Recap 2014-07-11: Caution


Risk assets increasingly look like they may be somewhat vulnerable to a temporary setback. The Banco Espirito news is really just noise in the macro scheme of things, the size of the sell off (though later partially recovered) suggests a number of weak hands in the market. Valuation wise, forward PE is sitting right at the 2005 & 2007 highs:

I think we will break through eventually, but I also expect some profit taking here first. Seasonality is also an issue – the average of the past 9 years, ex 2008 is in dark red below, and Monday is the vertical white line. As the chart shows, historically, price action has been sideways over the next several weeks:

The longer term chart is also sending some warning signals. While the trend since mid 2011 remains solidly up, a simple linear extrapolation suggests we may be at the higher end of the channel. The last time we were there was at the end of Feb and before that, year end. Both periods preceded periods of congestion:

The CBOE skew index has also hit levels last seen in late Dec, mid Jan, and late Feb. (I know that GS thinks this is bullish – I think it’s much more ambiguous) All in all, my take is that we may see some easing of equities momentum for a bit.

Random tidbit, per Wikipedia:

In 1801, Hamilton announced his intention to withdraw from the Federalist Party if Burr became its presidential candidate in 1804. In 1802, he began to organize "The Christian Constitutional Society", the first principle of which, even before supporting the Constitution, was "the support of the Christian religion"

So basically the evangelical Christians today are the new Hamiltonians?


  • Canada Employment declined -9.4K vs +20k exp and +25.8k prev. An increase in full time employment was more than offset by a drop in part time employment. With the participation rate unchanged, this took the Unemployment rate up to 7.1% vs 7.0% exp and prev
  • GS: WFC reported 2Q14 EPS of $1.01, in line with our estimate. While today’s results ends WFC’s streak of 17 quarters of EPS growth, results were still strong with commercial loan growth driving net interest income expansion and continued low credit costs. Against this, expenses were disappointing on higher legal charges and NIM declined again as deposits grew… Mortgage banking: Core production revenue was in line with our estimates at $662mn, as gain-on-sale margin declined 20bp QoQ (vs industry indicators of roughly flat) and originations up 31% (vs industry of +18%), both of which are likely explained by purchase volumes up a robust 46% and flat refis.
  • The AQR results will be leaked. Reuters reports that the ECB will provide banks with the results of the AQR and stress test 48 hours in advance, giving them a chance to comment and point out potential mistakes or mis-representations of the data. According to news reports, the banks are sceptical whether 48 hours will be enough to assess the results in all the necessary detail. The ECB plans to publish the results in October.
  • the Kurdish block says it is suspending all participation in the national government and according to reports Kurdish forces have taken control of two oilfields in Kirkurk region – Reuters
  • GS: Legislation was introduced earlier this week (July 7) in the US House that would attempt to revamp the FOMC’s monetary policy process. The bill would require the FOMC to justify to Congress each policy decision relative to a Taylor rule specified in the legislation.


  • Mon: RBA Minutes
  • Tue: BoJ, UK CPI, German Zew, US Retail Sales, Empire Mfg, Import Prices, CA Existing Home Sales, China Retail Sales
  • Wed: UK Employment
  • Thu:
  • Fri: