The big fat greek wedding

German newspaper is not happy - Merkel lost in a poker game...   http://www.spiegel.de/international/europe/0,1518,688580,00.html

More importantly the Germans see three steps in this bail-out:

1. Greece needs to fail in bond market and ask for help

2. Then Head of States will need to ratify - and some Parliaments needs to vote (Germany, Holland and Ireland)

3. Unanimous vote

AND - Merkel can't politically extent the help before the German election in May (http://www.wsws.org/articles/2010/mar2010/nrwe-m09.shtml)

W

What's going on in SPY? Soros thinks it's only 50/50 odds of EU surviving?

Three key charts, but first the down-and-out on the market:

All my model indicates that we are in short-term, medium- and long-term uptrend on the equity markets. The most likely cycle top being in August - or potentially (less likely) btw now and End of May...  I say 65% chance of August and 35% on now-ish.

However, there is clear toppish formation in place as seen in this SPY chart. The momentum no longer supports this move making it highly speculative, and if nothing else, there are REALLY POOR risk reward scenario for being or adding long here - despite the "wonderful" bail-out of Greece over the week-end.

That deal is so poor and implementation and content that I will not even comment on it, but give you link to Soros FT call on only 50/50 chance of EZ surviving: http://tinyurl.com/y2u8qos  

The article got me and my friend Yoshi thinking - and as always Yoshi came up with the better conclusions: "....So my take on this is Soros thinks the Club Med will be out and it doesn't matter what agreement the EU will come up with since more cheap talks without actions will buy the core EUs more time to get Greece run to the IMF, out of the EMU and blame Germany. The Greek yield curve is clearly saying the club med does not mix with the core monetarily and economically"

Strong words and something the market will need to look more seriously at.

Bottom line: Things are good - or at least the consensus is, but... be forewarned that we are entering but seasonally but also cycle-wise toppish part of this equity years, which looks more and more like 5 std.dev move....

W

Update pre ECB (Click on charts to enlarge)

The tosser Trichet is going to have a tough time explaining how he got from: We have saved Greece and the EU on last press conference to Greek bonds tanking - Trichet played hardball and lost.

Bernanke talk yday and overall the market is full of S...!    This feel EXACTLY like 1999/2000 when NOTHING could go wrong - Even Obama seems to be flying....

USDCHF potential for break higher?

The "clue" of the day seems to be: Fade all short-term breaks - my model sold EURGBP @ .66ish... never lower.. sold EUR @ .55 never lower .. bought DAX @ 6.260 .. pretty much same.... but watch this formation in USD/CHF - we are all well aware that SNB wants it higher - and they are bidding in EURCHF ... but if  EURUSD takes out 1.3355 ..then USDCHF may be better be

Divergence - also technically btw bunds and 10 yrs notes

This DIVERGENCE in momemtum is more than just - different economic cycles.. it is RISING RISK PREMIA Greece...and something worth noting, also Greece moved to new recent high this am @ 368 - BTP/bunds traied but now out 5-6 bps as well.

Winston

Investment meeting and initial thoughts post Easter vaca - April 6th 2010

(Click on charts for larger versions)

The best performing portfolio to my slight surprise has been the "inflation model" or the - why do not we just sell Treasuries, buy commodities, gold and oil trade!

It is up 319 bps since initiation compared to overall Benchmark portfolio up 203 bps.  This is quit a big difference in performance in such a short span, but the odd thing being the inflation expectations are almost unchanged in all measures - forward/forward and break-even rates!

This got us discussing how the higher yield should play out - and the semi-conclusion being for now, at least, pre the anti-sovereign debt issue, the REAL RATES needs to normalise to 200/250 bps which will take 10 year yields to minimum  4.25/4.50 vs 2.00-ish inflation - not at all unlikely as this should and could be part of normalised process - the favourite theme of the market presently.

From the model is also abundantly clear that there are NO REASON to fade the present bull market in stocks, the only risk being three factors:

1. Extreme bullishness as measured by put/call volumes

2. Failure of overseas investors to show up at the auction this week. (The conspiracy types reckons China and the US has done deal and as part of this Asia will be aggressivey buying auctions this week- My note: hmmmmmmm)

3. Some slight change in FOMC minutes (out today) and or some leaking to the press of imminent hikes coming (unlikely)

This makes for week where the odds favours test of 1200+ and a week where yield could take out 4.00 in 10 years.

We judge the economy and market to being in the "sweet spot" path, with risk of entering V-shaped recovery. (Which will have less upside potential due to higher potential rates)

The outlook for the week should include:

1. Greece - the never ending story. They failed to sell their "goods" in Asia - now they are in the US. Meanwhile spreads vs Germany going out reaching January levels again(368 bps this morning)
2. Iran - nuclear talks (with China attending) leading to widespread speculation revaluation coming.
3. Treasury auctions this week
4. Early month effect on equities
5. Limited economic data from the US
6. European PMI's out this week. (Norway this morning failed to regain 50.0)
7. Gold move- is it merely the usual early month move or more profound?
8. Oil - the big mover (with China) last week - what's behind the move?
9. VIX - risk of shoulder-head-shoulder now that everyone is bearish volatility and long the market?
10. HYG - high yield fails to stay bid - early sign of ?

Macro Funds, and admittedly us, have not had best of opening to the year. It seems to gain on average 1 pct a month one needs to risk 3-5% intra-day - not exactly the best scenarios favoured by old people like us, but having said that there has been several strong
trends:

• SEK and NOK stronger
• US Dollar stronger
• Yields - the last two weeks
• Equities higher

So merely bad risk management must clearly be behind it :-)

From here the risk reward remains skewed the wrong way - and has been so for too long - if the projected semi-top is 1200/1220 I can gain 3-4% risking 10-15%? This is not valid for me - but on the other hand this type of arguments is clearly behind why S&P moves up day-by-day as the
intraday traders open every morning with a Latte and a outcry of: Buy me some S&P's now!

Trades:

• Long US dollar vs EUR, GBP and JPY
• Bought Bunds vs BTP spread today (if Greece trades at high - this could be excellent risk reward trade)
• Long down-side in 10 y notes
• Short S&P (despite knowing better - but with tight stop @ 1186.00 GTC)
• Short AUD vs CAD - relative performance play.

Stopped in short Gold over easter - took profit in short cash 10 y notes.

Ciao,

Winston

Chart update:

Clearly the market likes RISK ON - the talk and expected small revaluation adding to the fire, although I remain extremely sceptical on significant revaluation due to China's trade balance eroding. The Chinese is playing US administation as they please!

Otherwise - I remain focused on RATES - they continue higher - now 10 years confirmed broken of long-term trend, and 30 Y on the edge indicating significant downside (higher yields)

There is divergence to watch: US dollar index should be higher with rates but is stalling - watch this.

In the equity market China has been the key mover over Easter - but despite this they remain the only market lacking in setting new highs - and finally note how investor sentiment is EXTREMELY bullish - do not know if it matters in a world where everthing is good :-)

Winston