There's an old trading aphorism that is worth being followed by both veteran fund managers and market neophytes: picking bottoms gives you stinky fingers. The point, of course, is not to catch the falling knife, not to stand in front of the runaway train, and not to say that "enough is enough" before sings of reversal emerge.
So it was with some trepidation that Macro Man read a couple of analyses of yesterday's US data that attempted to put a positive spin on new home sales. Mind you, the authors, among whom included Goldman Sachs' US research team, didn't have the temerity to say that "the low is in." However, they did suggest that a bottom is, in the words of Goldman's Jan Hatzius, "coming closer."
After perusing the data, Macro Man can't help but wonder if these chaps aren't about to experience "stinky finger syndrome." While yesterday's new home supply actually fell slightly when expressed in months' worth of sales, the recent figures on the supply of existing homes (far greater, obviously, than the supply of new homes in terms of number of units) reached a new high. No signs of a bottom here!
Another of Macro Man's favourite tricks is to look at the 6m/6m change in certain indicators. And while it's true that the six month change in existing home sales has recently ticked a bit higher (or, to be precise, a bit less low), the rate of change for other metrics- new home sales, starts, and permits- remain at their nadirs.
Call Macro Man crazy, but the experience with credit and the financials since last July have been lesson enough in the folly of calling the bottom in anything. In a world where being early is the same as being wrong, picking a bottom in the housing market would appear to be a low Sharpe-ratio enterprise, to say the least.
It's not as if Joe Sixpack, the putative buyer of houses that would help establish a bottom, is feeling terribly rosy at the moment. Last night's ABC consumer confidence survey printed an all-time low, and the Conference Board measure was similarly dire earlier in the day. So naturally the S&P rallied on the day; don'tcha love window dressing week?
Macro Man retains the view that consumers are feeling the squeeze from low real incomes, a phenomenon partially buit not totally explained by rising energy costs. Clearly, rising gas bills are beginning to impact drivers' behaviour; the year-on-year decline in March vehicle miles traveled was the lowest since records began in 1942.
Youl'll pardon Macro Man if he tries to avoid picking bottoms in anything at the moment....
So it was with some trepidation that Macro Man read a couple of analyses of yesterday's US data that attempted to put a positive spin on new home sales. Mind you, the authors, among whom included Goldman Sachs' US research team, didn't have the temerity to say that "the low is in." However, they did suggest that a bottom is, in the words of Goldman's Jan Hatzius, "coming closer."
After perusing the data, Macro Man can't help but wonder if these chaps aren't about to experience "stinky finger syndrome." While yesterday's new home supply actually fell slightly when expressed in months' worth of sales, the recent figures on the supply of existing homes (far greater, obviously, than the supply of new homes in terms of number of units) reached a new high. No signs of a bottom here!
Another of Macro Man's favourite tricks is to look at the 6m/6m change in certain indicators. And while it's true that the six month change in existing home sales has recently ticked a bit higher (or, to be precise, a bit less low), the rate of change for other metrics- new home sales, starts, and permits- remain at their nadirs.
Call Macro Man crazy, but the experience with credit and the financials since last July have been lesson enough in the folly of calling the bottom in anything. In a world where being early is the same as being wrong, picking a bottom in the housing market would appear to be a low Sharpe-ratio enterprise, to say the least.It's not as if Joe Sixpack, the putative buyer of houses that would help establish a bottom, is feeling terribly rosy at the moment. Last night's ABC consumer confidence survey printed an all-time low, and the Conference Board measure was similarly dire earlier in the day. So naturally the S&P rallied on the day; don'tcha love window dressing week?
Macro Man retains the view that consumers are feeling the squeeze from low real incomes, a phenomenon partially buit not totally explained by rising energy costs. Clearly, rising gas bills are beginning to impact drivers' behaviour; the year-on-year decline in March vehicle miles traveled was the lowest since records began in 1942.Youl'll pardon Macro Man if he tries to avoid picking bottoms in anything at the moment....
25 comments
Click here for commentsHi MM,
Reply"...picking a bottom in the housing market would appear to be a low Sharpe-ratio enterprise, to say the least". Could you please explain what you actually did mean? I remember the Sharpe-ratio as having something to do with mutual funds and their volatility, but many years have passed since I last read something on this subject...
Anyway, the spin you wrote about seems to have lifted USD as well. Yesterday I happened to watch the 5minutes chart of EUR/USD soon after the release of Conference Board survey and new home sales stats (courtesy of my employer...) and as far as I can understand it was moving quite the opposite way it was supposed to according to bottom line figures - I guess those currency news-traders out there must have had a really tough day!
It's going to be a hot summer for US consumers, anyway...
Read you later, AT
AT, the Sharpe ratio is an investment's return (typically expressed in excess of some risk-free rate) divided by its volatility. Essentially what I am saying is that you won;t make any money and you'll experience high volatility.
ReplyHaha, stinky fingers, haven't heard that one before. Will continue to watch the housing market with interest as Mr Gross has obviously tried to pick the bottom, although he may have some influence over events which changes the dynamic somewhat. Wondering if he'll have a Peloton style experience, they certainly smelt up the place.
ReplyKeep up the good work MM.
JL
i think many are struggling to understand why equities holding up so well.. which i guess is one of the reason they r holding up well; too many fast money shorts, i guess
ReplyBUT
if you have the time to look at the weekly charts, you will see a very similar pattern in 2001 when about 6 months from the peak the market rallied for about 2 months
just like now. same with market yields of bonds.
now i know how deceiving and utterly dangerous it is to 'datamine' for such patterns. but i cant help to see a hogh probability how eventually the pattern again rhymes and we see a selloff to new lows in equities and bond yields
any thoughts ?
18 of 20 cities in the Case Shiller 20 city index saw declines...what more does one need to know?
ReplyBest US Housing Analysis: http://calculatedrisk.blogspot.com/
If the USD/JPY can decisively break through 105.50 all bets are off on a US equities sell-off for now.
d
Reply18 of 20 cities, thats pretty bad I agree with you. but somehow the equity market is focusing on the 2 that did go up. i saw that fact highlighted by several commentators yday.
the glass seems 2/20th full to most people..
Your complaint is really about the cyclical nature of the markets. I don't think the market action over the past two days has anything to do with a housing bottom real, or perceived.
Replyeven if you pick the bottom in housing your reward is likely to be smelly---if a year from now case shiller is up 1% yoy your still looking at a 15% drop over two years--great if you bought your house at the peak and put 20% down 2 years later your close to negative equity once you factor in all those payments---doesn't make you want to go out and buy stuff--i think fast money is way to fast these days and missing the fact that real income is nonexistent outside of oil exporters we are all in debt---spx gonna be at 1000 in jan of 2009--and by the way one thing that doesn't go down as fast as up is prices--very aystmetic--don't think if oil settles at 100 we are going to see everyone run to cut prices (when was the last time the postal service cut rates) real income is heading lower for a long long time
ReplyNewsflash - this just in:
ReplyS&P 500 to experience negative volatility
May 28 2008 (Boomburg) -- The volatility of the S&P 500 index of leading industrial companies, normally always a positive number, is set to turn negative, experts say.
"After years of low volatility environment, we thought things couldn't go smoother. They have. With the introduction of imaginary numbers for prices has led to actual negative volatility," said a spokesman for the SUC, the US market regulator. "We are entering a new golden age."
"Your complaint is really about the cyclical nature of the markets. I don't think the market action over the past two days has anything to do with a housing bottom real, or perceived."
Replyi think it does have something to do, with a 'PERCEIVED' bottom, or the perception that we are nearing a bottom.
eventhough one must agree with MM that the evidence for this is hardly convincing
t, apparently the investment bank quants are basing their new vol models using a methodology adapted from the Riemann Hypothesis; they assume that all daily returns in the SPX, when fed through the appropriate zeta function, generate zeros that line up against a certain line when the SPX is plotted on an imaginary number landscape. Fascinating stuff, really....
ReplyT gets the Ministry of Truth's daily read too.. :)
Reply1984/Atlas Shrugged
SAFE is the best acronym out there for a government body. I also liked the HOPE Alliance for mortgages in the US. I guess the successor to the "Patriot" Act is called the "Victory" Act...I can't wait to see what they want this time.
MM, There is an apt children's picture parable entitled Verdi about a young eager python who tempts fate with acts of daring, vowing never to become old boring and conservative like the old pythons that just sit in the trees and sun themselves.
ReplyAs a contrarian, I, too, used to boldly go where few dared, scoffing at those who mimetically sold or were happy to "miss the first 50%", frequently making nice turns and swings, but in the process getting stuffed with lines of Adelphia, Woldcom, Enron and what-not. Fortunately, I have been wise-enough (for the most part) to eschew "full-blown" scale-down mentality, where the grand prize, is "a Martingale" and job in the mail room.
As I've gotten older, I am more sympathetic to the wisdom of waiting for validation, particularly with respect to strong trends with both cyclical and secular elements. And while I will be the first to admit that there is something inherently satisfying about being "the right way 'round" on the big gaps, these rarely come from contra-trend trades, as opposed to topping (bottoming) formations or with-trend positions.
As for housing, with such a diverse market, values still elevated and so much to still clear amidst a deteriorating backdrop in all anglo-saxon lands, buyers'll have plenty of time to know when it's bottomed, "bob's your uncle"
C, most of the non-CTAs that I know try to be contrarian (or at least to think of themselves that way.) And when there is large, stale positioning whose fundamental rationale is past its sell-by date, then contrarian positioning can be a thing of beauty (my long USD/JPY position in 2005, before the attack of the DOTW, springs to mind.)
ReplyHowever, buying something simply because the number is low (or selling something because the number is high) without a new fundamental catalyst is a difficult business, particularly in the hedge fund space, where's little investor tolerance for the slings and arrows of outrageous fortune. Value investing is, in any short run patch of time, an inherently lower Sharpe ratio strategy than many others, as what is cheap tends to get cheaper.
And most top-down index investors like yrs truly are simply not competent to reach judgement on when, say, homebuilders have discounted every conceivable weakness and thus offer true "value."
I think that true value investing does have a place in a diversified investment portfolio; however, I think it's best practiced by real money managers who have sufficient leeway to take a true long term view without fear of the dreaded "shoulder tap" from the risk manager.
M-squared - have you ever graphed ABC confidence against equity 3m or 1y returns. It wont make you terribly bullish unless you subcribe to stick finger theory of markets. It is true that major equity bottoms correspond to confidence extremes, but that may be too speculative at this point. Having said that don't you get the feeling that there might be one last hurrah for equities before the summer meltdown occurs? Wishful thinking?
ReplyMr. Prop...given that I am currently short equities in sundry fashions, I would like nothing better than if the equity chart "caught up" with the ABC chart.
ReplyCan we grind higher this summer? Sure. It seems to me, though, that this market hasn't unwound enough of the last painful grind higher to start a new one immediately.
The inflation data has been incredibly (as in, literally not credible) well begaved in light of the recent energy rise, but the confidence data tells you what the inflatoin pictures is REALLY like, IMHO. Merrill put out a note today going over the seasonal adjustment factors for gas for the next few months, and concluded by suggesting that it won;t take much for y/y CPI to hit 5.5% in early autumn. And if that occurs, it's hard to see stocks doing anything but tanking.
Specialized value investors like Eddie Lampert that know Citi is worth multiples of the $50+ they were value investing in it at.
ReplyWhat a great gig that guy has. 2 and 20 with a 5 year lock-up to sing and dance with OPM.
http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm
ReplyFed effective funds rate has missed the target rate by 23bps - does this presage a tightening, does it indicate stress or something else?
If so it would support the thesis that the bottom is not in in housing (if it needs any more support!)
The bear market bounce is close to over IMHO, not least because the cheerful optimists in investment houses are getting their pink slips. Along with 24,000 white collar dopes who work for Ford in the US. I'd love to see some trend lines in how many people are actively trading stocks these days compared to last couple of years. I suspect there are fewer rowers on the oars, and the equity boat will be slowing soon. The resilience of recent months are buyers punting so far ahead in the cycle they're skipping the econ downturn entirely to get ahead of the pack.
ReplyMM
ReplyI really must compliment you on your blogg. I read a daily bevy of expensive subscriptions, but a day doesn't go by without me reading your musings.
Keep it up and I wish you much alpha in your funds.
Mickson
MM-First of all, congrats on a very thougtfull blog. Having witnessed the decline of "Wall St."employment in the 1970's and having a belief that we are about to see a repeat of same, you will see declines in property values in the NYC metro region that will put FL,NV and CA to shame. I personally witnessed upper east side co-ops and town houses that traded for 10-20% of their 1960's values
ReplyKeep in mind that the Housing numbers may be skewed by reporting firms adding foreclosures to the sales figure.
Replyhttp://housingdoom.com/2007/01/11/
"Data Quick did not respond to my email. The Record Searchlight contacted DataQuick. Data Quick indicated their program,"Prospect Finder Farm Services", has NO function to distinguish Deeds from Trustees Deeds (foreclosures) and it would be expensive to fix this gross error."
It seems to me that there ought to be quite an easy way to forecast the thump of this fat American's housing bottom against the stucco*.
ReplyIt's so easy, even a global macro caveman could do it.
Take the futures price of the Case-Shiller indices on the CME, and convert to the implied future value of the index. (I figure there has to be some adjustments on account of yield curve that I don't have the expertise to do, but I'm sure Macro could ring up Baker street for some consulting).
When the future implied price rise from now until then is equal to the implied predicted inflator over that same interval, then bum has met bottom.
This should work because inventory arbitrage throughout the term curve for these futures seems utterly infeasible, and thus the price really should reflect a pretty decent informed consensus expectation of the true future value modulo cost of money.
* My apparently unconsciously presicient correlative neurons first commanded my fingers to type 'stucko'.
I personally witnessed upper east side co-ops and town houses that traded for 10-20% of their 1960's values.
ReplyTo me I wonder whether a city told to DROP DEAD, a debilitating crime explosion, plus a few cinema verite 70's films might have further spooked the animal spirits of that time?
Or is disco and the etcetera REALLY coming back?
Well you can tell by the way I smoked that TAF
I'm a macro man, ain't no laugh
Music loud and bloomberg warm
I've been kicked around since blog was born
And now it's all right, it's ok,
I can't trade no other way
You go try to understand
Rupert Murdoch's effect on man
Whether you're a gov'ner
or if you're still shaggin her
Stops are stayin' alive, stayin alive
Smell the yuan peg breaking
And correlation quakin
Stops are stayin' alive, stayin' alive
Bravo, Anon! You are well-equipped to burn, baby, burn in the Macro Inferno.
Reply