Consider these financial nursery rhymes a public service to those erstwhile members of the investment community who will now be "spending more time with their families."
Old King Cole was a merry old soul
And a merry old soul was he
For late in June
As he whistled a tune
He shorted the S&P
There was an old woman who lived in a shoe
With a mortgage so big, she didn't know what to do
She used to live in a house on Mulholland Drive
She made $20k but paid three million point five
Little Miss Muffet
Sat on a tuffet
Long of a CDO
But her Triple-B tranche
Made Miss Muffet blanch
Now she earns two and twenty no mo'
Mrs. Watanabe, she sold 10 million yen
The kiwi went to the top of the chart, then she bought them back again
When the kiwi went down she bought,
And then she bought a lot,
Now she's lost all her husband's hard-earned cash so he's left her there to rot
Old Mother Hubbard went to the cupboard
To get her poor dog a loan
So she lied on the docs
(She was sly as a fox)
He ran off when the teaser was done
Ha ha, Black Swan, who's the greater fool?
The shorts, or the longs with their eyes covered in wool?
The month's a disaster, my P and L's quite lame
Would you like to buy my pad I've got on Park Lane?
Jack Cox was quite short stocks
His wife was quite long credit
But when she sold 10 billion yen
He said "She doesn't get it!"
Elsewhere, risk-asset holders everywhere received a reminder yesterday that everything still isn't peaches 'n' cream despite the 109 point rally in the S&P 500. Bank of China, State Street, and Barclays are just three of the institutions fingered in the press as being on the hook for substantial losses due to subprime. And news from the root cause, housing, remains less than favourable.
While yesterday's existing home sales figures were more or less in line with expectations and appeared to show some signs of stabilization, the benign headline masked an ugly underbelly- namely, the supply of homes on the market. The data suggested that there is now 9.6 months' of supply of existing homes on the market; all in, Macro Man calculates that there are now more than 5.8 million new and existing homes available for sale in the United States. It seems pretty clear that housing will weigh on economic activity for the foreseeable future.However, evidence that subprime concerns do not necessarily filter through into economic sentiment and activity came from Germany this morning, where the ifo survey printed a better-than-expected 105.8. Remarkably, the 'current conditions' component actually rose to 111.5 from July's 111.3. What makes the data remarkable is that Germany has been hit by a series of high-profile subprime losses from regional banks, which one might ordinarily expect to hit business sentiment on expectations of tighter credit, etc. That it hasn't happened is another small piece of evidence that Wall Street overemphasizes its impact on Main Street.
This having been said, Macro Man continues to expect a mixed newsflow and sustained period of subtrend but positive US growth. In the near term, he remains of the view that the former factor should lead to another dip in risky assets. His belief in the latter is what makes him want to buy that dip.
Evidence to date from his poll, however, suggest that he has plenty of company on both Wall and Main Street in expecting a relapse in risk asset markets. With more than 200 entries so far, just 15% of the respondents expect the current rally to continue and form a V-shaped recovery. The remaining 85% of the vote is pretty evenly split between the buyable dip (W) and the transition to a bear market, the lambda. Interestingly, the market professionals favour the buyable dip while retail investors favour the lambda.
Does this mean that conditions on Main Street are not quite as healthy as Macro Man believes? It's a possibility worth considering, and he intends to keep a keen eye on the data. In the meantime, he was filled on his sale of 500 ESU7 1500 calls at 17, so his long risk-asset expoure has been (temporarily, at least) reduced.