Friday, January 18, 2008

Panic!

Panic on the streets of London
Panic on the streets of Birmingham
I wonder to myself
Could life ever be sane again?

- The Smiths, Panic

While "panic" might not yet be the word to describe the feelings of policymakers and risky asset longs, it may not be far off. In the meantime, "extreme discomfort" is probably a reasonable encapsulation of the angst being felt on Main Street, Wall Street, and the corridors of power.

Where to start? Housing starts slipped in December to their lowest level since the 1991 recession. While this is a necessary result of the continued issue of excess inventory in the US housing market, it's still pretty bloody painful. The Philly Fed survey, meanwhile, collapsed 19.3 points to -20.9. While the survey may not capture a terribly high percentage of economic activity in the United States, these levels are usually consistent with recession.
Meanwhile, Merrill's Q4 earnings announcement was worse than even the most ursine forecaster imagined. A quarterly loss of $12.57 per share was quite literally shocking. The obvious interpretation is that John Thain is exhuming all the skeletons at once, blaming them on Stan O'Neill, and moving forward with a fresh slate. That's probably the right thing to do. However, if there are more writedowns and losses in the future, one would have to think that the reaction will be very unpleasant indeed.

We took another step towards the dreaded monoline downgrade yesterday when Moody's put Ambac on negative review. In any event, the SPX broke what some were terming "line in the sand" support in the 1360-1370 region. A particularly bearish interpretation of the chart might suggest that the target of the "three mountain top" formation could be as low as the mid-1100's.
It's pretty clear that Macro Man's reasonably constructive view on equities has been wrong, wrong, wrong. Survival instinct has forced him to hedge the bulk of his risk, but there seems little doubt that he's missed the boat. Is it too late to sell? Not if the SPX is going to 1150, that's for sure.
In the meantime, a fairly obvious step would be to eliminate any vestiges of short duration from the portfolio. Yesterday's Bernanke testimony added relatively little to what we'd heard the previous week, other than perhaps the outright endorsement of quick-acting fiscal policy aimed at "the little guy."
As for monetary policy, a 50 bp easing this month is down fully baked in the cake, and markets are starting to romance the notion of 75. At this point Macro Man would judge the latter to be unlikely, though of course things can still change. However, even if the Fed "disappoints" with a 50 bp easing, in this mood the market will just price aggressive easing in March.
While a few commentators are calling for an oversold bounce in the SPX, which we all know can be truly vicious, Macro Man would look at such a development as an opportunity to extricate himself from his US 10 year payer position. Given that futures are currently up 13 points, the opportunity may come as early as today.
In Europe, meanwhile, gentle cracks are starting to form in the ECB's wall of granite. Yves Mersch of Luxembourg has been all over the tape this week, first suggesting downside risks to European growth and then reminding markets that the ECB remains vigilant on wages and did not discuss a cut this month. If Mr. Mersch's earlier comments reflect the view of several ECB voters, then perhaps cuts will be on the agenda soon. This, at least, is what the market seems prepared to price, so the German 2 year receiver will stay in the portfolio.
Having asked 20 questions yesterday, here are a quick fire 20 answers:
1) 95
2) With lots of talk and little action
3) Bloody awful
4) They do, and they're wrong
5) May
6) 1.5%
7) Extraordinarily
8) He kind of did
9) Yes
10) Another week, then pause
11) Drift ssomewhat lower, then sideways
12) Not enough
13) Seriously, but perhaps not as seriously as many seem to think
14) Added; they took profits at the end of last year
15) Not enough and too much
16) Tax cuts
17) It is, but you might have to buy and hold to maximize profits
18) Red Ken, sadly. London transport cannot even handle commuter traffic; how is it supposed to deal with the Olympic crush? Macro Man is considering taking a long vacation when the Olympics are in London.
19) Barack
20) Dems if Barack runs; GOP if Billary runs
21) Rafa; Tom Hicks and Gary Gillette can't roll over their financing loan, so will be forced to sell up. Word on the street is that Steven Gerrard has a live TED spread feed on his phone...
Finally, Macro Man was filled on the balance of his £ basket trade, which has entered the P/L below.




8 comments:

Anonymous said...

The alternative view is that Barack is in the race to deny Hillary the nomination. He is a light-weight. He runs right now with almost zero negative publicity. It will dramatically change when he faces the GOP opponent. Read this: http://www.amconmag.com/2007/2007_03_12/feature.html. Everyone will say they are for Barack, but when the actual tally comes in, he will lose in a landslide.

CDN Trader said...

MM,
Welcome to the bearish side. It's starting to get a little crowded over here, but I think we can still squeeze a few more in.

Anonymous said...

Yep, better fire off those sell orders and slip away into the alley before the shooting starts.

Q: are the HKD and CNY officially linked to same basket or policy? Could one take a long bet on HKD as a proxy for CNY?

Macro Man said...

Anonymous #1, Obama might be a relative lightweight, but he's the most charasmatic candidate in the race. And who was the last president elected who was less charasmatic than his opponent? Nixon?

What I do know is that a high school girlfriend whom I hadn't heard from in 15 years emailed me last year to invite me to a $1000/plate fundraiser for Obama in San Francisco. I didn't go and per previous posts, have little interest in any of the candidates; yet the lengths to which he inspired her (she studied under him at U of C)impressed me.

CDN, I'm not sure if it's joining the bearish side so much as exiting the bullish side. At this point, I couold go either way.

ANon # 2: HKD and CNY are two completely different currencies with different policies. While the market occsaionally romances the notion that the HKD will be linked to the CNY in the not too distant future, such an outcome is unlikely; as a deliverable currency, all the RMB speculation would then pour into HK, overwhelming the HK financial system. A term of the handover treaty in 1997 stipulated that HK maintain an independent currency for 50 years, fo as far as I can see the HKD peg will remain in place for some time, though a changeover at the HKMA could conceivably generate a change in the peg level

Frank White said...

MM,

Re Obama: He'd better watch his back. The powers that lurk behind the curtain in the US don't take kindly to politicians that actually inspire people and can move them to action.

Re London Olympics: I was living in LA at the time of the 84 Olympics. For months beforehand, the public was warned about how bad traffic would be during the games. Many people left town (and rented their homes to out-of-towners for a pretty penny). When the games arrived, traffic was unbelievably light. It seems that everyone was spooked into staying off the roads. Perhaps 2012 will have a similar contrarian outcome (though I wouldn't count on it).

Macro Man said...

frank, re: olympics- i suppose the big difference is that red ken is actually prohibiting private transport during the games (no doubt hoping to make it permanent after)- and public transport is already woefully overburdened 4 years in advance!

"Cassandra" said...

MM - On BCA has the opposite view of duration, though one would expect thus, given their status as uber-contra indicator ranking right up there with the cover of Biz Week.

RE: Election: POP-Media (from CNN Risamussen) via Daily Kos and firedoglake) polls were suggesting that in Head-to-head Q&A polls

* McCain is Repub strongest Candidate beating HC & BO, but losing to Edwards

* Edwards is Dems strongest wasily trouncing all repubs, except Guiliani with whom its a dead heat;

* HC is Dems weakest losing to everyone cept for Thompson and and Paul.

* BO is in between HC and Edwards, interesting beating Guiliani in head-to-head, but losing to every other republican, including McCain , Huckster & Romney

* Edwards is clearly Dems best hope if "head-to-head" polls mean anything

Anonymous said...

While a few commentators are calling for an oversold bounce in the SPX, which we all know can be truly vicious, Macro Man would look at such a development as an opportunity to extricate himself from his US 10 year payer position.

Everyone and his brother is looking for a bounce so more then likely we just crash intsead. That in the long run would be the best thing that could happen anyway. It would suck if one were long though and not at least hedged.