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Market Core Views

• Little to dispute on EPS recession, liquidity tighter than ever, CBs wallowing in
the dark, equities could still be expensive and at minimum are correcting

• VIX remains elevated and should be bought below 20
• The Dollar was properly thrown off the most crowded trade list but will not set
fresh highs despite being recently way oversold

• Markets will not be freed from macro fears and realities anytime soon but we will
largely sideways in a range that could be 1680-2250 on the tails but most likely
1810-2030; these wide ranges are appropriate based on the tail risks, extreme
positioning and liquidity sucked out of the mkt

• Total earnings yield of equities have a floor in an environment where bonds earn
nothing and many companies have pristine balance sheets. Many sectors have
already priced in recession

• Short term however – I would call for a pullback in equities…

Credit, Commodities, China,
Consumer are the obsessions

• China and EM have credit issues but they may not be as bad as you think
• Credit will get worse and you can position for that but we are not going into
2008 again and worse doesn’t mean it bleeds across the entire credit curve; I
argue for more bi-furcation

• Commodities are at the cross roads of supply discipline emerging, capital
investment has over-adjusted, demand never really fell…SORRY

• Consumer is structurally weaker than they have ever been based on nature of
labor market, negative real rates, financial oppression – get used to it.  Labor
market has not rolled over…yet?

EM FX better than you think:

• CEW (basket of 15 EM Currencies) is -16% vs USD in last 2yrs, versus
-20% for Canadian Dollar, Australian Dollar and Euro

• Is flat against most crosses ex-USD

EM FX better than you think:

Euro

EM FX better than you think:

Mexican Peso

China: HF’s ready to pounce
but will it work??? 

• Won’t be successful as long as credit markets remain steady
• Capital flight is being addressed with renewed soft capital controls (QDII
frozen) while $3 trillion reserves are still ample to cover repayments of
external dollar debt.

• While the change from a dollar-peg to a currency basket (similar to that of
Singapore) has created some volatility, the new regime will be heavily
guided by PBOC with a smaller than anticipated depreciation this year.

•Didn’t China basically stop the global devals in their tracks back in August
with their threat to devalue???  Maybe this alone was enough to stop the
flight the Dollar – China stole the game from the Fed/ECB/BOJ

EM Credit Monsoon? Maybe, or
maybe only for some.
• EM selloff has begun to morph from concerns about growth to broader
concerns about creditworthiness.

• Why has EM corporate credit's been relatively  resilient?
• Much of EM debt (35%) is quasi sovereign with much higher representation
in worst credit sectors energy (70% of debt in this sector is quasi
sovereign) EM corporates have a big brother in the government (credit
market microstructure in EM v DM very different)

• EM debt is why EM Equities have sold off so hard: Help from the sovereign
may bolster a company's ability to pay back debt, but raises the cost of equity
for other sectors. 

• RoE fallen more in EM than in DM, but this has happened despite EM
companies levering up

• Credit transmission in EM equities is different than DM equities

Why is EM Credit Not So Bad? Because
Much is Not Local Currency Debt

Many Debtors Are USD Exporters,
Buffering Their Losses

• The big issuers in EM are companies, typically in the commodity sector,
with external revenues. Currency weakness certainly hits their profitability
as commodity prices are strongly negatively correlated with the USD.
However, this weak profitability does not immediately impact the balance
sheet, as it does for external issuers with no external revenues.

Your Questions
Is the basic idea of low rates in bonds (rising TLT) simply that people are selling stocks and shifting
into bonds? Is it that simple or is there more to the purported "wisdom" of the bond market than that?
- Greg

To me, the reason underlying the market malaise is DEFLATION. All the negatives seem to stem
from prices on virtually everything going down. Is this also why the German banks are under such
intense pressure? - Robert

Record global $ debt + 70% reduction in petro $ creation = increasingly strong $, right? - Paul

BK: Asset managers' largest clients are pension funds. Does the risk of asset managers spread to
pension funds, public and private, causing the Gov't to step in, albeit in a different way than in
2008-09? - Robert

With US Global companies such as $AAPL keeping cash off shore for tax reasons. Does the China
devaluation impact these companies cash directly? Or just indirectly in lower revenue? - Don

I would love to hear thoughts on why USD/JPY FX rate seems to influence global markets more so
than GBP, EUR, or even Yuan - Mark
Tim: Which EM market would you dip your toe in and at what price or market event? - Rich
b) Tim  what are your targets for EEM - Kim