Global Macro Notes: A Massive Topping Process At Work

November 23, 2010
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“You look at every bear market and they’ve always basically occurred because of an up-tick in inflation and an up-tick in interest rates.”

- Paul Tudor Jones

We continue to operate on the thesis that, apart from one or two notable exceptions, there is a massive topping process unfolding.

This thesis is being steadily confirmed on three fronts — news flow, price action, and portfolio P&L.

The up-tick in interest rates PTJ spoke of is present (as we will further note shortly). And of course, “non-core” inflation concerns are here too… as are the gray swans of China, Europe, and U.S. financial fraud…

And what of QE2? According to the bond market — prices falling, rates rising — QE2 is a dud. The ‘vigilantes’ are calling the Fed’s bluff.

Meanwhile, rates are headed into a “raise, raise, raise” pattern for China — and the Fed is not exactly heaping glory on itself with ever more desperate emerging market finger-pointing.

A year from now, QE2 may be viewed on the charts as a headfake non-event… an excuse for one last sprint up the hill, rather than the start of  a new bull marathon.

After all, most of the love was priced in before the actual event- — pure psychology at work — and the post-QE2 gap, quickly closed, wound up littering the landscape with broken trends galore.

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Quantitative easing is supposed to keep treasuries high (and interest rates low). Looks like someone forgot to tell the bond market.

There are various theories as to why US Treasuries are dropping — against the Fed’s wishes — in the aftermath of the announced $600B buying program.

One theory argues that China and Japan, consumed with fiscal ills on their respective home fronts, can no longer afford to act as marginal buying supporters of the U.S. bond market.

Another theory says the bond market is predicting a politically constrained Fed, as rising “anti-QE” sentiment among Washington lawmakers precludes further stimulus.

Yet another line of thought says the missing-in-action bond market “vigilantes” are (finally!) stirring from their Rip Van Winkle slumber.

Whatever the cause — and perhaps it’s a combination of the above — when bond prices fall, interest rates rise. That is not what the Fed had in mind at this juncture.

Next up — a case of deja vu? The S&P weekly chart reminds one of the old Mark Twain line: “History doesn’t repeat, but sometimes it rhymes.”

The 4th quarter pattern, thus far, bears uncanny resemblance to the 2nd quarter pattern — or the first half of it anyway. But to complete the symmetry, what destabilizing event might wind up “rhyming” with Greece?

Take your pick:

Just to name a few possibilities…

Oh, and what of emerging markets? Did Citigroup jinx them in declaring the imminent arrival of super-Goldilocks? Was this a classic case of “most bullish at the top?”

The emerging markets liftoff theory, you may recall, was predicated on the assumption of a powerful and sustainable “global stock rally” fueled by QE2 — a deepening and widening of risk appetite as speculative capital flows washed over the planet.

But thus far, the U.S. debt markets aren’t cooperating… and if QE2 is in doubt, then all that is built on the foundation must be in doubt too.

There ARE still pockets of speculative strength out there. One is in silver stocks, where we continue to be long highlighted names like SSRI and SLW.

Another oddly strong spot is consumer retail. High-flying names like Lululemon Athletica (LULU), Netflix (NFLX) and Panera Bread (PNRA) have been giving  fits to value-oriented short sellers. For whatever reason and by whatever means, the U.S. consumer continues to spend money. We are happy to stand aside here and wait for the Energizer Bunny to run out of batteries.

Meanwhile, topping out is an all-around process that takes time — and a last bastion of strength at the mall does not offset the ominous deterioration elsewhere.

JS


2 Responses to Global Macro Notes: A Massive Topping Process At Work

  1. Ziggy on November 24, 2010 at 9:38 am

    So are you short EEM??

  2. Jack Sparrow on November 24, 2010 at 9:42 am

    Not at this moment, no — exposure is spread out over a host of other names (though EEM remains on our radar screens).

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