Friday, September 12, 2008

A Damned Shame

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.

31 comments:

CV said...

A shame indeed MM ...

Interesting general points you have made this week. I mean, if there really is a sort of catch 22 for "short" minded investors in the sense of the Teanm 1250 it seems that one should stay away from the time being.

Obviously, at some point, they HAVE to let somebody somewhere fail in which case you can once again pile up on the shorts. Of course, the longer this dance goes on the higher is the risk of a very serious SP500 slump. <1000 anyone?!

Sounds reasonable with an overweight of short Europe equity exposure. The data is simply horryfying at the moment and all those "official" forecasts are in for a real haircut in Q3 I think. It is really is the swan song for JCT I think ... they have to fold and as they are all in, it will cost them dearly.

Sad to hear about your plight with the garage. I guess, that your living room is now flattered by a flat screen of newer vintage rather than that old furniture and subsequent chunk of a tv?

Incidentally, does that Golf of yours have a hook (word?). I mean, could you not just rent a trailer and hawl it out to some dump? Or is there some sentimental attachment that forbids you to wreck it ... :) ?

have a nice weekend

Claus

Boat 52 said...

As General Patton was quoted to have said after defeating Rommel in North Africa: "I read your book!", many are saying the same thing about Paulson and Team 1250.

One has to go very far back in U.S. history to find a level of manipulation as exists today. In those days, the robber barons did it "illegally". Today, the looting is taking place if front of the world, supported by a band of influenced Congressmen, and hailed by foreign investors who have a great deal to loose.

My great fear is that there will be no regime change in January with McBush. Paulson then passes the book to the new Treasury secretary who will be a carefully picked fellow and will embrace the philosophy of Team 1250.

I still do not understand why some group has not tried to obtain the minutes of the PPT in a legal proceeding. Perhaps the PPT keeps no minutes just like the Skunk Works does not exist in Area 52.

Anonymous said...

Poole Says Fed Shouldn't Give Funding to Any Lehman Agreement (bbg news).....
at least someone across the pond is trying to keep a cool head, maybe.

Anonymous said...

I also am big (according to the scale in the bathroom), I don't have a market (my wife dislike the idea) and currently impairing (aged41 and two daughters) - I'm planning to put up a "bad company of mine" with residual loan payments and a few of smaller debts in, and spin off all other assets I own - anyone interested out there? After all, Italian government is doing the same with ALITALIA...

Joking aside, how come OECD Japan's leading indicator is upwardly oriented, given latest GDP and machinery orders data?

Anyway, in a mid-term world, short equities and long currencies like USD and JPY seem reasonable. The current relief in risk aversion eerily resembles the eye of the hurricane...

AT

Macro Man said...

CV, the outlook for Europe isn't helped by Trichet promising to "hike you back to the Stone Age."

Believe it or not, I am still rocking the big boxy 25" CRT TV that I bought in 1996...then one I bought the cabinet for. But when we moved into a new house in 2005, we decided we wanted to go with a sleeker look.

I think 300kg may have been an undershoot on the weight...I am a reasonably strong guy, and I can only lift up one corner by about 15 cm. So the chances of me getting it onto a trailer are zero.

Macro Trading Ideas said...

Hi MM, the biggest pink flamingo now could be: Lehman, goodbye, we don't save you!
Has anyone paid attention to Poole words,i know that he's a former Fed, but...
as you have told before, schatz at 25bps less than refi rate is not so bad, or at least versus 2yrUS. The same is a Euro steepening: this is the only thing that missed.
macro economic indicator in Euro are dreadful, but JCT everyday says the same boring things, bla bla bla..has JCT ever shopped lately or walked along shopping streets and inside shops?
To trade intraday or with a short term view, now, is an insane thing.

CV said...

"(...)and I can only lift up one corner by about 15 cm. So the chances of me getting it onto a trailer are zero."

Uff, that is one heavy bugger then. On the TV in general I hear you all the way. I still have a 14 year old 14 inch Phillips screen which, I should add, works just fine.

"the outlook for Europe isn't helped by Trichet promising to "hike you back to the Stone Age.""

Nope, this is the point. But all this is beginning to come off very hollow I think. The thing is, we don't need any mishap from Cern to see parts of the Eurozone getting sucked into a dark black void if the ECB is really serious that it wants an actual <2% CPI print before easing.

I think that Germany moving into a recession in Q3 will do it for them.

Claus

dblwyo said...

"that bear markets don't end until analysts start looking for accelerating nominal forward earnings per share. "

was that supposed to be stop looking ? if not could you expand a bit as it's a puzzlement to me.

normal being said...

Hi Macro,

I'm not convinced by your focus on Europe.
Those OECD numbers imply EURUSD at 1,58 more or less. We've got a major terms of trade boost right now.

So, yes there's a recession, but if it's a quick one and unemployment rates don't soar again, it won't be a big headache. We only have less "white wash" in our numbers here.

As far as I can tell, corporate access to credit is still healthy in continental E. The big question is more: Where is demand going to come from? Internal demand here in Germany hasn't really changed (no credit-binge here). The effect from some other European countries is felt, but I don't believe that compares in any way to what the US internal demand is going to experience.
European weakness comes down to being a Dollar-story. At 1,60 they effectively had to carry the world and they were not strong enough. At 1,40 they should do a lot better.
What is ultimately going to kill US optimism are house prices. And they ARE going to fall further. Although I would be very careful with market timing here.

And regarding Trichet: a lot of that is just posturing. The more people doubt him, the more he feels the need to play tough.

In no way I want to say, I'm bullish Europe, this is still a bear market, but you shouldn't expect a secular breakdown.

Macro Man said...

Chart 2 shows that 12m forward index level EPS expectations (all indexed to 100 for comparison purposes) have started to turn down. In other words, a few months ago analysts were looking for 12m forward SPX earnings of 101 (versus an index price of 1400.)

That has now fallen to 98, and in my view will fall even further. My point is that quities will not end the bear market until that number starts turning up again.

This is different from the implied growth rate, which chart 3 shows, which plots the differnce between expected 12m forward earnings with trailing 12m earnings.

That number can turn higher, even with nominal forward earnings expectations falling, if trailing earnings fall even faster.

That is currently the case, and in view my is consistent with lower stock prices.

Anonymous said...

tv cabnit has real value--as fire wood--just hold onto it a bit and folks might use it to heat home this winter--already happening in states in west va--never pitch a good source of fuel even with oil at 100

Anonymous said...

Try Craigslist and offer at a token amount in return for them removing the damn thing...

Macro Man said...

It would be a real result if someone from craigslist would take the caninet all the way from London....

Anonymous said...

Your strategy sounds appealing. I too am trying to extend the trading focal length. Re the govt's "get your bail outs here" approach, Team 1250 appears to genuinely believe that the markets are so dicey that any large failure will bring down the US/global house of cards. Because no real price tag is or can be identified as taxpayer cost, unlike Resolution Trust, the public outcry has not yet reached the point of reining in Team 1250. Re the cabinet, does Oxfam or the Salvation Army sell furniture in London? Many charities in the US have pick up services for large items. That way you can at least get a tax deduction.

CDN Trader said...

Try The Gumtree http://www.gumtree.com/ It's London-centric. There is a "freebies" section. I have used it to successfully get rid of lots of stuff in past.

Adog said...

I wonder if Paulson would arrange for a tulip bailout. Thanks for the confirmation that I'm not going insane. It's a damn shame I moved from the former Soviet Union to the USSA. Back in the USSA indeed

Anonymous said...

On the flip side, there is the systemic risk of allowing a big failure to cause a cascade failure of derivatives counterparties. Can central banks really afford to let that transpire? Can any of us?

dblwyo said...

Aha, by george think I've got it. Chart 2 says earnings expectations are being grudgingly and slowly lowered under protest while Chart 3 says they are still completely out of whack with reality. Hence an upturn will start when forward earnings expectations accelerate which will take long while since we're still working thru the Denial phase of Kubler-Ross. That any closer ?

If so I wholeheartedly agree.

Macro Man said...

dblwyo...bingo

Anonymous said...

Mmmm, but the 3rd chart's a bit misleading because it's showing a growth rate forecast, not a forecast of absolute return - in other words, it's showing the first derivative of earnings expectations. Next year, the "growth" will be measured, at least in the US, against a truly horrible year, will it not?

mikarsky said...

Team 1250 will literally be doomed
if 12m EPS forward expectations continue to fall. Will they defend line 1250 until the last man falls?? Any new orders from the Supreme Commander?

BTW, looking at EUR/USD I wonder where I was..

dblwyo said...

Very good, patience is appreciated though name isn't Rita nor, I suspect, do you resemble Mr. Caine. That said have you, speaking of Macro, compared GDP to Profits to earnings to markets ? On a YoY basis in the colonies one drives the next, give or take a distortion or twenty and the analysts miss it all until reality sneaks up, bites them and removes a limb. One need only point to the forward-looking geniuses who downgraded LEH yesterday while folks doing proper analysis were talking the book quarters ago.

Anonymous said...

CRTs last longer than plasma/LCDs and give better colour depth, esp wrt blacks, even if they don't look quite so sexy. http://london.craigslist.co.uk/
Gumtree is probably more frequented tho, freecycle.org.uk is another option. There is actually a burgeoning movement in localised bartering, sign of the times eh?
Is anyone long index gamma? Would have thought that would pay off. Interesting european finish chasing a break of the bund uptrend, pushing the curve steeper. Flippin' JCT will be tough tho.
Have a good weekend and brace brace for Sunday. Cheers, JL

Anonymous said...

Hey MM, better save the old TV cabinet, ya may need to use it for firewood this winter.

Enjoy your words.....

Anonymous said...

Looks like the PPT sticks the landing today.

Anonymous said...

Lehmans credit gone on R dealing its all over....

This could be the event that causes the usd index to bounce lower of resistanceat 80, cant see it going higher gere no one is convinced.....

its a data release game now

Daniel said...

Thanks for the post Macro Man! It helped me to close out the "bold prediction" I made on my blog around this time last week:


There's a scene in Spirited Away where Chihiro feels compelled to help one of the Susuwatari that was struggling underneath its piece of coal.

After relieving the dust bunny of it's burden, and being told by Kamajii to finish doing the job she started, Chihiro struggles to complete a task she's not quite fit to do.

Thereafter the Susuwatari as a group let the heavy pieces of coal fall down on themselves and scream loudly--presumably about how much they were struggling or how much they needed to be helped.

In light of the recently announced government bailout of what is essentially the US mortgage industry, we predict that other groups and individuals across the country will come to the same conclusion as the Susuwatari did. And act accordingly.

Anonymous said...

"A gambler makes good" Pimco founder staked his fund on a treasury bail out and won.... Weekend FT. Discuss.

Macro Man said...

It's only gambling if you don't know the outcome in advance.

As for the cabinet, I asked Mrs. Macro about Oxfam or Freecycle (which we've used to dispose of copious other detritus.

It turns out she was still hoping to get something for it...she had it marked at 10% of face on her sheets. Maybe she really should have been working at Lehman...

Anonymous said...

get a monoline wrap on that cabinet, write a CDO for it and take it to the TAF

cmon man get with the program

Anonymous said...

I'm shocked, shocked! About this cabinet!