Friday, March 28, 2008

How best to sell the UK?

How tough is this market? Consider the confluence of the following headlines:

* Rice prices rise 30% y/y as exporters cut back on foreign sales and/or raise export prices

* Japanese core CPI rises to its highest level since 1998; stripping out the consumption tax "hump" from 97-98, it's the highest in nearly 15 years (see below.)

* The inflation breakeven on iJGBs turned negative, thanks to massive liquidiation of losing positions.

Yowsah! If you needed any more evidence that these markets are trading on pain and positioning rather than macro, this is it. Eventually, these unwinds will provide attractive entry levels in a number of trades (linkers in Japan and the US, curve trades in Europe and the UK, etc.), but for now Macro Man is content to sit on his hands. It's probably just as well that his data systems are not yet up and running; he's only done one small trade over the last week and a half, and like most other people, he's seen it go against him.
One trade that Macro Man had in the old blog portfolio was a high-conviction short sterling position, against a 50:50 basket of dollars and euros. If only he'd put that on in real life instead of trying to gauge positioning; the newsflow from the UK has been broadly poor, and the market reaction has been telling; sterling's been beaten like a rented mule. Overnight, consumer confidence came in at its lowest reading since the aftermath of the ERM crisis (see below), while Nationwide house prices showed their lowest growth rate in a dozen years.The fact the sterling shrugged off much better than expected current account data is telling, and suggests that depite high levels of bearishness on the UK, positioning is currently moderate. That having been said, price is at an extreme, and until he is fully back into the swing of things Macro Man is somewhat uncomfortable paying tops. One benefit of Macro Man's new professional home is that he is amongst kindred spirits when it comes to thinking about the UK; when one sees blatant incomptetence like the Heathrow Terminal 5 screw up, one can only conclude that Martin Samuel is right. (One wonders if he is a closet MM reader....)

In any event, Macro Man is wondering how to play the UK. Sell sterling? It's at a bit of an extreme. Short the FTSE against, say, DAX? You'll be short commodity beta. Put on a steepener? You've got plenty of company, and you need Merv the Swerve to blink. Macro Man is struggling to come up with the best trade; perhaps the answer is to do a little bit of each and hope that diversification does its thing.

It's been more than a year coming, but Macro Man's bearish conviction on the UK remains as strong as ever. And after the current quarter end screw job is in the rearview mirror, the time for action may well be upon us.


Anonymous said...

Baggage handling was the Achilles heel of Barajas T4 as well, with the identical outcome. Clearly the flow models they use for testing minimize the outliers and ignore dependencies. Sound familiar?


CDN Trader said...

What about buying UK CDS protection against France / Germany, or even against a basket of the more creditworthy emerging markets?

Anonymous said...

groupthink? beware tally man!

Gregor said...

Short the FTSE? The FTSE has an emerging market p/e that sags each week below 10, and a dividend yield floating around 4.5%. As an index, it is now very heavily weighted towards energy and mining. RDS and BP are both yielding around 5.00%. They are huge components in the index.

I think the FTSE is at an historic low. I think it could go lower but is in the range of an enormous buy opportunity. Sterling needs to fall and then the FTSE will take off.

The lesson from the 1997 and 1998 financial crises was that the epicenter of those twin crises pulled everything down in separate bursts--but, the ground zero of where the bull market was taking place took off again each time.

Ask yourself: 1. Where is the epicenter of the current crisis? 2. Where is the current bull market?

As for the UK, I see a rather weak connection between the FTSE and the UK economy.

Anonymous said...

just receive sep meeting date sonia.

Anonymous said...

FTSE's emerging market P/E?

With a composition concentrated heavily in finance and cyclical industrials?

I always thought that Mr Holmes had a mind to sell deep cyclicals when P/E was low.

vlade said...

Take a deep out-of-money EURGBP punt? If you lose, nothing much happens, if you win, you win big.
Possibly, I'd also do a JPYGBP punt, same rules.