No Merry Note, Nor Cause of Merriment

The revisions of US 2014 Q1 GDP so far. Comparing the contribution to real GDP

Contribution to real GDP in percentage points (from BEA)

Most of the revision is basically from PCE, and the rest from EXIM (both exports and imports worsened). This is just a point estimate, but will definitely cause some serious re-think on the recovery. The PCE has been the flagship of US recovery so far. And this prints definitely NOT good.

If US enters a recession, inspite of QE3, that will shake the confidence of the public in general, and will not be exciting for equities. Are we back to rates rally?

Most of the other data, including something that you can rely on, like Federal Reserve FoF data, still show encouraging trend. So I would say nothing to worry as of yet, but be watchful.

Macro Views Series: A Global Asset Shortage?

Following austerity and fiscal prudence across majority of developed economies, the budget gaps across countries narrowed considerably. This means bonds supply is going to be lower in future. US had the biggest squeeze in deficit, while Germany already runs a balanced budget. To top this, non-sovereign fixed income supply is low as well. Mainly driven by a large fall in mortgage related issuance in the US and Europe, still recovering from the momentary lapse of reasons before the financial crisis

This along with low interest rates, low inflation expectation,  and large central bank balance sheet size, means that not only there is a shortage of safe asset, there can as well be a shortage of assets in general

Most G7 economies offer negative or very low real return – apart from the longer end of European peripheries (based on absolute return (FX Hedged), US and UK the belly of the curves, seem still cheap). In a word, there is little left on the upside for bonds for long term investors. Especially if you are looking for upside and NOT the carry 

Granted equity valuation is anything but cheap on most parameters. But compared to low bond yields, the relative valuation is attractive.  Especially true if inflation picks up from these low levels (Note: the earning yield above is NOT adjusted for leverage).

So if you are not managing grandmas' retirement fund, the equity upside and valuation still remains compelling, compared to other alternatives. Especially from an absolute return point of view.

NIFTY: Inside Stories

Reported insider selling has been quite active lately for Indian listed equities. So we take a quick look at it

Looking at the graphs, here are some stylized facts

1) the inside selling activity has been most wide spread recently. Although the total value of gross and net insider selling has come off the peak in April 14, the number of companies involved is still much higher than last few years average

2) The aggregated inside selling does not appear to be a good predictor of the general direction of the market. It seems, the company insiders are usually happy to lock in a local maxima after a slump in price.

3) Give 1 and 2 above, it may not be time yet to worry about the end of the bull market

2014 H1: Top 5 Pain Trade

#1. Short Rates: USD, GBP (USD shown below)

#2. Short JPY vs USD: (and Long NKY)

#3. Flattener: in USD and in GBP (USD shown below, see short ED + notes vs long in long bonds)

#4: Long CNY Carry

#5 Short EM

And now after the ECB, we are back to carry trades

Rates: Preparing for An ECB Disappointment!

EUR 5s10s slope in swaps is too steep

Comparing EUR with all other CCY 2s5s10s fly is trading at a too high level. Even with own history, it is trading at all time high (see below). At the same time compared to JPY, the 5s10s30s too flat.

On top in recent time, the beta of 5y to change in 10y swap has been highly assymetric for large moves (see below)

The trades are

#1: Pay belly in 2s5s10s in EUR

#2: Pay belly in 2s5s10s in EUR vs receive belly in 5s10s30s

Will work good in case of a disappointment. And downside should not be great in case of expected actions. Now a shock and awe from Mr Draghi is a different matter. So preparing for an ECB disappointment is not a bad strategy, given - a) the amount of expectation and b) history of ECB