Pain cave

Tuesday, September 23, 2008

Back from Madrid (which was not so much of a romantic getaway as an exercise in Blackberry watching), Macro Man has arrived back at his desk to find financial markets as one big pain cave.
Anecdotal stories of September's carnage are already beginning to filter through...and that's from before the roller-coaster ride of the last few days.

In any event, stress remains highly visible in short-term funding markets, which suggests that the Paulson Plan, even if approved, is far from a panacea. Other highly visible signs of stress include the following:

1) SPX. Here's a remarkable statistic for you: the SPX fell 3.82% yesterday.....and had its smallest daily range since September 12. Ouch!
2) Oil. Rarely will you see a purer short squeeze than what was observed in October crude oil futures yesterday. Monday was the last day that these futures were not assignable; i.e., from today onwards, longs can demand delivery of 1000 bbl per future at the depot in Cushing, Oklahoma. It seems quite clear that some short out there badly underestimated the market's willingness to let them roll their exposure to November; nothing like a 25% intraday rally in something that you're short. Ouch!
3) The dollar. Macro Man observed yesterday that he thought that the dollar might come in for a spot of bother; little did he know that EUR/USD would put in its strongest daily rally since the inception of the single currency! Based on the experience of last month, it was natural to expect the euro's rally to continue this morning; however, thanks to a new cyclical low in various European PMI surveys, EUR/USD is down more than a percent from last night's high. Ouch!
Within his own book, Macro Man has seen some of his erstwhile star performers turn sour this week; while he managed to dodge the bullet of last week's uber-squeeze, he feels like he's running as fast as he can just to stay still.

Not that still is an altogether bad result, particularly if it keeps you out fo the pain cave.

Posted by Macro Man at 9:35 AM  

33 comments:

the big question is whether being short the long end of the US yield curve is still the play .. it doesn't help that it's the most obvious trade in the world .. the other big question is where is all that money fleeing the US yesterday going to be deployed today?

fero said...
10:43 AM  

Bad timing for a weekend at Madrid. We had the worst weather in years, though you probably thought it was just raining ;-)

May I ask you how did you like your stay?

By the way, did you hear the rumours about a big hedge fund going bust (that would explain the short squeeze in oil, wouldn't it)?

Greetings from Madrid,

Diego said...
12:06 PM  

Have heard the "HFs are next" rumors tha diego mentions, but without names. Market seems still committed to cash so HF redemptions are bound to be running v high. We'll see how HF fare in the Congressional hearings on the bailout which commence today.

Anonymous said...
1:47 PM  

fero....sadly, not any of the places where my book is positioned, judging by today's price action.

Diego, we really enjoyed ourselves...perhaps it was because of La Vuelta or the Davis Cup, but the place seemed buzzing. Then again, it was our first weekend away without kids for six and a half years, so to a degree we could have gone to Timbuktu and enjoyed it. But we love Madrid, so were really glad we went.

Macro Man said...
1:53 PM  

Hi MacroMan,
it looks like there's an 11,000 team, on top of the 1250 :-)

pej said...
3:13 PM  

Pej, I assume that you're referring to the Dow rather than the Ibex...

Macro Man said...
3:33 PM  

Hold to maturity prices: what does it mean? Bernanke needs to write a new Fabozzi!

4:17 PM  

"the Paulson Plan, even if approved, is far from a panacea"

Rather than occasional outbursts of activity, I wish they had started to systematically strengthen the system, ever since Bear. Instead we see complacency driven by denial punctuated by sudden hyperactivism. What's needed: 1) tough regulation that eliminates the root of the problem without eliminating the market and ONLY if that's properly worked out have 2) the taxpayer clean up the mess. At the moment, it appears they start with 2) and then may do 1) only to go back to 2) because 1) came either too late or wasn't worked out properly. IMO, it's already much too politicized and emotionalized to ever resolve into anything but a disaster.

mikarsky said...
4:20 PM  

Yes, the Dow Almighty

pej said...
4:21 PM  

HTM: What's the difference between this and to suspend m-t-m to historical cost?

4:21 PM  

this is mr. market saying the paulson plan is pro inflation...

time to delve back into materials, energy and tech stocks, while perhaps shorting US small caps.

prophets said...
4:34 PM  

hold to maturity is accounting spea from IAS 39 (I don't know GAAP equivalent)

Anonymous said...
5:20 PM  

why is the plan pro inflation?
thanks

/some student

Anonymous said...
5:28 PM  

The first plan may cost up to 1 trillion USD and it may not be the last. Add this to the already 10 trillion US debt. Then add several TENS of trillions in outstanding pensions. At the same time US assets are worth less. But govs or nations are unlikely to go bankrupt because they can issue new money, something Lehman couldn't. Is there a catch? Yes, it's called inflation.

mikarsky said...
6:11 PM  

Bear in mind though, that at least some of the new debt will be backed by assets, unlike the current stock of US Treasury debt. While these assets are not worth 100, they probably aren't worth zero, either.

Macro Man said...
6:22 PM  

There's obviously a catch: who cares about the government and the people? What matters to Paulson and Bernanke is their own private profits and their handful of friends:

Comen Take Over America

pej said...
6:23 PM  

MM, you're right I oversimplified a bit. The assets won't be worth zero. The problem is with each "emergency" rescue they're trying to pressure lawmakers into waving their naive package through. If you don't, you're unpatriotic etc bla bla. Add to this emotionalized context the marriage between CB and Treasury and money supply won't be an issue.

mikarsky said...
8:18 PM  

A blackberry weekend....lol, I've been on mine for the last 10 days. Stress testing Schwab mobile trading platform.

Does it feel heavier as your stock goes down..I know mine does :O(. I even got my wife to change the password on Schwab but an hour of begging after Friday open got me my fix....

Eurobear said...
9:49 PM  

Macro Man, scale of 1 to 10...how worried are you? Whether it be margin increases, banning short sells or fines when you fart, it is clear that the authorities have a boner for hedge funds. A nice easy scapegoat and one that 'mr taxpayer' would love to see go to the wall. Many, many if not every hedge fund could almost be forced euthanasia soon. So you have to ask yourself how does the consequent positional unwinds affect markets near term? Although, would you care given you would be part of it? Lesson: keep your VaR as close to zero as possible and make sure your CV is up to date!

Anonymous said...
10:17 PM  

Berkshire Hathaway to invest in GS...

Anonymous said...
10:49 PM  

Gartman thinks that the xlf selloff is the unwinding of short positions in the long/short ports. The selloff will be done by the end of the quarter. So will the portfolio managers, according to him.

and as I am writing this.. aaarrrgghh.. the Colostomy Bag of Omaha just did it to me, again! And Gartman was long Goldman. Well friend, keep your fingers crossed for my crude hedges.

Anonymous said...
10:57 PM  

What is "perpetual preferred" stock?

Anonymous said...
11:11 PM  

It's like a stone around your neck, but you can never get rid of it.

Anonymous said...
11:25 PM  

yes, it's a pretty bad deal for GS, but the futures on the S&P and DJAI are up 1.5%, which means that the stupid traders think that's the a better deal than 4-DVD-players for the price of one at WalMart... idiots are going to get wiped-out.

I thought Buffett had learned a good lesson after loosing billions within a few weeks with Lehman. But no. He must be out of his mind.

pej said...
11:38 PM  

pej, I can see why you might take that view but on the basis that GS is/was, you could argue, the "best" investment bank chock full of clever people you have to think that this was one of the only rooms in town? Will it loose Buffett money? Guess in saying that UHNW individuals are not going to need servicing and corporates are no longer going to merge and aquire.

Anonymous said...
11:48 PM  

What's UHNW ?
It's never clever to bet against Buffett. I used to respect him very much and try to follow his path, but first he has made some very bad investments lately, like Lehman and second, he is one of the main backer of the Paulson Plan, which shows that his company is probably in bad shape and that he has no integrity. It seems like he is far more greedy that what he wants us to believe. I am disappointed.

That said, he is taking more a fixed income position here, than a stock, and 10% is quite a yield when the fed rates are at 2% and likely to decrease.

In my opinion, GS willing to pay that much shows that they are not in such a good financial shape.

pej said...
11:53 PM  

Mikarsky - FYI. Paulson and his team tabled the kind of structural reform proposal you're calling for in Mar. And it would/does address all/most of the issues he got raked over for today. Those hearings are on Cspan btw.

In Sep03 the kind of really deep structural reform of the Frannie twins that might have saved things was tabled by the Bush administration and short-stopped by Congress, largely led by Dodd and Franks.

All a matter of public record.

dblwyo said...
11:57 PM  

in regards to fero's post. i too would like to make that trade, but can't seem to pull the trigger. i have found some interesting analysis to suggest why you shouldn't.....

"You also have to look at demand, and we believe that retail and institutional investors alike will be seeking safe income-generating securities in a fragile financial and deflationary macroeconomic environment. If you only focused on pending bond supply in the aftermath of RTC back in 1989, you would have missed one of the great rallies in Treasuries in the subsequent three years.

One additional note: In the last credit crunch in the late 1980s, early 1990s, the household sector owned well more than $600 billion of Treasury securities. They now own half of that and the share of these bonds in the financial assets of the household sector is less than 0.7% - a historic low. We think this must have to do with concerns over the low level of the yield, but when investors more fully realize the return potential of the bond market - after all, a 4.8% yield on a 30-year Treasury bond twelve months ago managed to generate a total positive return for investors of 16% (compared, by the way, to a -20% total return in the S&P 500).

And take the commercial banks. When they were able to re-liquefy during the credit crunch of the early 1990s, courtesy of the steep yield curve induced by aggressive Fed rate cuts, the share of government securities in their balance sheet expanded from a 12% share to a 20% share, over a four-year period (1989-93). "

justin said...
12:50 AM  

Haven't read the other posts to see whether these topics have already been covered as I'm pretty drunk (Oktoberfest, sorry), but may I point out the following about BH's investment, and more broadly where the markets are going:

1) Paulson will not let GS fail and Buffett knows this.

2) GS have a great franchise, but in a market where cash is king, Buffett gets the best of this deal.

3) Buffett knows he can move the market with his actions. This will push the S&P at least 2% higher tomorrow, ceterus paribus.

4) Sell WFC, buy WB. Sound silly, but where is the upside in WFC and where is the downside in WB? (post bailout)

Anonymous said...
2:37 AM  

UHNW - Ultra High Net Worth

Anonymous said...
8:06 AM  

thanks for the UHNW translation ;-)

Re Buffett and Paulson, we all know how corrupt paulson is and obviously, he will not let GS down, but he's only in service for another 4 months. I guess he can still add a couple of dozens of trillions of liability on the back of the bankrupt US citizen in the meantime, but it doesn't mean that GS will be able to be as profitable as it has been during the past several years, specially once they have deleveraged from 30-40x to 10-12x.
One could argue that the banking regulations won't apply to GS anyway, and that they will only use the Fed borrowing facility and have no down side of their new change of status. Too many people are above the law in the US

pej said...
9:11 AM  

MacroMan, it looks like Warren Buffet is in the 11,000Team. What do you think?

pej said...
9:11 AM  

dblwyo - Thanks for the info, I wasn't aware why it's not implemented.

mikarsky said...
12:58 PM  

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