Friday, July 25, 2008

Dag NAB it!

Just when you thought it was safe to go back in that water.....a great white shark from the Great Barrier Reef goes and bites your leg off. While yesterday's US equity market meltdown was home-grown, it left the SPX in no man's land. A month ago, short equity risk was far and away Macro Man's biggest position, but now he has virtually nothing in equities except the tiny, wretched remains of the large cap/small cap trade and a modest long vol position in Europe.

For Macro Man, the most interesting recent developments have come from Down Under (and Just Over). While it has yet to garner too many substantial headlines, the news that National Australia Bank (NAB) has written down its US RMBS portfolio to 10 cents on the dollar could send shockwaves through the financial system.

Much of NAB's book was made up of AAA securities, so to mark them down so drastically certain suggests that "the model", whatever it is, is broken. Now, when you consider that a whole host of banks are either marking this stuff much higher on their balance sheets, or have moved it to the limbo of "Level 3" make-up-whatever-price-you-want assets, a publicly-disclosed 90% write-off on similar assets could represent a rather unpleasant dash of cold water in the face of much larger fish than NAB. No doubt a host of banking execs are cursing NAB into their Cheerios this morning; after all, nobody likes a whistle blower, especially when there's plenty of other bad news to deal with.

Meanwhile, we may have seen the first SWF stop loss in the financial sector. Rumours are swirling that Temasek, Singapore's "other" SWF, has puked some of its stake Merrill Lynch. So far from being the White Knight who saves the day with their hordes of cash, it appears that SWFs may exacerbate some of the selling pressure. Oh dear.

In any event, recent developments may tempt punters back into a trade that can only be described as "equity market crack", long energy/short financials. While it's tempting to call the recent, ahem, "setback" in that trade "just one of those things", Macro Man cannot help but wonder if the sharp reversal of fortune hasn't exacted more enduring damage, or is at least telling us something about slowing growth outside of the US. Remember, kids, don't believe the pipe!
Finally, it's worth noting that the 1 year anniversary of the beginning of last year's FX carry collapse has just passed. Macro Man mused last week about the chances of history repeating or rhyming in NZD/JPY....and sure enough, the cross has started coming a bit lower. Will the same hold true in EUR/JPY, where the pattern is almost identical?
If so, it will require Mrs. Watanabe and the reformed DOTW to capitulate. Recent data suggests record retail longs in NZD/JPY, so one lives in lives in hope.


Anonymous said...

Hey Macro,
fan of your's not true that us banks haven't marked their stuff to levels around where NAB is marking them...AAA CDOs are marked below 20c on the USD, check MER's results for example, or take a lot at where TABX and ABX are trading to get a better view. best,

Macro Man said...

Anon, the lowest AAA rated ABX tranche that markit has listed is about 42, and that for the latest, most-turd like vintage. Earlier vintages are priced much, much higher.

Hence, the shock value of NAB saying 'it's worth 10c' when the index level marking might suggest a "fair value" of 50c or more.

That's how I understand it, anyways...

Anonymous said...


Are you aware if there's a way to be short NZD/JPY using an ETF or other non FX trade?

tmcgee said...

On DOTW, bingo. The TFX data today showed a surge in NZD/JPY net longs to a record peak after the post-RBNZ slide. And now they make up about 60/70% of all net longs. Now that's mad money.

Sorry for the long absence and blog abandonment. Hope to make a return before long.

Anonymous said...

macro dude, u're right about ABX, but not about CDOs. those are more akin to TABX. basically ppl took a bunch of BBB stuff (look where those are trading on ABX) and put them through the CDO sausage factory and presto you get a layer of AAA stuff. that's most likely the stuff NAB has on its books, the same way MER and others do.
(i'm a pm for a macro fund in brazil)

CV said...

Some very astute observations MM and while I have little knowledge of NAB etc I can appreciate the potential significance. Thanks for the heads up on the SWF and Merrill ... that would certainly be hilarios (if not quite frightening) if what you suggest is right. Please do keep your eyes and ears open for more on this ... myself (and I imagine Brad Setser et al.) would be interested to know if this is suggestive of more to come.

In general, I am slow in revivng up for comments (or perhaps you are just fast) so I would like to reiterate the following point from Wednesday's installment which, in my book, is the comment of the week;

"There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way."

Well said; I think this is very much to the point and many an economy (read; recent floater) in Eastern Europe may be in for a lesson on this. Hungary and Ukraine in particularly I think. However, it obviously also applies much more generally I feel.

Now, a week ago I made the rather ridiculous (in a post mortem perspective) claim that one should short the AUD/USD at 0.95ish ... after which it promptly went to 0.98 or thereabouts. Now that the Kiwi is loosing yield advantage will the Aussie follow suit; that is, when will Mr. Stevens et al. cut or are they not even done with their hiking cycle? ... As for the recent drop in the AUD/USD it could of course also be all due to oil moving into the 120s but there must be an end to everything I guess.

Interesting comments on the EUR/JPY and while I am no techy at all, I am watching in amazement the levels of the EUR/JPY. Timing is everything in this game but I would not be surprised to see a move towards 158-160 at some point soon (profit taking anyone?). The only caveat would be the extent to which the slowing Japanese economy itself will intensify outflows (i.e. weaken the Yen further) ... heck; exports are falling too now!


spagetti said...

eurjpy went from 167.70 on fri early morning to 169.30 without the equity markets or the eur/yen int.rate diff doing anything. ??

also.. eurczk sold off on a doveish
then u get a very weak IFO and the mkt doesnt make the connection bw that and CEE's reliance on eurozone imports. so EURPLN, EURHUF rally back to the pre- Czech Nat.Bank announcement levels.. ??

i think its noise and CEE will weaken vs EUR and more ag. USD
as EUR generally will weaken
browsing through sellside research stuff now everyone is mega-bear on the eurozone economy (suddenly)
and the tone is shifting to equities and USD correlation moving from positive to negative

any thoughts ?

Anonymous said...

so, MER just sold 31bio of ABS CDOs, which is carried @ 11bio on its 2Q books (35c) for 6.7bio to lone star funds (22c) not quite the 10c from NAB. so i wasn't right that it already marked down all the way, but somewhat close...cheers

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