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Throwing out the baby with the bath water
When it's time to delever, discipline suggests cutting the losers and keeping the winners. Except it rarely works out like that - the winners bail-out the losers until the pain gets too ball-crunching and then a wholesale dump of everything in the book is inevitable. A lot of the moves yesterday, overnight and this morning are very suggestive of this capitulation point being reached as even the market's favourite whipping boy, the Euro has rallied 4% from the lows on Wednesday. There aren't any Pink Flamingos left.Yesterday had the feel of "throwing out the baby with the bath water". A few metrics in particular seem to point to many portfolio managers and traders getting the "tap on the shoulder" from superiors telling them to cut their losses. A 20bp move in TIPS breakevens and $7 collapse in Oil are all symptoms of Inflationistas throwing in the towel and converting to the religion of European deflation. Oh dear.
Endemol must be thinking they missed out on a great reality TV show as players in the cash equity market yelled "I've got a position... get me out of here!" as basis positions were liquidated, with the Advancers/Decliners index on the NYSE (see ADLN chart below) hitting the extremes of the last 20years. A few bright sparks have also pointed out that a mere 7% of stocks are now above their 50-day moving average, a feat not equalled since March 2009.
In the more illiquid space, equity derivative desks and the funds that dabble in them are having something of a very bad week (and this time it's not Jerome Kervial's fault), with Dec 2015 Eurostoxx Variance Swaps hitting a high of 0.41. While not an expert, the idea that volatility can stay that high for 5.5yrs seems somewhat silly, given that it averaged about that for just ONE year, and only if you timed the Lehman Crisis perfectly! The Dividend future market also seems to be undergoing another wholesale haemorrhage, with Dec 2015 Eurostoxx Dividends trading South of EUR 85, around 9% lower than the Dec 2011s. Now that works out to be something like a 1.7% annualised fall in earnings per year in that period (caveat, not an expert) which, if a proxy for the change in Nominal GDP, is pricing in some sort of deflationary event.
Baby and bath water indeed...
If the German vote passes, after the weekend it's not hard to imagine players feeling somewhat "less long" of risk than they want to be, and being forced to chase things...
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