The T Report: Hope vs Expectation and NFP’s QE Impact

Posted by on Aug 3, 2012 in Uncategorized | No Comments

Positions Are Based on Expectations, Not Hope

There was a lot of hope yesterday, including me, that Draghi would come up with a comprehensive plan. He didn’t. There were a lot of people positioned for disappointment, including me. Yes, I was still long, but had sold into it. I was very clear on that, and while yesterday wasn’t a positive P&L it ended not too bad as I had added on the sell-off. But my point is, that while there was a lot of hope that the ECB would do something, not many were betting on it in a meaningful way.

As the day wore on, more and more people became convinced of the bull case. The initial reaction was that Draghi had brought a water balloon rather than a bazooka, but over the course of the day, people accepted he would act in a meaningful way once countries asked for aid through some formal request “modality”.

There is ZERO Liquidity and it’s Worse the closer to the Core you Get

There is no liquidity. Every move is exaggerated because there are no true liquidity providers. Market Makers aren’t there to take liquidity. They are there to scalp a little bid/offer. That is fine, but when there are no customers leaving big orders, the moves accelerate quickly and reverse just as quickly.

10 bps in MAIN CDS used to be a good week, if not a month, now 4 sellers and a positive story can make that happen in a couple of hours.

This lack of liquidity needs to be taken into account in positions, and in how to react to market moves. Market moves don’t signify as much as they did even a few weeks ago as liquidity has deteriorated since then. Order flow can be misleading. Small, nimble, and confident is key.

QE and NFP

I actually am looking for upside surprise in NFP with a number of 125 or above. What I’m struggling with, is how the market will react to any number. It seems to me that many people think that a beat of NFP will result in a sell-off. Poppycock I say in honor of the Olympics being in London.

The U.S. markets are not currently being supported much by QE. QE has been a part of why they are here, but hopes that a resolution to Europe, at least for a decent period of time, has been far more important to U.S. markets. Those analysts who don’t look beyond our shores may have the parochial view that U.S. is dependent on QE, but they are wrong.

A healthy beat on NFP would be good for the markets. We may get an initial sell-off, which is there to be bought. While the market needs the ECB here, it doesn’t need QE, and eventually (possibly in minutes) the market would realize that jobs are more important for the economy than QE, especially if Europe is really finally getting its act together. That would be a far healthier rally than any we have seen, and would confirm signs of bottoming in housing. So that is how I’m looking to play stocks on an NFP beat.

If we miss, I will lighten up. The QE crowd may raise its head, but I will sell into that. There are enough issues with bringing QE that it isn’t certain, and again, at 1,400 or so on S&P 500, the QE won’t do enough to spike the economic data high enough to boost stocks much further.