Tuesday, January 29, 2008
Yawn. Another 1.75% day in the S&P 500, this time to the topside. It's all getting to be old hat, really. Those days when people were highlighting the lack of volatility seem a long time ago, indeed.
Yesterday's rally could easily have been a paper-shuffling exercise ahead of tomorrow's FOMC meeting. There appears to be some evidence that popular shorts were being squeezed and that quant models of various description are once again coming under the cosh. Macro Man's own equity RV trade, the large cap/small cap trade, has given back all of its monthly gains and now is sitting slighty in the red for 2008. However, he still believes the rationale behind the trade. He'll give it another day to unwind, and then look to pull the trigger on adding tomorrow ahead of the Fed.
What made yesterday's stock market rally curious was the execrable set of macro data that accompanied it. New home sales, and there's no other way to put this, sucked. Not only were the sales figures the lowest in a dozen years, but those weak figures came in the context of tumbling prices as well. While the median sales price data is subject to significant distortions, dependent as it is on the geographic and value mix of the monthly sales, it is nevertheless telling that the y/y figure fell nearly 15%, the lowest since at least 1970. And the monthly supply of unsold homes made a new cyclical high as well. So naturally, the homebuilders spiked higher yesterday.
Anyone not believing the "quants getting squeezed" explanation for yesterday's action might instead offer the explanation that the data was so weak that it has cemented a 50 bp rate cut tomorrow. Why that should be a near-term benefit when the prior 1.75% of easing has failed to meaningfully buoy the market over the last few months is something of a mystery.
One source of hope cited in some quarters is the recent rise in mortgage refi applications. To be sure, the recent decline in interst rates across the curve has prompted increased demand for refinancing credit, as show in the chart below. Macro Man has a few thoughts on this matter.
While it is the case that refi apps have surged, they remain well below the levels observed a few years ago. It's curious to note that apps for purchase have also rebounded recently, though as yesterday's data demonstrated, that has yet to translate into increased buying activity. Meanwhile, Macro Man would question the very desirability of spurring further mortgage refis. It was that very process that ultimately landed us in the current pickle, so why start a new cycle while we're still picking up the pieces of the last one?
Finally, we also need to distinguish between demand for credit and the supply credit. While it may well be the case that Mr. and Mrs. John Q. Public would like to borrow large sums at the the rates they read in the newspaper, most professional investors can tell you that the rate you see on the screen ain't always the price you get in real life. That's particularly the case in the current environment; the securitization market is still seized up, and banks' willingness to take fresh mortgages on balance sheet is pretty low at the moment. So applying for a mortgage is all well and good, but there's no guarantee of success. After all, Macro Man could apply to be the new England football manager in 2010 after Fabio Capello leaves in a huff following the World Cup, but there's no guarantee he will get the job.
Speaking of Mr. Capello, today Macro Man has the dubious pleasure of taking a test on life in the UK. He's doing so as part of a Home Office requirement to attain permanent residency, a status which confers a few marginal benefits and opens the door to obtaining a passport (which itself confers the benefit of enabling him to choose the shortest passport queue when flying into the UK.)
Sadly, Mr. Capello does not make the list of required knowledge about life in Blighty. Among the requisite items of knowledge, however, include the following:
* What proportion of the UK is Buddhist? (0.3%)
* In the early 1950's, the UK held a recruiting drive in the West Indies for which profession? (Bus drivers)
* How many members are there in the Scottish parliament? (129)
* When did women win the right to divorce their husbands? (1857)
* On April Fool's day, one plays tricks on other people until which time of day? (noon)
To prepare for taking this test, Macro Man was forced to spend £9.99 on a Government-issued handbook. For the pleasure of taking the 24-question exam (average time taken to complete a practice version: 2 minutes), Macro Man incurs another £34 charge. And to actually get the stamp in his passport, he has to fork over £950. All in, that's a £993.99, just to keep getting taxed by Gordon Brown. If ever there was a statement about life in the modern UK, that is it.