My colleague John Hardy makes interesting observation(see John's email below) on small caps outside (UP) yesterday…. It lead on down-side – are we now in sideways action or final capitulation?
Source: Jesper Christiansen
When doing projections it's impossible to do both level and timing due to model constraints (predicting two outcome with same time series) – it does not stop even Gundlach to tell market that market has line in the sand 2.20% now….only to see it trade sub 1.90% yday… I'm telling you this to let you know NO ONE can do both… timing and level….but its classic forecasting mistake- and to some extent my mistake yesterday to…. Level 1810/20 and then saying mid-November – sorry it was same J
The timing model still says early to Mid-November – the price action for now is 1790/1810… so either we reached the "spot" for now before consolidating…. The key metric to watch, which is impossible, is the VaR (Value-at-Risk) books of the market. VIX exploded even FX model rising…
For now I took profit on short stocks yesterday….. maintain the ONE asset which needs to adjust further is EURUSD – 2Yspread now have 1.3200 as fair value but discounting Draghi/Weidmann and Ebola probably 1.3050/75 is more realistic target.
It brings the world back to square one… Europe still got small boost, US is happier at 1.3000+ and certainly EM countries will like the easing which is desperately needed. I will add one more time - The world cannot afford a high US Dollar…
Finally,
Look at year-to-date performance (US dollar makes it worse in Europe but DAX is down >10% and CAC40 > 8% YTD
From: John J. Hardy (JJH)
Sent: Thursday, October 16, 2014 9:24 AM
To: Steen Jakobsen (SJN)
Subject: RE: Macro Charts: SME spreads - Target for S&P 1814/16?
Or timeframe yesterday…
Yesterday saw nice outside day bullish reversal in small caps….that might have been the short term climax low in the big indices… a 61.8% retracement would target 1943 in the cash s&P initially
From: Steen Jakobsen (SJN)
Sent: Wednesday, October 15, 2014 10:16 AM
Subject: Macro Charts: SME spreads - Target for S&P 1814/16?
An interesting chart from IMF/Martin Wolf: How to better than the new mediocre
The chart confirms my theory that in 80/20 model – the 20% of the economy: The big business, listed companies and banks gets 95% of all credit and QE supports which makes their funding cost 200-300 bps lower than normal business cycle (and explains high P/E and valuations in stock markets) . Meanwhile the 80% (& 100% of all new jobs created) in the SME have funding costs which is 300-600 bps higher than normal business cycle.
Want to solve lack of jobs and productivity? Stop supporting the 20% and do nothing else for the next five years.(Last time Fed expanded the balance sheet like now was in the 1940s – the rotting only stop when they stopped QE…)
Doing nothing is the only viable solution to this crisis, but our politicians can't run on such a program….. Activating the SME is THE solution.
Maybe the "target" for S&P is 1810/20 1st ? When? Mid-November?
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