D-day for Lehman: A running diary

Wednesday, September 10, 2008

Macro Man is going to try something new today, an occasional running diary of his thoughts, fears , joys, and frustrations on what looks set to be a momentous day. It might prove useful ex post in helping him to evaluate how he deals with noisy days. Scroll down to see updates....

8:58 am: The LHC has been turned on, and we're all still here. Lehman's trading over 10 in Germany, despite DKB apparently pulling its bid. European equities aren't nearly as weak as bears (including MM) might have hoped...this market really is quite frustrating. I'd certainly expect to have been better than flat on the day at 9 am.

9:20 am: Today is one of the few days that physics jokes are all the rage: A neutron walked into a bar and asked, "How much for a drink?" The bartender replied, "For you, no charge."

9:49 am: And the FTSE goes briefly positive on the day. The drawer labeled "Things I Understand" is rapidly emptying.

10:23 am: The EU downgrades its 2008 Eurozone growth forecast and warns of serious downside risks to its 1.5% 2009 forecast. At the same time, Trichet pops up on the wires yet again railing against higher inflation expectations. Eurostoxx futures now back at 3240, IBEX down close to 1.5% on the day. I love it when a plan comes together....

11:23 am: Back from a spot of exercise (Macro Man is a firm believer in sound body, sound mind), and the market seems to have settled into a pre-Lehman lull. LEH still up a couple of bucks in European trade, so it seems like someone is betting on good news. There could be an interesting dichotomy of outcomes here. A spin-off scenario, wherein Lehman divides itself into Goodbank and Turdbank, is pretty good for shareholders. Turdbank shares will probably go to zero, but Goodbank shares could eventually recoup all those losses and mroe through price appreciation. If bondholders are left with bonds of each company, however, they're looking at a possibly significant haircut on principal repayment.

On the other hand, if Lehman is undertaken or bailed out a la Bear and the Agencies, shareholders will be S.O.L. but bond-holders yet again made good. Macro Man votes for the bondholders to get stiffed this time....

12:23 Seven minutes to go and equity indices and USD/JPY have firmed. Team 1250 spreading the rumour of good LEH news through the Japanese walls? Hmmmmm

12:34 pm Come on, where are these results? This is worse than waiting for payrolls.

12:45 OK, I'm no equity analyst, but this looks pretty bad. $5.92 per share loss, selling off the crown jewel of the asset management business, spinning off some (but by no means all) of their bad assets. Why the heck are they still paying ANY dividend if they are bleeding money out of every orifice?

European equities are coming back off, but I have to say I am a bit disappointed with the reaction so far. Come on, get stuck in!

13:00 Patience is a virtue, apparently.....having spiked above $10/share LEH now trading at yesterday's closing price, Spoos are negative, USD/JPY below 107 the figure

13:43 The market seems to lie the conference call, and some of the marks do seem quite conservative. Still, Macro Man is left to wonder if LEH isn't going to turn into something of a zombie bank: an institution with lots of illiquid crappy assets on their balance sheet, funded via a central bank liquidity milk-teat, and an eroded client base, that jumps limps along interminably. He hopes that isn't the case, but cannot rule out the possibility.

14:00 At last, some lunch. Macro Man has a bad feeling that we're going to see a horrible squeeze higher at the US equity open. Ugh.

14:26: Viva la squeeze! Spoos and USD/JPY bid no lid, and European equities are about to turn green. It feels like there are a lot of electrons in my book right now, giving it a negative charge...

14:56: LEH has traded back to yesterday's closing price and bounced, taking broader indices with it. All in all, it's been a frustrating day so far.

15:35: Macro Man is a tad surprised at how much disintermediation there appears to be between LEH and broad indices. It's as if indices in the US and Europe are saying that the buck (or perhaps more to the point, the crisis) stops with Lehman. In reality, it would appear likely that after Lehman recedes as in issue, another bank in trouble will immediately crop up in its place, just as Lehman replaced Fannie and Freddie on Monday.

Crude inventories look pretty bullish; if WTI and Brent cannot rally on that and the OPEC cut, you'd have to think that it will go quite a bit lower. Good for the consumer, eventually; bad for energy stocks fairly immediately, one would think.

And yes, Macro Man is blatantly talking his own book there.

16:05: If you'd told Macro Man at this time yesterday that the S&P 500 would close yesterday at 1224 and that LEH would lose $5.92 a share, he'd have told you that a) European equities would easily be more than a percent down from yesterday's closes, and that b) he'd be doing a damn sight better than flat on the day.

Exhibit 57 on why this is such a difficult market.

16:24: And as the SPX goes through the low of the day, USD/JPY goes through the high of the day. A frustrating end to what's frankly been an irritating day.

16:35: Grrr. Lehman now bouncing. Macro Man's book feels like he's experiencing all of the upside of equities (bearing in mind that he's short) and none of the downside. Time to go home and manage the rest of the day from the study.

18:07 Home, to find LEH small down on the day but Spoos up half a percent. Despite a reasonable amount of market volatility today and a nonzero (but in fairness, not massive) amount of risk on, Macro Man's daily p/l doesn't seem to have strayed too far from flat on the day. Hmmm, where was this lack of P/L volatility a couple of weeks ago when he could have used it?

19:22: So Spoos are now back to Friday's level, and Eurostoxx futures are up on the day. What an unpleasant market. At least tonight there's something else to look forward to: RBNZ announces rates at 10 pm London time. A 25bp cut will be a snooze, but a 50 could be an open invitation to start taking potshots again at the flightless bird.

20:34: So Macro Man ended up doing 4 trades today, all from the train on the way to work, and each pair locked in a small loss. That's why this blog is called "Macro" Man and not "Day-Trade" Man. Watching the US close will probably only wind Macro Man up; time to go downstairs and see if he can beat the Mrs. at chess.

21:45 The chess mirrored the market; Macro Man was had a big advantage and was sure he'd won, but allowed Mrs. Macro to escape through his fingers and snatch a draw. Not so poor Lehman; they need to sell valuable assets to raise capital, but if they do they'll face a ratings downgrade that will cripple their ability to conduct client business. Perhaps they should hire Mrs. Macro as a troubleshooter, given her ability to scape from checkmate. Oh well, roll on RBNZ.

22:05 Perfect end to a perfect day. RBNZ cuts 50, only Bloomberg reports it as 25, so as Macro Man sits there thinking "I could have sworn rates were at 8.25%, not 8%", NZD gets clumped. Just great. He needs to go to bed.

Good night.

Posted by Macro Man at 8:56 AM  


Hi MM,

a) crude oil moved up, but less than expected, after tonight move by OPEC - commodities still firmly bearish and inflationary pressures scaling down?

b) financials' turmoil and foreign capital supposedly leaving Russia - equities still bearish and risk aversion growing?

Were both a) and b) to hold true, then carry trades should feel the pinch as well. I know you're out of currencies right now, but I think USD/JPY or EUR/JPY are worth a look...


Anonymous said...
11:46 AM  


Anonymous said...
11:55 AM  

Interesting point by AT ...

could it be time to revive that old pink flamingo of yours and buy some JPY and CHF?

The only thing is that GBP/JPY and EUR/JPY are already at quite low levels, so I am not sure that I would want to dip my toe at this point.

as for the USD/jpy ... sure, if the shit hits the fan the 90s could be in the offering. But what about the dollar smile? Hell if the mouth is turning sour, then you should buy sterling and euros agains the buck too just to cap it off.


CV said...
12:03 PM  

Wondering what MM thinks of gold and silver. My view is that gold outperformance should be short lived to restore a more reasonable ratio, 10-20% below current levels, but I am not sure what has been attributed as the cause for the silver plunge and whether or not it is hedge fund related.
Needless to say, great blog, thanks..

Anonymous said...
12:23 PM  

Lehman Brothers reports preliminary share loss $5.92

Anonymous said...
12:40 PM  

That 5 cent dividend made me laugh

Anonymous said...
12:50 PM  

Yeah, I mean, what's the point?

Per earlier posts, no real view on commodities outside of the observation that the dollar seems to be going up against everything other than the yen. I am trying to keep my eye on the ball of the equity bear trade at the moment.

Macro Man said...
12:52 PM  

there is a better than average chance that euro/yen and pound/yen get absolutely trashed today. if that happens, i expect gold to fall nearly 10%. i'm very bearish gold.

Corey said...
1:04 PM  


Um, wasn't that the last two quarters as well?


Anonymous said...
1:10 PM  

With USDBRL moving higher at speed is the last pink flamingo left, UST's, ready for the large short as we move towards post payroll levels?

Anonymous said...
1:12 PM  

I have to say, it feels like SHORT USTs is the pink flamingo, given this week's price action.

Macro Man said...
1:18 PM  


regarding EURJPY, do 5 consecutive days of the aptly named "Satan's Finger" setup constitute the notorious "Satan's Fist" ?


E said...
1:44 PM  

You will see UJ at 109 in a second, along with a 3-500 pip rally in EJ / GJ / AJ and consorts. :)

Anonymous said...
1:44 PM  

MM - don't know if you've access online or otherwise but the Canadian Business News Network (BNN)does a superb job covering business, economic and financial news. They started this a.m. with an interview with a currency strategist who sees continued strength in the dollar on the back of growth and rate differentials. It being your area you might want to give it a listen.
In my perspective her analysis is sound but based on a flawed assumption based on mis-reading the state of the US economy as much stronger and likely to recover earlier. When one nets trade impacts and focused on YoY changes the US economy grew 1.1% in Q1 and 0.4% in Q2 without any of that deflator folderol roiling the blogosphere. And we've crossed a tipping point into an accelerating downturn. Worth a think perhaps.

dblwyo said...
1:51 PM  

E, yes, that's about right. I'll leave it to you to figure out what Satan does with his fist....

Macro Man said...
1:52 PM  

The results are certainly bad for LEH and I think there is still some downside potential as they wrote down their ABS exposure to around 30 cents a dollar. 20 cents a dollar would not surprise me in the end. But this doesn't mean that they will collapse today or tomorrow or even next week/month. But it's certain they to exist as a independent insitution. I think there is now some short term upside potential for LEH

Anonymous said...
1:53 PM  

meant cease to exist

Anonymous said...
1:55 PM  

Hold on to your pants, my squeeze is beginning :)

Anonymous said...
1:56 PM  

Coming days might show just how little power Opec has. They provide a great villain for politicians when energy prices are rising. Some of the most hawkish members who have been calling for cuts have not been able to produce at their quota--they want others to cut back to their levels. And as for SA and gulf states, are they really going to cut production 2 months before US election, injecting themselves into the campaign?

PureGuesswork said...
2:16 PM  

On oil, LEH et.al. listening to their commodities, Bove and Gross interviews from the Tues. archives and wonderful stuff.
Bove think LEH management has really screwed the pooch and created a ripe opportunity for a hostile takeout.
The discussion in commodities about $80 oil destroying the economics of new exploration and production is also very helpful.
Bloomberg had stories on WM and Nat City being in trouble as well.

dblwyo said...
2:50 PM  

well nice, i have a chance to square up some short positions, maybe play for a rally, short some t-bonds (with the commercials still net long), put on a little fx carry...who cares that the s&p is only 2% from the July lows, i mean LEH is OK, right? i think trading what i don't know makes sense right here - and what i don't know will likely take the s&p below 1200.

short gold / long yen (still)

Corey said...
2:56 PM  

is on my side
yes it is...

Anonymous said...
3:15 PM  

Time decay, on the other hand, is decidedly not...

Macro Man said...
3:27 PM  

even as the markets turn frustrating, your posts are becoming more delightful to read. thank you.

Anantha said...
3:48 PM  

leh --is there anything left to buy outside of the asset maangent group--i mean couldn't u just hire the employees and start with a clean book--they always say the assets walk out the door at night but the debts stay on the books--well i would hire want i want and then use fresh capital to buy what if any is on there books that you want but he leh name is going away--and man eurjpy is the widow maker on steriods

Anonymous said...
3:50 PM  

While it's tempting to pull out the Joe Pesci line from Goodfellas ("What? Am I some sort of clown that I amuse you?), I will restrain myself and say thank you and that I'm glad that my bewilderment is doing somebody some good. ;)

Macro Man said...
3:52 PM  

looks like it's Washington Mutual's turn today...-25% at present...

I guess you can't have "slaughter" without "laughter"...


E said...
4:07 PM  

MM - not at you at the situation. We're laughing and crying right besides you. (:<

dblwyo said...
4:27 PM  

it seems the yen has been following the vix...i just can't believe the vix is still down with s&p well off the highs.

covered my gold short (probably much too early), but i'll take my profits when i can get them these days.

Corey said...
4:34 PM  

Feeling the pain, pissed off and grumpy. When right directionally through options, I look at my P&L and vol has been marked down so hard that I have lost money. Where high conviction on direction, it goes the other way. Maybe law school not such a bad idea.

Anonymous said...
4:38 PM  

I expect that the BS-LEH problems would cause derivatives to move to clearinghouses, leading to more transparent pricing. Customers will have better price discovery options once this deleveraging is finished. If so, the ongoing profitability for all players, including Goldman, will be muted. Makes it difficult for me to want to argue for LEH.

RichL said...
4:38 PM  

Gold is going to see 730$, then 700$ minimum near term.

Anonymous said...
4:57 PM  

Deflation has the SPX in a chokehold.

Anonymous said...
5:20 PM  

Hang in there Macro Man. Take a look at the mini spoos over the life of the (September) contract, putting the volume below the chart. It's classic: Heavier volume into the May-June selloff, then declining volume into the upward consolidation, and dramatically increasing volume over the past 6 days. I'm a small core short and have no intention of tinkering with it. (I'm also a medium core long US 2-years, have you seen the TIPS 5-yr breakevens? Down to 1.5%--Fed Funds now ABOVE inflation!!!)

Steve said...
6:50 PM  

how you down?? When you said you were going short uk equities MCX was at 9600 so that's been superb. LEH could have made long or short from $8...

Anonymous said...
7:40 PM  

I'm up in equities- though not nearly as much as I was on Friday and I would have expected to be today- but I've more than compensated for that this month with losses in FX and US govvys. Somehow, my low-risk bond hedge has completely overturned my equity profits, thanks to my cutting equity risk at nosebleed levels on Monday.

It's all recoverable, but highly irritating nonetheless.

Macro Man said...
7:46 PM  

what happened to the convicition!!!! I thought you were in the uk going to hell camp!!!

Anonymous said...
8:16 PM  

Oh, I haven't touched my UK equity position.

But I covered the IBEX short on Monday's open- I mean, we all know Spain is buggered, too, but given the illiquidity of that contract and the rip-snorting level of Spoos at the time (1278 or so on the futures at the European futures opening), it seemed prudent to trim European futures risk- some of which I'd added on Friday half a percent from the lows.

While I swiftly replaced the position with puts, my delta was less- and combined with a purchase of OTM SPX upside gamma, it's left me a lot less short on the way down than I was on the way up.

Which is why it would be nice to at least visit Friday's lows in Europe. It's a bit odd, really; European equities have gone from trading horribly last week to trading bloody well so far this week. As I write, the SPX is largely unched from Friday's close, but the SX%E and UKX are both well up on the week...and that's with more hawkish nonsense from Trichet today.

Colour me confused.

Macro Man said...
8:33 PM  

Lehman going out at $7...

Steve said...
8:57 PM  

WTF? Can't Bloomberg even read a press release correctly?

Anonymous said...
10:16 PM  

This happens often enough with BBG that I have to start wondering if someone in their new headline department is taking a bung from unavoury characters to misreport CB decisions.

Macro Man said...
10:21 PM  

on the Large Hadron Collider.

If you were itching for the Global Macro Apocalypse, whether that's exponentially growing black holes, stimulated Goldman emissions, dark energy balance sheet chain reaction, EUR/GBP=1.0, or Jim Simons to lose money, you'll have to wait for next year.

nerd diversion:

They only turned it up to "1".
The LHC's collision energy this week was no more than 0.5 TeV, significantly less than the maximum used at Fermilab. So like the credit crisis, we've seen this physics before.

Next year, they call Scotty to turn up the antimatter drive to '11'. That's when the going'll get weird.

Hold on to your shorts, and put Mycroft on speed dial.

drchaos said...
11:27 PM  


You are the Macro Man. Take a step back and think to yourself. Is LEH going to zero? A: Yes. Is the U.S. Economy (specifically consumer) buggered? A: Yes.

Keep the short delta position on and stay away from the crap shoot that has become FX.

BTW, as the new guy I have been assigned the job of going to CB websites and Yahoo! finance and clicking refresh over and over again after this Kiwi debacle.


Anonymous said...
3:31 AM  


You are one impressive fellow. I read your blog, almost, daily.

I don't usually read the comments section, but looking at the time stamps on the site, it doesn't look like you are getting much sleep.

I am also in the fund management game but I try and keep things a lot simpler, which is probably why I am managing a lot less money than you are. You seem to have everything at your finger tips with complex positions each with 1st line and 2nd line derivative implications and you find the time to maintain your blog.

Now that I have flattered you, I may have missed the post where you explained your reason for dropping your P&L report.

I like everyone in the industry want to know how my colleagues in the industry are doing, call it nosy, but I suspect we are all alpha males trying to brag that we are bigger/better than one another. Dare I say it we also sometimes draw comfort when others fail.

As I never ask the question of P&L outright as I deem it inpolite in the extreme, I will not ask you. However, I am curious as to the reasons you chose not to post it. I do recall writing to you probably a year ago that you were tremendously brave to expose yourself to the degree you were doing it. Almost before I read your blog I went straight to the P&L.

In conclusion I am a great fan irrespective of whether you are making money or losing it as you provide me with useful macro views in order for me to make my own mind up.

I to try and keep a daily journal, I remember you called this blog a scientific laboratory, but I am sometimes overwhelmed by the days activity that often all I get down is "I am depressed", "I am on the money" "this is hard".

By the way when your 6 year old starts beating you at chess, you know that you probably need to take a break.


Anonymous said...
11:06 AM  

I am extremely embarrassed I never checked out your time stamps correctly. If you are sleeping well please forgive me.

Anonymous said...
11:09 AM  

Mickson...the P/L disappearing is nothing sinister, I can assure you. I switched shops in March, going from a place where I ran my own book on a spreasheet (thus making it easy to copy/paste) to a shop where the technology is great and automated. Thus, to maintain it separately would require double work, which I am not really interested in doing.

My performance since inception at the new shop is mid single digits, which I'd charactrize as reasonable if unspectacular.

Macro Man said...
11:59 AM  

I am suitably impressed, and thanks for responding. I am just recovering from the swing around myself. I thought this was it (the crash)I wake up as I am in the east and then I see my S+P shorts are all stopped out.

This market ain't easy.

Anonymous said...
10:30 PM  

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