Monday, July 30, 2007
We've all been there. You're at your desk, working hard and concentrating, when someone taps you on the shoulder and says "Uh, Bob, can I have a word?" The conversation that follows such a shoulder tap is rarely pleasant and, in Macro Man's experience, normally results in either the conveyance of bad news, the performance of an unpleasant task, or both.
As Macro Man surveys the rocky landscape of global financial markets, he sees a number of people for whom the shoulder tap is coming:
* Leveraged risky asset longs: these poor souls are receiving taps on the shoulder from two different sources. Internal risk managers, noting that market volatilities have risen sharply, are encouraging their charges to trim risk as VAR usage has increased markedly for unchanged nominal position sizes. Meanwhile, margin clerks are out in force making margin calls, which probably partially explains the late session swoons that the SPX has put in the last few days- swoons that are reminiscent of last May/June. In both cases, risk positions are getting sold because portfolio managers have to, not necessarily because they want to.
* Japanese housewives: As long as Mrs. Watanabe is punting NZD/JPY profitably, her husband is no doubt pleased as punch with her hobby. But when she loses as much in a week as she'd made all year, her salaryman husband cannot be too happy. Japanese retail aggregators suggest that the yen positioning remains at record short levels; how much more can poor Mrs. Watanabe lose before her husband leaves her for a younger, better-looking woman who knows how to take profits?
* Shinzo Abe: This tap on the shoulder came from the Japanese electorate, who delivered a crushing defeat to Abe's LDP in the Upper House elections. The ultimate result is likely to be legislative gridlock, which should further divert the Abe train from the 'Koizumi redux' route that many observers had hoped and expected from him.
* Investment bank credit market makers: These well paid souls are getting a tap on the shoulder from their bosses telling them either a) "you cannot spend all day in the toilet!", when the market seems to be stabilizing, or b) "get back into the toilet!" when the market craters again. For those not in the know, "dealer in the toilet" is a common rationale for not quoting a price in something especially toxic.
* The management of American Home Mortgage: Last week the accountants must have tapped senior management on the shoulder and said "remember that dividend we're supposed to be paying..."? (Thanks to the Ape Man for pointing this one out.)
* VIG and other sovereign wealth funds: Slightly earlier than even Macro Man expected, the US and Europe are reminding the soverign wealth funds that participation in their domestic asset markets is a privilege, not a right.
It appears as if the market has recovered some modicum of risk appetite over the weekend, as equities and carry trades are both putting in a reasonable performance so far. This has delivered a bit of a blow to Macro Man's p/l, which suffered from the late-session collapse in US equities in the beta portfolio but has not made any of the losses back in the alpha portfolio.
The bounce is not entirely unexpected, as the magnitude of the SPX sell-off has more than matched that of prior A wave declines over the past few years. Nevertheless, Macro Man cannot believe that there isn't more pain in the pipeline, particularly with an ugly month end approaching for those with large long equity or credit betas.
Friday's GDP data was probably as benign as it could have been for risky assets. Although growth was solid, the composition did not suggest durability, what with large portions of the gains from government spending.
Of particular interest to Macro Man was the fact that net exports were the single largest contributor to GDP growth, adding 0.3% to non-annualized quarterly growth- despite the huge run-up in energy prices. The data was a bit of a milestone, actually; it took the three year rolling cumulative contribution of net exports into positive territory for the first time since the early 90's.
The improvement is particularly impressive given the rise in oil prices over the last several years, and is a testament to the fact that weaker than "normal" consumption isn't an unambiguous negative.
Remind me again why the dollar needs to fall forever?