Monthly Archives: January 2014

When the Tough Gets Going……

Ok everything was going well and then suddenly the market decided to remind itself that the Fed was in tapering mode and that this should feed into EM liquidity.  Bearing in mind what the Fed told us about the tapering early December and that overall US  data has been on the good side, I am not so sure this FOMC release should have been a surprise to anyone. Anyway it has been a bit of a bloodbath over the last week  in preparation of the release as can be seen from the below charts. The first one shows the T-Stats (i.e mean return/standard deviation * sqrt(sample size -1)) over various time horizons for major equity markets whereas the second one shows the components of the FTSE 100, my current playground. The greener the best and the redder the closer to hell for the bulls…

stock markets      ftse100all

So what is the driving  reason to sell equities and “risky assets”  aside generating fees and commissions for some ? Clearly the market does not seem to be  at its most rational state. The Fed tapering as mentioned in my other posts should be good news since it is driven by the bettering of the US economy. Even things seems to get better in some part of Europe. Ok China is slowing down  as per its latest data points but this is engineered  and certainly not an abrupt surprise. Anyhow the Chinese government has ample reserves to steer their economy up if they wanted and Japan is really picking up at long last.  Looking at my favourite data which track US mutual funds inflow/outflows it looks like recent events have not slow down the appetite of US investors for international equities. In fact we carry on pretty much on the same established trends of last year. Buy equities and stay away from bonds….and the bond inventory is humongous which does not bode to well in a cycle were rate3s are likely to go up at one stage…R.I.P PIMCO and alike….

usmutualfunds cumulative flows

So what to do when its getting tough ? Clearly the world is not any different than what it was in the last quarter of 2013…The global economy is slowly but surely re-leveraging and the central bank will remain accommodative potentially leading us to an inflation surprise down the road. Though we admittedly have some time before we get there as we clearly need the consumers to reach his wallet in a more significant fashion. The risk environment is in safety mode as shown by a Markov 2-state regime switching model. And yes the VIX the so called index of fear as spiked….

regimes    vix

However as a quick observation , historically those period of   loss of nerves by market participants  are not very long lasting and tend to open new opportunities. Now the Fed has released  its statement it is time to buy back those stocks….hopefully at a lower cost after fees….Else just hang on to your longs….

Update on US Mutual Fund Flows and Market Risk

Another batch of data has came out from the Investment Company Institute and though  for the first time  in a long time we are seeing  modest inflows into taxable bonds  funds, the theme is still about buying International equities for US investors. as the below charts indicate (click on them if you want to see larger versions).

inflowoutflow Rplot01

The appetite for equities clearly affects market risk and as can be seen  through our  Markov regime switching analysis the market is still in risk on mode.


The world  appetite for risk and returns seems to pick up and economies are doing better (even Europe does…). So if the Chinese GDP does not come much worse than expected or surprise us on the upside it could be an interesting few weeks ahead for us Equity Bulls…..If it is worse I guess it will provide laggard with a better level to enter the market.



2014 …Same All Same All…But Only Faster…

Ok it looks like 2013 finished on a theme of international equity buying and selling of bonds. Or so tell us the latest  data release of the US jmutual fund flow data from the ICI . The usual charts are in the below.

inflow 31122013

Cumulative flows


And yes we still have a lot of stale bond investments to clear out there so on an inventory basis bearing in mind the withdrawal of liquidity that central banks are about to embark on and the effect it will have on bond valuations I will stick to my long view on equities and short bonds. I think the telling factor for 2014 will be the acceleration of the shift in asset allocation ( I ll think of a few charts to visualise this…) ….It may even think about building up further my holdings of financial equities….