Friday, October 27, 2006
This weekend is the longest one of the year, as clocks roll back and we get another hour of sleep on Saturday night/Sunday morning. It’s a good thing, too, as Macro Man needs as much time as possible to rest up and recover from what has been a tiring but nevertheless rather profitable week. Today’s data has not been particularly good for the portfolio; the kiwi stop was triggered in the end, the long $ call has nosedived thanks to a CTA exodus from USD/JPY, the short bond position has obviously suffered, and even the energy stocks have seen their recent rally curtailed as oil has failed to follow through on its recent rally.
The GDP report was unequivocally a dovish one; growth was in line with expectations, but the price deflators were lower than most (including Macro Man) looked for. Although the contribution from inventories was worrisome, we should also bear in mind that in many ways it simply represents the mirror image of net exports. As inventories are wound down, so too will be import growth. Moreover, it is difficult to see the contribution from the public sector remaining negative. Meanwhile, the unfilled orders data from yesterday’s durables report hardly suggests that capex is going to crater in this quarter; moreover, the positive income shock from lower gas prices will be felt most acutely in Q4. And let’s put things in perspective; this ‘horrible’ US report which reflects the ‘implosion’ of the housing market still represents a higher level of Q/Q growth than Europe has managed on average since the beginning of 2002. A horrible number for the US is par for the course in Europe. Remind me again why Europe is such a great investment opportunity?
Regardless, Macro Man must acknowledge the risk that the market has a go at the dollar and the US bond market. One possible transmission mechanism would be a ‘devaluation’ of the buck against that barbarous relic, gold. The shiny yellow metal is tantalizingly close to breaking trendline resistance at $600, a break of which should target $640 initially. However, it this thing goes, we’ll want some tasty exposure. Goldcorp is a nice leveraged play on gold and even pays a dividend! Therefore, if gold trades $605, Macro Man will buy $2.5 million of GG at best/on the open. Risk parameters will be identified once filled.
And so, another week ends. We now enter into the long darkness, particularly the next couple of months where the days become horribly short and the nights depressingly long. We can only hope that as the days grow darker, the outlook for financial market volatility brightens.