Friday, June 06, 2008

Stop! Hammer Time

Man oh man. Just when you think things can't any weirder, they turn around and do so. Yesterday saw ECB president Jean-Claude Trichet provide further evidence of his affection for late 80's hip-hop music. For having noted that consumer price inflation was likely to perform the Humpty Dance earlier in the year, JCT switched tack yesterday and in his monthly press conference said "Stop! Hammer time!"

For what else can you call promising to re-embark on a tightening cycle, possibly as early as next month, into a slowing economy? "Hammer time" is also a pretty good description of action in European fixed income, particularly at the front end, over the past 24 hours. Euribor has been crushed (check out December Euribor below), dragging short sterling, eurodollars, euroswiss, and many a punter's P/L with it. Eurostoxx sold off a bit yesterday, but today have roared back to trade at pre-Trichet levels.
And what, pray tell, can be more bullish for equities than a central bank forced to tighten into a slowing economy by inflation? Judging by yesterday's evidence, having your credit rating dropped by the ratings agencies, and both Ambac and MBIA rallied after S&P lowered their financial strength ratings.

No doubt job losses of "only" 30k or so in today's payroll report will be taken as a further cue to buy stocks. Clearly, yesterday's chain store sales report was uber-bullish; at +3% y/y, they were only down 1% y/y in volume terms! And the impact of the stimulus checks is clearly beginning to boost spending growth: just check out the recent 12 week surge in those chain store sales!

And hey- what could be more bullish for the economy and equities than a y/y decline in household wealth? Just look at how great is was to own equities during previous periods of wealth contraction, such as 2001-2002 and 1974!
But hey- at least the low level of interest rates is helping the economy to resuscitate. Hey, the housing market's gonna revive any day now....and mortgage refis can only go one baby, and that's up!
Yeah, Macro Man's a bit confused and, frankly, bitter at the resilience of equities. A little "f*** you" transactional friction hasn't helped, either. Judging from a couple of the comments yesterday, Macro Man is not along in his short-equity pain. And perhaps that's the real story here...markets are still trading off of positioning.

Because everything else that Macro Man looks at with respect to equities, including Mr. Trichet yesterday, screams "U can't touch this."

16 comments:

Anonymous said...

Wall Streets job is to take the most amount of money, from the most amount of people, in the least amount of time. Up right now must be taking the most.

Macro Trading Ideas said...

Mr. Trichet have done his nice job, maybe he could also be right to hike a quarter, i don't know.. but what the hell is pricing mkt??
Today has been the greatest curve move in the euro story, this morning we see schatz -0.3% and buxl +2,3%, it doesn't make any sense. Huge stops due to structures products..
However we need to keep calm, how much is in the curve??
We have, on OIS, 4,5 at 100% in october, and 4,75% at 100% in 2009: why a new tightening cycle? 2yr schatz at 4,75% is a huge buy!.
But really Trichet thinks to control food and energy prices?? infact insterday crude + 6$ and corn new high!!!
Short-term interest rates impact cost of credit, but not supply/demand of money. We have a huge divergence between M1 and M3, repo growth, why don't work on this??
Now people will pay 6% more with this Euribor rates, I'm betting in some riots at ECB palace, driven by "peripheral" prime ministers!!

Macro Trading Ideas said...

PS: equities in Europe will suffer. Obviously rally in US on a crude oil jump??crazy.. driven by our "devil's index" Russel2000 at new relative highs!!!
Difficult markets for some macro trader...

spagetti said...

and i thought macro trading is finally in, and momentum finally out. that was to be one of the themes this year, more differentiation more market moves based on fundamentals.
it think you yourself MM have mentioned this in a post sometime late last year.

im printing blog comments and showing it to my boss, i hope he sympathises .. because looking at the p&l he isnt the happiest camper around..

also.. looks like EM still vulnerable despite the equity market's irrational exuberance

Hungarian forints blew up today
and its more likely to cause weakness in the currency than support it. i bet the same will happen in turkey.

so maybe its EM that will be weakest link near term and not equities. because needless to say i dont still believe risky assets can 'hang in' there as they are

Anonymous said...

my comment is totally anecdotal and may not add much value: when everyone is "thinking" the market should be lower and it goes up, be careful not to abandon the lower thesis when it finally starts to move in your direction...i.e. the final selling will be quicker and deeper than many will otherwise believe due to the current relative strength of risk assets getting embedded into the equation.

i always worry about my positioning and analysis when it moves my direction from the first day. my best trades take weeks/months to play out, but pay off big b/c i'm not a wuss to press when the tide changes.

Macro Man said...

Spag...I concur on certain EM stories, but even there it is very very tricky. Look at Turkey, for example, where the bonds and equities have been stuffed and roasted, respectively.....and the currency is bulletproof, despite the inflation target shift and the headscarf decision.

@Anon

Interesting. I find that my best ideas tend to start workig straight away, and when they do I add aggressively. I suppose my "expertise", insofar as I have any, is to be 24 hours cleverer than the street...or at least to know when my macro views are not in force, so to speak.

Anonymous said...

i'm thinking of a silver trade a few months back that you tried...it wasn't panning out for a week or so, trade abandoned, and then there was a 30% move higher...now that was a great idea that didn't move overnight.

Anonymous said...

MM got to love today's market. It somehow looked like March all over again.

TV said...

The more "obvious" the bear trade, the more it must confound prior to the move.

I feel the pain and frustration....for your examples and others. Its the cross we bears bear.

The payoff is the speed of the decline and performance spread benefit

Yesterday and today's price action feels like an inflection point

Macro Man said...

Well guys, you're right...I am enjoying today quite a bit more than yesterday. I'd have enjoyed it even more if I hadn't been stopped out of 1/3 of my position since 4pm NY time yesterday. I guess you need to make a sacrifice to the market gods before they reward you with a little lovin'.

Macro Man said...

Anon- toiche on silver. Tho as I recall, it worked immediately, then snapped back to clpse to entry.

You're right, I was too quick to chop, but I suppose I was negotiating to leave my old shop and had other things on my mind!

Anantha said...

It might sound silly and juvenile (probably it is a bit of both). But, America has put pressure on Gulf countries not to cut the peg. It has told them that their SWFs are welcome and in fact, requested to buy American bank stocks. They may perhaps be enlisted to support stocks to keep up - to any extent possible - consumer spending, for an asset-price driven consumer would be crazily hurt if both stocks and houses drop.

The quid pro quo would be not to let oil price fall too much?

Hence the most striking disconnect between market action and reality.

Sounds far-fetched and it perhaps is. But, what the hell, speculating on hare-brained ideas is free.

Mr. Prop said...

What may be missed is that pre-payment models were designed for appreciating housing markets. In a credit impaired world, models are broken. The opportunity to refinance is not available at any price. Lenders have no appetite to lend. So, for a given level of rates, there is much less refinancing, ergo much less liquidity that can be accessed for the economy as a whole. Categoricaly bearish the economy and risky assets.

Macro Man said...

Mr. Prop....agreed, categorically bearish. Hence the unbridled irritation that equities have been so resilient! Even today, which feels horribly bearish and a vindication of all things ursine, has merely taken us back to yesterday's open in the S&P 500.

The lesson I have learned this week is that even on an index level, security selection is important. My short in Eurostoxx and FTSE has been pretty stress free all week. The NDX and Nikkei shorts, now consigned to the stop-loss dustbin of history, were unsatisfying performers since inception. S&P shorts have worked but been unsatisfying, as this 1370 level is strangely resilient. Short RTY has been a non-stop visit to Dr. Market's free enema clinic.

A Thinker said...

With the 3% move down today, I wonder if we now see a very rapid acceleration lower in stocks..possibly a stock market crash next week. My reasoning is as follows

a) The fed has imposed on itself a straitjacket - with BB's hawkish comments last week (supposedly to try and credibly instate the reinactment of the strong usd mantra (which initself was I think an indirect attempt to stabilse commodities)) if the market was to sell off very quickly, the potential for the fed to cut rates has been severely impaired (as the consequences now would be a severe dent to credibility and a collapse in the USD - something that they may be forced into at some point). In addition, there is very little the Europeans can do either now, that they have firmly, as they have firmly made their bed, and headline infl pressures have accelerated over the last 2 days. Policymakers tried to be clever this week - it has blown up in their face. The Fed is now back behind the curve.

b)The market has been frustrated at playing the downside, but given the number of false starts I doubt many ppl are on this move. As such, I fully expect hedge funds/macro players to add/initiate early next week.


Buy Chf, wear diamonds..

Charles Longfellow said...

Nice MC Hammer Link. His deep crotch trouser style is suggestive that he might have made a great day trader!
You need a certain deep crotch attitude to make it happen, (baby).