It's delightful, it's de-lovely, it's de-risking

Enough is enough.

Markets are completely imploding, both in terms of price and liquidity. When the FTSE future opens 11% lower (!), that's not a market, it's a financial Chernobyl. And unless you're equipped with the proper equipment to deal with hazardous waste, you're best advised to flee the area.

We have now reached the point where even when you're right, you're wrong, in the sense of not being able to crystallize the P/L that you think you've made. At least that's the case for any type of option structure, judging by the quotes Macro Man has received over the past 48 hours. Of course, one can always opt for naked futures or spot exposure.....the problem, of course, is that being wrong leaves one open to virtually unlimited downside. Perhaps in the glory days of macro punters in the 1980's or 1990's, that sort of risk/reward was acceptable; these days, Macro Man would be surprised if any investors would allocate capital to a fund that isn't focused on managing the downside in this market.

And so Macro Man has decided to bid adieu to an old friend, his equity short position. Most major indices are down 20%-25% this month alone. While it is of course foolish to suggest that further downside is impossible, Macro Man now believes that prices are discounting a bone-crushing recession and could actually be cheap. At the same time, the Four Horsemen of the Investment Apocalypse- Risk Aversion, De-leveraging, Illiquidity, and Panic- stalk the land like hounds from the bowels of Hell.

Macro Man thought that the coordinated rate cut would shore up confidence and generate a decent bounce in equities. That opinion was wrong. Fortunately, he is paid to take investment decisions rather than render opinions; after going long at 12.01 on Wednesday, he was short again within the hour. However, the moves that we have seen over the last sixteen hours are enough. The strain of keeping track of every single development, every gut-wrenching reversal, and trying to extract as fair a price as possible for his positions has reached an extreme.

So, too, has bearish sentiment and interest in the market. The blog traffic-o-meter has literally leapt off the charts recently. Perhaps Macro Man's writing has improved or his insights become more accurate. More likely, however, is that visitors flock to financial websites during market extremes, much like rubberneckers gawk at a gruesome highway accident.

Macro Man observed yesterday that the Lehman CDS settlement could serve as some sort of market flashpoint or the apotheosis of the Four Horsemen, and that indeed looks likely to be the case. Macro Man really has no idea what the next 48 hours of trading will hold, nor the weekend that splits today from Monday.

So he has decided to ring the register, take the "opportunity profit" hit and close just about all of his bets on near-term market direction, and re-charge the mental batteries. He has an 11.46 tee time today and the Blackberry will be left at home. De-risking: it's delightful, it's delicious, it's de-lovely.
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Anonymous
admin
October 10, 2008 at 11:08 AM ×

What time is the Lehmans CDS auction at?

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October 10, 2008 at 11:08 AM ×

An exceptionally eloquent post. Nice one.

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Anonymous
admin
October 10, 2008 at 11:21 AM ×

Shall we wait for Barack Obama winning by a landslide on November 4th to restore confidence, at least for a while? It’s the only pathway out of this mess I see right now…

Anyway it’s a sunny and warm autumn day here in Florence; have a nice weekend, AT

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Anonymous
admin
October 10, 2008 at 11:40 AM ×

have a nice tea-time and deleleveraged, risk-free weekend. thanks again for the blog!

humble student

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Anonymous
admin
October 10, 2008 at 11:47 AM ×

Lehman auction timeline: US time
Friday 10 October
9:00 Clients submit physical settlement requests
9:45 Dealers enter inside market & physical settlement
10:30 Inside mid market and open interest is published
13:00 Deadline to enter limit orders
14:00 Final auction price and trades published
15 October: NOPS deadline at 4pm EST
20 October: Settlement date for trades
21 October: Cash settlement for CDS trades in the auction

"when in trouble, double"
i nearly did it with mi fresh eqt long. make it or brake it (probably the latter

sick trader

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dblwyo
admin
October 10, 2008 at 11:51 AM ×

There's an interesting argument that a big part of this huge downdraft is the hedge funds liquidating because the ibanks aren't funding them anymore. Floated on CNBC several times and makes sense.

FWIW for US market followers the entire collapse yesterday was a post 3pm one and seems to have followed a CEO's discussion of shutdowns from lack of CP credit. Apparently traders don't read but do watch CNBC and that brought home the seriousness of things :) ?

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SwissBoy
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October 10, 2008 at 11:53 AM ×

SwissBoy will go to Paris for the weekend to spend his Swissies, which have rapidly appreciated against the EUR. He's not the last man standing, but he just might be the last man shopping.

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mikarsky
admin
October 10, 2008 at 12:11 PM ×

MM
"take investment decisions rather than render opinions"

I try to develop my own opinion from many views, and this blog and its sometimes contrary views is great. But at the end of the day, my roadmap stays. And I play the game along that roadmap. It didn't take a genius to figure out that short indexes and long gold, CHF/GBP, CHF/USD is all you need.

I agree that the panic in Europe is COMPLETELY unjustified, but you can't model people's fears.

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BDA_GUY
admin
October 10, 2008 at 12:15 PM ×

I believe that there is going to be a similar settlement process for WaMu. Does anybody have the details regarding the dates/times on that?

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ndk
admin
October 10, 2008 at 12:32 PM ×

Over the last several days, I've taken my profits on my puts/shorts and allocated the capital to volatile, risky equities such as DEO, PM, and KFT. As a result, I've gotten my face ripped off.

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bengt
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October 10, 2008 at 1:02 PM ×

Anyone has any idea how this Lehman event is going to turn out? Been searching and reading but my main conclusion is that insight is shallow, guesses widespread and outcome scenarios range from doomsday to a mere blip.

So anyone have a clue?

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Anonymous
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October 10, 2008 at 1:33 PM ×

The size of the credit squeeze is about USD 10 Trillion, it's equivalent to 20% global GDP. So we will see SP500 earnings going to ZERO in the next couple of years or maybe during some quarter of 2009. In my view the bear market will end when SP500 reaches 500.

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Anonymous
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October 10, 2008 at 1:42 PM ×

Team 1250 seems like a lifetime ago.

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Anonymous
admin
October 10, 2008 at 1:42 PM ×

CHF - HA! What an illusion

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Anonymous
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October 10, 2008 at 1:52 PM ×

Best post ever. US markets look UGLY. Pres about to speak but we are plagues by the lack of an administration (of either party) in the driver's seat right now. Brown seems to have been doing some things right although the UK press never seems to see it that way. All I really know is that this too shall pass.

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Anonymous
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October 10, 2008 at 1:53 PM ×

I do not think I am good at 2nd-guessing where S&P should be for it to hit the bottom. But the scenario I have in my mind is this: next summer/autumn will mark the bottom of the market.
In the short-term, Lehman settlment will be make or break. When former, markets will be in for a huge rally followed by wide range for the next month at least. Beginning of the next year, markets will start to fall again, hopefully less viciously.

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Anonymous
admin
October 10, 2008 at 2:26 PM ×

If this keeps up, you can charge people to read your blog.

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mikarsky
admin
October 10, 2008 at 2:42 PM ×

Anonymous 1:42 PM

No illusion - available as cash to plan the weekend.

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Anonymous
admin
October 10, 2008 at 3:45 PM ×

Mikarsky -

ISK x10 = CHF

Banks too big for the country to fix.
It used to trade as a safehaven/funding currency... but umm, 30x leverage for UBS and CSFB = CHF implosion. Probably my favorite short here. And i'd do it in options bc people are not seeing it.
JPY/CHF/USD all have great correlations. But, you need to be an independant thinker when mkts are down 27% in a month.

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cprouty
admin
October 10, 2008 at 3:59 PM ×

enjoy the golf Macro Man, you deserve it.

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Tastexperience
admin
October 10, 2008 at 4:30 PM ×

>>If this keeps up, you can charge people to read your blog.

If this keeps up, no one will be able to afford it!

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Anonymous
admin
October 10, 2008 at 4:30 PM ×

*MEXICO HAS SOLD $6.4 BILLION IN FOREIGN EXCHANGE MARKET TODAY

...and the price action in MXN was real and massive. Get out of EM.

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Anonymous
admin
October 10, 2008 at 4:59 PM ×

LEH CDS is 9.75 cent per dollar. Do you receive the call from Mr. Margin today?

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mikarsky
admin
October 10, 2008 at 6:32 PM ×

Anonymous 3:45 PM

You may be right but at the moment it works. I'm not in for longer than it takes emptying a cup of hot tea. Right now, UBS is still the world's largest fiduciary in terms of assets. But of course, nothing is set in stone.

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Anonymous
admin
October 10, 2008 at 6:37 PM ×

I hope you have a small cup

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Anonymous
admin
October 10, 2008 at 8:50 PM ×

anonymous at 11:21 said it all.

The market is just waiting for the Obama election to start buying all over again.

"It's the politics, stupid"

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Anonymous
admin
October 12, 2008 at 3:05 AM ×

Dear MM

Have been enjoying your posts as much as I have been enjoying these markets. For the first time in many months I am getting the feeling that the bottom of this crisis is a matter of days away. I have two very un-marketlike theories for believing that way.

The first is thanks to an astute colleague who pointed out to the Kubler-Ross model of dealing with grief(http://en.wikipedia.org/wiki/K%C3%BCbler-Ross_model) a while back. We certainly have entered the fifth phase of Acceptance if the media and press is anything to go by.

And second relates to the solar activity. If you look at the nearly 11 year cycle of Solar activity, you'll find that Solar Minima have frighteningly coincided with market upheavals (1986-87, 1997, and now 2008). I can't remember exactly where I read it, but the current local minima should be set this week as far as sun spots go.

Your friends at BoK and RBI certainly used all those reserves this week as you exhorted them to do.

As for USD/MXN, I believe that the underlying cause was a rumour that foreign banks have been sitting on a swathe of MTMs with local corporates and that they'll be forced to bail out of Mexico if these corporates default. Banxico certainly thought otherwise!!

Regards.

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Anonymous
admin
October 12, 2008 at 9:55 AM ×

so where does the 300 bil of cds exposure sit....

is this lights out?

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October 13, 2008 at 11:10 AM ×

Readers really needs this article in this right time of financial/trading crisis and wall street issues.

Andrew Abraham
MyInvestorsPlace - trading, value, investing, forex, stock, market, technical, analysis, systems

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