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.