The Widowmaker

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Includes: AAPL, EWA, EWJ, EWU, FCA, FXI, OIL, RIO
by: Polemic Paine

The trend towards rotating from shiny, codey things to old fashioned lumpy things started a couple of weeks ago but Apple’s (NASDAQ:AAPL) results are a kick in the nuts reminder that this is a real trend. To be honest I am not at all surprised to see Apple suffer as basically, dear Apple, we’ve already got one. If it wasn’t for Apple’s genius miserliness in restricting drive memory sizes in mobile devices and the maximum RAM in the computers, I doubt anyone would be upgrading at all. But Apple has a huge cash pile and hopefully will move on to making something we all need again (how about a new antibiotic iBiotic?). Whilst huge amounts of wealth are tied up in Apple stock, I don't think that Apple products need to be taken as THE bellwether for demand for everything else and Apple is hardly likely to cut its dividend with that pile of cash in the background. So don’t panic unless you have a Unicorn farm, where USE, Unicorn Spongiform Encephalitis, has finally been diagnosed in the herd. But for the rest of your stocks it should be business as usual. Even after the Apple ‘Shocker’ Spoos are currently still languishing around the 2090 level.

Before I finish on Apple, two observations -

Japan saw the greatest growth in sales. Abenomics at work.

If the UK left the EU and joined Apple each household would be £6,000 better off. Well if the UK treasury think dividing GDP change by households is a valid equation, when household income has never, ever, ever been GDP, then why can’t I divide the Apple cash pile by number of households. It's equally as irrelevant.

Whilst Apple has crumbled 8%, oil has made new highs for the year with Brent pushing through $46. The metals sector, well any of those with a futures market, have been putting in spike tops, accompanied by huge Chinese speculative flows.

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Iron and copper most noticeably, being followed by rips and drops in the likes Rio Tinto (NYSE:RIO) stock. It looked blow out and normally I would be saying it is over for them, but with what I see as a grand rotation back into cyclicals away from tech I think there is another rally to come.

Whilst in commodity land, Aussie CPI took a sharp move lower but with the currency having rallied 10% over the last quarter it isn’t too much of a surprise. It is more local than global, but does put pressure on the RBA to cut, which will be a detractor for the yield hungry Japanese but not a game changer. Japanese yields are low and Australia still has one of the most attractive AAA rated yields around.

Which takes us to Japan, where I have done something that is anathema to any old lag macro trader. It is the widowmaker of all trades, it is the fatal schoolboy error of hedge fund PMs. It is the graveyard voodoo scene in James Bond's "Live and Let Die". It’s shorting JGBs. The plan is that the BoJ goes nuclear on the short end and the back end steepens. They need to stop buying trillions of their own debt, which just locks their money into new debt restricting transmission, and instead moves it into stocks and ‘stuff’. In fact I would suggest that in the mad alter-universe of Japanese economics, Japan needs to do something that would be fatal for any other country, certainly a deficit country, and that is to shake confidence in its own debt. It needs people to worry about the security or volatility in the long end and start selling. Weaker currency and steeper curves ensue. Mad? Maybe and I doubt they will ever explicitly say as such but the Japanese saver needs defibrillating out of their torpor, and made even some ECT shock for their behavioral saving problem.

Savings are an odd thing. They have basically two purposes - they are an insurance policy against unplanned cash flow interruptions (e.g. losing your job) and they are also a method of buying free time, whether that is retirement, holidays, or just working less hard. But the value of savings is dependent upon inflation. If we imagine that everyone decides to retire at once and cash in their savings to pay for it there will be no one left to supply the services that those savings are expected to supply. The cost of services rockets and the value of the savings collapses in real terms. In the end those with the lowest savings will end up being forced to supply the services to those with greater savings. So the value of savings is not absolute, it is relative. Much as the old joke of the two fellows encountering a lion and one donning running shoes, you don't have to outrun the lion, you have to outrun your peers. With this being the case, we end up with an arms race of saving that is futile and that futility is further exacerbated by the demographics of old age.

Enough waffling, back to the short term - so like an alcoholic at an AA meeting, "My name is Polemic and I am short JGBs". I am also long of upside 107.50/115.00 June USD/JPY risk reversals.

For score keeping sake, I was quickly washed out of short oil and GBP/USD. The mockery of the Brexit campaign seems to be working but we are entering hubris levels for the Remain campaign. As we saw with the general election of 2015 - it ain’t over yet.