Exquisite timing

Talk about exquisite timing. Earnings season is winding to a close, and while the figures haven't been great, they haven't been uniformly awful, either. As a result, US (and, by extension, global) equities have enjoyed quite a tasty respite from the early-year bear market.
However, as Macro Man looks at his calendar, he sees that tomorrow is the end of April (and what an eventful one it should prove to be, what with the US GDP release and Fed announcement!); and he cannot help but recall the old equity trading saw that one should "sell in May and go away." Yet lo and behold, what should appear on the cover of Barrons this week but a tan, rested, and ready bull, looking relaxed and ready for some action.

Colour Macro Man skeptical. The S&P 500 has wended its way towards its 1400-1405 resistance zone, but the price action and volume has been less than convincing. The Barrons cover article was revealing; its survey of "big money" managers showed a marked skew towards bullishness, with many appearing to believe that this was a contrarian view. Yoinks!

It appears that these chaps are prepared to trade the recovery before we've actually experienced the recession; Macro Man remains highly wary of this view and outcome. Worryingly, resilience elsewhere in the world is starting to crumble. Dataflow in Europe over the last week has been pretty uniformly awful; it is starting to look like Macro Man himself was guilty of some exquisite timing last week.

Similarly to the SPX, the Eurostoxx is running right into resistance, though chartists might note that a break above would appear to confirm an inverted head and shoulders pattern, thereby heralding further gains. But with the European dataflow turning down so hard and equities nearing resistance, Macro Man finds himself growing more and more bullish fixed income, particularly euro fixed income, every day. He has some positioning there, and has now resorted to sitting on his hands so that he doesn't add too much, too soon.
He can only hope that his timing is as exquisite as he reckons Barrons' cover to be.
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April 29, 2008 at 10:30 AM ×

MM, now risky markets are falling in love with "second derivative world" theme, in which only rate of change is important. The problem is that the change is based on optimistic wishes, we will see.. Good time to buy cheap put on SP500.
About Euro bonds, today we can see the confirmation of big problems for some country as Spain, have you seen retail sales YoY graph? It's dreadful and other data today confirm that bad times are coming again..
I too have bought some call on schatz, but also today we aren't having a lot of fun... bad data are coming slowly, but sadly also ECB will adjust slowly.. have you some idea about the timing??

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Macro Man
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April 29, 2008 at 2:36 PM ×

That's exactly it...at this point, the timing remains uncertain. Wellink took pains today to play down the significance of the German CPI figure...but inflation throughout the Eurozone has surprised to the downside for April. Should this carry on for another couple of months, particularly in the context of weak activity data, confidence, and money supply growth, they could conceivably about face during the summer. Not a base case, mind you, but it is possible.

Of course, what the market will do is another thing. We know that the street has gotten carted out trying to play the euro bull fixed income story this year; it would be a real f*** you for the curve to rally now, even with the ECB still somewhat on the hawkish side.

At this point, I'll I'm really prepared to do take low risk, potential higher ward bets like the DUM8 calls.

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Anonymous
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April 29, 2008 at 7:06 PM ×

Hi MM, agreed on the EUR curve. I also got some pain from it recently but would also think better times are coming. Any thoughts on ZAR markets? SARB governor suddenly in very hawkish tone while economy clearly showing some signs of slowing although from fairly high levels. London boyz seem to be convinced 100bps (if not more) of further hike is done deal while some of the locals (including myself) see bit of political game here too, i.e. Tito trying to score good points in Zuma camp by lambasting the (still) Mbeki administration for messing up his inflation targeting regime. Afterall, he apparently wants to be the next FinMin.
Regards,
Bitr

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Mr. Prop
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April 29, 2008 at 9:01 PM ×

While I lean towards a correction in the recent bull run in equities for the very reasons articulated by M-squared I realized also that stocks are forward discounting mechanisms. I also am somewhat in love with the 1992-1994 replay - the last housing bust/credit crunch scenario. If you bought stocks on the third consecutive down payroll report you were loving life 24 months later. The key was a Goldilocks outcome - soft growth and disinflation. The difficulty now is will inflation moderate in the normal lagging way it did then. On a secular basis inflation is going higher, but on a cyclical basis is should soften. So Goldilocks has a chance. In terms of risk factors, I dont believe financial are the issue. Instead is it whether oil goes parablolic and creates a non-linear demand destruction. I see no way that stocks can rally if oil goes to 135-140 in the next 6 weeks. So for now trade the "sell in May and go away" but be cognizant that relief would come if oil were to unwind the current speculative mania - ie - I am wrong about the coming parabolic rise.

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D
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April 30, 2008 at 12:02 AM ×

Here's 2 cents USD from Chicago:

Fed pauses tomorrow to curb commodity/currency speculation. The post G7 meeting message that "participants didn't get what we meant about the dollar" speaks to the bankers' short term priorities and the action on the IRX is the tell.

The commodity sector should correct, but you cannot compare the global credit contagion with the post-S&L era. Private funding of debt has not returned and there is upwards of a trillion dollars in losses yet to be taken...not the mark to market variety. When the government has bought into FNM/FRE/C/GS/MER etc. the credit crisis will be over. I don't see that happening until 2009 with the latest round two of recapitalization.

Expect the USD to strengthen into the Olympics and the real games to begin after that brief intermission.

Trade your own beliefs, just offering you something to consider.

:)

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D
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April 30, 2008 at 6:12 AM ×

Update...

Not sure what this means, but Bloomberg has 1.5% on their MarketDate page:

http://www.bloomberg.com/markets/index.html?Intro=intro_markets

Probably a f'up but interesting nonetheless.

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Adrem
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April 30, 2008 at 12:37 PM ×

One might say that a recession is a no-brainer. Not just weaker consumption but investment too, which is around 15% of GDP. Also the net export contribution is struggling against the "J" curve effect of a fallen dollar and likely to continue to abstract from GDP. All it leaves is a steady gov input, usually around 15% of GDP. Can gov make up for investment? Doubtful.

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Anonymous
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April 30, 2008 at 12:46 PM ×

I don't know where that 1.50 comes from. The page (correctly) shows 2.25 as the target rate. The effective rate yesterday came in at 2.21 (see http://www.ny.frb.org/markets/omo/dmm/fedfundsdata.cfm for details), nowhere near 1.50.

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