Well, that was fun. ADP strong = the world is good. US GDP weak = maybe not. Fed cuts rates by 50 bps = happy days are here again. Fitch cuts FGIC = no, they're not. Got it? Good.
The FOMC statement was probably as in-line with consensus expectation as the Bernanke Fed has ever been, so from that perspective could perhaps be taken as a victory for risk assets, insofar as there was no gratuitous injection of volatility a la the December statement. The observation of further downside risk to growth would appear to open the door to further easing. Interestingly, John Berry has written a piece suggesting that the Fed could be hiking again by the end of the third quarter. Whether they do or not probably depends on the degree to which Fed concerns on inflation are genuine, as opposed to merely lip service. (For an amusing take on monetary policymaking, readers are encouraged to check out some of Cassandra's recent efforts.)
As for GDP, the headline was weak but the details encouraging. Yes, residential construction remains horrible, and yes, non-res construction growth can only go lower from here. But inventories, highlighted in this space yesterday as a factor to watch, subtracted substantially from growth. If firms are already de-stocking, there is less risk in an abrupt slowdown in corporate demand in H1 2008.
So everything was looking peachy until the FGIC downgrade, and now things are looking a tad ropy. Data out of Europe has been poor, a foul-tasting cocktail of upside inflation surprises and weak activity and sentiment figures. The euro has remained broadly resilient, however, thanks to the utter crapness of the dollar against most other currencies out there. For the time being, the safer way to play a European slowdown may be receiving the short end, which Macro Man already is. That may seem perverse with inflation high and the ECB hawkish, but markets seem confident that it is only a matter of time before the ECB blinks. As such, pullbacks in 2 year swaps are likely to remain shallow.
All the more so if equities turn back down. As if the monoline downgrade wasn't enough, from a purely technical perspective yesterday's price action generated a warning sign that the upside correction may have run its course. The candlestick produced by Wednesday's late session swoon is basically the reverse of the hammer-type formation that prompted Macro Man's call for a spurt higher last week. This candlestick, known as the "hanging man", generally forebodes lower prices.
Macro Man added a little bit of short directional beta yesterday, as the large cap/small cap spread currently trades like a short SPX position. Macro Man was filled at 0.9108 in the spread, and his exposure is now up to $15 mio per leg. The fills are in the P/L below. Macro Man will also look to sell out his March 1375's at 40; they've made him a bit of cash, and 'twould be a pity to ride them all the way back down below 1300. Finally, the dividend for the SPY beta position is paid out today after the close, and is accounted for in the P/L. Per the usual, it will be mechanically re-invested into SPY at tomorrow's open.
The FOMC statement was probably as in-line with consensus expectation as the Bernanke Fed has ever been, so from that perspective could perhaps be taken as a victory for risk assets, insofar as there was no gratuitous injection of volatility a la the December statement. The observation of further downside risk to growth would appear to open the door to further easing. Interestingly, John Berry has written a piece suggesting that the Fed could be hiking again by the end of the third quarter. Whether they do or not probably depends on the degree to which Fed concerns on inflation are genuine, as opposed to merely lip service. (For an amusing take on monetary policymaking, readers are encouraged to check out some of Cassandra's recent efforts.)
As for GDP, the headline was weak but the details encouraging. Yes, residential construction remains horrible, and yes, non-res construction growth can only go lower from here. But inventories, highlighted in this space yesterday as a factor to watch, subtracted substantially from growth. If firms are already de-stocking, there is less risk in an abrupt slowdown in corporate demand in H1 2008.
So everything was looking peachy until the FGIC downgrade, and now things are looking a tad ropy. Data out of Europe has been poor, a foul-tasting cocktail of upside inflation surprises and weak activity and sentiment figures. The euro has remained broadly resilient, however, thanks to the utter crapness of the dollar against most other currencies out there. For the time being, the safer way to play a European slowdown may be receiving the short end, which Macro Man already is. That may seem perverse with inflation high and the ECB hawkish, but markets seem confident that it is only a matter of time before the ECB blinks. As such, pullbacks in 2 year swaps are likely to remain shallow.All the more so if equities turn back down. As if the monoline downgrade wasn't enough, from a purely technical perspective yesterday's price action generated a warning sign that the upside correction may have run its course. The candlestick produced by Wednesday's late session swoon is basically the reverse of the hammer-type formation that prompted Macro Man's call for a spurt higher last week. This candlestick, known as the "hanging man", generally forebodes lower prices.
Macro Man added a little bit of short directional beta yesterday, as the large cap/small cap spread currently trades like a short SPX position. Macro Man was filled at 0.9108 in the spread, and his exposure is now up to $15 mio per leg. The fills are in the P/L below. Macro Man will also look to sell out his March 1375's at 40; they've made him a bit of cash, and 'twould be a pity to ride them all the way back down below 1300. Finally, the dividend for the SPY beta position is paid out today after the close, and is accounted for in the P/L. Per the usual, it will be mechanically re-invested into SPY at tomorrow's open.
12 comments
Click here for comments"further downside risk to growth would appear to open the door to further tightening."
Reply- is what you typed what you meant?
Good catch, that's fixed to "easing" now.
ReplyI think you might mean shooting star, hanging man is a hammer at the top.....
ReplyWho knew? All these years I've been calling that formation the wrong thing. Either way, it ain't bullish...
ReplySurprised you didn't close your SPX calls based on the formation.
ReplyWell, that was my intention ("Macro Man will also look to sell out his March 1375's at 40"); sadly, the SPX has tanked since I wrote that and now the suckers are only 32 bid. In the grand scheme of things I can afford to be a little greedy as I still do have a bearish portfolio tilt, so I'll hang on at 40 to see if there's a squeeze later in the day.
ReplyHi,
Replythat is not a shooting star either, it is an inverted hammer. The bottom line is, the candle " aint bullish".
Squeezed indeed! 41-43 at present! There are just monstrous intra-day ranges on so many of the Liquidity-sensitive names. It has the comical feel of massive and repeated whip-sawing. How many times can specs survive buying the top and selling the bottom of 10% ranges before they make a career change to the WMT check-out counter?
ReplyQuite remarkable, isn't it? A cheeky 3% intraday range today...and implieds fall. Long gamma is the ambrosia of the gods....and short gamma, either literal or by disposition, is, as you note, a one way ticket to oblivion.
Reply'Twill be quite interesting to see how performance numbers come out. As a counter to the horror stories that are pinging around, I recently heard about a chap who made his entire year's return target....in two days!
...C's old saw is: "What you make in two you can lose in one!"
ReplyOf course today was the last day of the calendar month and there are no of players who will do their window-dressingly-best to avoid becoming the next John Henry or, as the case may be, Goldman Sachs Global Alpha[less] Fund. At least for the Jan 2008 month end.
More and more people are piling into the idea that its just a matter of time until ECB cut rates. I personally actually dont think they will cut rates.
ReplyIt will be fun too see how they play this one.
V
No, it IS a shooting star (hammer and inverted hammer at lows, hanging man and shooting stars at highs).
ReplySee this:
http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_cand