Quiet Riot

"Come on feel the noize"
-Quiet Riot, covering Slade


OK, let's take stock of a few things that we know:

1) It's the last day of the month, with the concomitant fixing/rebalancing flows from non-directional players

2) It's the week after the UK bank holiday and the Friday before Labor Day

3) There are rumblings of exotics flows going through the European fixed income market of the kind that provided so much joy in June

4) Sensationalist stories are circulating that the Chekist Republic will cease oil shipments to Western Europe; in any event, the saga in Georgia rumbles on, with Turkey somehow getting sucked into the fray

Suffice to say that market liquidity is "subnormal" and that the noise-to-signal ratio is nearly infinite. Given the low levels of staffing and interest today, price action is perhaps best described as a "quiet riot".

These sorts of markets are not Macro Man's forte, and he's reduced risk to the extent that he's now carrying almost as much VAR risk on his left hand (via his wedding ring) than he is in his book. A slight exaggeration, perhaps...but not much.

How bad is it? Consider one of Macro Man's recent trades. On August 21, with USD/JPY at 108.32 and seemingly headed to zero (having been nearly 2 yen higher the previous day), Macro Man took a tactical bet that it might mean-revert, and bought an August 28 expiry 109.50 $ call for relative peanuts. Less than 24 hours, spot was through his strike.

Thus ensued a week's worth of furious gamma trading, with Macro Man selling USD/JPY spot above his 109.50 strike and buying it back below. It's a measure of how noisy the market has been that he managed to execute 17 (!) different gamma trades in the span of five days. Part of this total is down to his style of doing multiple small clips rather than one large one. but still; spot crossed through strike every single day after he bought the option.

Now, this particular trade was a successful one; Macro Man made three and a half times as much scalping as he spent on the option. But still; it's noise trading to the very edge of reason, and the return for all the attention and trading was, at the end of the day, pretty modest.

And to be honest, Macro Man doesn't enjoy it very much. Far better to wait for the dust settle, the smoke to clear, and for macro themes to re-assert themselves.
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Anonymous
admin
August 29, 2008 at 12:44 PM ×

A first-- no one in the office save moi and less than 50% occupancy on the morning rails. The US is beset by storms and politics as this hol weekend begins; work has been set aside. Your post was heartening as it showed that one can eke out a living in these times. Well done. In your experience, how long can one expect markets to trade w/o consistency with macro trends? I like your reference to Quiet Riot. I close while humming the BB King/ Muddy Waters classic--"I've Been Down So Long, It Feels Like Up to Me."

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Anonymous
admin
August 29, 2008 at 12:55 PM ×

Amongst my colleagues there are few that have experienced a tough market. We veterans have a substantial advantage. It helps, too, if one banked the bonuses in those good years, which vets knew to do. Musical reference-- Guns n Roses-- "Welcome to the Jungle."

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Anonymous
admin
August 29, 2008 at 1:11 PM ×

Identified with the post and drew comfort from it, sort of a --we're all in this together-- moment. Amused by your "edge of reason" comment at the end-- perhaps a raffish Helen Fielding reference? On second thought, Helen Fielding's works would not be on MM's reading list. Cheers.

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jill
admin
August 29, 2008 at 3:36 PM ×

A little levity for the long weekend:

http://equityprivate.typepad.com/ep/the_spiral/index.html

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Macro Man
admin
August 29, 2008 at 3:56 PM ×

Anon #1: These horrible conditions generally last longer than you think possible. And believe me, had a displayed the chart of the trades I did this month around a short gamma NZD position....well, let's just say it wouldn't look as nice.

Anon # 2, Indeed. I am already dreading my mortgage rollover early next year, so I'm glad that I haven't spent much of the last 2 years' bonios. These gray hair that has made its way onto my head has brought some benefit...

Anon 3, I did read the first Bridget Jones book when it came out a decade or so ago. It confirmed to me that, in my 20's, I didn't understand British women any better than I did their American counterparts.

Jill, yes I have been following EP's saga with amusement. I wonder how she does that?

Another amusing item (which carries a bit of industrial language) is this little item on the far-reaching impact of high energy prices.

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August 29, 2008 at 4:40 PM ×

Macro man just wanted to say i read your blog daily and have never failed to be amused/interested. keep up the good work. its an outstanding site, best of all the financial or markets related websites in my view

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Anonymous
admin
August 29, 2008 at 4:57 PM ×

So it's come to this-- P Diddy, who made conspicuous consumption cool, is flying commercial. I believe that sanity may slowly be returning to the world. In my town, nannies and 10-year olds are routinely outfitted with iphones. Bottles of wine that cost less than $50 are considered to be undrinkable. Does this represent the decline of the west or just the end of a cycle? Let's hope that we, like the Greatest Generation that made it through both the Depression and WWII, find a way to prevail. PDiddy's conversion to commercial carriers is an optimistic not. Thanks, MM, for the thought- provoking blog.

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Anonymous
admin
August 29, 2008 at 6:33 PM ×

one question re. your observation that markets are not trading in line with macro/fundamental themes... i don't think that's fully accurate. the recent move in the usd is fully consistent with the sharp correction in commodities and the marked deceleration in euroland and developed asian economies (i.e. south korea,singapore,taiwan). in fact, us/european rate spreads signaled the currency move (though not the magnitude) early enough to get in on most of the eurusd breakdown.

it seems to me that the "difficulty" of markets in august has been more due to the speed and magnituded vs. direction, after all you've highlighted the overvaluation of eur vs. usd for some time now. isn't this a classic reversion to fundamentals from massively overbought levels in european currencies and commodities?

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Anonymous
admin
August 29, 2008 at 10:13 PM ×

totally offtopic

http://www.youtube.com/watch?v=CJzEN2C8vF0

tgif.

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Anonymous
admin
August 30, 2008 at 7:39 PM ×

I suspect traders looking for the decisive break through 110.00 - 110.10 were pulling their collective hairs out last week with USD/JPY.

Like USD/JPY, I had a fair bit of success selling EUR/JPY in to rallies the last week of August. By Friday, signicifantly perhaps, the break through 160.00 appeared to have more conviction than the supposed false breaks earlier in the week. On Friday, the cross went as low as 159.22 before retracing back to 159.64 and ended the week with a hammer formation on a 4 hour chart. Volume on that 4hour hammer didn't show a lot of conviction.

With event risk, Mrs. Watanabe, a spike in commodities prices, etc. I suppose we could get strength back to 160.00 - 160.30 in the first week September. I suspect savvy traders know the fix is in though when the ECB comes out sounding hawkish just after August euro-zone & German CPI reads came in below consensus due to moderating fuel & food prices. For the patient there could be a signficant downside coming.

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