A short rant about nothing terribly significant

These markets ain't getting any easier, are they? While Macro Man's alpha portfolio remains a strong performer- up 2.9% already this month- the beta performance has obviously been wretched. And even the alpha performance has been less than what one might reasonably expect; given the decline in both the S&P 500 and US yields since last Thursday, one might reasonably have forecast that USD/JPY would be lower.

Instead, it's actually a touch higher; could the "final insult" of the ongoing bout of volatility be that the yen ceases to perform as a macro hedge to risky assets? Perhaps, though it's probably premature to reach such a conclusion. For one, "risk asset" weakness has been largely contained to credit and US equities; EM, for example, is trading very well. Moreover, Japanese retail has returned to the market this week, filling its pent-up demand for the usual high-yielding currencies. Such demand has been spurred by strong data from Australia, which has propelled the AUD higher against other developed currencies.

Meanwhile, sterling has continued to underperform, with the latest bout of weakness courtesy of horrible results from Marks and Spencer. Thus far, his patience in setting GBP shorts has not been rewarded. Still, Macro Man cannot have too much cause for complaint; thus far, his 2008 theme of "differentiation" has been evident.

No, the rant alluded to in the title of today's post has nothing to do with financial market prices. After all, if you're going to play the game, you should be prepared to meet with adversity on occasion. Rather, Macro Man was struck by the absolute inutility and cack-handed presentation of one of the newest pieces of economic "data", the US pending home sales figures.

This release only intruded on the market's consciousness over the last year or two, and indeed has only been calculated since 2001. As the name implies, it does not reflect an economic activity or transaction, but rather the intent to perform one. Per the description on Bloomberg:

The pending home sales index tracks the number of home resales under contract. The majority of pending home sales become existing home sales one or two months later and therefore, this index can be used to predict actual home sales activity.

Fine. That sounds reasonable enough, doesn't it? It's a leading indicator of home sales, and given the market's fetish with all things housing these days, there's an understandable demand for good leading data. The problem is that this data is evidently subject to significant revisions. As one of Macro Man's brokers put it yesterday when the November figure was released: "Weak headline, strong revisions."

Huh? What, exactly, is the point of revising the previous history of an indicator that is only supposed to lead official activity figures by a month or so? And how/why exactly does it get revised? Last month you thought that the amount of homes about to get sold in October were up 0.6%, and now you realize that they actually rose 3.7%? Where did these extra intentions come from? What are we, the market, supposed to do with this information?

Now, Macro Man realizes that this is a minor issue surrounding what is, after all, a minor piece of data that isn't actually calculated by the government. It's produced by the NAR; you can peruse Barry Ritholtz's site for plenty of analysis on the reliability of that organziation. But the fact that people actually trade off of an indicator that is essentially useless (the underlying data is an index, and Bloomberg only reports monthly changes) just underscores the degree of noise to which modern day financial market participants are subjected, and emphasizes the importance of filtering out the vast majority of "information" that crosses one's desk and instead focusing on the things that truel matter. And Macro Man feels safe in concluding that pending home sales ain't one of 'em.

Rant over. Now about that yen.....
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Peter
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January 9, 2008 at 10:28 AM ×

my feeling is that the US equity markets' weakness is now going to start to spread to other parts of the world..

for example Euroland data (retails sales) has been pretty weak, but it did not get too much attention by the markets. but then today looks like the DAX is having trouble resisting gravity. if it breaks it will surely start to drag the European time zone EM equities with it... ?

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Macro Man
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January 9, 2008 at 10:34 AM ×

Yeah, one would think so, but the relative outperformance has been striking. There certainly seems to be a wedge between what equities are pricing on the one hand, and the emerging consensus that biggest rate surprise this year will be ECB cutting...

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Peter
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January 9, 2008 at 10:48 AM ×

i have no hard facts to prove it, but my personal experience is, that in any given market, the fixed income portion of it tends to be more 'reasonable' than the equity portion. probably boils down to the typically different structure of equity markets and fixed income markets. but this is something i noticed in smaller markets. so not sure it holds for the Euro area as a whole..

i think your Eur rate trade will yield, just wait a few more sessions

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Anonymous
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January 9, 2008 at 11:04 AM ×

agree with the dax call check out the dax vs eur/chf fx cross (HMS on bberg) has been really well correlated all year(07) eur/chf has taken a beating but the dax is defying gravity...

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Anonymous
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January 9, 2008 at 11:07 AM ×

any thoughts on eur(or aud) steepeners as the big trade of 08, the carry is good in both trades as opposed to the us which is very expensive to hold ?

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Peter
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January 9, 2008 at 11:19 AM ×

just reading a JP comment, going into how they think the tone will change at tomorrow's ECB meeting..
sounds like a no brainer that the tone has to change, but I guess the market actually needs to hear Trichet saying it; downside risks to growth

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tmcgee
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January 9, 2008 at 11:52 AM ×

on japan retail, i'm kind of surprised. we heard that new investment trusts launched today only attracted a whopping 930 mln yen of funds vs an upper limit of 500 bln. and in december the flows in foreign asset toushin slipped a bit more. there's been some talk of toushin buying, but pension funds/insurers have been said to be bigger fx buyers/jpy sellers than retail.

one source of consistent usd/jpy buying is japanese importers. each morning since their business year started on monday they've been buyers, for obvious reasons with oil and other commodity prices where they are.

anyhoo, hope to blog about this soon...

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January 9, 2008 at 11:56 AM ×

Peter I'm agree with you, DAX is a world apart, but that's is principally due to the incredible performance of EON, RWE, BASF, BAYER, DTE.. often some stock indexes don't tell the truth: watch small cap, watch italy or japan!!!
The most difficult thing last year and during these early days has been the grade of dispersion between sector or single stocks: if you keep an index different from dax and an overweight in -50% stock your beta kills your performance.
But the core problem comes from earning expectations, watch here:
http://ftalphaville.ft.com/blog/2008/01/09/10003/short-view-the-coming-earnings-recession/
How can firms raise their earnings in these environment??
According to me Europe, and in particular peripheral countries, have only a time-lag: Europe has kept the tone of growth thanks to an incredible transfer of wealth from workers to firms, with an impressive erosion on purchasing power. Trichet needs an update!!!!!

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Macro Man
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January 9, 2008 at 12:00 PM ×

Anon #1, yen crosses are also, and unsurprisingly, highly correlated with the DAX. I suppose relative resilience of yen crosses equates to equivalent in DAX.

Anon # 2, curve steepeners in Europe make a lot of sense. Actually, you could argue that outright longs at the short end are even better. Aud curve is tricker...potential reward is much hgher, but then again so are the risks. Today's data does nothing to suggest inversion will reverse any time soo, and indeed more of the same could exacerbate it. Suspect it will be a safer trade in a quarter or two than it is today.

Peter, I think the ECB is a really interesting study at the moment. They eventually will blink...but they might need to see more visceral evidence of a pronounced slowdown in activity/decline in inflaiton than we've seen to date. Given the way the year has started in this portfolio for me, sod's law says they are hawkish and EUR front end gets whacked.

Mr. Mcgee, my impression was that retail has been active on the e-platforms, while importer demand has been evident but relatively small and scattered. ON Japanese instiutions, I've heard mixed info, so I'm not sure what to believe....

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CV
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January 9, 2008 at 3:08 PM ×

Hi MM,

I am going to cut in straight on the FX pointers.

On the USD/YEN ... well my take is that it is stalling at the moment. I have been trading it on my funny money account this week and it does not want to beat 110 and not exactly >109 either. The thing is, from a fundamental point of view I would be buying the USD/Yen since I sincerely believe that we will see ZIRP in Japan in 2008. Moreover, we have the whole point about how Japanese investors are moving out in search for yield.

On the other hand, what I am hearing from the techies and those who buy the risk reversal argument is that we should be looking at something like 100-105. Now, at what point will the MOF step in? This would be my first question. I would expect more like 105 than 100 but this is really a formal question of where to put the entry order then for the trip back up.

So, my guess is that USD/JPY will break the 109-110 vice soon but in which direction? If only I knew :). If I were pressed to put my money where my mouth is I would be buying but really, it is a stinker to call.

As for the GBP, it seems to have entered the bull pen today and is getting a sound beating, at least against the USD. The EUR/GBP does not seem to be beating 0.75 though.

Claus

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Macro Man
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January 9, 2008 at 3:18 PM ×

Claus, I'd suggest that any macro environment that's so execrable that ZIRP makes a comeback would significantly curtail Mrs. Watanabe's activities in uridashi, toushin, and gaitame. com, and that the yen would likely rally.

As for £, my PPP estimate for EUR/GBP is roughly 0.75, so on a valuation basis it's only getting back to equilibrium...

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CV
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January 10, 2008 at 7:31 AM ×

Good point on the Pound MM. The good old fundamentals of fundamentals :). It is just that looking at the charts would lead me to conclude that we are moving into uncharted waters with +0.75.

On the Yen and ZIRP. Well, this will be one of the big tests this year and beyond I feel. Just how much will the Yen rally if the macro environment really turns for the worse (i.e. testing the safe haven role of the Yen). In itself, I concur that retail bets on the carry bets will probably wane off considerably, at least initially, but a return to ZIRP would also intensify the more long term outflows I would say in the search for yield.

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