Two thoughts before the data, the US stock market opens, and the first beer of the weekend

Friday, July 27, 2007

1. Are we now at the point where good = bad? In other words, might a strong US GDP figure, chock full of real final demand, actually be a bad thing for risky assets? Such a number could suggest to the Fed that its forecast of moderately below trend GDP remains on track, there's no need for a growth scare, and thus no need to ease rates (as the Cramers of the world hope.) A bad number, with below expected growth concentrated in inventory accumulation and weak final sales, could perhaps kindle further hopes of a monetary balm and deliver a "don't fight the Fed" rally, however temporary it might be.

2) Is there a double entrendre more compelling that "redemption" right now? On the one hand, a redemption for the market means a normalization of the credit market and a recovery in risk assets- hurrah! On the other hand, the single greatest threat to market stabilization is the forced sale of illiquid securities by funds to raise cash to meet month-end redemptions. Some hedge funds may unilaterally choose to susend redemptions, but there is plenty of toxic dross held by mutual funds that don't have that option. As end users read their FTs, WSJs, Economists, and the like, the risk must be that they decide over the weekend to raise a little cash...which could mean price-insensitive selling next week. Consider yourself warned!

Posted by Macro Man at 1:10 PM  

7 comments:

Do you have access to Trimtab data - particullary for US MFs? There has been some behaviour I've witnessed that I'd like to compare against recent fund flows (particularly net equity flows)

tnx -C-

"Cassandra" said...
2:12 PM  

Unfortunately, no. I generally rely on brokers to answer specific queries that I have on the flow data, via their subscriptions.

Macro Man said...
2:19 PM  

thankfully i'm already on my sixth beer. or is that the seventh...

tmcgee said...
3:37 PM  

I have gotten crushed the last 2 weeks. Trying to get out but some of my positions that it is very difficult (Argentina !!). It feels to me that it continues further and I want to get to a more neutral position so that I can nimble. Any thoughts??

Banker said...
6:15 PM  

Speaking of Monday pain, have you seen this? If so what do you make of it?

Ape Man said...
12:42 AM  

Banker, I suspect that we are probably due for a little bounce in equities after the worst week in fifteen years. Whether that provides respite for illiquid markets is another question, particularly if redemption flows hit the tape next week.

I'd very much concur that being flattish makes sense in this environment or, ideally, introducing some optionality into one's portfolio. What makes the current risk asset sell-off different from prior episodes this year is that credit is getting junked and the ability to execute has been severely compromised.

I suspect, therefore, that any bounce will represent an opportunity to lighten up, and should probably be used accordingly.

Macro Man said...
10:40 AM  

Ape Man, I think the suspension of a dividend payment declared six weeks ago tells you how swiftly the credit market has deteriorated.

If AHM doesn't feel comfortable paying its dividend because its portfolio has imploded, what might that suggest about the performance of structured credit mutual and hedge funds?

I can only conclude that more equity weakness is in store (perhaps we'll actually end up with an "old skool" correction of 10% or more); as such, and early week relief bounce should probably be sold into.

Macro Man said...
10:46 AM  

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