Wednesday, December 12, 2007

OK, so...

...The Fed did have something up its sleeve, a program to auction liquidity that broadens the eligibility of tapping the Fed, both in terms of institution and collateral. At the same time, it's announced a joint FX swap facility to provide foreign currency liquidity across the world.

The Grinch has seen the light, and provided a treat (TAFfy?) to all the Whos in Whoville. Still, $40 bio this side of the Turn isn't exactly OTT, and surely the timing could have been handled better? The last 24 hours has seen substantial amounts of unnecessary financial market volatility; while the Fed doesn't have to bail out market participants, it doesn't necessarily have to go out of its way to screw them, either. And clearly, anyone short gamma over the last day has just been screwed.

So while the story apparently has a happy ending and the Grinch is everyone's new best friend, Macro Man remains wary. This may be the beginning of the end...or it may be the end of the beginning. Either way, the last 24 hours suggests that wherever we're going, we ain't gonna get there in a straight line. Stay long vol.


Tony Starks said...

Here's my hypothesis. The Fed is worried about being overindulgent. I didn't want to do 50bps if 25 would suffice. So it tried to get by with 25. The markets threw a hissy fit. The Fed responds by promptly throwing it another bone that it was holding in reserve. The timing gives the impression that the markets are in the driver's seat and the Fed is overeager to placate them.

Peter said...

the seasoned traders (those who have seen more than bull markets) call this the 'get out of jail' card.

usually, its worth using it..

Macro Man said...

The question, of course, is whether you use it today...or in another couple of sessions if/when prices are a few percent higher!

Throw said...

Confusion in the markets is never a good thing. I note that all the financial names that have been having issues are all lower on the day. SLM, FNM, FRE, CFC, WM, PMI, ABK, MBI etc etc.

Forex is clearly confused, so it's no suprise gold is higher.

BB gets worse and worse as time goes on. Who would have thought that possible?

Anonymous said...

Dear MM,

You are making me real scared with this statement .. "in another couple of sessions if/when prices are a few percent higher!"

Do u think markets are headed higher in the next few sessions because of these injections ?

I am SHORT by a big amt :-(

Anonymous said...

whats your favorite ways to play long vol macro?I'm switching my dollar hedges from euro,cad to chf,yen and not paying attention so much for positive carry.
btw, why the dollar was so strong against the euro for a good while?it seems that this news shows that bernake is sticking to his word when it comes to sacrificing the value of the dollar to reach his 'objectives'

Macro Man said...

Anonymous it's certainly a possibility that markets are headed higher over the next few sessions. There's a possbility they're headed lower. And there's a possbility that they're headed both higher and lower.

What it means is that we're living in a world of higher volatility, and in an environment where sentiment and positioning drive prices rather than notions of 'fundamentals.'

I cannot provie any advice on your positions; all I know is that this is not environment where I feel comfortable having large risk in any direction.

Macro Man said...

Anonynous #2, I still have my long dated downside one touches in EUR/USD. If and when the market pukes yen implied volatility, that will be an intersting opportunity as well.

As for price I suggested in my previous comment, we are now in an environment wherein you can get quite large moves with no fundamental rationale. I'd put it down to noise and positioning.

Peter said...

its a tough call here, because a little less than 24 hours ago it looked pretty bad for the S&P, Commodity ccies, EM...etc
and good for Treasuries and the Yen

this measure has the potential to completely turn around the game for risky assets. if LIBOR rates get 'sorted out' it will free up a lot of ammo. some sales report that many of the banks wo are market makers in certain debt securities, are simply restricted in how much cash bonds they can hold. that could be reversed now.

on the other hand..
I remember in 2001 Jan it was similar, the Fed was agressive and lot of us got excited. and then some of the bold, older traders driving the uncool cars said something about the 'get out of jail card' ...

Macro Man said...

then some of the bold, older traders driving the uncool cars said something about the 'get out of jail card' ...

Peter, does this mean if I get rid of the '98 Golf then I'll lose the respect of "the room"? ;)

'Twill be interesting to see how the market trades for the next couple of hours. A flat close would set teh stage for a rather ugly downside test tomorrow...which of course could then get squeezed later. "Position for mean reversion" would appear the appropriate strategy at the moment...

Peter said...

MM ..

if you switch to the M3 that you talked about earlier, you will lose the respect of the room, and you will have joined the dark side. what will be your next move then? an oversized wristwatch and a pink striped tie ?? :)

I also think that if the market fades the central banks' action it wont be pretty tomorrow

mean reversion.. but the mean on what time scale ?
is it the mean of yday's selloff in equities, or today's rally ?
or are we reverting to where we were before the Fed? (that looks most likely)

Anonymous said...

It has become ugly already (just like the Word Verification that shows up when I Comment)

SP500 nearly flat...falt..

Dr. Dan

Macro Man said...

Funny, someone else has been giving me stick about the M3 as well. Who knew that buying a five year old used car (my preferrd option) would dent one's non-posing street cred? No fear on the tie, however; to call my wardrobe "relaxed" would be an understatement...

As for trhe question of what will mean revert, it's not difficult to see the SPX playing ping pong between 1450 and 1525, is it?

Dr. Dan, I hate the word verification thing, but it sadly became necessary when spam started getting posted here...

Anonymous said...

I think MacroMan doth protest too much.

The Fed obviously knew about the klaxon-level producer price melt-up.

And Bernanke at least in his academic heart really is an inflation targeter.

The peer-pressure to blow Wall Street is preposterous.

The LIBOR/Fed spread isn't high because of a mistake on Bernanke's watch.

It's because of Greenspan's slavish devotion to that ancient deregulatory religion of Ayn Randism, which hasn't managed to conjure up those stolen prosperity formulae or find the location of the Western industrial base.

The Fed had plenty of power to specifically and precisely investigate and regulate mortgage standards and bank underwriting, just as they had the power to restrict margin loans in 1999-2000. Both times Greenspan did not, when he should have. The reason is simply ideology.

The financial misallocators deserve a hosing at the discount window.

The non-financial commercials, 99% blameless, by contrast, deserve Ben Bernanke's Money. But alas people who actually make things and didn't do anything wrong will be strangled.

In the end, we have inflation because of war. War is inflationary, always has been, always will be.