It's time

With talk of Beazer going bust this afternoon, the death of housing has well and truly gone tabloid. Macro Man reckons it's time to bank some profits on what's been a stonking trade, so he has covered his XHB cash short at 25. He may look to sell out the SPY portion of the spread trade during Wave B.

He also bought SPY at 145.60 with the proceeds from yesterday's dividend payment.
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Anonymous
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August 1, 2007 at 5:16 PM ×

Nice one on XHB. May be you could have waited a bit more to cover ? No ?


Perhaps you could help me with this concept of "credit contraction". How will credit contract suddenly ? It kinda sounds like money going into vapour? Can you explain this in lay mans terms MM ?

Cheers
Dr. Dan

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Macro Man
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August 1, 2007 at 8:34 PM ×

It's not credit so much as credit growth, which is an ongoing dynamic in any market economy. It's simple supple and demand, really: if lenders are no longer willing to provide credit at a given rate, but rather insist on earning a higher rate of interest, then all else being equal there will be fewer borrowers willing to borrow at the new rate, and the growth rate of new borrowing will fall.

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Anonymous
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August 1, 2007 at 8:38 PM ×

Getting tighter...via Calculated Risk

"Due to the appetite and demand for this product in the secondary market, we [Wells Fargo] are not able to obtain pricing from our investors."


Due to Current market conditions National City is making the following changes effective immediately:All Expanded Criteria Products/Alt A - No New Registrations and No New Locks

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Anonymous
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August 1, 2007 at 8:42 PM ×

It could be actually worse than that, MM: if lenders suddenly see their balance sheets full of unexpected risks, they may stop giving loans altogether, no matter what price (on the assumption that the price which they would lend at would scare all the good borrowers away). This is the biggest risk right now, and the easiest means through which this housing/subprime debacle could spread to the “real” economy, via weaker corporate investment (thankfully they´re awash with cash) and household consumption spending (if this scenario becomes incorporated into equity prices).

(Not that I think this will actually be the case.)

avinash goldfish

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Macro Man
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August 1, 2007 at 8:56 PM ×

What precludes that nefarious outcome at present, IMHO, is that global liquidity conditions remain ample/accommodative, and that it won't take terribly long once the music stops for quality borrowers to obtain funds at a reasonable price. This price should be higher than that charged in the past, which may slow the pace of LBOs and fraudulent/speculative household borrowing, but in my view liquidity conditions need to be restrictive before credit contraction can endure for longer than brief periods of time and thus harm the real economy in a meaningful, recessionary way.

Look out for a post on this subject in either the next couple of days or after I return from my holidays in mid-August.

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Robert
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August 1, 2007 at 9:50 PM ×

MM,

Will you comment a little more regarding your reasons for covering XHB at this time? Are they fundamental or technical in nature?

The only reason that I ask is that I have yet to see the kind of positive divergences that I would typically look for to cover and I am very interested in learning from your analysis if you are willing to share your thoughts.

Even if it is as simple as "It reached my profit objective", I would still be interested.

Great work as always. Your blog is a daily visit.

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Macro Man
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August 1, 2007 at 10:06 PM ×

Pretty simple, really. I had a sneaky suspicion we might put in a real reversal day today, and per the previous post I was mulling taking some of the short risk off the table.

When the Homeys got mullahed on the Beazer bankruptcy rumour, that seemed like just the sort of event (climactic decline based on hearsay) that could prompt a squeeze. I have been toying with the idea of covering since $30 and have fortunately sat on my hands.

Ex post I am even happier with the decision, as the SPX chart should have put in a reversal candlestick today, which I would suggest represents the first portion of Wave B proper. I'd look for an SPX rally of another 3% or so over the next week, at which point I reckon it will be time to sell again- again, per the roadmap in the sweet science post.

Thanks for your kind comments.

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Anonymous
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August 1, 2007 at 11:41 PM ×

i have been losing sleep on this "enhanced liquidity fund" story - like axa and oddo. axa sent an investor letter that basically guarantees they will back the redemptions. oddo wasn't so fortunate. these funds pitched as aaa way to pick up yield w/o extending too much duration. all you give up is a stable nav. post enron balance sheets were flushed with cash and flocked to these funds. in 2006 basel II called them same r/w as cash and grwth rocketed again. what do you reckon these AAA investments were? these funds are huge - and unless backed by a daddy the size of axa... they are dead. btw - there are 10yr vol sellers of those eur/usd for as much as you can buy - so much of the street should be a structural offer - for a very long time. i am looking for ideas to short landesbanks. any ideas? CARRY OUT TRADER

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Macro Man
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August 2, 2007 at 1:18 PM ×

C.O.T.: AXA and Oddo have both stated that they had a minority of the fund's assets in US subprime, playing the credit arb between subprime yield and LIBOR (their funding costs/target, depending on the fund.) It's the same old story- ratings agency lethargy has allowed 'safe' funds to populate their portfolios with high yielding turds and deliver I.R's in the stratosphere.....until the penny (and the price) drops.

Per EUR/USD, I am aware of the structured product supply of mega long term EUR/USD vega. However, even that supply seems to have dried up with 10 year implieds in the mid 5's, and we have indeed inched up to the mid 6's. Both of these are much too low unless one posits that Voldemort will call the shots in EUR/USD from now til kingdom come.

Even if vol does sink back down to previous levels, the optics of the powerball strip are too good to ignore. Nondecaying permanent EUR/$ puts given away cheap as chips. To me, it's the greatest value trade in finanical markets, offers a hedge against mega-risk aversion events, and should occupy a place in the bottom of every macro trader's drawer. Rationale for the trade is here.

No idea on the Landesbanks, sadly, though the few charts I did pull up bear a resemblance to the MCO chart...shorting MCO on a bounce in anticipation of the lawsuits (and for karmic reasons) appeals, I must say.

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