20 апреля, 22:11

It's Goin' Down In The DM, Hit Me Up On The EM

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Quick update on DM and EM divergence today. I know it has been a well-documented topic for the last few years, but wanted to point to people's attention again, as I feel like we are close to the precipice for a reversal.I'm sure Bloomberg has shown this chart in the past in its regularly scheduled programming. But digging into the fundamentals, things become even more eye opening.A quick look at fundamentals, obviously EM is cheap - I picked a few indices that generally people put in "EM" and "DM" buckets. For the most part, DM is expensive. For the most part, EM feels cheap. Valuation below - (by the way, Eurostoxx was used for Europe, FYI)I'm sure we've all seen US equity and growth divergence charts on Zerohedge.com. I wanted to dig deeper myself, to look at the differences between EM (MXEF as the proxy) vs DM (US/SPX as the proxy) in terms of growth vs equity performance.Despite EM outgrowing DM - the underperformance has been palpable.Please mind the gap. The divergence has been evident, yet it seems to be bottoming. I hate to bring everything back to Trump but I think that will be the catalyst. Remember from the last post, trades go in and out of favor. The EM trade has been out of favor for 7 years. The Trump trade has been 7 weeks. Both of which might be making a resurgence soon. Yo Gotti knows it's going down in the DM. But, but, but, but...Protectionism and other Trump stuff!Well, interestingly, after all the populist rhetoric, EM equities have actually outperformed DM in 2017 YTD.  EM currencies have been ripping as well against the dollar during the same period. Inflationary pressures can be good for EM exporters can temporarily soften any blows from protectionism.  Additionally, the potential lack of access to the US and other DM can lead to meaningful reform in emerging economies. The world runs on unintended consequences. Trump's actions can unintentionally manifest as incentives for EM to take on reforms that will drive wage growth, productivity growth and domestic consumption that ultimately leads to economic resilience. A number of EMs are in crisis/post-crisis mode, where their domestic issues are being aggressively addressed (Brazil, Turkey, Argentina, and Russia come to mind). Although I like most EMs, a caveat must be noted. There should be a distinction made between good and bad EMs. Zuma's debacle that is South Africa - bad EM. Real reform and progress made in Argentina - good EM.As always, good luck out there.

19 апреля, 09:13

Does Breaking The Support Line Mean Mr. Bond Is Truly Out Of Danger?

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A wise man once taught me that most trades aren't necessarily "right" or "wrong" but are either in favor or out of favor.A few posts back, Leftback (LB) took a strong stance stating that Mr. Bond chose to die another day and seems to have been vindicated. Hopefully, LB is sitting on a nice, hefty profit!Another contributor, Macro Clown (MC) commented in his GBP post that he was a strong believer that duration has entered a long-term selloff, and bonds into a bear market. I happened to have and still continue to share MC's view.Clearly, the clown's face has been ripped off, and I haven't faired so well myself - as you can see below, 10yr rates pierced that mythical 2.3% support level.  With that said, I just want to remind everyone that this doesn't necessarily mean we are wrong - it could be that the trade is currently out of favor.Holy technical support levels, Batman!(It's a very clean break of support, but I would like to remind all veteran traders that technicals usually don't work when all the technicians are fixated on it - we broke 2.30, but now what? Everybody's  and their mom's CMT sees this trade. Instead of chasing I'm looking for a reversal signal)Although it might seem that all hope is lost on both the fundamental (the last few prints of missed PPI and CPI, poor manufacturing numbers, etc.) and technical fronts, I believe there are potential signs of relief. For example, one of the leading indicator assets that have been the harbinger to the move in US breakeven move has been the move of base metals (specifically iron ore in China).Iron ore has collapsed. Risk reward for this asset is no longer to the downside. If iron ore finds a bottom, that could spell the bottom for inflation and yields.With that in mind, the doom and gloom concerning hard data - it is important to remember that unemployment is still historically low and ISM has been printing at the highest level in a few years. Some assets have held up okay such as oil during this sell-off. In the very short end, the market still thinks that the Fed is on track. Inflation (PCE and CPI) have not shown sharp drop-offs either - I know they're slow moving. Nothing in the rate progress has changed other than psychology. Read: the short duration trade is out of favor.These tidbits could offer clues of where inflation could go next.With that said, there are a few gray swans that exist in the market: continuing escalation in Syria (I know - I was supposed to write about this but didn't), North Korea, French elections (suddenly a photo finish - this global election cycle has engrained the idea of never trusting polls in my psyche). DM equities could find itself on false footing and see a drop as well - be careful Harry Hindsight!These are all valid and possible concerns that can force yields to shoot even lower.MC wrote about the populist trade getting ahead of itself. We have been witnessing the reversal. Just keep in mind that we could get to the point where the reversal itself gets overdone.Good luck, don't lose your shirt or your face.Oh! By the way, I wanted to tell a quick fictional story/obituary that should serve as a lesson for traders of all ages and sizes.There was once a court.The court had a jester of the global macro nature and a monkey of the execution variety.All the jester had lofty ambitions outside of the court. All he wanted to was to be left alone so he could read, write and trade in the macro world. The execution monkey was simple, always chopping wood and playing on his iPad. The jester thought he had ripped off enough faces with his short duration trade to earn himself immunity in the court.Little did he know, the monkey would falsely brand the jester a heretic in the court just as the short duration trade roared back, causing the jester to lose more than his face. In one foul swoop, the monkey had killed the jester. Although the jester is currently pronounced dead, with any luck, he will be resurrected, make his return and get the last laugh.Trades are never always right or wrong - just in favor or out of favor. Look alive out there and stay nimble.

07 апреля, 07:43

AUDNZD - How Much Can It Run?

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As I toil during these Asia market hours, I thought it would be good to do an Asian market piece.AUDNZD has been in my interest since its initial bottom in mid-2014.  Historically speaking the pair's movement is reflective of the business cycle differences between the two economies. We have bounced off historical lows both in nominal terms and real terms.What caused this move off the lows? Can this bounce continue? Or is it time to be a Dodger's fan and leave before the trains start running late or the traffic gets too bad ;)I have distilled that into a few focused factors that I believe are important for AUDNZD right now.AUDNZD has been recently trading off the terms of trade differential between the two countries that disregarding the potential housing bubble aside, the economy in Australia looked much more favorable than that of New Zealand – something that AUDNZD has yet to price correctly.One of the main things I’m looking at here is the divergence in Australia’s and New Zealand’s respective terms of trade. There has been a strong correlation between the two country’s terms of trade and their currency levels. The rising prices for Australia’s commodities have been driving by the huge rebound in metal prices (20% to 25% of Australia’s exports = iron ore, the price of which has risen precipitously). However, base metal prices have failed to maintain these current levels, as the Trump/populist trade unwound somewhat in the past few weeks. On the other hand, milk futures prices seem to be establishing a bottom. It’s reasonable to expect an appreciation of AUDNZD to come to a halt as well.With that said, we are at a good risk reward point in terms of relative economy performances.NZ has experienced growth and inflation after the RBNZ lowered rates after the Christchurch earthquake in 2011. After experiencing growth, they were the only major central bank raising rates back around ~2014.  AU has been relatively more stagnant, however, after having relatively lower rates since mid-2014 is starting to pick up.Looking at relative unemployment rates, we are at a local low of NZ minus AU unemployment (higher unemployment rate in AU than NZ) and have to start to trend the other direction. Ultimately, from a trades perspective, New Zealand is strongly dependent on Australia (~19% of total trade) but the reliance is non-existent the other way around (~3%). One could interpolate from this relationship that New Zealand, with their higher interest policy,  will soon start to feel some of the economic pains that Australia has had to deal with in the last couple of years.Additionally, looking at the respective central banks’ posturing: both central banks are in easing cycles, but it is clear that NZ has been doing the catch up since 2015. The central bank rate differentials using AU minus NZ should that AUDNZD should be higher, especially if the trend continues of the RBA starting to taper and RBNZ continued to need to weaken its currency, the story is also true for approximate real rates for the two countries as well (generic government bond rates minus inflation). I also built a real rate spread using extrapolated CPI and government bond yields (to calculate a real rate). This does show that there continues to be a break between AUDNZD and real rate differentialsWith the above highlighted, it is easy to imagine that AUDNZD presents a lot of value. Looking at the pair in real terms – NZD still hovers around historical levels, potentially prompting more action from the RBNZ while the AUDNZD real rate is near historical value territories.From a positioning perspective – using CFTC FX futures positioning, it's starting to look stretched from a long AUD vs short NZD perspective.So now what?I think from the rate's and central bank's perspectives, there still seems to be a disconnect between the rate markets and AUDNZD. We could be witnessing the long term bottom of AUDNZD as the business cycle slow shifts to a long-term bottom for base metals and energy. However, after the explosive move driven by the rise in inflation and yields (derivative effect evinced through rising base metal prices), we could possibly be in a position of over extension of those metal prices. If we pullback in metals/inflation (I think we can pull back), so can AUDNZD.Unemployment differentials show a clear bottom, but no clear strengthening in Australia vs New Zealand. Risk reward is to be long that chart and thus AUDNZD.Finally, positions seem a little stretched at this point, but obviously, this doesn't necessarily have to be the utmost driving factor.Conclusion:I think it's okay to be a short term dodgers fan and book some profits for now. But as AUDNZD pulls back between 1.05 and 1.06. I would look to rebuild or add to a long position.Thanks guys, good luck tomorrow with the jobs number. Been really busy of late - will do some work on US equities + Wars - look out for a Syria piece this weekend! 

29 марта, 17:34

Around the word

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Spring is in the air. Blog pages need to be refreshed. A few charts from around the world.First on rates, since I don't have much to say and will leave it to the other excellent members of MM blog, except the 5 year looks to have made and held a new range. I am assuming there are lots of players using the 5yr in their spread model, looking for the curve to flatten, though TBH that was a 2014 trade and the 5/30, 5/10 have been in a narrow range since.5-10 spread. Hasnt done much lately.Staying in the realm of Fixed Income, we move to Credit, where CCC bonds saw spectacular returns in 2016 and into 2017. They are about 3% off their high.Benchmark High Yield CDS spreads have ticked ever so slightly higher, though I would caution its to early to really call it a trend change.For those of us who are not NYC hedge funds trading the CDS contracts or buying CCC bonds (which always have some hair) BB and B bonds are a good proxy for the risk most bond investors are willing to take. Since the beginning of 2017, single B have generally been below 6%, which is not very appealing IMO, but given the alternatives, isn't the worst one can do if you are buying credits you like.Alternatively, if you move up to BB, good luck finding anything with a 5 handle.Indeed the BBB spread, has hardly moved. There is little worry about investment grade credits at this time.Turning towards FX, which I will leave to the other authors in this space to be more specific. The DXY, after doing a nice break out early in the year is right at some critical moving averages now, given the strength in the Euro and Yen of late.The consensus shorts, of Asian currencies (proxy by the Sing Dollar) show a similar trend. Though to me the LT play is still short, especially given the price of things in SingaporeHowever EM FX, to this author, has been strong this year, especially given the move in oil. Though to be fair, oil and EM FX wen the opposite way after the US election and are now just closing the gap.(JPM EM FX in White, Oil in Yellow)But when the beaten down Mexican Peso strengthens for almost 2 months straight, perhaps something has changed. We saw a similar type of move in BRL in 2016. Blow off and then strong reversal.Where your author does have some interest is in 'other' currencies, like Gold and crypto landGold hasn't been able to get above the 200 day recently. Though it did put in a nice 75% retracement in December which would be the maximum allowed if 2016 really was the start of a move higher, according to most voodoo.In crypto land, bitcoin looks to have topped. Below is  chart in CNY, given that is where most of the specs are. Though it seems like other crypto coins, have picked up the slack recently. Your author is pretty cautious on the space hereTurning toward equities, where Europe has seen strong returns to start 2017. Even still IBEX is still far from the recent highs. My guess is we get there after the French elections.While EM equities have reversed its losses post US election, earnings are no where near where they were 5 years ago (some of that is FX related). But the chart looks good as well.However if you want to play the global reflation theme, you really should be looking at Asia Ex Japan, IMO. Earnings estimates have been on the rise in 2017And dont look now, but its been positive almost every day this year.And the EM heavy weight, South Korea (why are they still considered EM is another question) has seen EPS expectations rise and the KOSPI on the verge of breaking out of a 6 year range.  India has also been on your authors watch list, as the Sensex is  now near the post Modi high, though EPS haven't caught up yet.  Lastly the US stock market juggernaut, proxy by the Nasdaq 100, is still growing it EPS and valuation is pretty similar to the past few years. Hard to short stocks like that. Happy Q1

17 марта, 00:30

Populism Getting Unpopular?

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Quick one today. I know I'm late with this. I just returned from visiting a small Caribbean island, stuck in the 1950's.When I left, it had seemed that Trump and European populists were continuing their march towards some sort of global revolution.Fast forward to today: we started to see the US equity and fixed income markets finally come to the realization that the anticipated Trump objectives (read: tax plan, possibly deregulation, all the "good" Trump stuff, etc.) are not guarantees and that people/the markets have gotten ahead ofthemselves.Today's special: reversal of all Trump reflation trades. Pow, right in the kisser.We can debate Trump in the comment section. For now, I want to shift the focus to other parts of the world. In the previous few sessions, we have borne witness to other populists stumbling as well.Wilders disappointingly came in second in the Dutch elections, despite leading in February polls. In Germany, Martin Schulz - a heavy critic of Brexit and the "anti-Trump" candidate, unanimously won his party's nomination. His party, the SPD , has started to lead in polling. Lastly, Le Pen and Fillon are losing steam in France as Macron seems to be locked to take the election.This makes me think. Are we seeing a local peak in populism or the absolute?I'm not 100% sure - I have a guess but I'm going to keep that close to the chest for now...With that said, regardless whether populism has seen its local or absolute peak - close your eyes and think...what would happen if Europe walks away from these elections with no right wing populist in top office?My belief is that this is a contrarian view and can catch many market participants by surprise. Yet, I think it's starting to look like a real possibility. It will ensure the EUR will survive - either forever (practically speaking for macro investors) or for the time being (practically speaking for tactical FX traders). Both the long term and medium term charts look supportive.Oh yeah, and there's the EU CPI is printing 2% with Mario Draghi discussing rate hikes.Who knows, maybe the people are getting mighty tired of populist rhetoric - don't they all sound the same anyways?Thanks guys, good luck out there.

13 марта, 00:00

Smart Beta for dummies

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I’ve been meaning to do a longer, more educational piece for a while but sadly the joy’s of having an infant have given your author very little free time to sit and write. But I figured better to get something out and perhaps let the community fill in the blanks and oversights I missed. After introducing the concept of smart beta I will give some market based observations which may be of more interest to the typical MM reader who knows this stuff already, but I get the feeling there are many readers who are not full time finance professionals and would like some educational content. Anyways here goes.Smart Beta, what is it?The term beta, when applied to financial markets, usually describes a stock’s relationship with the overall stock market. This is usually expressed as “beta to the market” but could also be “oil beta” or beta to anything else. Wikipedia/Investopedia have a good theoretical and practical discussions of beta, but I am assuming most here have heard of the term.Smart beta takes the concept of beta and augments it, saying there are many other “factors” out there besides the market that have a relationship with the movements of a stock. For instance, it is well documented by the god father of efficient markets, Eugene Fama, that company size and value are informative in determining a stock’s predicted return, though only after much obvious evidence was thrown at him. Anyways as most normal people expect, a stock’s future return is based on a number of factors, some of which are easy to explain and some of which are more idiosyncratic or company specific. Popular factors include: Beta, Value, Price momentum, Quality, Growth and Volatility, but there can as many factors as you want, as long as you have the data. Quant funds typically play factors on a market neutral basis, meaning they rank all stocks on a factor, say earnings growth, and then to obtain the earnings growth risk premium by taking the top 20% of stocks less the lowest 20% (market neutral) and that result is called the factor premium, which is typically calculated on a monthly basis. If you have access to a Bloomy you can do this yourself with FTST, seen below:While many quant shops determine a factor’s return on a market neutral basis (after adjusting for other factors and sometimes sector weightings) but on the flip side many “style” investors are long only a factor, including many actively managed mutual funds. If you own a “value” mutual fund, try and see if you can find a value index (Russell Value) and compare the two, especially as it relates to their outperformance vs the S&P 500. Often you will find that “value” funds tend to outperform at the same time. If this is the case, then you might want to re-think if your active manager is really providing much “alpha” or only beta to the Value factor. Rise of ETFs, Quant Funds, Indexed MoneyListed above are just some of the secular trends that have embraced smart beta/factor investing and given their force in the markets I think its fair to say that factor investing is only going to increase, at least until there is a negative shock to disrupt those secular trends. Indeed many traditional stock pickers already complain of the rise of the machines and have been unable to adapt to the rise of this type of investing as its consequences have been far reaching.Why should I care about smart beta and factor investing?From the individual investor point of view, the rise of smart beta is very powerful as new factor ETF’s allow anyone to play the market from the angles the pro’s use. The problem is that smart beta investing is still very new to most investors and they may be unaware of how quick and big the moves can be when factor positions get over crowded. For example, at the start of 2016 we had a climactic sell off in value stocks. Yes it was Oil and High yield that really led the market, but if you owned any value stock,  chances are that it got killed as well, even if the oil or high yield exposure was not very obvious. Think QUALCOMM. Also financials tend to be the “value” sector because they often have the lowest PE ratios in an index, and they were also killed (but had obvious high yield and oil related exposures).As oil prices bottomed, value stocks started to perform strongly. And post Brexit they were very strong, as global growth improved. Indeed the “value” factor often performs best at the early part of an economic cycle. Given that global growth was so slow heading into 2016, its no surprise that value started to outperform as growth bottomed. Market ping pong. In the same way that some traders try to trade the business cycle with different sectors (buy cyclical sectors at the early part of a cycle and buy defensive non-cyclical towards the end of one) today’s traders can also implement the trade with “smart beta” or factor ETF’s if they choose to do so. While trying to beat the market via sector timing or smart beta timing is no easier than trying to beat the market outright, there is still a lot of information investors can gain from seeing what factors performance is. We can see what is working in the market and try to generate a thesis for what the market is telling us. When value is outperforming along with cyclical sectors, its usually a good sign that we are still in the early stages of a business cycle rebound. When factors like quality or growth are outperforming, along with traditional non cyclical industries, it usually means that we are in the latter stage of a business cycle. To me these are the two biggest pieces of information you get.Momentum, the dumb factorFor whatever reason, and there are many logical ones, momentum is a documented fact of financial markets. By simply looking at a stock’s price momentum (ie its price change over some historical period, usually 9M to a year) one can better estimate its future returns. Why a stocks historical returns should matter to its future, and how this effect can have existed for many many years is another discussion. But the fact that momentum is commonly used in markets is the main point I want to make. Indeed CTA’s base much of their models on momentum and lots of quant funds have it in their models because it works so darn well. The problem with momentum is that it works until it doesn’t; as its prone to sharp reversals. Momentum trades tend to work like carry trades, they eat like birds, but shit like cows, as I read once. Implications for Today’s marketsCurrent Factor TrendsAs mentioned, post Feb and March lows in 2016, commodities, EM, high yield, small caps and value stocks all outperformed. This was a the typically play book trade at the start of a cyclical recovery, even though there was no recession and we were more than seven years into a bull market. As with all market moves, it ebbed and flowed, with commodities initially leading, along with high yield and then only later with financials after the Trump election. Still good with the cyclical play. It is my view that many commodities are over bought, (though oil not so much, again a post for another day) and that the Chinese stimulus of 2016 along with their capacity reductions was the main reason for the uplift in most commodity prices to what are now unjustifiably high levels. Even if commodity prices don’t fall, I don’t think base commodities like Steel or Iron Ore will rise much from here. This is the first sign that the cyclical economic growth story is a short cycle. Small cap outperformance is also dubious given their high PE ratios and rising inflation and interest rates. They could outperform but I think the market is in a “show me” mode. Value stocks have already started to underperform generally, as seen below, though the trend is not very clear to me that they will underperform. (PS anyone know of a good market neutral growth index? Anyways, Russell 1000 Growth Index is the big leader this year)What I do think could be a catalyst for the markets is the financials. When the financial sector starts to underperform, because they start to miss earnings or Le Pen gets elected or just some other sector start to do better, there could be some serious selling pressure and knock the market off guard even if financials turn out to be a great buy at current prices for the next 2 years (I guess its possible, you never know). I feel like many financials are simply trading on momentum at this point. Enjoy it while it lasts. The main point of this post has been to illuminate the role smart beta plays specifically in equity markets and try to explain to the novice financial market participant of what sort of things they should pay attention to. If all of this was new to you, then perhaps you will enjoy this little throw back as well. 

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08 марта, 11:48

Where Are My Manners/Food For Thought: Grains Market Primer

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Where Are My Manners:I was so excited to send through my first post last week that I forgot to pay homage. (Sorry!)I just want to say thank you to Macro Man for the incredible opportunity to contribute to this blog and hope I can be up to par in terms of insightful market commentary, executable trade ideas, and refreshing levity that has made Macro Man popular.Additionally, I would like to tip my hat to all the other posters of the blog - we don't need to make Macro Man great again; we need to make Macro Man greater than ever!Always feel free to comment and give me feedback on my posts - whether it’s the writing or the ideas. I sincerely believe that if I put out an idea that every commenter agrees (Harry H, that includes you bud) then the idea is probably not so great :). Also feel free to shoot me ideas of what you guys want to hear about as well - if I think I can add value writing, I will try! Food For Thought (Grains Market Primer): Between daily wood chopping and scavenging for food from the company pantry, Macro Clown often involves himself in the most unlikely of markets for that of a macro trader: grains and softs. The convention among those foreign to grains and softs  is to group these different groups of assets together. What a faux pas! This irks me as they are very different. Grains (corn, wheat, soybean and related products, oats, rice, etc.) display a lot more autocorrelation – there is a grains beta, if you will. I believe this is the case due to the characteristics of usage substitution and similar growing climates and environment for grains, with short and similar growing cycles of about 5 to 6 months.Softs (sugar, coffee, cotton, orange juice, cocoa, etc.) also grow in similar climates to each other but there are more intricacies regarding their growing needs. And obviously, something like cotton isn’t exactly a substitute for something like coffee. Most softs also have a much longer growing cycle of multiple years which leads to large long term trends in prices - managed futures funds and CTAs fav. Grains show similar trends but those trends happen in shorter (6 months to ~1 year) bursts. Currently, there are a couple of factors that are setting up good risk reward (putting yourself in a position to get lucky) for outright directional and spread bets.Intuitively, as prices of these crops drop, production and marginal producers would be pushed out or forced to switch crops. As a result, supplies get drawn down and any supply shocks become sharply apparent, leading to a spike in prices. Truly, the cure for low prices is lower prices. Vice versa is also true. Without being a meteorologist or having a crystal ball for supply calamities, Macro Clown can still use fundamentals of a crop to position him in an area of strong risk reward and (with some trusty chart work) find good entry and exit levels. Long only trade: The directional view for grains here is that all of the major US grains are in deep value territory. Reviewing the WASDE number that came out today – there has been a buildup of ending stock in the main grains, as prices are at or near 10 year lows reflective of such glut. The market seems vulnerable to potential supply drawdowns or shocks.  What’s the result?  Soon there will be fewer than two million farms in America for the first time since pioneers moved westward after the Louisiana Purchase – Oh boy, this opportunity sounds as juicy of as the leftover BBQ ribs from the broker meeting – supposedly there is a wave of foreclosures coming in the near future as American farmers have accumulated too much debt.   Charts looks like it’s trying to make a bottom – a smooth technical analysis operator should be able to patiently find good entries with relatively tight stops. How far grains can run? (Think 7% to 10%  stop for 50% to 100% upside in the event of a supply draw down/shock) We’ve had bumper crops the last 3 years where weather in the US has been perfect. Let’s see how long this streak will last.There are also some relative dynamics at play as well. Soybean has been the best priced crop in the past 5 years-ish. Needless to say, like investors, farmers also chase the market. There has been a land grab in the US Farm Belt in favor for soybeans at the expense of corn and wheat. Add to it today’s WASDE print showing a topping out of wheat stock. Sprinkle on the large non-commercial position short in wheat that has started to unwind. You end up with: Wheat-soybean price ratio. The cure for low price ratios is lower price ratios? Shrug. Sounds about right.  As an additive to your portfolio, picking up some of these grains or the wheat-soybean basis opportunistically as a speculative lottery ticket looks pretty good here. Stash them for the year, do an anti-rain dance and see if anything good happens.It’s not hard – Macro Clown stashes food from the pantry at his desk all the time. Speaking of which, where the hell are those pistachios snack packs…Macro Clown (MC)

03 марта, 09:00

Carney The Cable Guy

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Let's try a classroom activity - we are looking at GBP:Who's still short at this point? Raise your hands. Mhmmm.Who's long? Not many. Huh. That's what I thought.The myriad of reasons that has pulverized GBPUSD has been well telegraphed (divergence in central bank policy, Brexit, etc). I get it. But this reminds me a little of EUR in 2012/2013 when the world was convinced EUR was headed lower, and everybody who jumped in short at what eventually turned out to be the bottom had their faces ripped off.I'm not necessarily recommending a direct GBPUSD long, but you damn sure don't want to be short here.A couple quick things to mull over:At these levels, Cable is showing historically low levels when it comes to value using CPI and PPI based real effective exchange rates. This means that GBP has become much more competitive and valuation is stretched to the downside. Good Brexit vs Bad Brexit. Obviously, we've heard of all the terrible ramifications of Brexit - but has anybody ever considered the positives?  I'm no expert at deciphering British politics but let's think about this: capital goes where it is treated best. There is no shortage of EU regulation forced on the UK in the past (costed UK billions). UK was a big contributor of EU taxes - that money comes back.So...deregulation? Check.Taxes? Check.Donald Trum...Err, I mean Nigel Farage? Check. Wait, so how is this not boom town and we are not off to the races? Ah! But we have been...UK breakeven inflation has ripped. CPI has ripped. CPI including housing (the one that Hammond wants to switch to) is already at 2% - the inflation target for the BOECiti Economic surprise index is persisting at very strong levels for the UK. Growth rates are being revised up and unemployment is at levels last seen in 2005. Industrial production YoY broke out of its slumber at end of 2016.On top of all of that, the Fed is ripping rates higher and the BOE is....??Really? Seems either mispriced or Carney is falling behind the curve as the cable guy. Brexit uncertainty shmertainty. Doesn't scare me. I know what my eyes see. So what now? Well, like I said, you might want to head for the exits if you're short Cable (but hopefully 2016 was great for you!). There is a lot of dollar risk if the Fed ever disappointed in the upcoming 9 months, so if I was to go long, check out GBPJPY or GBPCAD. Speaking of CAD, Poloz was as dovish as one can get without cutting rates - but maybe that's another story for another day. You can look for opportunity in rates as well. Short Sterling greens look a bit rich and could probably be a fade on rallies. If the BOE falls behind on inflation, 19s to 20s short sterling must steepen enormously. So 19s, or 19s to 20s, or 20s short sterling curve steepeners might work here as well.  Have a good weekend guys. See you next week.Macro Clown (MC)

28 февраля, 13:54

Mr. Bond Decides to Die Another Day

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An update on US fixed income instruments by TMM2 member 'Leftback'This is another in our series of periodic updates on the status of our recent fixed income trades here at Falling Knife Capital Management. This weekend, our correspondent Leftback was relaxing in his homeland, which to his horror, has recently become the United Kingdom of Theresa May:UK Net Migration from where he reviewed a number of charts for US fixed income instruments and, as he reports here, despite the yammering in the mainstream media about inflation and “higher yields are coming”, recent trading has been peaceful, almost soporific - and the tone of many bond markets is now positive, almost bullish in fact, with traders taking every opportunity to “buy the dip”. Not many saw that coming, when we first mooted the idea of a tradable rally in bonds, back in early January Anatomy of a Bottom … or even in late January Buy The F/I Dip .Avid readers of Macro Man will recall that in late November and December, we donned first the Kevlar gloves and then the full body armor in a bid to catch a variety of fixed income ETF instruments as they were reaching terminal velocity under the influence of the market’s often-invisible gravitational force.In the process we became very long US fixed income [to the extent of 80% of the portfolio], with substantial positions in AGG, TLT, LQD as well as a closed end muni fund, IQI. Since then we have remained long all of these instruments, and have continued to monitor their performance, as well as the widely traded ETFs, MUB and BOND. As a side issue, we continue to monitor USDJPY, which became a proxy for risk assets in 2016, but has shown signs of weakness in 2017. In recent years, increased FX volatility (especially a stronger yen) has tended to precede moves to lower UST yields, and eventually we have seen declines in risk assets such as crude oil, other commodities such as copper and, yes, even US equities.Suffice to say that fixed income trading has not been plain sailing in 2017. As is common for 007 in his line of work, BOND has been attacked by a series of would-be assassins in recent weeks. The long bond auctions and the February PPI and CPI data releases have all taken shots at BOND. Worst of all, the shadowy and sinister villain who inhabits the Eccles Building [The Woman who is known only as “Y”] has threatened BOND that each of her meetings with him are “live”, and that she will be seeing him in March. Y does tend to talk the talk a lot, though. One and all have tried to do their worst to BOND, in a seemingly non-stop succession of assaults, to the point where we would expect BOND to be not just on the ropes, but face-down down on the canvas, about to breathe his last, perhaps making a last call to Bill Gross to warn him to stock his yacht in Newport Beach and set sail into the sunset…In fact, much to everyone’s surprise, BOND has refused to expire. BOND sits well above the December nadir, and rests on firm support provided by the 50 day moving average, having pulled back near to the 50dma on 2/1 and 2/15. The 20dma crossed over the 50dma some time ago, and BOND lies well above these levels this morning. Believe it or not, the 200dma is now in sight just 1% or so higher than Friday’s close. RSI is 65 and rising.We know, of course, because we are constantly being told this by no less an authority than CNBC, (nicknamed “Tout TV” by the late great Alan Abelson), that “bonds are finished” and “yields are going higher”, but the fact is, punters, what you are looking at here are bullish chart indicators, and clearly, for the time being at least, 007 has decided to Die Another Day.Don’t believe me? Check out the US curve, here: US Yield Data Yields in the 5y are hovering below 2.00% and the 30y below 3.00%; even if one views this merely as movement within a trading range (which we do not), then the 10y seems to have been capped around 2.50%, and yields in the 30y around 3.10%. Those yields obviously compare favorably with the prevailing dividend yields currently associated with IWM, QQQ or SPY.Here is a look at a 3-month chart, showing a series of higher lows and more recently higher highs in BOND:After finding a bottom in December, the PIMCO ETF “BOND” eventually bounced and broke above the 20- and 50-day moving averages in the first few trading sessions of 2017 (1/2 – 1/5), but then pulled back, suffering a sharp reversal following the January long bond auctions. After a few days when BOND was clinging on to support, BOND finally closed on or very close to the 20 DMA on 1/19, dipped briefly below on 1/20, but then bounced back. The chart for BOND clearly shows a series of higher lows and higher highs over January, culminating in a short-term high on 1/12.The subsequent price action in BOND was more challenging, although on the heels of a strong auction of US 3y on 2/7, BOND gapped open on 2/8 and rallied strongly into the rather weak auction of US 10y. Then came the series of assaults in mid-February, and subsequent trade saw a series of price dips (yield surges) early in the day followed by a slow steady slope higher in BOND (slow yield decline). Interesting…. it is almost as though there were a group of buyers waiting for each dip, and a fairly large group of shorts, slowly exiting the day trade, perhaps unconvinced that yields can break higher. No less a sage than Sir Jeff Gundlach has opined, no doubt with a wry smile, that Shorts May Get Squeezed Here. Gundlach Sees Yields Falling Below 2.25% Price action in AGG has been broadly similar.The trading trajectory for muni funds has also been strong with the technical picture softer of late, but still unequivocally positive for IQI and MUB since early December.Our underlying rationale for entering the trades in medium-term US bonds can be summarized as follows: inflation is low, and it’s going to remain low. How so, with US equity markets seeming to make new all-time highs every five minutes and President Trump touting Yuuge Tax Cuts and to Make America’s (infrastructure) Great Again? We would argue that US wage inflation remains almost non-existent, the recent spike in oil prices will be transitory due to the continued global oil glut, and the “base effect” of last winter’s low oil prices is about to disappear from y/y inflation data. We therefore propose that the Fed is likely to hike only once this year, or at the most twice, and this bolsters our faith that the belly of the curve (5-7y) will not move beyond the 2% seen recently, and in fact may well move a lot lower than 1.5%. This explains the renewed bid for BOND.Now what of the long end, where fear of the dread Duration doth reside? The most deeply oversold in December 2016 among the ETFs reviewed here were TLT and LQD, both vehicles expressing the market’s negative views late last year on longer duration debt. Despite plumbing the depths for longer than the shorter duration vehicles, and reaching a lower nadir following the US election, both US long duration IG and US Treasury bonds have actually found buyers since mid-December. The chart for LQD shows a fairly positive technical condition with LQD sitting on the 50dma. As Polemic once counseled us in the days of Team Macro Man Mark I, when the price of an instrument ceases falling on bad news, the market is telling you something. Just as markets top on good news, so they tend to turn upwards when bad news fails to depress prices further. Once there is no marginal trader left to sell, price will drift upwards and then all that remains is for shorts to cover….Let’s look at the performance of long-term corporate bonds (LQD):Below, that most-reviled of instruments, the Long Bond ETF, TLT:TLT is less healthy but still well above the lows of December, despite an avalanche of bad news. Once again, the performance has been strong since early December. How can this be, when adding duration seems to be flying in the face of logic, the Fed and CNBC??? In a nutshell, we believe that the Fed isn’t actually going to reduce the size of the balance sheet significantly any time soon. Why do we believe this? We think this because Ben Bernanke, the architect of the policy, actually TOLD US SO. Many times, Big Ben informed the world that the Fed’s portfolio of USTs and MBS would simply be “held to maturity and allowed to run off” naturally, (a slow process that will take decades to complete). This balance sheet aspect of Fed policy affects the long end of the curve more than the short end, and we think this indicates that some degree of curve flattening will occur once more later in 2017, bringing the 10y perhaps to 2% or below and the 30y back to 2.5% or potentially much lower, as the prospects for the Trumpflation trades fade and an extremely large group of shorts are forced to cover. A full exposition of this position has been aired here: Trumpflation or Return of Deflation? Similar views have been outlined in the past by Lacy Hunt, by Gary Shilling, and by others who remain firmly unconvinced that the bull market in bonds has in fact ended. Whether new lows in US yields remain to be experienced, or whether this moment merely represents a tradable bounce in US fixed income before the bear resumes (as Jeff Gundlach has suggested), we are not sure, and will remain agnostic for the time being. One of the best supporting arguments to be made concerning a move to lower yields in the US is that European and Japanese fixed income investors are starved for yield and remain desperate for both yield and safety. In this context, please note the recent move in bunds, and that the US-German spread remains wide. USTs therefore are very attractive, and this can be seen in the enthusiasm of foreign buyers at recent UST auctions.One could go further, and suggest that the talk of higher bond yields on CNBC is just yet another example of “Fake News” from The Media, and punters should look at what happened to Swedish bonds* last night…*Just kidding, folks. All is well in Scandy Land, at least until July 2017 and the next round of the Greek tragedy….?

21 февраля, 05:46

Getting a fix on the VIX

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Below is a chart of the VIX daily vs. a rolling percentile ranking +/- 3St Dev. This is a simple way to look at implied volatility that I often use in FX land,  but in this case I am applying it to the VIX index. Based on this very simple indicator, and as is known to just about anyone knows who pays attention to the financial media, the VIX at the moment,  is cheap. Another key indicator you can grasp easily from the chart below is when the distance between the Percentile highs and lows narrows it represents a  compression of the vol of the VIX, and as it expands the vol of the VIX is rising.  As you can see below while the gap currently is   narrow there have been two other periods when the gap has been tighter still. So, while the VIX may be close to an extreme low, the vol of the VIX is not yet at an extreme.  And below is the proof of what we surmised just by looking at the chart above. The chart below is the three month actual vol of the VIX; currently just over 80 but it generally bottoms around 60. What may well be more important is that it is clearly in a downtrend having taken out some support around the 90 level.   The next chart is the VIX plotted against the daily momentum of the VIX. Notice too, not surprisingly the momentum trend is down. However, as you can also see the most recent trend had been rising quite steadily from 2013 until it formed a nice double top in 2016 and broke the trend line and now is testing levels just aboe the previous cyclical low.  Since we are not too far from the historic VIX lows, momentum is going to find it a bit of a hard slog to move much lower from here, and may in fact start to find a bottom. The next chart might involve a bit more controversy, from any conclusions we may try to draw. It is the rolling 55D and 143D correlations of the VIX and the S&P 500. As you can see, and not without too much surprise, in general the S&P and the VIX are negatively correlated. The VIX tends to contract in periods of equity trend expansion and expand in those sharp short periods of equity market weakness. The interesting thing about this chart, is the current weak negative correlation between the VIX and the S&P. It is still negative, no doubt about it, but is is showing the least negative readings in years. Well, it may just be telling us nothing more than what the momentum chart above is suggesting, namely that the VIX can go lower on higher equity prices, but the room for contraction is limited. The other possible explanation is the market short covering gamma positions produced from the sharp rise in the S&P. The other factor that may be holding up the VIX is the skew,  which is also not at a compressed level as out of the money options get bid up for protection purposes. Apologies for the busy chart below but this is the VIX plotted against the CBOE Skew index which attempts to measure the degree of skew in option prices. And as you can quickly see from the chart below, while the VIX is close to a low, the SKEW is elevated. In fact the skew, recently traded up the its limit at 150 indicating very robust demand for downside protection. The easy conclusion to draw from this is that the skew is not worth owning at these levels, and that option based hedge strategies should incorporate shorting some skew against ones longs. The most obvious trade is put spreads, but there are other variants as well. Finally, the next chart below is the S&P 500 daily plotted against the VIX as well as the actual vol of the S&P calculated using a variant of the Parkinson statistic(using the daily Hi and Low of the S&P as apposed the the close to close values). This chart demonstrates that the spread between the VIX and Actual Vol (AV) is almost universally positive and the only times they narrow substantially is following a VIX spike where the VIX declines faster than the AV. Apart from those instances the spread is positive. Another way to asses the cheapness of options is to do the same percentile ranking exercise on the IV-AV spread. At the moment it is running at around 0.66. This is with the VIX at 11.49, the AV at 5.24 and the spread at 6.25. Ideally, it would be better to see the spread below 0.25. In other words the criterion would be less than 3stdev below the rolling percentile rankings, and in the bottom quartile in terms of IV-AV spreads, and some clear signs of momentum exhaustion. The final chart blow is the S&P vs.my daily momentum indicator. As this chart demonstrates, momentum is just breaking above the previous highs prior to the financial crisis in 2008 and above the levels recorded just prior to the August sell of in 2011 but below the more recent highs seen in 2014. Whether we see those levels again is still in doubt but momentum is clearly trying to trend higher still. Taking all these indicators together in sum, it is not unreasonable to expect some sort of S&P correction. This  may not be a secular top (unlikely) but more probably, a top that leads to some sort of 10% or as much as a 15% correction. In a more ideal scenario, we would like to see the skew get sold off as well, as it is in periods of total capitulation that the market starts to sell any sort of premium it can find. However, we are not there yet, and more likely, we may not get there. So, any downside hedge or spec trade should try to short some skew in the process. That, as I mentioned above suggests buying put spreads, or ratio put spreads. For example buy 3X ATM puts and sell 2X 25 Delta puts. On a 10% correction roll out of the put spread 2 by 2 and leave yourself long one in-the-money put as a running hedge. Secondly idea is similar. Buy 3X ATM puts sell 2X 25 delta puts, and buy 1X 10 delta put. If you get the 10% sell off sell all of the put spread, and leave yourself long the 10 deltas as a hedge. And the expiry of these options should be long dated in my view. Consider Sept or Dec 2017 expiration with lots of time to work in your favor. And in terms of execution work out the mid mark prices and then leave bids still lower. Let the market come to you. -James

16 февраля, 02:23

The Quincunx Page Turner

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First, let me say that this post is primarily a page turner. Turning the page on the blog to free up white space for the comment section to use as the last one is a bit full. It is purely a lift of a post I wrote elsewhere and should be considered as Polyfilla in the decorative works of the new TMM2. ------It's been a while since I last posted as I have been waiting for the realisation that Trump was not going to be a shoehorn to economic prosperity to dawn, as his extremes either shock the rest of the world into moving away from buying US assets or his changes collapse in a cloud of impracticality. Neither of which has happened.My simplistic de-Trumping plan has turned from a binary game of all on / all off into a multi-dimensional game of chess. Hard Trump and Soft Trump, to borrow a Brexit phrase, are forms of Trumpism that are quantum-like and more probability waves than certainties. The strength of policy swings on a Tweet or judicial feedback. With foreign policy we have seen back peddling from 'hard' as the one China policy appears to have been acknowledged, Japan declared ‘best friend’ and Canada told that Trump is only planning ‘tweaks’ to NAFTA. Yet the rhetoric against the likes of Basel III remains as strongly worded as ever and the deregulation of US banks could cause some of the greatest strains between the US and EU. Since the 2008 crisis regulations have been seen as much a moral crusade as one of practicality. Dodd-Frank and Volker, though nice ideas, were never fit for purpose and the laws of unforeseen consequences have produced all sorts of schisms, whether it is liquidity holes in corporate bond markets or just ridiculous generalised reporting conditions on markets that were not exchange based. So getting rid of these, or at least watering them down, would be a sensible compromise between practicality and moral protection. At least that’s the line I am willing to excuse the panel of top bankers currently advising Trump with.Basel III is a bigger issue. If McHenry’s letter to Yellen is properly representative of new policy then it hits the EU head on. The EU has been proudly touting its new banking regulations which should identify weak banks (yes, done in style) and be part of the path towards a unified European financial system, whilst also allow the politicians to wave a huge moral flag in triumph. But what happens if the US banks are suddenly told they don't have to play by the same rules? They instantly have a competitive advantage unless the EU backtracks and loosens Basel III in response - Highly unlikely for them to do such a massive U-Turn just because Trump has pushed them into a corner - or they immediately remove the US’s European banking licenses if they don't comply.This is al the more interesting coming in the wake of Brexit where apparently the US banks are threatening to up-sticks for continental Europe, well let’s be honest, it’s a threat as none of them really want to go. France may well be offering sanctuary to US scientists and the world's bankers, but if it were really that great they would have gone there already.There is a small version of the State of Liberty on the banks of the Seine in Paris and I was wondering if they should attach a plaque to it similar to the famous one in one in New York -Give me your scientists, your bankers, your huddled masses yearning to breathe free, the wretched liberals of your teeming shore. Send these, the visa-less, Trump-tossed to me, I lift my high tax rates besides the red tape. But if the US banks aren’t going to be playing to Basel rules there may not be that tide of bankers. Indeed, the UK would be looking pretty as an intermediary between the two. It would also support another idea I was nursing, the introduction of an offshore Euro market in line with the original Eurodollar market. If London launched such a beast the EU would not be able to control it yet it would provide a method for EU unregulated institutions to fund and lend Euros just as the Eurodollar market did for Russian held dollars when it was established. The great thing about the City is that it has thrived on bypassing regulations, or rather, creating the most efficient systems to mitigate their impacts. It's what it thrives upon.But back to the markets, I am lost. I see risk piling up everywhere except in the markets, which are driving on upwards. I don’t need to list the European stresses but I think this sums up the EU's position pretty well.There are so many possible outcomes to current uncertainties I am looking at the markets as a quincunx-  not a Harry Potter creature but another name for the 'bean machine' devised by Sir Francis Galton.The box itself could even be used as a metaphor for Trump's policies. An Executive Order, or even just a tweet, is dropped in the top and it rattles down through so may deflecting processes that, though you think you have an idea where it is heading, the policy's final resting place may be some way off where it started.Add in the rest of global politics and you end up with so many variables, or pins in the box, that the sum of paths may well mean that there are not any fat tails, but the standard deviation of the resulting distribution is a lot wider than volatility pricing is currently suggesting.I have been discussing buying volatility now rather than direction as I was, or so far have been, wrong on direction but I am being amply reminded that the scenario we have could be looking like the great vol compression of 2006. With Mr. Cohn (bless his poor cotton socks having to take that meager compensation for having to give up his job at GS) at the helm, the perception is we are going to have a smooth path to financial wonderfulness with the lifting of bank restrictions and the extension of credit underwriting all risk. In a way it's a passing of stimulus back from public QE to the private sector banks, a pay off for, or by-product of, lifting the bank restrictions. Some would no doubt ask what happened two years later, but we won't go into that now. But, back to volatility,  buying vol doesn't necessarily need a turn lower in markets to perform, though falls in markets do drive up implied volatility. You can buy implied volatility and be measured against realised by managing the hedges rather than, as with the VIX, buying implied volatility and being measured against implied volatility. There is a big difference meaning you can make money being long vol on rallies, despite perceptions. Especially when people gets squeezed out of a large short call positions.----Right there you go commenters, new space to play with.

06 февраля, 16:58

Party like its 1999 - A Late cycle resurgence

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In the financial markets, participants are always looking for analogies or historical examples to glean information from. Technical analysts look for chart patterns, value investors prefer a process and often talk of "checklists" and algorithmic traders follow a set of rules most often optimized or at least tested on historical data. Practice makes perfect in most areas of life and participating in financial markets is no different. However sometimes the inexperience of youth can be a blessing, as there are no "bold and old" traders on Wall Street and many Nobel Prize winners did their best work when they were young. So always remember there are lots of ways to skin a cat in this business. Moving on.Wednesday's ISM headline number missed expectations coming in at 55 vs 56 expected but still increased from December. If you are going to focus on one economic statistic, I think ISM is probably it. Even though its released from a non government agency, it has data going back to 1948, is widely used in many quantitative models and most importantly gives an up to date reading of "supply management professionals", those managers highly attuned to the current business cycle. You can find more information regarding the release along with some interesting anecdotal comments directly from the ISM website.WHAT RESPONDENTS ARE SAYING …“Demand very steady to start the year.” (Chemical Products)“January revenue target slightly lower following a big December shipment month.” (Computer & Electronic Products)“Strong start to the new year. Production is increasing and we are adding capacity.” (Plastics & Rubber Products)“Business looks stronger moving into the first quarter of 2017.” (Primary Metals)“Economic outlook remains stable and no current effects of geopolitical changes appear to be penetrating market conditions.” (Food, Beverage & Tobacco Products)“Sales bookings are exceeding expectations. We are starting to see supply shortages in hot rolled steel due to the curtailment of imports.” (Machinery)“Year starting on pace with Q4 2016.” (Transportation Equipment)“Business conditions are good, demand is generally increasing.” (Miscellaneous Manufacturing)“Conditions and outlook remain positive. Raw material prices are stable resulting in stable margins. Asset utilization remains high.” (Petroleum & Coal Products)“Steady demand from automotive.” (Fabricated Metal Products)The headline index is a composite index which includes various sub indexes on Prices Paid, Inventories, New Orders, Employment, to name a few.  Below is a chart of the New Orders Index, resized so that a reading of 50 is plotted at 0, given that 50 is typically used as the difference between expansion vs contraction for this survey. The circles in red denote recent times where New Orders did a quick dip below 50, only to bounce back hard, outside of a recession. The observation in 1998/1999 coincided with the LTC/Russian Ruble/Asian Tiger disaster, 2012 with the Euro Crisis and last year with the Oil/EM debacle. What is interesting to note is that these observations occurred in what can be characterized as a latter stage of the economic cycle (though 2011 was far less than last year). However given the nature of the ISM survey, which essentially asks managers about their business activity on a month over month basis, the series tends to rebound quickly, peak and then go lower. Its mean reverting by nature as business conditions often don't get better/worse month after month for too long. We can see the ISM New Orders index bottomed in October of 1998, at 48 and then peaked in September/November of 1999 almost a year later at 63. Notably, when the US Equity market peaked in March of 2000, the New Orders index was already down 7 points from the high, at 56.2.If we look at the 1998/1999 experience as a guide for today's market that would imply that the December 2015 low of 48.8 has probably made a high ~ 12 months later, at the last two readings of 60.3 & 60.4. While history never repeats exactly, it often rhymes.Btw, good times in 1999. I figured even the yougins know Prince's song. I doubt many here remember this ;)