On the hunt

At last. September (and with it, the third quarter) is over, and we can now all hopefully move on with our lives. For some, of course, September's volatility proved fatal; while the fate of listed companies has been on the front page of the newspaper in recent weeks, there may well be bad news in the pipeline as September's hedge fund returns begin to trickle in.

So the likelihood of further apparently puzzling, flow-driven price action in financial markets appears to be very high indeed. Macro Man has asked for a couple of prices this morning, and let's just say that liquidity will have to improve quite a bit before we can label it "execrable."

Still, with September in the bag, it's time to go on the hunt for tradable themes for the rest of the year. First and foremost, of course, is stayin' alive. It's not just a Bee Gees song, it's also become a way of life for financial market punters. Focusing on risk management and market liquidity has become of paramount importance; while trading defensively can carry its own pitfalls, recognizing the downside risks before putting on a trade has never been more important.

In terms of macroeconomic themes, Macro Man is focusing on the death of the US consumer. "Never bet against the US consumer" has been a useful maxim for the past twenty-five years, but in Macro Man's view it has finally run out of rope. Current data suggests that the decline in US household net worth has not yet reached historic proportions; however, current data doesn't capture the declines in house and equity prices in Q3, which were considerable. Moreover, there is no other bubble for the authorities to inflate, as they inflated a housing bubble in the early part of the decade to offset the equity bear market.
What Macro Man has yet to figure out is how to profitably play the death of the consumer in terms of financial asset prices, given that he doesn't do single name stocks or sector ETFs.

This year, betting against the ECB has been as profitable as the historical return from betting against the US consumer. However, the confluence of financial crisis, economic slowdown, and inflation base effects have made Macro Man increasingly interested in betting on ECB/BOE capitulation. Whether this pays dividends in October or November will likely be determined tomorrow, when the CBs announce policy rates (and Trichet holds a news conference.)

While OIS markets are already pricing in easing from the BOE and ECB, Macro Man still sees value in some short end instruments. Schatz (German 2 years), for example, currently yield 75 bps under the ECB policy rate. In the US, that spread traded to -1.9% soon after the Fed started easing rates. While Macro Man doesn't expect that sort of spread in Europe, it does suggest quite a bit of downside for front end govvy yields in Europe; Macro Man wouldn't be surprised to see Schatz yields 100 bps lower at some point in the next six months.
Emerging markets going for growth is another theme that seems likely to intensify in the coming months. Again, however, the immediate asset market implications are not obvious. If EM fixed income traded purely as bonds, it would simply be a case of receiving rates in the usual high-yielding suspects. However, EM fixed trades primarily as emerging market risk, and thus is subject to global risk aversion concerns. And those can turn on the unpredictable, such as the failure of the TARP vote, etc. If, however, equities but in a sustained, multi-week bounce, EM fixed income should trade well.

As always, an open mind is important. In this market, Macro Man is trying his damnedest to remain the hunter (of investment ideas) rather than the hunted.
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Sean Maher
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October 1, 2008 at 11:30 AM ×

Agree on imminent ECB (and BOE) rate cuts; note Intrade now quoting 93% odds on bailout approval this week, Dems seem willing to go it alone with intervention for foreclosed households in bill, so maybe further bounce back to 200 day MA; however, hearing lots of very grim news out of China; stockpiles of coal, iron ore, copper etc have soared with slumping industrial demand; I've been a bear all year on the unsustainable China growth model, and been short copper, aluminium and oil; all have significant further downside until prices at least hit their marginal production costs eg $70 odd for oil.

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Anonymous
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October 1, 2008 at 11:43 AM ×

Charlie McCreevey to the rescue! totally hilarious to me a "non-dom paddy", that it is the "Oirish" who seem to be best placed to dance out of these banking Shenanigans..
Depositors at Ulsterbank (part of RBS) are switching their money across to road to AIB and BOI..
Reminds me of the scene in Braveheart when the Irish ran at the Scottish, only to stop for a "cuddle" before joining the Scots and turning on the English..
-Gav

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dblwyo
admin
October 1, 2008 at 12:51 PM ×

MM - when you talk about "death of the consumer" what timeframe are in ? In the immediate future the latest PCE data is not good, especially when looked at YoY and compared to Retail Sales
http://llinlithgow.com/bizzX/EconCharts/EconQ308/ConSlsAug08.jpg
In other words, aside from markets, the US economy is starting to really tip over more than acknowledged generally.

But you put up assets and savings which implies a longer term so I'll take that as consumers are going to be forced to change into savers ? Boy that ripples across everything.
Past the crisis into the downturn and down the long malaiseaway perhaps a theme is to look for Buffet-like companies; i.e. defensible competitive position, l.t. performance advantages, so fort.
Translation to macro themes, dunnoh ?

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Macro Man
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October 1, 2008 at 1:02 PM ×

Gav- indeed. Thinking of sending some dough to my old Bank of Ireland account.

dbwlyo, yeah, it's the latter. Dunno, indeed.

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Anonymous
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October 1, 2008 at 1:28 PM ×

MM,

I don't know whether your aversion to sectoral trades is absolute but you may want to peruse the GS wavefronts - US Consumer Growth springs to mind although wouldn't be able to tell you constituents/metrics etc.

As an aside in your hunt for ideas, how about you ask the audience in an online version of the Drobny award.

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Macro Man
admin
October 1, 2008 at 2:05 PM ×

Anon @ 1.28 , I love the idea of wavefronts, but as of yet I cannot trade them for prospectus-related reasons.

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mikarsky
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October 1, 2008 at 3:45 PM ×

I'm not into equities but I would stay away of so-called "emerging" markets. With the dead of the US consumer and with the EU consumer not on a spending spree, there's not much left to emerge. FX and commodities are interesting..

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mikarsky
admin
October 1, 2008 at 3:50 PM ×

PS: commodities = gold or platinum. Nothing else. Playing with agricultural commodities kills lives.

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Anonymous
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October 1, 2008 at 4:05 PM ×

***What Macro Man has yet to figure out is how to profitably play the death of the consumer in terms of financial asset prices, given that he doesn't do single name stocks or sector ETFs.***

IMHO, short Nasdaq 100 or Kospi 100 to play the death of consumer spending. Discretionary tech spending AAPL, RIMM, Samsung, LG has held up well but I see cliff risk come Christmas....especially if a lot of the current 0%/no payments for two years offers promoted by the big box retailers/Amazon.com disappear.

Too chicken to short now, spanked by bottom fishing on Monday...waiting for the much anticipated reflex bounce come mid-October.

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Macro Man
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October 1, 2008 at 4:06 PM ×

Anon @ 4.05, should I be worried that I, too, am looking for a bounce in a couple of weeks?

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Anonymous
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October 1, 2008 at 4:15 PM ×

Any thoughts on convergence trade between US and German or UK 1 year govt yields? Best way of implementing such a strategy?

I assume one of 2 things happen
1) this financial problem persists for some time. severe risk aversion spreads further to Europe/Asia, causing a deflationary slowdown and yield collapse in Europe.
2) we look back at this episode as point of maximum fear in which case there is an allocation away from US treasuries into US equities in coming months.

PS: my money is on scenario 1).

the best analysis/commentary I have seen on rescue package is www.rgemonitor.com. if you have the time listen to the interview Roubini did with Bloomberg TV (linked in article). If you've got even further time dig out the IMF paper on financial crises and understand the alternatives to buying toxic assets. i.e buying preferred stock. I am surprised that more of these recommendations from individuals such as Roubini who have so far forecasted this situation very well are not featured in the proposal in front of the politicians currently.

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Anonymous
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October 1, 2008 at 4:19 PM ×

PS: anyone got recommended reading on the Scandi banking crisis and how the government handled it?

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Anonymous
admin
October 1, 2008 at 4:24 PM ×

I think the way to play the falling consumer is to either short WalMart or short the XLP (which is mostly Walmart and P & G). Everyone thinks Walmart is immune.. its not. Its the biggest retailer in the world, and is now pretty much just a Grocery store, with even lower margins than it is used to. It will shrink IMO.

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Ian
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October 1, 2008 at 5:33 PM ×

MM- How many different positions (or I guess more broadly ideas) do you generally hold in your portfolio at one time?

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bengt
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October 1, 2008 at 6:18 PM ×

@Anon 4:19
Look here http://www.rgemonitor.com/ spotlight issue #14 "Lessons from Sweden`s respeonse..." Some of the linked documents are written by people who where involved at the time and/or have political agendas (Bildt/Bäckström).

http://www.riksbank.eu/upload/Dokument_riksbank/Kat_publicerat/PoV_sve/eng/qr96_1.pdf is another good document, written by someone who was in charge at the time (Ingves).

Much of the documentation is only available in Swedish obviously...upcoming boom market for Swedish to English translators? :)

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Macro Man
admin
October 1, 2008 at 6:22 PM ×

Ian, the number of my positions obviously depends on the condition of the market and the number and strength of my views and confidence.

Currently I am running risk in 10 different strategies, one of which is a "catch all" book for tactical FX trading.

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t
admin
October 1, 2008 at 6:29 PM ×

"PS: anyone got recommended reading on the Scandi banking crisis and how the government handled it?"

both recommended, both short and readable:

The IMF paper:
http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf

Reinhart & Rogoff:
http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf

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t
admin
October 1, 2008 at 6:34 PM ×

OR more in answer to your qn:

A Norwegian perspective on banking crisis resolution
Kristin Gulbransen
http://www.norges-bank.no/templates/article____13822.aspx

Government ownership of banks - the Norwegian experience
Jarle Bergo
http://www.norges-bank.no/templates/article____13819.aspx

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Anonymous
admin
October 1, 2008 at 6:35 PM ×

Anon@4:19

Some reading on the Scandinavian banking crisis:

http://www.bof.fi/en/julkaisut/tutkimukset/keskustelualoitteet/2001/dp2001_6.htm
(you can look for more using the keywords)
http://www.imf.org/external/np/speeches/2002/091102.htm
(speech by Stefan Ingves, nowadays the president of Sweden's CB)
http://www.riksbank.se/templates/speech.aspx?id=1722
http://209.85.135.104/search?q=cache:4NEfytnXD8oJ:www.clevelandfed.org/research/PolicyDis/pdp21.pdf

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mikarsky
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October 1, 2008 at 7:02 PM ×

Does anyone know why DJI jumped from 10726 to 10859 in 59 secpnds???

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Macro Man
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October 1, 2008 at 7:04 PM ×

let's just say that liquidity will have to improve quite a bit before we can label it "execrable."

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Anonymous
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October 1, 2008 at 9:04 PM ×

MM- Outstanding post. Thanks. Market stateside seems to be in wait and see mode. However, small business owners are really squeezed. Those who borrow to manage cash flow are having trouble getting funds. Liquidity assistance has not trickled down to the grass roots level. Nothing new here, but it is offered as real time intell from the foxhole where cash is king. Dunno how this translates into a trading strategy other than to be short equities and to maintain a tactical cash position.

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Anonymous
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October 1, 2008 at 9:23 PM ×

My Dear MM - here is a trade idea for you: Buy Morgan Stanley bonds. April 2011 20.11 pct annual. Buy bonds, clip the coupon, and head back to Madrid for some Sangria.

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Steve
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October 1, 2008 at 10:46 PM ×

I am long fixed income out to wazoo since I think capitulation will be involuntary, if not tomorrow then certainly by year-end. This trade has actually been working for quite a while now, despite the big chunk 'o change it cost me in the spring.

The trade that I find very intriguing is shorting the EUR. This was a very frustrating currency for me because I was very right and very bearish up at 1.60 and yet failed overall to make any money whatsoever.

What I like about it now is, will the strains of the global economy not upset the apple cart? If our bloody congress can't pass a bill setting up a liquidity facility, how the hell will Europe come to the rescue of their fat bloated banks? And how will the strains on the financial system feel to Spain and Ireland when they're already choking on 4.25% money in the face of a real estate collapse?

No idea when to enter, let alone where to set stops.

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Anonymous
admin
October 2, 2008 at 12:49 AM ×

Macro,

It won't be long now before you have to get a real job, creating real value for someone, rather than the paper shuffling, casino gambling crap that has provided you a living up till now. Welcome to the real world. Oh yeah, welcome to the real world salary scale as well. dmc.

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Anonymous
admin
October 2, 2008 at 1:31 AM ×

I am getting very enticed to sell treas buy agencies.. Bbg anywhere not working for me right now but i believe the ticker is FNMGS3 Index. That is the 3 year spread. Was at 145 when I went home today. Take a look at a 10 year chart and tell me that it doesn't look enticing.

The obvious play for the American consumer is to short XLY but seeing as you can't do that I'm not exactly sure. This has to be the most compelling play in my PA (not running institutional money)

NY

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Macro Man
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October 2, 2008 at 5:29 AM ×

Anon @ 12.49, don't forget to pin your name tag on your shirt before you go to your "real job" tomorrow. I really don't have much tolerance for cretins, so please rest assured that further trolling will be deleted forthwith.

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sharpe_mind
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October 2, 2008 at 11:19 AM ×

MM- I think Chinese equities here are a very interesting play re: EM going for growth. China was the first to see inflation and is the first coming out. PBOC has already started cutting and soon may relax loan quotas. Government is in a tremendous fiscal position to deal with the slowdown. Banking system is relatively insulated from the troubles elsewhere and loan to deposit ratios are quite reasonable. Also, China is in the unique position in EM that it saw relatively little by way of western foreign portfolio flows. Notice that USD/CNY spot has been quite stable.

For a variety of reasons I think the story of China's impending doom is quite an exaggeration. Retail sales have actually been strengthening and, while export growth is slowing it is hardly falling off a cliff. In fact August was China's largest trade surplus ever; I believe China is now the only non-energy exporter running a trade surplus. H shares are trading at 11X for what is still a great growth story.

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Macro Man
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October 2, 2008 at 1:15 PM ×

Sharpe, I hear ya, but for me Chinese equities fail on two basic criteria that I think are important these days: transparency and liquidity.

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sharpe_mind
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October 2, 2008 at 11:09 PM ×

you're talking A or H (or both)?

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