Unenjoyment day

It's the first Friday of the month, which means that it's time for the next episode in that periodic exercise in statistical futility known as the US payroll data. Not for nothing is today known in some circles as "Unenjoyment day"; the degree to which the market fixates on today's release (nonfarm payrolls, the unemployment rate, average hourly earnings, hours worked, et al) far outweighs the amount of usable information contained therein. Yesterday's price action around the ADP report (wherein rumours of a -82 print circulated widely, only to be confounded by a +40 out-turn) perhaps gave a preview of today's "fun."

Regular readers will know that Macro Man views the headline NFP release as useless at best, particularly as the underlying trend in payroll growth is now much less than the acceptable statistical margin for error. Insofar as there is anything to watch, it is probably the unemployment rate, which, while lagging, at least filters out a bit of the noise inherent in the NFP data. Macro Man's preferred ancillary indicator, the "jobs hard to get" component of the Conference Board consumer confidence data, suggests that we should see a new cyclical high in the u-rate today; might Holmes lay his hands on the missing missing construction workers?
Elsewhere, a few other items are worth noting:

* The UAE is keeping its dollar peg after concluding that it has not contributed to inflation. In a frankly puzzling conclusion, CB governor Sultan Bin Nasser al-Suwadi announced that the dollar peg, the maintenance of which has produced massively negative real rates, explosive money supply growth via unsterilized intervention, an undervalued exchange rate, and rising wage demands from migrant workers, has not caused inflation. No doubt the real reason is down to sunspots, El Nina, and the whims of fashion....

* For the first time in recent memory, inflation is an issue in Switzerland! December CPI exceeded expectations and printed 2% y/y, the first time that that threshold has been reached in a dozen years. After three years of steady bleating about the level of the CHF, might the SNB finally feel comfortable actually doing something about it? (The flash estimate for EMU CPI registered another 3.1% reading as well.)

* PBOC announced that it will tighten policy further in 2008 and that the yuan's flexibility has increased "noticeably." 'Twill be interesting to see if this is maintained, and what the impact will be on reserve accumulation.

* Those fund managers who now find themselves out of a job can now apply to CIC. Good luck!

*Macro Man's FX carry beta plus portfolio was triggered again this morning, fortunately in advance of a nasty short squeeze in sterling. However, the day isn't over yet, and it would hardly be a surprise if the position were exited on Monday.



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Anonymous
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January 4, 2008 at 11:12 AM ×

I can't understand why you're still carrying a tanker-truck full of long S&P. IF you want the commodity exposure and international exposure, then go direct to te source - oil & oil service holdrs, and QQQQ. There is a lot of dregs in the S&P500. At least do a call-spread or range forward to limit your downside. Ouch!!

-C-

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Macro Man
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January 4, 2008 at 11:17 AM ×

It's a beta trade, per this post. Observe that the alpha portfolio offsets about half of that via a short futures position, and the correlation structure of other alpha trades has actually insulated the portfolio from a lot of the beta losses.

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Anonymous
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January 4, 2008 at 12:46 PM ×

Great Blog!!
given that the blog has matured and hopefully will stimulate readers the same way it does with me, it would be helpful to find a summary on macroman's approach, summarizing things like...
construction of beta & alpha portfolio, how does the Carrytrade, your TIPS etc fit into it...what are your key macro indicators (one area I find particularly interesting given the macro spin and interpretation of the statistical presentation and interpretation).

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Macro Man
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January 4, 2008 at 2:24 PM ×

Anonymous, [erhaps I'll get aroudn to reviewing the thematic rationale of or each trade. In the meantime, perhaps this and this will whet your appetite...

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OldVet
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January 4, 2008 at 3:20 PM ×

I was looking at some small Gulf investments, but am rethinking in light of foolish FX decision. If you ever get a handle on why UAE did this, pls let us all know.

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"Cassandra"
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January 4, 2008 at 3:24 PM ×

that was then, this is now. i too was bullish (or not negative) on S&P prospects as the lesser of the asset evils - particularly largecap tech hard assets, and energy - from 04 through 06, the latter two still somewhat fancied by me. The way I see it. either you're concerned about th market's concern for inflation, or you're not. IF you are, (and I believe the market will increasingly recognize this concern) this is very very bad news for equities - particularly when cluster-f*cked by melting growth and demand in US. You know the score, but for those too young to remember, or without historical data, stagflation crushed equities in nominal terms and catastrophically slaughtered them in real terms. With all but a narrowing complex of commodities rallying, generalized beta is simply negative alpha, so why carry it (and pay for the luxury? It's not as if there is an offset benefit to regulatory capital charge as there arguably is for a reasonably diversified & balanced long/short portfolio.

Counter-arguments?

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Macro Man
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January 4, 2008 at 3:44 PM ×

C, all of those are valid points. In my world, however, they belong in the world of "alpha" rather than "beta". To refresh, the point of the beta portfolio is to generate similar risk adjusted returns to the typical macro manager (as defined by the Tremont macro index) from relatively simple strategies. Taking bets on relative perfomance of QQQQ or OIH vs SPX is a different bet, and while it may be a worthy one it's not something that I am prepared to do for the time being. Particularly QQQQ- much like 1999, it's a fairly narrow range of names driving it, and I have zero confidene in my ability to forecast the turn of those companies currently residing in quasi bubble territory (AAPL, GOOG, RIMM, et al) before the next guy.

Where you might have an action point is issue of real earnings. I know the CXO guys look at real earnings; perhaps there's a way of incorporating that into my beta strategy (which WILL exit US equities when earnings do turn south.)

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January 4, 2008 at 3:55 PM ×

Outside of a regression equation of excess returns to a properly-selected benchmark, "alpha" and "beta" are meaningless. There are only three components to return: issue selection, timing of entry/exit, and luck. The problem with using "alpha" and "beta" as performance metrics is twofold: first, their meaninglessness outside of the equation and the tendency of pundits to overascribe meaning to the words, and second, the tendency of everyone everywhere to properly select the benchmark index for the excess return regression.

Inflation is a monetary phenomenon, and is global. Inflation is therefore a positive factor for investment markets in general, although for the specific asset classes where it impacts most, one needs to consult Cantillon and do some looking around.

If Cassandra meant a specific U.S. stock market concern about increases in CPI, that's a horse of a different color. Regard that the market doesn't give a sh!t about CPI in and of itself, but they are concerned with the Central Bank's possible responses.

Another example is "melting growth" when one is really referring to a decreasing rate of increase in GDP, which isn't actually a very good measure of the underlying economy.

But I digress ... the above is not so much a counter-argument as a correction of Cassandra's mangling of meaning and language. She appears to be saying, in rational translation:

(1) the overall market movements represent an estimation that the U.S. will enter a recession

(2) that "equities" will suffer, based on a parallel, perhaps not an appropriate one, to the "stagflation" of the late 1970s

(3) you fail to mention whether you are referring to "equities" in the U.S. only, globally developed world, globally emerging market, or universally across sectors or industries

(4) you propose a diversified long/short approach

Aside from the mangling of meaning and language that Cassy committed (again) in these comment pages, our job as entrepreneurs (and trading is an entrepreneurial activity) is to determine where to eke out profits. Perhaps a diversified long/short is best; perhaps a selective long-only is best; perhaps the market is overestimating the impact of current economic events; we shall see.

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"Cassandra"
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January 4, 2008 at 4:05 PM ×

Aqgregate earnings mask much. The market is much smarter than the sparse data-sets of forecasted earnings, let-alone trailing earnings. It discounts well in advance, hammering things when the rate of change slows or disappoints. Homebuilders topped in mid-05,and end of 05 at the latest. Stocks were cut in half before estimates began to fade, let alone catch up. They traded with low single digit multiples for most of 06 as stock prices collapsed more than estimates BECAUSE sufficient # of people could see the absurdity of extrapolating the past into the future IN THAT SITUATION. In the prevailing context of the present, the same holds IMHO. Either way, S&P is buggered: further inflation will crater it, but the flip side of slower than expected growth will also torpedo it because it will mean significant earnings fade. It is the first time this been so blatantly apparent - just as early 2006 was for those short housing & related. I promise I won't beat this to death anymore...

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January 4, 2008 at 7:08 PM ×

C-

Not to disagree with the principle, but it seems a little hard to develop a rationale for the inflation part of the stagflation formula reaching the outlandish proportions it did in the seventies. We're not seeing postal workers manning the barricades in defense of their right to 15% wage increases, for example (although it may happen in other parts of the world).

As for where to put the money, it's interesting to note that John Hussman has recently, and inexplicably, been the target of a lot of pus in the blog world. A dog on the verge of having his day?

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January 4, 2008 at 8:59 PM ×

CB,

It's happening not just in other parts of the world, but in other parts of the dollar zone!

Stagflation is always and everywhere a political phenomenon. Think of the "stag" as a cancer patient with horrible, bonecracking tumors, and the "flation" as a healthy if somewhat debauched young man. Unfortunately, they are both on the same morphine drip, and the former has control of the dial.

I don't think I need to say who is the US and who is China-Petrostan in this relationship.

Our young junkie could easily pull the needle out of his arm, and probably should. But every time he thinks about it, he realizes what a cold, boring, awful place the real world is. And so the show goes on.

As for the old patient, what he needs is not morphine, but chemo. Or, better yet, chemo and morphine. Somehow I don't see either Dr. Obama or Dr. Huckabee dispensing a dose of financial austerity, especially on the massive scale that is now demanded. And so, again, the show goes on.

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January 4, 2008 at 10:23 PM ×

Not recently. I've been poking a stick at Hussy for two, almost three years now. I do it because, compared to his reputation and prestige, his performance sucks.

Not inexplicably. He has underperformed the S&P 500 for 4 of the last 5 years, beating it one year by less than a percent on the basis of distributions vs dividends, and in the last five years on a cumulative basis he is about 5%, annualized, below the S&P.

He's basically a bear fund manager, although he denies it. His models don't work for predicting bull markets, they have read "it's a bear" ever since he started writing his weekly screed. Buy BEARX instead, it's a better fund all-around.

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January 5, 2008 at 1:08 PM ×

Mencius -

There is no doubt that the episode of the seventies was a political phenomenon. Even better, it was an ideological event, the logical and inevitable result of a worldview that had insinuated itself into the very marrow of western society and still claims ascendancy as if non-adherents continued to be relegated to the third world. Freud, Marx and Weber let loose in the candy store, if you wish. Even Braudel (inexplicably) divined that 1978 marked an apex in the long cycle.

The philosophical component of the current bout of the disease might rest within the economist's profession which has not accounted properly for the simultaneous occurrence of disinflation and the reduction of savings in one country in particular (a hint - not Japan, for those who might think there is a direct and inmutable relationship between low interest rates and rabid consumption). Simply, if enough members of a society react to increased buying power by either buying more expensive substitutes (SUV for family car) or expanding the gamut of necessities to fill the vacuum created by available money, the end result is inflation.

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