Monday, March 12, 2007

Wave B(ye-bye?)

Well, we’re approaching crunch time for the Macro Man risky-asset scenario. Non-US equities have, by and large, reached ideal Wave B retracement targets- the DAX, Nikkei, and Bovespa have all reached their 55 day moving averages

Credit has also rallied strongly: even the toxic-waste ABX indices have bounced smartly.
Risky currencies such as AUD, NZD, meanwhile, have also reached/breached moving average resistance and are through their 50% Fib levels. EUR/USD, of course, never really sold off, de-railing Macro Man’s cheeky payroll punt.

It appears, therefore, that the time is rapidly approaching to wave goodbye to Wave B. The question is, are we about to usher in Wave C of the correction (new lows in all things risky), or are happy days here again?

Macro Man sees little reason to change his view at this juncture. While Friday’s employment data shut the door on near-term downside tail risk for the US economy, the lack of exuberance in stocks was telling. If we were in the early stages of a V shaped rebound, surely the S&P 500 could do better than a one point rally?

The beauty of Elliot-wave type analysis is that it allows one to project multidirectional price action moving forwards: A-B-C, corrections, etc. Its weakness is that it is often a bit fuzzy on how far things can go before the scenario must be discarded. For the time being, Macro Man is sticking to his guns, and looking for this week’s data (retail sales, Empire/Philly, PP/CPI) to perhaps provide a catalyst.

Failing that, it could be the good old fashioned ‘more sellers than buyers’ that send risky asset prices lower. And if that doesn’t emerge....well, then it’s probably back to the drawing board.


Anonymous said...

Macro Man is a... a... chartist?

Macro Man said...

No, no...but he is someone who uses as many analytical tools as he can comfortably wield.

The Elliotician notion of five wave trends and three wave corrections may be hooey (and certainly Macro Man feels that Fibonacci levels are hooey- any retracement of more than a little bit and less than everything seems to hit one of the many retracement levels), but Macro Man likes the notion of anticipating pullbacks and having an idea of how long they may persist.

As Tesco says here in the UK: 'Every little helps', and using charts to time the implementation (and de-risking) of trades is something that Macro Man tries to employ.

It beats sunspots, astrology, and full moons as a market timing device!

Anonymous said...

For better or worse, I'm in the same position and short-short-short risky assets. Crowds are gathering ready to build the pyre and chant about my foolishness. I think the lending system in the US is going to get a good shaking and a lot of happy talking morons are going to fall out of the branches, however, so I'm persisting for a while. I told Mrs. OldVet we might be reading about beaches rather than walking on them next year. She may become leader of the mob if things don't work out. :) OldVet

Macro Man said...

While I have a short risky asset beta both in the blog and in the real job, the risk level is pretty low, precisely because it is difficult to time when corrections can end.

And to be clear(ish): I think this is a correction (higher) within a correction (lower) of an underlying bull market for risky assets.

So I am hoping for the Wave C shakeout, not only to make money now but also to set up good entry levels for long risk. So while we share a desire for near-term weakness, I suspect that I'll be quicker to de-risk and go the other way, judging by your stated concerns on potential systemic risk.

Anonymous said...

Actually I'm optimistic medium and longer term on EM equities, simply because the hungry work harder than the well fed. I've got some very specific targets in several markets like Brazil, India and the like where I will buy and hold for a long time, if we get there or close to there. But I won't get to the long run unless I get through the short run. OldVet

Charles Butler said...

I dunno, MM. But the whole incident is starting to get a 'one off' feel to it. All of Europe spending the day prognosticating varying degrees of doom, then suddenly 5:35 rolls around and look who starts to party..

Macro Man said...

Yes, today's price action has been rather peculiar. For once, currencies appear to have led stocks, as risky asset faves like AUD and NZD caught a pretty hefty bid even as the SPX was languishing near unched on the day.

I am trying to remain cognizant that corrections are meant to get you to do the wrong thing, no matter how you are positioned.

I suspect that the beta plus portfolio may be adding risk tomorrow, but on the alpha side I remain very, very nervous.

jill said...

Not just a subprime issue anymore. This is getting downright scary.

"Mortgage Liquidity du Jour: Underestimated No More", Ivy Zelman, et. al. at Credit Suisse wrote:

we surveyed our private homebuilders and their mortgage lenders to asses the new home market’s exposure ... and ... it’s not just a subprime issue. ...

We believe that 40% of the market ... is at risk of significant fallout from tightening credit and increased regulatory scrutiny. In particular, we believe the most pressing areas of concern should be stated income (49% of originations), high CLTV/piggyback (39%), and interest only/negative amortizing loans (23%)....

We remind investors that the headwinds from deteriorating credit will impact supply and pricing conditions, as well as incremental demand. With delinquency and foreclosure rates continuing to rise, we believe this will result in more supply hitting the market throughout the year. In addition, we estimate that current inventory figures released by the NAR could ultimately be 20% higher when homes currently in the foreclosure pipeline hit the resale market. Finally, we believe that tightening liquidity and more stringent appraisals puts current builder backlogs at considerable risk for fallout, which should lead to another surge in cancellations and additional spec inventory on the market. As such, we believe the impact of these headwinds will be felt throughout the entire market (regardless of builder price point), and will likely contribute to the next tranche down in pricing ..."

Macro Man said...

I have more sympathy with the JP Morgan view:

"The JPMorgan economic forecast recognizes the severe
contraction in the subprime mortgage market and expects
that its impact, while noticeable, will not be so great as to
threaten the expansion. Tightening of credit standards is
expected to prevent a rebound in home sales, but not force
another leg down in housing demand. Credit spreads are
expected to increase from their lows, but remain narrow
relative to historic norms in credit markets other than for
risky home mortgages. Home foreclosures are expected to
increase, but not to such levels that the forced selling of
homes would drive national average house prices substantially

The posted links were interesting, particularly some of the charts in the second one. Pardon me if I stifle a yawn, however, whenever someone cites forthcoming 'rioting in the streets' as an investment rationale (usually to buy gold, funnily enough.)

What I found striking from those charts was the degree to which main street banks appear to be disintermediated from the mortgage process- surely this is a good thing? Given that previous recessoins have usually involved banks refusing/unable to lend, I think the fact that a lot of the toxicity is wrapped up in crap that won't be marked to market for potentially years suggests that the real pain will be felt in 2008-2009, not in 2007.