Monday, March 10, 2008

So What'd I Miss?

Bloomberg's back, baby! Macro Man 's interim subscription kicked in over the weekend, giving him an opportunity to catch up on markets and update the P/L at long last. While it's only been a week since BBG pulled the plug on his old login, in reality he's spent but a few days out of the last three weeks watching markets closely. As readers are no doubt very much aware, it's been as stormy as today's UK weather, which threatens to prevent Macro Boy the Elder from riding his new birthday bike when he gets home from school. Fortunately, today's football birthday party is being held in an indoor venue...

In any event, when catching up on what he's missed, Macro Man finds it useful to simply peruse the charts of key financial market prices and variables. He doesn't need a chart to tell him that Friday's payroll figure was bloody awful (though as always, the lower unemplopyment rate suggests that something in that data is awry!), but seeing the chart of the SPX, EUR, et al does offer a sense of persepctive. And so, without further ado...

1) SPX. Man oh man. This chart was was hit with an ugly stick, fell out of the ugly tree, hitting all the branches on the way down, and then was run over by the ugly truck whilst lying in the middle of the road. It's setting up for a fairly textbook five wave downmove- all that's needed is a break of the "Kerviel low"at 1270. Assuming that that is accomplished, a wave equality target of 1220 or so would appear likely. Thereafter, one can probably play for a tradeable bounce, but it's important to remember; a break of the Kerviel low would suggest that the underlying trend is down. (At this juncture it would take a break back above 1400 to negate the threat of a five-wave downmove.)

2) Commodites (as proxied by the CRB.) Bid no lid, as the saying goes. They want 'em but they ain't got 'em. How much of this is real demand, how much is a reflection of the parcels of dollars that Ben Bernanke is dropping from his Federal Reserve-issue Sikorsky, and how much is pure speculative excess is up for debate. But with oil zooming through $100/bbl and gold threatening a grand an ounce, the Seventies parallel is becoming more apt by the day.

3) Breakevens. Unsurprising, therefore, to see breakevens reach a new relative high. Recent comments suggest that the Fed is at least aware of the criticism that they don't care a hoot about the dollar and inflation....but at this juncture at least, the comments suggest that they just don't care. Yes, it would appear that the dual mandate does spell doom for the dollar!
4) June Euribor. Contrast the "cut at all costs" mentality of the Fed with the relatively Calvinist approach taken by the ECB. Charged with maintaining price stability as its sole primary policy mandate, Trichet and co. have taken a "no soup for you!" attitude towards policy relief. Macro Man's earlier expectation of a potential easing in May now looks very far-fetched indeed, as the ECB appears to be channeling the Bundesbank. Needless to say, Macro Man's option spread has worked a treat.
5) The euro. Or should that be the dollar? It's hard to know where euro strength ends and dollar weakness begins. Suffice to say that if one central bank doesn't give a crap about the purchasing power of its currency (or, to put iot another way, actively wants to reduce the purchasing power of its currency for a range of dodgy financial and residential assets) and another one does, then you're likely to get a big currency move. Kinda like the one below, actually.
Somewhat amazingly, despite all the turbulence of the first week of the month, Macro Man's portfolio is basically flat. He's completely missed the boat on the dollar move- if not intellectually, then in terms of market positionjing, which is the only creiterion that counts in this game- but his equity hedges and particularly his fixed income bets have worked well. At this juncture relatively small delta risk appears appropriate...Macro Man is hearing rumblings that prime brokers' collateral demands are being raised left, right and center. In this environment, you wouldn't be surprised if Peloton were the only Goliath to be slain by a margin call from David.


vlade said...

Re unemployment figure - participation rate. I guess a lot of people decided it's easier to make the same money of social security than actually working, in the current conditions.

Anonymous said...

hihi....I would be careful in regards to your textbook 5 wave decline in SP500. Personally I am worried about the constant internal overlaps within the structure and suggests this may just be a series of 3's before heading into a long term range/triangle and then new highs...guess time will tell, as always

Anonymous said...


Any comments about USD/TRY move?
A big move on Friday and some indications the Turkish Central Bank is selling to keep a lid on the upward pressure.

Anonymous said...

Hi MM,

I must have missed something. When did you close your USD/JPY trade? I actually read that you were flat on such a trade, with each leg amounting to $50 millions, after knock-out 106.00 calls expired slightly in the money... and when did you close the ERM8 short trade?

Read you later, AT

Macro Man said...

USD/TRY- about time! is my only realy thought.

AT, the USD/JPY was closed via the exercise of 106 calls for $50 mio on Feb 27, which combined with a $50 mio short cash possy left me flat as of the end of Feb.

I was never short ERM8- I hput on an option spread trade (long 96P), which I still have.

As for the wave count, it's true that some of the internal wave counts are a bit complex....although the latter chopping could be part of an irregular 4th, which would contrast nicely with a straightforward wave 2.

Anonymous said...

oops... Sorry, I didn't spot the ERM8 positions in the attached P/L...

Anyway, the whole trade benefits from ERM8 moving south, that's why I mistakenly called your spread a "short position".

Ciao, AT

Anonymous said...


Together with your points I would add the bank de-leveraging theme... which affects most of the asset classes ... any thoughts on this ...

Macro Man said...

I think it's not a theme, it's the the theme. Banks have taken crap onto their balance sheets and written down a lot of it. Their reaction has been to freeze hiring budgets and batten down the hatches...namely be demanding greater (more realistic?) margin from their leveraged customers, REGARDLESS of style/quality/provenance etc.

It's not an environment where you necessarily want to be buyin g the fund of the guy who was up triple digits last year...because to do that, you need pretty big leverage. And leverage is anathema at this point.

Anonymous said...

We are into stage 3 here and this is a big one. Stage 3 is not sub prime bozos or Alt A. Those market are down more than anyone could imagine. Collateral "hair cuts" on non-agency GSE debt was 10 to 1 and is now down to 4-5 to 1 and in some cases 2 to 1. So you need 50% DOWN to get this mortgage financed.

Stage 3 is hitting agency debt. Agency debt is the Gov't implied guarantee (Fannie and Freddie) of MBS. Now this debt is even questioned and repo haircuts are even up on Treasuries. Why? Because banks do not want the balance sheet usage. They are being extremely picky on what they will use their liquidity for. And they are going to make us all pay for their usual.

So haircuts are up across the street for the most secure debt next to treasuries. This means everyone is being squeezed and asset values of these securities are falling as spreads hit all time highs.

WHen you are levered 20 to 1 as banks are this means a lot. And likely this spigot has not really hit the corporate debt market.

IMHO, this is getting worse not better and IMHO it is because the shadow banking environment is now going away they were an incredible amount of credit creation in the last 5 years.

Fannie Mae is in trouble. ANd in the end might go away for awhile as the Gov't probably will bail out the mortgage debt and leave FNM shareholders to waste. Tell this would not freeze you up as a banker?

IMHO, Paulson is fool and playing a dangerous game not giving the market some clear guidelines. Presently he's heading the GSE's down the road where they will lay to waste a ton of bank assets. Many will fold unless they don't firm up the agency bids. I have talked to many in the biz and they agree. When you shore up the top classes then risk levels can increase. But even today the top class is not seemingly secure as they play games. In the end a bank bailout with dwarf what it takes to avoid it now. But that likely takes an understanding which I don't believe Congress has. They are bailing out sub prime bozos that mean "nothing" in the big picture.

Inflation worries??? I hope this time next year we do have them because it means they have stopped the tide of credit contraction.

OldVet said...

I can attest to margin call effects on hedgies. Got a longstanding order for Indian fund at low price filled. Down 6% on India market action, down another 6% on margin call potential to Blackstone who runs it. Banks getting bulked up by supercheap funds from Fed, now laying wood to erstwhile best customers. Where is that tape about "bum fights" where kids paid bums a couple bucks to knock each others teeth out?