Friday, October 12, 2007

Just one of those days

Yesterday was just one of those days, one of those glorious days that comes around only once or twice a year, when everything comes together. Just about every single position that Macro Man has in his real-job portfolio was making money yesterday, and he had the rare and pleasant sensation of being positively surprised whenever he looked at his P/L. It's once of those days that you wish you could bottle because you feel invincible.

Of course, you're not invincible, and it's important to remember that fact. When Macro Man mentioned to a colleague that he was having "one of those days", the colleague asked him how long he reckoned it could last. "Until I walk out the door," Macro Man replied, "then I'll start losing money."

Little did he know how right he was. For once Macro Man left the office, yesterday's "one of those days" turned into another type of "one of those days", a type that, alas, occurs with much greater frequency than the first kind. The sharp intraday reversal in US equities put a dent in the risk asset lovefest (Macro Man's risk appetite indicator took a tasty plunge away from euphoria levels), but that's not what turned today into "one of those days." Sharp intraday turns are to be expected in high volatility environments, and regular readers will recall that one of Macro Man's core views is that secular volatility is on the rise.

No, what makes today another "one of those days" is the rumour and innuendo surrrounding yesterday's share price swoon and the hysterical overraction across asset markets to tick-by-tick moves in equities.

So far, Macro Man has heard the following explanations, presented in all seriousness, for yesterday's reversal:

1) JP Morgan downgrades, the overvalued Chinese inernet company that has partied like it's 1999

2) JP Morgan itself has a Merrill- or UBS-like turd about to be unveiled

3) Turkey recalls its ambassador to the US as Congress contemplates legislation to call a 90-year-old campaign against Armenians as genocide.

4) Hank Paulson reiterated that America likes a strong dollar. (He also asked Santa for a PlayStation 3 for Christmas.)

5) Belated realization that oil is trading at $80, not $20

Macro Man is almost surprised that there wasn't some mention of the Plunge Protection Team taking profits on the stocks they bought at SPX 1375...

In any case, Macro Man was inundated with tick-by-tick reports on Shanghai shares this morning. Amusingly, they closed more or less unchanged, and on a six-month chart the day's action is pretty indistinguishable:

Despite today's PPI and retail sales data in the US, therefore, Macro Man is fearful that today will be one of those horrible "infinite noise-to-signal" days. Perhaps he'd be better off by closing his Bloomberg terminal and doing research...

Elsewhere, yesterday saw the release of US trade data, as well as Macro Man's new favourite datapoint, import/export prices. Trade was better than expected, and will likely force the Street to mark up its Q3 growth forecasts. Folks, the Fed spends several paragraphs in the minutes talking about foreign growth for a reason: they are expecting the rest of the world to help support the US economy. So far, this is one thing they have got right.

But US import prices from China rose yet again, the eighth straight month that such prices have been flat or higher on the month. Year-on-year import price growth from China is now 1.6%, while the annualized quarterly rise is in excess of 4%! Those claiming that food prices don't matter (a posse that includes the Fed, it must be said) are missing the boat, in Macro Man's view.
One central bank not missing the boat is that of South Africa, which hiked rates another 0.50% yesterday to 10.5%. While the rand is at levels that has previously made the SARB uncomfortable, they hiked rates yestrday and observed that a strong ZAR mitigates the impact of higher food and energy prices.

Contrast that behaviour with the Central Bank of Russia, which this week has stated that a) they don't plan to allow any more rouble appreciation, and b) that they are giving up hope of meeting their inflation target. you think those two facts might be connected? In what is surely an unrelated development, some Russian banks are reportedly running into a spot of bother.

So, too, are banks in erstwhile petro-darling Kazakhstan, where the central bank has spent a quarter of its FX reserves on supporting the tenge and purchased all sorts of turd-like assets. Now the government appears to be set to embark on a prgram that is tantamount to re-nationalizing some Kazakh companies.

Could we finally be on the cusp of sub-optimal policy choices coming home to roost? If so, the world could be set to get a bit more interesting...


Anonymous said...

Gud stuff as always MM! Inflation seems to be a problem as PPI today demonstrated (weaker core notwithstanding, stripping out autos it was almost 0.3% still). Spiking Baltic Dry index amongst others adds to the worries.
Since you mentioned SARB cant help but ask whether you got any view on the local rates in SA?
Have a gud w/e!

Macro Man said...

Bitr, it looks to me like the SA curve is still too inverted. Everyone keeps receiving, and the SARB keeps hiking, and the trades keep losing....

RJH Adams said...


PPI & trade data comment noted w/interest as it is another indicator (to me at least) that a small contrarianist movement seems to be building up against a pretty heavy consnsus battalion of low key/lower forecast CPI and GDP growth figures for the next 3 to 4 Qs.

Alot of stock (unintended pun) is placed in the (supposed) accommodative (is that really a word?) stance of the Fed (must get a Taylor rate graph up soon); some unexpectedly chirpy GDP (looks a pretty interesting bet) coupled with some price pressure going into late Q1 2008 could be quite a scenario...

Hey, if NZ can be sent home "early" anything is possible.

Macro Man said...

I find it difficult to believe that in a world where low-cost suppliers are feeling price pressures, high-cost consumers aren't as well. The rate of change of headline CPI will have stepped up sharply in September, to go with the sharp rises observed earlier in the year.

While I'm not quite at the point of looking for big GDP figs over the next few quarters, I do think it's reasonable to view Q3 as the likely nadir. That the macro inventory data looks healthy is a strong suggestion that the economy isn't in horrible shape, particularly with import growth slowing.

Anonymous said...

Thanks MM. Will see how it pans out.

Go bokkas!

Cheers, Bitr

Anonymous said...

gud stuff, what happens if the mortgage market goes one step lower, because the abx indices are tanking again and the last time that happened(august) it wasnt pretty..

Macro Man said...

I think the ABX indices are falling in response to the agencies' wielding the axe on some of the underlying securities.

A few months ago, the market's Pavlovian response was to sell risk assets. For the time being, at least, people seem happy to view mortgage securities as ringfenced...

Banker said...

Great post. Trader's live for "one of those days" and that is what keeps us coming back for more !!!

Good Luck.