Tuesday, October 31, 2006

Halloween Horror Show?

The month is coming to an end, and the portfolio is hard at work attempting to snatch defeat from the jaws of victory. . Having been positive since inception towards the end of last week, the portfolio will now struggle to reach a positive October given the significant downturn in oil. Such is the danger of a relatively concentrated portfolio, and Macro Man looks forward to building out and diversifying risk in the months to come. As it stands, oil reminds Macro Man of British commuter trains; neither one can be counted on these days to perform as expected.

Elsewhere, the news that US incomes continue to rise at a healthy clip has received a collective yawn from bonds and currencies. So important is the housing market, evidently, that a sizeable boost to spending power from wages and lower utility bills is irrelevant. Never mind that consumer confidence is rebounding, or that the employment cost index rose 1% in Q3 for the first time in more than two years. Hmmmm. As the chart below indicates (or will indicate once Blogger lets Macro Man post images), consumer confidence has been highly correlated with disposable income growth in this millennium.

Macro Man trawled a few notable economics blogs over the weekend and was startled to discover the number of people expecting a 20% decline in house prices; indeed, many believed that the price data from the new home sales figures represented the actual decline in the value of the stock of US homes. Meanwhile, the OFHEO house price index, which uses data from mortgages for purchase AND refinancing, last showed a y/y gain in excess of 10% in Q2, which represents a material depreciation but nevertheless is comfortably positive. A further decline in the rate of appreciation would not be unprecedented in the least; note that this index showed house prices gains in the low to mid single digits for the entirety of the 1990’s. Should the US equity market correct lower, Macro Man will be sorely tempted to buy some longer dated low delta calls on the XHB homebuilder ETF.

Will the stock market correct? That is the million dollar question for hedge funds, real money, and EM investors. The consensus seems to suggest ‘yes’, particularly given that many recalcitrant shorts and hand sitters have been dragged into the market. CFTC data suggests that futures traders are net long. Indeed, Macro Man has been waiting for a further rally to scale into shorts. However, he is beginning to wonder if the pain trade isn’t SPX 1450 by the end of the year, as the market will surely try and set shorts > 1400. Perhaps more strangles are the way to go. More thought is required here.

Elsewhere, the BOJ left the door open for further tightening in the near term despite the predictable decline in the inflation forecast. Interestingly, a government official suggested that the BOJ would be unwise to tighten unless core CPI were at least 0.5% (currently 0.2%.) Meanwhile, the economy continues to shown signs of deceleration. The unemployment rate rose and household spending fell precipitously overnight, while industrial production has been essentially flat in Q3. Perhaps the myth of independent Japanese domestic demand remains just that. However, the situation bears watching. If both the Nikkei and JGB yields fall sharply, Macro Man believes that the yen will likely rally, in which case the $ call will perform poorly. A sale of EUR/JPY or CHF/JPY might be a useful hedge; stay tuned.

Monday, October 30, 2006

A la recherche du P/L perdu

Macro Man is a bit busy today doing some research, the fruits of which may be shared at some point in the future. The only portfolio shift today is the purchase of Goldcorp on the open per Friday's late post. A more in depth commentary and review of risk positions will be forthcoming tomorrow.

Friday, October 27, 2006

The long darkness

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.

Friday morning bullet points

* Apparently, Boeing does not count. Headline durable goods orders were lofty yesterday, but the market chose to focus on the core shipments data, which were legitimately poor. However, the more forward-looking components of the data (unfilled orders, for example) suggest that production should accelerate in Q4. More strategically, it seems that Boeing is wiping the floor with EADS now that the latter’s sub-parity EUR/USD hedges have rolled off. Sure, some of this has to do with the mismanagement of the A380, but a goodly portion of it surely has to do with Airbus being relatively uncompetitive with the euro at overvalued levels. Macro Man will watch the relative value of Boeing and EADS with interest, and will look to buy Boeing at 3x the price of EADS if the EUR/USD rate is north of 1.20.

* Is Macro Man’s currency luck about to change? The stop in NZD narrowly avoided being done after better than expected trade and spot has come back lower in London. It is interesting to note that in the last couple of days that NZD/USD has sold off during post-Asian hours, whereas the previous couple of weeks it was bid only. Perhaps the times they are a-changin’

* The bond market, meanwhile, is growing as erratic as the currency market. Macro Man assumes that the outsized rally in bonds was a response to the lower prices received on new home sales. However, surely it is a rational response that homebuilders respond to weaker demand by adjusting the price (Note that inventories were the lowest since May.) Moreover, one has to wonder at what point the housing market becomes fully discounted. Macro Man couldn’t help but notice that while the bond market couldn’t get enough Treasuries on the back of the data, the stock prices of Lennar (+$0.80), Beazer ($0.92), and Toll Brothers (+$0.06) all went up yesterday. All the more reason to add to the bond short on any further rally on the back of GDP today.

* It is interesting to note that despite bang-up earnings from Mister Softee last night, SPZ6 is down a couple of points in early morning trade. Although November and December are seasonally very good months for equities, seasonality hasn’t exactly been working terribly well recently (one rarely hears of record low vols in September and October, for example.) Moreover, the forthcoming US elections may provide a few jitters, so perhaps it is time to think of bearish strategies for stocks. As an initial step, Macro Man will offer $2.5 million of his long OIH at 140. If SPZ6, it might be time to take advantage of extremely low vols and spend some money on puts.

Thursday, October 26, 2006

Going to extremes

The fatigue felt by the stock market today despite the rally in bonds is telling. Most oscillators are showing overbought readings, and contrary indicators like the put/call ratio and the Rydex bull/bear flow of funds have reached levels that are ordinarily associated with market reversals. In the spirit of locking down profits, Macro Man sells out his legacy long SPZ6 position at 1386. In the end, the long strangle position has proven to be marginally profitable. Microsoft earnings tonight could be the next trigger for the market. The stock has had a nice run recently and surely risks disappointing those who have bought on the vague rationale that Vista is going to be released on time (well, the revised time after numerous delays.) A further rally in the SPX will provide an opportunity to scale into shorts, most likely through the purchase of puts (give how low implieds are at the moment.)

A Timely Reminder that China is Run by Communists

Well, that was disappointing. The FOMC statement (and more importantly, the market reaction to it) was not what Macro Man was looking for. The Bernanke Fed has evidently devolved into the business of wishcasting rather than forecasting. Lower energy prices should lead to a moderation in inflation (funny how the emphasis shifts from core to headline CPI when it’s convenient, eh, Ben?), but strangely do not provide any sort of growth-positive income shock, or at least not one worth noting. So inflation is going to fall because of the modest growth trajectory and “the cumulative impact of monetary policy actions”, among other things.

Let’s examine this for a moment. What exactly has been the “cumulative impact of monetary policy actions”? Let’s look at corporate borrowing rates. The Moody’s index of Baa rated borrowing costs is currently at 6.48%. The day that the Fed tightened policy for the first time (June 30, 2004), the index was at 6.71%. Hmmm......so the impact of monetary policy actions is that it is cheaper for companies to borrow now than it was the day the Fed started tightening. OK, it is the case that mortgage rates have risen along with Fed funds, particularly the much-ballyhooed ARM rates. Yet the flip side to higher ARM rates is the substantially higher deposit rates that savers earn on cash (and yes, Virginia, despite their profligate reputations, US households do actually save money.) In June 2004, US household interest income was running at an annualized $890 billion rate. Fast forward to August, and interest income is now running at a tasty $1.03 trillion dollar rate- an increase of more than 1% of GDP. Given the extent to which asset allocators and sovereigns have scooped up Treasuries, Macro Man suspects that the Fed has overestimated the lag (and indeed, the degree) with which monetary policy impacts the economy.

What we are left with, though, is a Fed operating a ‘golden mean’ wishcasting policy: everything in moderation. Growth is expected to clip along at a moderate pace, and inflation pressures are expected to moderate. What this means in practice is that they are likely expecting the run rate of nominal GDP to decelerate to 5% or so. As the chart below indicates, that slow of a pace has been difficult to maintain for more than a quarter at a time during this expansion. The Q3 GDP figure released tomorrow, however, might be one of those occasional hiccups. Nevertheless, Macro Man is struck by the sort of inverse ‘Lake Woebegone’ expectations of the market. Every institution that Macro Man has professional dealings with is calling for real GDP growth to be on a 1 handle, yet the Bloomberg consensus is for 2%. Truly, a market where everyone is evidently more downbeat than consensus! Give that we evidently remain in a range and that the initial GDP reading is highly dependent on the (volatile) trade and inventory assumptions, Macro Man will look to fade any gap higher in bonds after the report. He doubles the short Treasury position at 108.


Elsewhere, foreign exchange remains a sucker’s game. The noise to signal ratio is very high, with ranges persisting and flow dominated by short term traders and, the rumour goes, sovereigns. Macro Man was simultaneously irritated and amused to see confirmation that China is, after all, a Communist country. The State Administration for Foreign Exchange, who regulates the domestic currency market and manages the country’s $1 trillion FX reserve portfolio (partially by day trading EUR/USD and/or selling volatility), issued a new regulation today prohibiting domestic banks from quoting CNY NDFs offshore. There was no reason given, but it presumably has something to do with eliminating the possibility of arbitrage profits between the onshore and offshore markets. As a result, the offshore market will become wider, less liquid, and less reflective of onshore fundamentals. For SAFE, evidently, currency speculation must be centrally planned and administered by the public sector agency set up to do it, e.g. themselves. That the regulator is essentially destroying private sector competition for profits with the stroke of a pen goes a long way to explaining why this market remains one with many more visible losers than winners.

Sadly, Macro Man’s two forays into currencies are among the losers. The RBNZ did its part in easing his pain, though, as the statement overnight opened the door (very slightly indeed, mind) to acknowledge the contemplation of rate cuts at some point in the future. Macro Man does not expect rate cuts over the next six months at least, but given that 25 bps of tightening was priced as a done deal by year end, the squeeze in NZD and kiwi rates could have further to go. Per yesterday’s post, Macro Man battens down the hatches on the short NZD/USD position by trailing the stop loss down to 0.6600, just above the day’s high. The surge in the energy complex has brought the portfolio back into positive territory since inception in early September, so now is no time to leave money on the table with shoddy risk management.

Wednesday, October 25, 2006

Hip To Be Square

The moment of truth/obfuscation/irrelevance (delete as appropriate, depending on your opinion of the Fed) is nearly upon us, with the Fed slated to release the statement accompanying its unchanged monetary policy in just a few hours. Will they acknowledge the decline in headline CPI, which was a statistical certainty? Will they take note of the Houdini-like appearance of 810,000 jobs, which goes a fair way to explaining why the unemployment rate is low and labour compensation is high? Will they focus on the continued mixed nature of sentiment data, or instead bask in the positive income shock that is $0.70 off a gallon of gasoline in the matter of two and a half months? Or will they once again offer wisdom on the housing market, fearing the worst if the apparent stabilization does not materialize? It's hard to say, and with Treasuries and the dollar perched at an inflection point, they can direct the next 10-15 bps in the 10 year depending on whether they choose to focus on downside or upside risks to nominal GDP growth. For this reason, markets have concluded that, as Huey Lewis sang in one of his darker moments 20 years ago, it is 'hip to be square'-hence the lack of follow through on the recent selloffs in Treasuries and EUR/USD, among other things.

However, with uncertainty so high, now is the perfect time to own options, as we could well get a decent move one way or another. Therefore, per last week's game plan, Macro Man re-establishes his long March 107 straddle at 1-28, the same price he took it off for. No savings was made, but no cost incurred, either.

Elsewhere, the NZ CPI was not as dovish as Macro Man had hoped, but not as hawkish as it could have been, either. The market has voted with its feet thus far, taking the kiwi lower, but with the RBNZ lurking Macro Man remains wary. He trails the stop in NZD/USD down to 0.6700, with a further tightening of the screws coming after the sundry monetary policy reports later today.

Oil seems to have stabilized, though with inventory data later today that could prove temporary. Nevertheless, with the DIA/OIH spread (finally!) in profit, Macro Man can breathe a sigh of relief. A further improvement today should take the since inception portfolio P/L back into the black.

Monday, October 23, 2006

Back in the saddle

Well, the bond market has dragged Macro Man back in the saddle earlier than anticipated. Whether the ride turns out to be smooth or bumpy depends on the outcome of the second half of the week with the Fed, durables, and of course the muhc-vaunted weak Q3 GDP. Macro Man was filled at 106-23 on a sale of 100 Treasury futures, and now needs the CTA community to provide a tailwind by exiting some of their near-record longs.

Elsewhere, the dollar is refreshingly firm as models have been jerked around yet again. It is close to D-day for the kiwi, with the new model CPI plus RBNZ this week. If the kiwi retains in mysterious bid after these, it will be time to pull the plug. Oil has once again broken down, hurting the OIH exposure, but the Texas/Brent spread is hanging in there at a reasonable profit.

Friday, October 20, 2006

Friday bullet points

* Maybe the mysterious buyer was there, maybe he wasn’t, but Treasuries once again stopped around the 107 level. The weak Philly Fed headline certainly helped bonds bounce after the bearish jobless claims data, but in the big picture the rally has been fairly modest. Macro Man expects bonds to range trade until the middle of next week given the absence of any market moving data. He therefore sells out his long TYH7 107 straddles at the current price of 1-28/32 and will look to rebuy on Tuesday evening or Wednesday morning.

* The SPZ6 1355 calls expire today and will of course be exercised. The trade, including delta hedges, has generated a small loss given the one-way train that is the US equity market. The long of 11 contracts provides a small hedge against the short DIA position. Macro Man leaves a stop at 1363 on the futures and will trail it higher.

* Back in Black: The DIA/OIH trade, a source of consternation since inception, is finally (and modestly) in the money. Courtesy of bang up earnings from Noble and a somewhat more hawkish than expected commentary from the Saudis, the OIH broke through trend resistance at 130.90, surging to close at the highs at 132.85. Given the embedded bearishness on the energy complex as well as the cheapness of the stocks, it is worth pressing bets here. Macro Man spends $50k of option premium, buying 100 Jan 145 calls @ $5.00. If oil spikes to $65, let alone anywhere close to the highs, this should provide a nice leveraged exposure.

* FX becomes more wretched by the day. Central bank flow and the concomitant range trading environment has killed risk appetite and telescoped trading horizons to the micro-term. An 80 point pullback in EUR/USD was sufficient to send the market scurrying for cover as traders stopped out of long $ positions across the board. Patience on the NZD trade has worn very thin indeed, though Macro Man senses that the market is now leaning long kiwi. With the CPI reweighting/RBNZ slated for next week. With bills discounting another RBNZ hike with virtual certainty, risks must remain that disappointment ensues. Nevertheless, Macro Man isn’t prepared to lose too much more on the trade. He sets a stop at 0.6755, above the previous high of the move.

Thursday, October 19, 2006

Ring the register

Well, the jobless claims figure has pushed the US 10yr back towards support and to the levels where our mystery buyer appeared yesterday. Given the listless nature of these markets, it makes sense to book profits at the current level of 106-31 and re-enter on a break- Macro Man puts a stop entry at 106-24 on 100 lots, with an OCO offer at 107-15. If markets want to go nowhere fast, we might as well try and make a little wedge on the churn.

Playing breakout

Macro Man feels like he’s been transported back to the days of his youth when he used to while away winter days playing the Atari 2600 game Breakout. Currencies and bonds remains frustratingly rangebound, and every attempt to breach established highs/lows is met with a wall of resistance. Markets may have chipped away at some initial layers of the wall, but like the ‘ball’ in Breakout, keep coming back. Yesterday’s post data price action was suspicious, to say the least. A new cycle high for core CPI and, perhaps more importantly, a strong rebound in housing starts were met with fleeting weakness in bonds before an evidently motivated (and price insensitive) buyer put the squeeze on. Was it a central bank? A pension fund doing an asset allocation switch? It’s hard to say, though central banks were once again active in constraining USD strength against the euro yesterday. Either way, it stinks.

Elsewhere, Macro Man finds that most of his portfolio risk is coming from energy plays. While the lurch lower in crude has set the DIA/OIH spread higher, comfort can nevertheless be taken that the OIH is putting in an impressive positive divergence vis-à-vis crude prices. However, the WTI/Brent spread has widened marginally, providing a handy offset. Yesterday’s inventory data was curious- a sharp decline in distillate/product inventories, but a sharp rise in crude stocks. Clearly utilization rates are heading lower. Hopefully the recent cold snap is a sign of things to come and demand will pick up. In any event, today’s OPEC 1m bpd production cut has been well-flagged, so the surprise content should be zero.

Tuesday, October 17, 2006

A crude entry

So Kuwait announced today that OPEC plans to cut output by 1 million barrels per day. This announcement, due on Thursday, has been well-flagged. Nevertheless, crude appears to be trying mighty hard to put in a bottom, with WTI back above 60 at the time of writing. Moreover, energy stocks have caught a bid, and the DIA/OIH spread, which was looking like nothing short of disaster last week, closed almost at the entry point on Tuesday. A good thing, too, given the execrable performance of the rest of the portfolio.

Macro Man is not prepared to press his luck on that spread at this point. However, the time appears ripe for another RV trade. Front future Brent is trading well above WTI, a historical anomaly. However, Macro Man believes that this is a temporary phenomenon which is largely reflective of trapped longs in the WTI market. This should correct, though Macro Man does not know when. Therefore, it makes sense to position for a reversion to the historical norm further out the energy curve. Macro Man therefore buys 1000 CLZ7 and sells 1000 COZ7 at $0.07. The target is $2.00, at which point we will re-evaluate. The review level is -1.

Monday, October 16, 2006

Taking the BIS

If there is one group that consistently brings a smile to Macro Man’s face, it is the tin foil hat brigade at GATA and other goldbug paranoia societies. Their constant invective about the barbarous relic and why it should really be at $5000/oz provide Macro Man with the same sort of amusement that Aesop’s fables provide to seven year olds the world over. It is with a great deal of trepidation, therefore, that Macro Man finds himself on the same side of the fence with the goldbugs when it comes to one nefarious operator in global financial markets: the Bank for International Settlements.

Macro Man’s primary beef with the BIS is the contempt with which the so-called “central bankers’ central bank” holds the private sector. Specifically, the BIS needs to decide whether it wants to be a public sector entity or a private sector asset manager. On the one hand, the BIS is a central bank; it has regulatory/supervisory responsibility, conducts research using privileged information, and has central bank level access to foreign exchange, bond, and money markets. Moreover, it also acts as a broker for other central banks in executing currency and bonds deals pertaining to reserves shifts.

However, the BIS also acts as an asset manager. Their website proudly boasts of offering a “range of asset management services” including the management of global bond mandates on behalf of their central bank clients. This is presumably done on an active basis, given that the BIS suggests that it can offer “an attractive and competitive return” on their assets under management. Herein lies the problem. The BIS is essentially competing for central bank mandates and having its performance evaluated against the private sector.

Yet the BIS has access to a wealth of information-much of it sensitive-that is denied to the private sector. Unless the BIS has very rigid Chinese Walls in place-and Macro Man does not know if they do or not, but suspects that the answer is no-then their asset management arm is trading off of privileged information. In most markets, that is called insider trading and someone goes to prison. Granted, currency markets are not regulated so this is not illegal; yet it is surely contrary to the spirit of regulatory regimes that exist in other financial markets. And what does it say about the BIS, which ostensibly is at the heart of ensuring the smooth functioning of global markets, that they are willing to exploit a gap in the regulatory regime?

However, unbridled arrogance and contempt for the private sector is nothing new for the BIS. Prior to 2001, some shares in the BIS were actually held by the private sector. This was a legacy from the foundation of the BIS in 1930, when the Fed (in perhaps their only worthwhile decision of the first half of the decade) refused to take up their allocated share. The gap was filled by private sector banks, thus placing some 15% of the shareholding of the BIS in private hands. By 2001, however, the BIS decided it now longer wished to be associated with the hoi polloi, and unilaterally announced that it was cancelling its listed private sector shares. The compensation offered, CHF 9000 per share, was deemed to be farcically low by the institutions whose shareholding were being looted by the BIS. The resulting lawsuit ordered the BIS to pay another CHF 5458 to its erstwhile shareholders-more than 60% greater than its original offer. Macro Man wonders: if the BIS was willing to screw its shareholders so badly, what reservations might it have in using inside information to screw asset management competitors? Macro Man suggests that the answer is ‘none.’

Unfortunately, this is likely a problem that is here to stay, as there appears to be little appetite to call the BIS to heel. Meanwhile, the Basel bad boys will continue to enjoy inside information and straddling the fence between interbank counterparty and AAA platinum customer. It’s hard to see a happy ending for the private sector, either sell side or buy side, from the participation of the BIS in the asset management business. Their behaviour is just one of the reasons why currency markets have been such a wasteland for the last few years.

Wednesday, October 11, 2006

Dollar vollar

Have we turned the corner? Are markets finally turning from aimless to trending, with a concomitant pop in volatility and interest/participation? Anecdotal evidence is encouraging. Trading rooms are reporting more noise than they’ve seen in a while, and implied vols in currency land have finally turned up. Macro Man expects that we are in for a period of dollar vollar, where implied vols will trade with a 100% correlation to spot (higher dollar = higher implieds, lower dollar = lower implieds.)

The performance of USD/JPY since breaking the pivotal 118.50 resistance after payrolls has been impressive. At the time of writing it is only 20 pips off its highs, despite Japanese exporters having had two full sessions two take advantage of the ‘gift’ of USD/JPY spot close to 120. Quite what Japan’s importers make of it is another question altogether, having had relatively little experience over the years managing the need to buy USD in a bid market. Risks must surely lie in the direction of these guys, along with their investment management counterparts, chasing the $ higher. Given that the price of a 6m ATMF $ call is less than the forward points, this seems an excellent way of expressing a bullish spot and vol view. Macro Man buys $20 million 6m 116.65 USD calls for 2.13% of face (i.e., 254 yen pips.)

Meanwhile, fixed income has traded refreshingly poorly. Recent Fed speakers (with the sad exception of Bernanke) have highlighted that markets have gotten ahead of themselves in pricing 3 cuts next year. Risks must surely lie in the direction of the strip and the back end both selling of further. Bulls may try to hang their hats on cherry picking dovish comments from tonight’s Fed minutes, but obviously subsequent data has brought less dovish factors to light. The 25 bps of easing that’s already been taken out has been worth a point and a half on the 10yr future. Presumably, a total eradication of 2007 easing expectations would generate another 3 points or so of downside. Given the uncertainties surrounding the US and the fact that the Treasury market is generally high-beta, it is remarkable to observe that implied vol in the Bund market is above that of Treasuries. Macro Man smells a trade here. He buys 250 TYH7 107 straddles at 2 3/32 points (4.1 implied vol) and sells 200 RXH7 117.50 straddles at 2.45 (4.33 vol.) The trade should win unless the ECB drastically overreacts to the VAT-inspired surge in German Q4 consumption.

Monday, October 09, 2006

Payroll payoff

Well, for once the US employment figures delivered a spot of volatility to financial markets, courtesy of a tasty 810k upward revision to part payroll data through March 2006. It is really getting to the point where macroeconomic data is becoming utterly useless, given the frequency and magnitude of historical revisions. Are unit labour costs 0.3% y/y or 5% y/y? Is nominal GDP 6% y/y or 4.8% y/y? Is the unemployment rate turning dangerously higher or reaching a new low for the cycle? If you don’t like today’s data, wait til next month, when it will be revised away!

It begs the question of why volatility remains so low when the very building blocks of a macro view can be undermined with the swish of a bureaucrat’s pen. Nevertheless, Friday’s edition of ‘Revise-U-Like’ was friendly to Macro Man’s view, seemingly confirming that the underlying strength of the economy is greater than a myopic focus on monthly payroll numbers would indicate. Indeed, the revisions at least eased the discrepancy between apparently tepid payroll growth and the strength of personal income and expenditure. The strip and bonds both responded by moving lower, though the latter remains way too high in Macro Man’s view. The Fed doesn’t ease rates until the unemployment rate begins to rise, and we currently reside at the cycle low for the unemployment rate (at least until Friday’s data is revised away in March.) Therefore, a 60 bp inversion between 3m cash and 10y yields continues to look excessive.

Also remaining too high is the NZD. Although the USD enjoyed a solid day on Friday, breaking key resistance levels against the EUR and JPY, it is actually down on the month against the kiwi. This makes relatively little sense, given New Zealand’s clear policy preference for a lower NZD. It is difficult to see many differences between the NZD and the ZAR, other than that the latter goes down in a straight line and the former, well, doesn’t. Macro Man is beginning to wonder if it isn’t time to seek pastures new in expressing a long dollar bias. At this juncture it is worth waiting to see if technical breaks are confirmed, or if this is just another in a seemingly endless series of false breaks and loss-making opportunities. Stay tuned.

Far and away the most significant (alas, negative) contributor to P/L this month is the DIA/OIH spread. We are entering ‘put up or shut up’ territory now. Earnings season kicks off this week, which should provide a bit of volatility to equity prices. Hopefully, the generally upbeat news on US activity will spur oil higher, providing a fillip to the OIH position.

Friday, October 06, 2006


Macro Man feels like doing his Christmas shopping, these markets are so slow. Foreign exchange is a total write off, as the G3 appear to be trading in the same 0.3% daily band as the CNY, while minors like NZD and NOK exhibit the erratic behavior characteristic of Brownian motion. Fixed income is equally sluggish, with bonds waiting to take their cue from the monthly sacrifice at the altar of standard error, the US non-farm payroll report. Yesterday the ECB took rates up to 3.25% as everyone including Macro Man’s milkman’s dog expected; on the margin Mr. Euro was slightly less hawkish than he could have been (the ‘vigilant’ count was fairly modest), though that is the norm on rate hike day.

Commodities and equities are more interesting, but that is really the same trade. Energy prices remain limp, thus providing an excuse to take stocks higher. The rally appears to be becoming more broad-based; small caps, which had lagged the rebound off of the June lows, have now kept pace with the S&P 500 since mid-July. This suggests that participation in the equity bull is broadening. The OIH took a sickening lurch below 120 earlier in the week before snapping back. The danger is still not over, however, and the DIA/OIH spread remains (un)comfortably offside. Perhaps we need to see evidence that specs are actively short the energy complex before a more meaningful rally can occur; in that vein, tonight’s CFTC data will be especially interesting. Certainly oil is trading limply despite the efforts of OPEC to talk it up.

That’s about all the writing that Macro man can muster this morning....hopefully payrolls or the Hungarian political vote can inject a spot of volatility into markets that have become well and truly dire for anyone not short vol or long equity indices.

Wednesday, October 04, 2006


All my troubles seemed so far away
Now oil’s down another fifty cents today
Oh, I believe in yesterday

My P/L’s twice as bad as it used to be
There’s a shadow hanging over me
Oh, yesterday came suddenly

Why oil
Had to fall I don’t know, I couldn’t say
I did
Something wrong, now I’m long and in big pai-ai-ai-ain

FX was such an easy game to play
Now I need a place to hide away
Oh, I believe in yesterday

Why kiwi
Won’t go down, I don’t know, I couldn’t say
I said
Something’s wrong, and I’m paying big decay-ay-ay-ay

Bonds were such an easy game to play
Now yields seem to drop three beeps a day
Oh, I believe in yesterday

Tuesday, October 03, 2006

The Unbearable Sh***ness of trading

Yesterday was not much fun for Macro Man. After a solid close to the month last Friday, virtually every single position went wrong on Monday. Indeed, it was one of those days where Macro Man wished to erect a brick wall next to his desk so that he could bang his head against it throughout the day. As the title of this post suggests, patience is wearing thin.

Where to begin? The bond position started going wrong well before the US data dump, with the losses picking up steam after the release of a below consensus ISM report. Of course, both construction spending and pending home sales were higher than expected (and positive); given the degree to which the ‘US hits a brick wall’ bandwagon has hitched itself to the collapse of the housing market, one might have reasonably expected the bond market to sell off on the back of this relatively cheery news. Instead, markets appeared to react (or predict- more on this later) a below consensus ISM, with a particularly sharp decline in prices paid. Why anyone should be surprised that the price component of the survey fell after 25% declines in the prices of crude and gasoline is perhaps a question for a sage on top of a mountain; nevertheless, this provided a handy ex post rationale for the bond market rally.

But that’s not all that went wrong yesterday. The dollar sold off hard 45 minutes before the 3pm data fest, dragging even the lowly kiwi substantially higher. The contemporaneous explanation was a rumour of a sub-50 ISM (in which case, why didn’t the dollar and yields rally after the 52.9 release?), but it doesn’t really hold water. Rather, the real answer lies with that nemesis of foreign exchange traders everywhere: emerging market central banks. Ex post, it is quite clear that a number of central banks sold dollars in exchange for euros, sterling, and yen some 45 minutes before the US data dump. Why? Who knows, and there’s the rub with foreign exchange markets. They are being increasingly driven by central bank flows, which often appear to be fairly arbitrary in their timing, level, and direction. What is ironic, of course, is that China, occupant of the FBI’s Top FX Hoodlum List, was supposed to be out all week. So much for the much hoped for respite from CB shenanigans. At this point, Macro Man is wondering why he or anyone else bothers with foreign exchange, given these conditions.

Finally, the DIA/OIH went spectacularly wrong as oil once again failed to hang onto recent gains. Long term, oil is a buy here; however, as Lord Keynes once observed, in the long run we (or, more to the point, our P/Ls) are all dead. Macro Man has little doubt that a barrel of oil with cost a Benjamin before the end of the decade. However, at the moment it’s trading as if you’ll get change from a Ulysses (S. Grant, whose face adorns a fifty dollar bill) in exchange for a barrel by the end of the year. Macro Man believes that current weakness reflects positioning; recent CFTC data suggests specs are still long, and there is no doubt a raft of GSCI-linked merchandise undergoing reverse peristalsis, applying further pressure. Therefore, he sticks with the volatile DIA/OIH spread for the time being, though price action in the latter below 120 will warrant reconsideration.

All in all, it’s not much fun at the moment. We can only hope that earnings season brings a resolution to the current period of low core market volatility and positional unwinds in key energy markets. Till then, it’s batten down the hatches time.