Tuesday, September 16, 2008

Snake eyes

So Team 1250 rolled snake eyes and did nothing with interest rates. From an economic perspective it's not such a bad decision- as noted this morning, previous cuts haven't exactly been a panacea for this market.

In any event, AIG is now the main event, and even as Macro Man writes this post, the Fed is on the tape saying that they may lend money to AIG. Cue the obligatory 20 point bounce in the SPX from the levels prevailing when the chart below was printed.
Far be it from Macro Man to point out that the emperor has no clothes...but didn't the Fed also lend money to Lehman Brothers via the various TAF/PDCF/TSLF programs? How did that work out for everybody?

In any event, given that AIG management has refused capital that would require their own departure (known forever more as "Fulding 'em"), any infusion of public money should require immediate hari-kiri for the AIG management team.

While the market is starting to feel a bit squeezy, it does feel like it needs a final cathartic flush ; price action similar to yesterday's would probably do the trick. Macro Man reduced some of his short deltas earlier today , and at this point isn't sure whether his next equity trade will be a buy or a sale.

In this market, best to stay nimble so that you don't crap out.


Anonymous said...

>1B shares traded today in AIG - the world's most liquid call option.

Surprised the likes of USD/JPY and NZD/JPY turned a -3% London open into +1.2% print so far, quite a range!

Macro Man said...

Indeed. Satan's finger is alive and well, and coming to a market near you.

It's still not clear to me why the Federales adding new members to "Hank's Handouts" club (motto: No Dicks allowed!) should lead to a flatter term premium, but then I guess I am just old-fashioned.

Anonymous said...

'Hank's Handouts club...allowed.'
Thank you thank you.
First time I have really smiled today!
Trademark it quick!

Macro Man said...

You gotta laugh, or else you'll cry. 3 minutes after I buy a little AUD/JPY after MS' excellent results, 3 minutes later the headline hits the tape that AIG may be put into conservatorship, spoos drop 1.5 pct and I am selling spot 70 pips lower.

This is the sort of market that puts hair on your chest if you're a woman and takes it off your head if you're a man.

Anonymous said...

Why do you call the fed (I assume?) Team 1250 ? Thanks.

Macro Man said...

Because the Federales (Fed, Treasury, SEC, et al) always seem to come up with a new policy initiative when the SPX has threatened or broken 1250.

Anonymous said...

Russell/rest of the market divergence is indeed staggering considering they are most affected by the crisis. It's like Amazon's twin brother where no one except bill miller is actually buying but the shorts are nervous playing among themselves, pushing it higher.

Anonymous said...

I too was hoping for a Fed fade moment if they cut (altho 15 points on the S&P wasn't too bad), should just have jumped on the short end $ curve instead.
I would call it the current situation regime change/switching, and until we are through that silly ranges and levels will reign, although still expect and positioned for a hippy hippy shakeout. (Hey nicely done with sorting out comment widths so links are no longer chopped!) This is one way to look at it:
Anyone have any colour on using 2 part Markov chains as postulated by Hamilton to model/analyse/trade regime switches? Just thought I'd put it out there, am more prone to relying on my own economic analyses, but can see the possibility of deriving some utils/pnl from a more quant approach. Keep up the excellent work MM. Cheers, JL

Anonymous said...

JL, Vineer Bhansali has done no more than tell you in very fancy language that it can all go up in in a puff of vapor.

--Charles of Mercury Rising

dblwyo said...

MM, et.al.
Now word is that AIG will get it's bridge loan...$75-80B. We'll see

Have you watched JPY:Euro vs SPX ? As the carry trade worked away if you'd overlay them they were moving in concert.

The relationship appears to be broken in the last few weeks however. Regime change indeed. Too bad these damm cusp points are chaotic and subject to butterfly wing effects.

Anonymous said...

Question for CDS Trader, if s/he is lurking:

Alea reports that FNM/FRE CDS *are* delivering securities to settle, versus the cash-settle that s/he predicted. What gives? Are CDS contracts so heterogeneous or poorly written?

Link to Alea: http://www.aleablog.com/no-strippers-at-fannie-and-freddie-cds-auctions/

NYT, CNBC, Bloomberg, all report Fed "considering" $85 B loan that includes warrants to all-but-wipe-out the common equity (and the preferred equity, I wonder?).

dblwyo said...

Loan appears to be set up, Fed gets all AIG assets and warrants. NYT reporting management exit as essentially Fed takes over world's largest insurer. Whee.

Steve said...

Macro Man I appreciate your agnostic stance and as one who has maintained his core short I am not enjoying the rally up to 1230. (I even added to it about 10 points ago.)

Citi technicians (who are IMHO very good) are saying the low may be in.

So it's lonelier at the bottom. But I am not cutting just yet, because the main problem, as I see it, is the massive global bleeding of capital as the multi-trillion dollar Bridge Too Far collapses. Now we have two major institutions that will be liquidated. While this flushing will be good in the long run, in the meantime I see nothing but financial distress.

The only thing sticking in my craw is the possibility that AIG represents the beginnings of RTC II, an $80 bio down payment on a $1 trillion operation. This keeps me from increasing my 50% short to 75% or 100%.

Anonymous said...

It may be the scotch talking, but it strikes me that this has been an event-driven market all year. Like the plot of a bad detective novel, each thrilling new chapter removes another of the "usual suspects" and adds it to the list of corpses. At some point we're down to Colonel Mustard in the Library with the Lead Pipe, are we not?

Assuming the AIG takeout proceeds, who's left to trigger the next swaps emergency? In the US we appear to be down to just one oft-mentioned i-bank that I shan't name. Beyond that, what? The thrifts just don't have the swaps meltdown potential, and many are already so cheap they could well be taken under by the strong before actually triggering FDIC action.

Not to suggest that we're at the bottom in share prices, but perhaps we're finally within sight of trading on earnings fundamentals and not the crisis du jour.

Anonymous said...

My guess for next trigger: UBS. Rumor has it the Swiss will only cover Swiss depositors in the event of a failure. But it's an institution larger than the host country itself. They've been on the ropes for a while now.

MM - I have a question regarding Citi's alleged $500 billion to $1 trillion in off-balance sheet "assets." I'm assuming that short-term financing was used for long-term high yield debt purchases. Shouldn't refinancing be required in relatively short order?

Anonymous said...

Fascinating post, MM, and great follow on comments as Team 1250's nationalization of AIG infolded . The gov't could liquidate AIG but I presume they will run it and eventually sell it back to the private sector. A page from the Maggie T playbook. I wonder if Barclay's is getting Fuld as part of their purchase of the LEH banking/trading assets?

Hanky Panky said...

the eur/jpy is shadowing the spy??? Noooooooooo, you don't say. You mean it hasn't been doing that since Feb 8 when the BOJ started pumping the futes here?

A wee bit disappointed with your firm Macro. Figured you were a Millwall man fair and square. We have the best chant - 'Nobody likes us and we don't give a shit.'

Your friend, Hanky.

Anonymous said...

MS, GS is the game over?

Mencius Moldbug said...

Okay, what just happened? Did GS or MS just dump a big gold short, maybe?

Macro Man said...

Moldy....somebody has.

RN said...

Do you know where in line the Fed is with regard other Lehman debtholders with what it lent through the alphabet soup windows?

The bigger question is obviously, will taxpayers take a direct hit because whatever is lent through the windows goes away/isn't recovered in a bankruptcy? Or is the Fed atop the creditor list.

I don't know about you, but I don't see why Barclays should walk away with prime ex-Lehman assets financed by me.