Wednesday, July 16, 2008

Buy...I mean sell...I mean buy....I mean sell

Shift F9.

Well, what can you say? Yesterday was a "sell everything" least until that list included oil....after which it became a "buy everything" day. That is, until there were 45 minutes left in yesterday's US equity session, at which point it became a "sell everything" day again. Fun for the whole family!

As observed a few times over the last week or so, Macro Mas has found trading conditions evolve from pretty relaxing to downright terrifying at times. He's found it pretty easy to second guess every trading decision he makes, often after only a few minutes. That's an urge that he is trying to fight; in all conditions, but particularly when it gets a touch difficult, it's important to look forward rather than back.

In any event, it doesn't take much digging to confirm that conditions have been tricky, and that Macro Man hasn't dropped 50 points of trading IQ since the 4th of July. Consider that over the past 10 trading days, a period in which the SPX has dropped 5.1%, no less than seven of those days have witnessed an intraday rally of at least 1.5%. Unless one is a brilliant intraday trader- and Macro Man is not- this sort of market naturally lends itself to trades that have a, ahem, "suboptimal P/L impact."

Elsewhere, yesterday's post was a perfect example of the market Heisenberg Uncertainty Principle in action. In observing the strange lack of volatility in GBP/JPY, Macro Man evidently changed the dynamic, as the cross finally broke away from the 211 tractor beam to close New York at 210. At the time of writing, it's now in the mid 208's.

The ability of the yen crosses to withstand equity market volatility has certainly been puzzling, but it's not completely without precedent. After all, it was last June and July that the collapse of the Bear Stearns (remember them?) hedge funds sent the initial shockwaves of the current crisis through financial markets. For most of those months, FX carry was unperturbed: NZD/JPY rallied 8.8% from the end of May to July 23!
After that, of course, the wheels came off rather badly, as the chart above demonstrates. Now, Macro Man would not suggest that we'll see a sell-off in yen crosses of a magnitude similar to last year, for the simple reason that aggregate positioning (at least among gai-jin) is much smaller. Curiously, next week's RBNZ announcement is slated for the 23rd/24th of next week (depending on your time zone)....what odds that history repeats, or at least rhymes?

Finally, Macro Man supposes that he should write a few words about the regulatory regime in the US, where the SEC has temporarily banned naked short selling in certain institutions. While there may be some merit in banning naked shorts, the move does smack of desperation- particularly when one considers that a number of firms on the protected list are probably themselves perpetrators of the strategy in one way or another. What's next? Banning puts? Banning sales altogether ("So sorry...this stock has a 100 year lock up period")?

It's enough to make one shake one's head in despair. Macro Man had to laugh at yesterday's Bernanke testimony, where Sen. Jim Bunning delivered a philippic of such vitriol that you've gotta say that he's still got the fastball that propelled him to baseball's Hall of Fame! If you haven't seen it, click on the link for the video- it really is quite amusing.


Charles Butler said...

I can see that you're on it, MM, but in the likely event that 'this situation' continues over a medium term, the forward risks for investment strategies are outstandingly political.

In another vein, yesterday's general tenor raised the spectre of excessive correlation, doncha think.

yoni said...

the Jim Bunning philippic requires a "h" in the link. At the moment it is "ttp://" so the link doesn't work.

Macro Man said...

CB, indeed. I am just pleased that I was able to use one of my favourite words, "philippic", in a market context.

Yoni, Doh! It's been fixed. Thanks for pointing it out.

Anonymous said...

sec is good news --bet getting rid of naked shorts cuts down on some of those 1.5% short squeezes you highlight--now it will be a heck of a lot less bumby to be short equity indexes--thank u MR cox--and PS are US housing number now the most important number for us govt debt--seems like they ought to be now that us govt is the offically the biggest home lender in the game

spagetti said...

"Consider that over the past 10 trading days, a period in which the SPX has dropped 5.1%, no less than seven of those days have witnessed an intraday rally of at least 1.5%. "
Macro Man

"Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so."
Douglas Adams

this is a good article

.. perhaps the bottom in equities is near, but not till we see a painful washout..

(im short again, im making the bookies rich)

Anonymous said...

bush view of anglo-saxon capitalism--its cool for govt to buy shares of publicaly traded companies, its cool to intervien to support currency (but other countries should not), its cool to outlaw short sales and negative info about companies (esp if we own stock or debt in them)

thats some serious free market capitalism--maybe the US can take some lessons from the chinese might learn something

Macro Man said...

Anon, point taken...except on the currency front. If anything, the US has has been too laissez-faire while many of its trading partners (Asia, the Middle East) fiddle around with their and others' currencies on a daily basis.

The US currently has just $42 billion in FX reserves, according to Bloomberg....less than Switzerland, Indonesia, Algeria, and the UK, among others. Frankly, it would be nice to know that the authorities did give a crap about the value of the dollar and backed up their words with action.

D said...

The attention given to all of the non-issues like short-selling and "rumor mongers" illustrates the magnitude of the problem. Hank was noticeably uncomfortable and had the most laughable response of the day, "I believe what I am saying."

His avoidance of calling the GSE "reform" a tax-payer funded bailout was instructive of his mentality: bet big so you marry the house if you go down! The thieves today are much more sophisticated than the old-school train robbers/outlaws. Casio G-Shock watch aside, very polished! I should send some kids to T-P his place in Barrington.


Anonymous said...

The US has become a bannana republic. This is not going to come at a low cost, this is the road to destruction and I view holding any US assetts at this point a fools game. I'm not a short term trader as Macro Man but longer term over the next 5 years or so the US is on the road to hell.

Richard said...

The tell on the US stock market was, IMHO, the spectacle of Ackman giving his solution on CNBC for the GSE's of wiping out the equity, while at the same time disclosing his short sale of same. In the meantime, most of the USA has rather low default levels on loans and mortgages. Indymac is not the same as FNM & FRE, and there are alot of folks who don't understand the difference. So, for now the shorts will be pasted.

Market move in the direction that makes the largest number of people the most uncomfortable.

RebelEconomist said...

Fun video Macro Man! It must be great to be able to stick it to central bankers like that. Interesting to read your concern in these comments about the US lack of fx reserves! Actually, the US has enough reserves to support the dollar, but its all gold. I'd love to see them have the cojones to sell that!

Anonymous said...

Anon, point taken...except on the currency front. If anything, the US has has been too laissez-faire while many of its trading partners (Asia, the Middle East) fiddle around with their and others' currencies on a daily basis.

That's because Bush's crony class can't figure out any way to make tons of money off it.

Everything else is explainable by the unified field theory of modern GOP economics: government is something which should be looted, not restrained.

Adrem said...

Re oil break down: The current Crude futures contract expiry is close. Is not the the degree of roll-forward crucial. If many back off and call it a day could lead to quite a drop?

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