need to see here is Temer step down and a credible replacement agreed by the coalition. Elections aren't until later in 2018, so there's still time to replace Temer and get the reforms done. If you end up with early elections here, the Brazil story is potentially finished.

Luckily took off my delta-one exposure to USDTRY yesterday but put back on at spot=3.62. Then Erdogan goes on the tape: "what has emergency rule obstructed for businessmen?" Moron. Getting run-over.

Re-shorted buxl earlier today. Maybe too early for this. Working, but we'll see.

My guess is gold is a short here.

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IPA
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May 18, 2017 at 6:33 PM ×

@johno, I'm buying your Gold right here! Exits: 1340, 1380, 1440, 1480.

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Leftback
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May 18, 2017 at 6:55 PM ×

Hard to know if we are in EM RISK-OFF buy the dollar (Brazil) or US RISK-OFF sell the dollar (Trump). Suggest we sit and wait out the weekend while perusing all available charts.

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johno
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May 18, 2017 at 8:25 PM ×

Temer isn't resigning => no quick resolution => I'm not touching Brazil.

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Mi Pa
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May 18, 2017 at 9:28 PM × This comment has been removed by the author.
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eruditetroll
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May 18, 2017 at 9:51 PM ×

Speaking of China, is this an echo of Japan in 1986 or the conglomerate mania in 1968, where it was believed that it was a good idea to purchase unrelated companies as long as your company had a higher p/e than the target (the premise being that the p/e of the combined company would maintain the acquirer's p/e, thus increasing the value of the purchase). As I recall, neither of those situations ended well.

Traded 564 VIX futures today. Pretty sure that is the most I have ever done (and a reasonable number for a little retail guy).

Confident that Harry would not make an appearance yesterday, but now I am wondering who shows up first - Harry or Nico. Probably depends on the path forward. If there is more carnage, I do hope that Nico shows up to call the bottom (the past timings of his "covering my shorts" posts have been pretty much spot on at the nadir).

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IPA
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May 19, 2017 at 12:16 AM ×

@eruditetroll, I don't know if those two traders are coming back to help us out with calling a bottom. I think they may be tired of noise and are resting by the beach. But I do think the bottom is not near yet. I look at some monthly charts that are so overextended they make yesterday's pullback looks like a blip on the radar. Pull up pretty much any NDX high-flyer tech. These charts either need a reset or another planet to occupy. I believe that big money is hiding there and may be ready to flee.

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dfdsfiol
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May 19, 2017 at 5:15 AM ×

Why are you guys talking about a bottom when all that has taken place is a tiny 2% sell off from record high territory?

The bottom is likely far far away. Use metrics like % of stocks in the index trading under the 200 DMA as a good indication of a bottom.

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checkmate
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May 19, 2017 at 10:55 AM ×

"Why are you guys talking about a bottom when all that has taken place is a tiny 2% sell off from record high territory? "
I would guess because expiry week as promised so much so many times before and failed to deliver following on from that week. Could this time be different. Sure it could ,but we have been here before many times have we not. Guess the answer gets delivered between now and the end of the month which as a trading statement is of little help whatsoever other than as an indication that sitting on one's hands might not be a bad thing to do.

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Rain
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May 19, 2017 at 12:42 PM ×

On Oil, in the spirit of 'managing expectations' does anyone (IPA?) have a counter for a case going short oil for over the OPEC meeting?

There was the big move up after the Nov 30th meeting, then the additional gap higher Dec 12th, but the price hasn't really been higher than the level reached that day. To recap, Nov 30th was for 1.2M bpd cut, Dec 12th was non opec joining in for another ~550k bpd.

Of the three options, 1) cancel output cuts, 2) do nothing (ie maintain current reduction), and 3) increase production cuts, which is most likely, already expected and to a similar extent priced in?

I think the consensus seems option 2 will be the outcome. Is that case therefore not already priced in? Crude inventories haven't surprised in a bullish sense, while product inventories are increasing, limited future demand. I think potential upside based on either OPEC or demand is capped here, i'll be short July future.

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IPA
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May 19, 2017 at 1:22 PM ×

@Rain, I sold 1/3 of my long WTI position here at 50 but still have another third left for 52 target. I will assess the situation at the top of the range but have no current plans to short up there yet. If I decided to short there would have to be a technical reason for it like price reversing on high volume and/or major support levels breached on daily consecutive basis. I'll post them here as I enter/exit. If you put a gun to my head I would say crude is going up in a steady upclimb into the end of the year from here on.

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johno
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May 19, 2017 at 3:40 PM ×

Rain -- the US is the lowest cost storage in the world. That means inventories go down last here. The bullish surprise is yet to come in US inventories. When it does, oil goes to mid-to-high 50s. That, at least, is my framework. At these levels, I'm sitting tight with call spreads and KO calls, and of course, short EURNOK, which is cheap-to-oil but requires patience.

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Leftback
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May 19, 2017 at 4:06 PM ×

A few of us predicted a bounce in spoos into expiration and here we are at about the 61.8% retrace of Wednesday's drop, with the bounce in QQQs a little better. Gap/s not yet filled. This might be a decent short set up by the end of the day if we hold around here going into next week. Some think it may be revealing that the bounce in small caps, IWM, and in the 10y yield are significantly smaller than that in the spoos and Qs, with VIX not yet returning to single digits, until perhaps this afternoon.

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johno
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May 19, 2017 at 4:54 PM ×

Palladium views? Car sales look toppy in the US and China, speculative length is high, and chart people might see some kind of wedgie thingy there.

Not much comment on DXY here given that it's broken the 98 level every chart guy thinks is crucial.

Big buy-the-dip day in Brazil. Not biting. I still remember how (and why) people viewed this country in 2015. Without pension reform (that probably only this congress could get passed), the country's finances are doomed. Counter-view?


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johno
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May 19, 2017 at 5:13 PM ×

For anyone who thinks the special prosecutor is a negative, consider:

"Five different Senate and House committees — including both congressional intelligence committees — are running inquiries into the Russian meddling. But the special counsel, Robert S. Mueller III, who was appointed on Wednesday, is widely expected to ask Congress to scale back public hearings with witnesses who might be integral to his investigation.... Mr. Rosenstein also affirmed that the Justice Department’s inquiry was focused on possible crimes, meaning that potential subjects of investigation would almost certainly refuse to testify before Congress or withhold documents from lawmakers for fear of possible prosecution."

That nicely articulates why I added some risk after the special prosecutor announcement (though I should have bought e-minis too).

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Skr
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May 19, 2017 at 7:25 PM ×

Johno re:DXY - buying op at the moment, 95.5 worst case. Might help others also ;)

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Leftback
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May 19, 2017 at 9:00 PM ×

Bounce seems to have failed for the time being, most clearly in IWM. We have a small short in IWM, now that this chart action looks consistent with a trend change, at least for the immediate future.

Fairly boring day in bond land. Yields certainly didn't spring back…. have a good weekend, all.

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IPA
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May 19, 2017 at 10:01 PM ×

Leftback, agree with your assessment of US equities here. It was a nice bounce for those who missed the wake up call with a chance to unload into opex. I have GTC order on NQ short @ 5688 with a stop just above the high - 40 point risk with 240, 300, and 370 point reward. Hopping to get filled sometime on Monday after everyone cheers no bad news over the weekend and then gets surprised with a mid-day selloff into the strength.

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SRX
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May 20, 2017 at 12:26 AM ×

Seems like you're looking for a reason to justify a China blow up theory (the bodies of thousands of US and European traders over the last 30 years there - "uh yeah, China's a bubble") but you've not even bothered to look at HSI or HSCEI?

I'm going to posit the theory that you read this at ZH:
http://www.zerohedge.com/news/2017-05-04/someone-blowing-rbc-warns-china-induced-unwinds-are-escalating

and you liked what you saw, and you're looking for reasons post-hoc?

* I like to recall having dinner in Tokyo with a certain Head of Department from LEH in Aug 2008: "It's unbelievable that ICBC has a larger market cap than Citi. It's definitely a bubble". For those with bad memories or too young, a couple of months LEH blows and my dinner date is getting a package, and soon after that C gets bailed out and shareholders have blue chip toilet paper.

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abee crombie
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May 20, 2017 at 4:32 AM ×

Brl is capped in my view, unless you get broad dollar strength. Even if temer leaves. But for sure it could go more before we stop. Hard to say if all that is in the price just yet. Itau did sell off 20% for some lucky dip buyers. Will have to watch CDS spreads and interest rate expectations.

So s&p filled the French election gap. Back to la la land. Bitcoin near $2000 now. My guess is that googl and Amzn need to hit $1000 before this is over. But Iwm is the tell.

On China, so far it's only been correct to play China cycle via commodities. Everything else is more complicated. China is slowing not blowing up. Big difference. Global markets only panic when they think China is blowing up. Otherwise it's a process. We are still enjoying the stimulus of last year imo. But I'll be watching em leaders like kospi.

Though as I said before its so much about tech these days. Em is a tech driven index now along with US.

IPA I didn't buy Aeo but damn interested now. Pretty good mgmt team and good returns on capital. They are not losing to competitior imo. Just tough retail environment. Might pair it up.

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abee crombie
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May 20, 2017 at 4:43 AM ×

Re rain, johno and oil. A lot is in the price. U.S. Energy equity can't find a bottom. Hard to be bullish until they do. I'm holding here but starting to get worried.

If risk markets sell off I'm out. If oil is weak bc demand isn't what it's supposed to be, and we have to wait for market to factor that in, could be a lot lower fast. I'm not there yet but thinking ahead. Estimated demand is near highs and I don't think too many ppl have any downside factored in. Just a thought.

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IPA
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May 20, 2017 at 5:39 PM ×

I dunno abee, teen apparel does not strike me as a viable option going forward. Things in retail are unfolding fast now. Pretty sure someone can copy Aerie's model, unleash a Snapchat/Instagram advertising campaign and become a formidable competitor catching them by surprise. Once that happens, AEO is a single digit stock with very little left to spare. I look at bankruptcies in that space and it makes me cringe. Why am I going to invest in a stock about to go into single digits and no support on the chart as of yet? Risky proposition in the environment you correctly pointed out - very tough. It would completely contradict my XRT short, even if I was to pair it, which I can't see myself doing after AEO's report this week. Teens are a finicky bunch to sell to. My daughter said she does not like Aerie, but she has always been a VS girl.

More importantly, I think the carnage in shoe biz is a telling sign. I look at Payless bankruptcy, DSW, FINL and FL stocks and they are telling me that ladies are buying a whole lot less shoes at brick-and-mortar and men are not excited about sneakers for some reason. I say NKE 49/50 support breaks and sends shock waves through the market and engulfs retail for sure. Scary times ahead. XRT target 35.

One stock I think could be a real loser is ULTA. I am watching their chart like a hawk. Yes, playing with fire, going against a cult. But if ladies can buy shoes online they can certainly buy their cosmetics and body lotions there as well. The nut case analysts are going crazy over the stock which is in the thick of a vulnerable retail market and a company that expanded rapidly and has a huge exposure to slowing foot traffic at shopping centers. What could go wrong?

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IPA
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May 22, 2017 at 7:23 PM ×

Some things just don't add up today. Not trying to talk my book but... Gold is up along with stocks, oil svc stocks are down while crude is up, all defense stocks hit a wall at the open, 10-yr is just meh while equities are ripping and commodity currencies are not ripping. I am adding to my CAD short here. I am short NQ here. I am not crazy about this rally, I think it runs out of steam this pm or tomorrow in am.

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Skr
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May 22, 2017 at 7:38 PM ×

Ah bless those duvet days.

How about that silver/gold spread trade today?
Trump it seems is not as unloved abroad as he is at h... Nah he is,but when you're a messenger, it is polite to listen.
Oil reached it objective earlier today.

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IPA
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May 22, 2017 at 11:03 PM ×

Could there be a possible flaw in the thinking that WMT is going to benefit from specialty retailers and other big boxes shutting down their stores? I have to imagine the demand is not there vs the demand shifts to WMT. I read quite a few analysts pounding the table on WMT and I have to disagree. Many of these closing stores cater to a very different consumer. I don't see how WMT gains a lot of their biz, and if anything, the biz is simply shifted online or is not there any more. Clothing/shoes, electronics, gaming - they are all shifting online. Not a single doubt in my mind that WMT does not come up as the top consumer choice for shopping those items online. Nor can they compete on the item they simply don't carry in stock. WMT carries cheap crap that breaks a lot - a reputation they have garnered over many years and not one to be changed quickly enough to capitalize on this retail debacle. I think that resistance @ $80 holds and price goes down to test $60. Using puts to play this trade.

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abee crombie
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May 23, 2017 at 12:34 AM ×

Agreed on wmt ipa. But do momo quants care? So many stocks below thier 20 moving average. Just waiting for a reason...

Bitcoin land is going insane. Smaller crypto currencies doubling in a week.

Em tech very strong. Sold my last part of tencent. Good comapny. Crowded trade.

Xle vs oil here is giving me a pause.

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IPA
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May 23, 2017 at 4:26 AM ×

They've been selling 50 dsma on XLE and XOP since the end of Jan. One day (pretty soon) that trade will stop working and both will blow through and keep on going. I am holding onto both and will add more on that possible breakout. Inverted head and shoulders here as well.

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HarryH
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May 23, 2017 at 12:36 PM ×

Just wanted to stop by and thank you guys for shorting spooz (and equivalents) thus helping to drive prices higher. Please continue to do so as we push through All Time Highs. Thanks guys!

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IPA
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May 23, 2017 at 2:34 PM ×

Yes HH, we know, all money went from our accounts to yours. Congrats! Based on your appearance equities should top today by noon US eastern time. Now, STFU!

So WTI doing the dance way north of 50 may be an indication that quite a few wanted to buy the pullback but instead will be forced to chase. It is looking to go higher still and is only 15c below YH here as I type. I rolled into N last week and have a skin in the game, so talking my book. It's a 30c adjustment from M so my exit target is 52.30 and that is about where the trendline resistance (2/21 & 4/12 touches) comes in. OPEC meeting is a risk, I'd like to be out by then. Only 1/3 position left.

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checkmate
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May 23, 2017 at 3:04 PM ×

Lot more believable HH if you could keep your storyline straight. Last time of asking your positions had banked and you were bored waiting for something to happen. Like most liars Harry you trip yourself up by assuming everybodyelse shares your lack of attention to detail. Mummy must be calling you by now. Surely diaper changing is due.

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HarryH
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May 23, 2017 at 8:03 PM ×

ROFL! Keep shorting retards, the Bank of Japan will happily buy your margin liquidations...

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IPA
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May 23, 2017 at 9:17 PM ×

Pulled the trigger on ULTA short. 10 dollar risk vs 70 dollar reward.
Look at DSW today, ouch! Not the same specialty but caters to the same consumer.

Lovely charts on auto retailers today. Are the wheels completely falling off? (pun totally intended) Soon enough the driverless era talk will start to take a huge bite out of these companies and I don't know what they will do in those times. Must be really scary for the execs to have a vision on that scenario. Talking about reality check. Start closing them stores now :)

Hey Harry, STFU!

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IPA
admin
May 23, 2017 at 9:18 PM ×

Auto parts retailers, that is.

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