Whew.....and ouch

Macro Man breathed a sigh of relief this morning when he saw the cover of The Economist. It would appear that the trend of dollar weakness has at least another week to go; more importantly, it's nice to see the magazine focus on a life and death type issue that has unfortunately been ongoing for the better part of two decades.

The dollar continues to trade on the back foot, meanwhile, as markets slide into the end of the quarter. Word on the street is that take-up for recently launched investment trusts in Japan has been paltry, thus giving the yen a small boost this morning. Meanwhile, even erstwhile whipping-boy the Taiwan dollar has gotten into the act, with USD/TWD now trading at its lowest level since mid-January. If the greenback starts losing ground against the Zim dollar, however, then you'll know it's probably time to start covering.

Macro Man wonders what is more unpleasant: the chart of US new home sales, now down 40% + from its peak, or the frustration of housing market bears that their favourite issue has not resulted in lower stock prices, as measured by the indices, in the US? That the SPX is up this week despite a pretty unambiguously poor set of macro data (yesterday's jobless claims notwithstanding) is a testament to the importance of liquidity and globalization in driving asset prices.
Macro Man wonders if there won't be plenty more juice in the emerging theme of large caps (many of whom derive income from foreign operations) outperforming small caps (which tend to have a more domestic focus.) He intends to do some more thinking and investigation, and may establish a position next week.

For now, it's hold onto your hats (and hopefully, your P/L) time; only a few hours left to make (or keep) money this month and quarter. Good luck.
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jdc
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September 28, 2007 at 9:34 AM ×

Does anyone else find Macro Man's posts are significantly better if you read them in the voice of Duff Man from The Simpsons?

"Macro Man is thrusting in the direction of the excess liquidity"

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Anonymous
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September 28, 2007 at 9:39 AM ×

Why do you consider The Economist, and for that matter, any other decent publication, as a counter-trend indicator? Because you think it's a good sign that $ weakness is already "in the mainstream"..? But isn't the whole "let's fade all mainstream publications' covers" already a mainstream thought in itself? If markets are pretty efficient and quick-reacting everywhere, shouldn't it be also true for covers of magazines and newspapers?

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T
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September 28, 2007 at 11:47 AM ×

http://www.economist.com/displaystory.cfm?story_id=9867489

"On October 1st the ten-year process of privatising the postal system begins, with huge financial implications. It is the world's largest bank, with almost $2 trillion in assets. Its deposits represent a quarter of Japan's total household savings; its insurance arm accounts for 40% of the country's life-insurance policies."

"Its capital-adequacy ratio, a measure of its risk intolerance, is 54%; at other commercial banks it is around 10%."

Albeit over a long period, does this mean a lot of japanese savings are now going to redirected to riskier assets and with a multiplier effect if the capital adequacy ratio is decreased? Is this going to prolong the party?

I welcome macro man's sagacious judgment.

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Corey
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September 28, 2007 at 1:38 PM ×

now that the congestion around $730 spot gold has worked out this morning to the upside, my thought is the next two weeks will be all about chasing prices higher in gold (or chasing the dollar lower). my sense is MM is correct in his interpretation of dollar positioning - i.e. concensus view is a rebound, but length in euro, et. al. is nowhere near an extreme. $850 by end of October is still on the radar.

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OldVet
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September 28, 2007 at 4:12 PM ×

May be something to the Large Cap story, altho I prefer non US large caps right now. In a falling interest rate environment, even US consumption may be propped up for a while.

There's a balance sheet consideration, and an income consideration. If all or most assets are in the US, they'll be getting cheaper for the sovereign and other buyers. If they export all or most of their production, their incomes will not be falling from the foreign perspective. That's your ideal target, not the debt loaded crap to be sold by the private equity funds.

In such a twitchy market, it's hard to catch bargains with research. I'll stick with simple GLD and FX for October (thanks Corey as well.)

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Anonymous
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September 28, 2007 at 6:20 PM ×

No doubt the headline indices have been impressive but there has been considerable sloppiness underneath. While bulls can happily point to present levels and feel smug in their earlier forecasts the same cannot be said about their playbooks as to how we've come to now (bottoms, containments, falling oil, etc..etc..)
Resilience?Complacency?Or just milk from Mother Fed?
RJ

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Banker
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September 29, 2007 at 1:45 PM ×

I have been trying to fade the dollar weakness trend all week, (against the majors)which has been.....very painful.

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Mickson
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September 29, 2007 at 8:35 PM ×

Brilliant trading month, well done!!!

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Macro Man
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September 30, 2007 at 6:02 PM ×

Better late than never, afew replies....

jdc: Duff Man is, in fact, Macro Man's brother. The clue is in the last name ;)

anonymous, the Economist has a brilliant track record of marking intermediate bottoms in the greenback by making dollar weakness the cover story. I don't know the history of other magazine covers, to be honest; all I know is that the Economist jinx seems to work.

T, there was a story circulating last week that Japan Post has already decided to make substantial allocations out of bonds and into domestic and foreign equities over the next few years. At this point it is still unclear how they will proceed, but yes, it would appear that they will serve as another source of risky-asset liquidity.

RJ, I view the current rally in equities partially as reflecting the still-generous liquidity environment, yes. There is also the issue of large3 companies being well-placed to benefit from globalization; small compnaies and labour, less so. Not sure if either of these phenomena will change any time soon, though protectionism could oput a dent in each.

Mickson, far from brilliant- otherwsie I woould have paid the bid/ask on the powerball strip and saved myself a couple of percent! Cheers though...

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wcw
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October 2, 2007 at 6:36 AM ×

Hey, watchit. You can be a 'housing market bear' and be out of your short homebuilder positions. The one has to do with things like housing prices and starts, the other to do with your judgment of what price is high enough to make a continued short position attractive.

Back when, probably on the a Ritholtz comments thread, at much higher homebuilder prices and while I was still short, you asked somthing like 'how low should the homeys go?' I quantified an answer (~3/4ths post-writedown book) at time when books multiples were closer to 1.5x and few writedowns had been taken.

These days, book multiples might be 1.1x on some mostly written-down stock. While you don't see me in the market going long, I've been out of my shorts for a good while. The difference between 1.5x book before writedowns and 1.1x after is the difference between a good short and a bad one.

Now, housing prices, that's another thing..

Ah, found it. Cf http://bigpicture.typepad.com/comments/2006/12/gdp_revisions_a.html

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Macro Man
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October 2, 2007 at 10:43 AM ×

Oh, I wasn't referring to you, wcw. Indeed, as you know I have dabbled in the homeys from the short side myself. I was more referring to index shorts (some of whom are of my acquaintance)who cannot understand why the S&P 500 keeps going up despite weakness in housing.

I remember the discussion and appreciate the follow up.

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