Friday, September 12, 2008
Well, what can we say? Another day, another US government intervention- this time to broker a buyer for Lehman Brothers. Per the usual, someone got wind of it beforehand, leading to the by-now de rigeur spike in the SPX before the news hits the tape.
It's a damned shame that LEH has gone to the wall, but being a damned shame isn't necessarily a good criterion for government intervention. Readers across the world can no doubt think of domestic issues that are a damned shame but have yet have yielded no government response.
Still, there appears to be an ever-lengthening list of items in the United States which are a damned shame and which are generating a policy response. Consider:
* It's a damned shame that the hegemonic mortgage lenders/guarantors have run out of capital. We need to give homebuyers the ability to maintain mortgages, so let's put Fannie and Freddie into conservatorship.
* It's a damned shame that Bear Stearns has run out of liquidity. Given their role as a clearer and prime broker, we need to organize an orderly sale of Bear to stabilize the financial system.
* It's a damned shame that Lehman Brothers' share price is at 4. Clearly the market is pricing in a failure. In the name of financial stability (again), let's work the phones and broker a sale.
* It's a damned shame that bank stocks are going down. Hey, here's an idea: let's start tinkering with the regulations regarding short sales and rumour-mongering.
* It's a damned shame that American automakers make poorly-built, expensive cars that require way too much fuel to run. Ford and GM can clearly see which way the wind is blowing; they are demanding $50 billion from the government's liquidity milk-teat.
Allow Macro Man to add one more to the list; hopefully someone from the US Treasury reads this and sorts him out.
*It's a damned shame that Macro Man has an enormous TV cabinet taking up space in his garage. This situation appears to tick all the boxes for a government bailout:
- Is it big? Yes- the cabinet is 1.5m tall, 2m wide, and weighs at least 300 kg. It's about as easy to shift as 2007 vintage BBB-rated ABX
-Is there a market for it? Not really. A quick perusal of Ebay reveals a lot of supply of big TV cabinets, with very little demand. Kind of like the asset side of Lehman's balance sheet, really.
- Is it impairing? Yes. It takes up a lot of space in the garage- Macro Man would like to stick the lawnmower in there, but this bloody cabinet takes up all the space.
So come on, Secretary Paulson: sort Macro Man out. (Alternatively, anyone in SE England who wants a handsome oak TV cabinet and is willing to arrange for some strong blokes to take it away should contact Macro Man at the email address on the right.)
So anyways, equities everywhere are roaring higher today, as no one wants to go home short. While market scuttlebutt is that LEH will make an announcement at noon London time, it's pretty clear that something will be done by Sunday.
Still, the fundamental backdrop is awful. Macro Man has had enough of the short-term roller coaster, and is now trying to fixate on the things that he thinks matter. Consider the following:
Economic growth looks bad. Looking at the OECD leading indicator, growth prospects in much of the world look dreadful- particularly in Europe. Not coincidentally, Macro Man's equity shorts are concentrated there.
Earnings expectations are still coming lower. Macro Man's research suggests that bear markets don't end until analysts start looking for accelerating nominal forward earnings per share. So far, that ain't happening. And Macro Man doesn't expect it to for a while, because....
Earnings expectations are still too high. Macro Man isn't sure which is more remarkable about the chart below: the fact that 12m earnings growth expectations have never turned negative during this crisis, or the fact that they are accelerating higher (other than in Japan, where ironically the OECD indicator above is the best of the bunch.)
So Macro Man has taken the deliberate decision to disintermediate himself from the intraday highs and lows of running an equity index short. He's paid his money and he's made his bet. While he runs the risk of being flattened by Team 1250, the increasingly dead cat nature of the index bounces, combined with the lousy fundamentals, will hopefully help him fixate on the horizon a few weeks ahead, rather than the noise of the intraday waves.
And if they don't...well, that would be a damned shame.