Tuesday, September 02, 2008

And so it begins....

And so it begins. With staffing levels returning to normal, today marks a fresh beginning on a whole host of levels. Consider that today marks:

....the beginning of the late year performance drive for funds and banks, though employees of the latter are more concerned with keeping their jobs than getting paid this year.

...the beginning of a month of critical central bank announcements; the RBA cut rates for the first time since 2001, and the ECB and BOE announce policy decisions on Thursday.

...the beginning of the death throes for the current UK government as they hit the panic button on the housing market.

...the beginning of a new school year for some kids in the UK, though the Macro Boys have another two days of freedom.)

...the beginning of the cold and rainy season in the UK, which will last for another nine months (until we return to the cool and rainy season.)

...the beginning of Macro Man's campaign to return to peak physical condition after a gym-less month of coughing and nose-blowing.

The story of the day so far is oil, which has traded limit-down after Hurricane Gustav failed to decimate the Gulf coast infrastructure. The price action isn't exactly constructive, and the perceived $100/bbl "new floor" for oil looks set to be tested in the very near future.
Oil has taken the dollar with it, and unbelievably EUR/USD is now down on the year. Higher beta currencies like AUD and NZD have also been badly punished, with each down nearly 2% on the day against the dollar at the time of writing. While it is certainly possible that a USD resurgence could be a key theme for Q4, at this point Macro Man is a tad leery of getting sucked in; after all, if the rest of the world is slowing sharply, it will be a touch more difficult for US net exports to be as positive moving forwards as they were in Q2.

While equities are bouncing this morning on the back of the oil collapse, the support could prove ephemeral. Lower oil does little to improve the fortunes of the financial sector, which continues to depress top-line index level earnings, while on the margin it could dampen the prospects of the highest-earning sector, energy.

The top-down model that Macro Man uses suggests that the prospects for equities are very dismal indeed; the chart below illustrates the 12m forward price return forecast for the SPX. It ain't pretty.

That the USD/RMB one year forward has traded up to 6.75 today- pricing in the slowest pace of RMB appreciation since a year before the peg was broken- is as indicative as anything of what is going on. Favoured trades are being flushed, and you'd have to say that markets are starting to flirt with the notion of pricing in global recession.

If this trend continues, you'd have to think that stocks look vulnerable, regardless of what oil does. Macro Man has re-introduced some short equity deltas into his book this morning as a result.


Anonymous said...

without disclosing your exact market equity valuation model, what is it roughly rooted in (fed model inverse bond yield model, etc.)?

Brian said...

No action on NZD/JPY? It just hit your vacation absence lows (and now a triple bottom low, going back to Aug '07).

I was a buyer at 74.00 just a moment earlier. I'm hoping Mrs. Watanabe isn't still too overweight in her kiwi holdings.

Anonymous said...


I trade the USD resurgence for two reasons.
First I like to trade with the trend and this one looks quite clear to me
Secondly the theme of the past years has been that the US imports way to much. Although a world wide recession will put a strain on its exports, I do tend to put more weight on diminishing imports. It's easier to correct an imbalance by rebalancing what caused the imbalance.


Anonymous said...

MM- I share your thoughts about Sept. There have always been two new years for me-- one in Sept ( start of school, post hols rededication, autumnal energizing) and one in Jan(calendar and tax year end and bonus payment-- back in the good ole days when there were bonuses.)In the US the seesaw economic news is becoming a foil for politicians : The economy is getting better! Is not! Is too! I diminish the dialogue a bit with this cartooning, but still report the gist of it. For everyman, the pay packet is lighter, necessaries costs much more, assets (RE and Investments) have shrunk in value and taxes have gone up, with more increases to follow. Things are tough out there. Professionally, it feels right to try for singles, not home runs.

Macro Man said...

The equity model looks at earnings and growth trends, and includes an inflation term that puts earnings into a "real" context.

NZD has been my own personal Hades for the last 5 weeks. I've been uber-bearish and not made a bean because of the structures I've had on and my cack-handed gamma trading.

Macro Man said...

Anon, I hear ya. What's irritating, of course, is that price action in stuff like the USD suggests that there are home runs there to be hit. The last 5 weeks, though, I feel like I've been facing CC Sabathia throwing golf balls while hitting with a wiffle ball bat.

Anonymous said...

Another thing to add to everyone's 'to-watch list' ...the asian markets as a potential tell on the strength of christmas spending.

up or down, Q4 should see some explosive, perhaps historic, moves.

cheers all.

Anonymous said...

I share the views of MM and prior comments. Also, to make matters worse, the political answer on obht sides of the aisle to US financial industry woes is more regulation. Oh joy. Somewhere a new, 21st Century Glass Steagall act is being readied with a special section on trading, making sure that the compliance paperwork involved increases by a factor of 10x. Aargh..

Anonymous said...

As Finbar Taggit consistently opines, HF are the new trading desks, all the more so if regulatory arb becomes too difficult for the big banks.
This gives me a neat segue to ask you MM, and your readers, for any opinions on this recent piece from down under, I don't fully agree but its a stimulating perspective. http://brontecapital.blogspot.com/2008/09/
Have personally stuck with NZDJPY and GBPJPY, enjoying the ride so far, and couldn't quite believe the profligacy of Mrs Watanabe as sourced in that old Times article. Spread betting is the new-ish opiate of the masses, trade your way to that Fendi bag. Cheers, JL

Anonymous said...

While I agree with USD home-runs for the next year, I just wonder whether USD will be on its way to start giving up some of its gains in the v near future given such a steep and long rise. My concern level starts to rise as soon as the sentiment gets on to the one-way track.

Anonymous said...

Interesting comment on the position of HFs. In the US, HF managers are the largest contributors to the Dem campaign. Nonetheless, the HF industry is in the crosshairs of the reformers-- read higher taxes on carried interests and more regulation.

Macro Man said...

JL, having been on holiday and feeling crap when the Inflation Report came out, and with my book having been risked-up as it was, I have missed the boat on GBP. Ugh. NZD, as noted above, has been a classic case of snatching defeat from the jaws of victory.

Interesting comment from the Bronte guys. I think they simplify the world as if banks' only business were structured credit, which clearly it is not. There are an awful lot of franchise traders out there who make good money and think they are legends, but who find out that "the chair" is worth a lot (selling on your offer, buying on your bid, and seeing custy flow to lever off). UBS' John Costas comes to mind in that regard.

Anonymous said...

Some have adopted the armadillo strategy (roll up in a ball and only show armored plate to the world) to get through this period and some the Braveheart strategy (endure and never surrender.) It's hared to do either from a P&L perspective. However, it does seem the wrong time to parachute in with negative surprises.

calvino said...

The arm in arm action of eur and the chf might be one of the homerun pitches coming at us? Chf does not want to act like a funding currency and follows the eur tick for tick. Any thoughts, Macro?

Also, possible bounce for the gbp and the eur on Thursday after rates hold and a good time to fade the action?

gsm_73 said...



and the chart comparing current GBP action with past suggests a possible near term bounce.

Anonymous said...

Interesting observation in USDCNY.

USDCNY is trading at 6.8450. Yet fair value for USDCNY is below 6.50.And yet again you are telling me that is on year's time USDCNY is going to be trading at 6.8100. This to me, is like telling me that EURUSD will no go above 1.4600 AT ANY POINT IN TIME FOR THE NEXT ONE YEAR. For if you examine the correlation between EURUSD and USDCNY 1yr NDF you will see that they are one and the same trade.

Just that the latter is fundamentally overvalued!

Having said this, I see now as short USDCNY as a relatively attractive trade with limited downside. Sure perhaps next week or the one after we see a continuation of this buying of USDCNY, but if your horizon is longer than that then you should be selling USDCNY. The upside I see as limited

Anonymous said...

Surely, MM, if banks and other institutions were throwing money and plastic at people over a decade the savings ratio would be bound to fall. Its the other end of the see-saw.