Strange bedfellows

Strange times make for strange bedfellows, a fact which has been amply demonstrated by the financial crisis of the past fifteen months. Didja ever think you'd live to see the broad-based nationalization of the banking system in many Western, notionally-capitalist economies-including those governed by ostensible free marketeers?

The trend has continued apace this week. Consider the juxtaposition of the following pair of headlines, each of which is factually true:

1) "US Consumer confidence registers lowest-ever reading" and "Stocks rally more than 10%", each of which occurred yesterday;

2) "Over-leveraged emerging economies face crisis" and "IMF to lend up to five times its asset base to ease crisis". Uhhhhhh......OK. So the answer to a problem sourced in leverage is for a multilateral institution with a proud history of failure to lever itself up? Good luck with that. (As an aside, apparently the IMF has sought to re-mortgage its Washington, DC headquarters to increase its capital base. Unfortunately, they don't qualify for a jumbo mortgage and so couldn't obtain a loan.)

So what are we to make of yesterday's newsflow? The consumer confidence data was execrable no matter which way you slice it, notching up the worst reading in the nearly 40-year history of the Conference Board survey. Ominously, Macro Man's pet indicator the "jobs hard to get" component surged above the high of the early-Noughties recession, heralding more job losses to come.
And yet markets rallied.....err...because they decided to. Now, it is true that there is a negative correlation between the consumer survey and forward returns on equities, suggesting that it is indeed always darkest before the dawn. Yet the absolute value of the correlation is quite small, certainly not enough to justify a ten percent rally immediately after the print.

However, there is a lot of talk about month-end pension fund rebalancing flows out of bonds and into equities. Given the scale of the monthly moves, there is probably something to that talk. Certainly both legs worked yesterday (though not, it must be said, on Monday.) Macro Man had a plan to scale into a small equity long to take advantage of this expected flow; while he managed to execute a truly miniscule clip on Monday and Tuesday, he lad little interest in chasing yesterday's uber-rally.

And let's not forget; 10% rallies are not normal, and they don't occur in bull markets. Yesterday's price action managed to crack the list of all time best days on the Dow, which Macro Man published earlier in the month. The updated chart (which calculates lognormal rather than arithmetic daily returns) is below; this month now features two of the best and worst 15 Dow days of the past 80 years.
Not even the crash and Great Depression saw that kind of concentrated price action. Then again, we're living in a world where a German automaker briefly becomes the world's biggest company even as the global economy heads into a bone-crushing recession. Strange bedfellows, indeed.
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Boat52
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October 29, 2008 at 9:58 AM ×

One can speculate that the Romans were confused by all sorts of odd events as their empire slowly and painfully ended.

The Empire of Debt will do everything to remain in power as the de-leveraging Mogul hordes steadily take over the remains of it. At some moment, all will realize that their efforts to remain in power have failed and a new world order will ensue.

Note: Art Laffler wrote an enlightening column in yesterday's Wall's Street Journal Opinion cloumn.

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Sean Maher
admin
October 29, 2008 at 10:28 AM ×

MM any idea what the hit was on VW at the hedge funds? Huge range of numbers quoted from 5bn to 25bn, on the VWAP and the 12% on loan truth looks in teens to me...does seem that long/short equity hedge funds facing margin calls in Europe had to close US bets, kick starting the rally yesterday...mutual funds happy to window dress the move.

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Macro Man
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October 29, 2008 at 10:31 AM ×

Haven't heard many specific losses- most of the names I have heard have been on the sell-side- GS, DB, SG, etc.

Safe to say though that very few people other than Porsche and Lower Saxony are smiling.

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Anonymous
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October 29, 2008 at 10:39 AM ×

FT says losses on VW roughly 4bn european drachmas.

As I understand it the rally was caused by the lunarcycle. New moon new market? Makes more sense than some of the other things I´ve seen these past weeks.

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Erling
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October 29, 2008 at 11:02 AM ×

I'm with you on the end of month bond to stock repositioning as source of much of the post 2pm EST rally yesterday. Bulls are gleefully pointing to the cheap looking ave P/E on the S&P , but the "E" looking out 6-10 months is so precarious, i'm largely discounting its validity and remain tied to the mast.

+ Rep for pointing out that 10% upticks occur only in Bear markets. Depending on where one sits on the horizon, A flare gun going off at 2am can easily be mistaken as dawns approach.

btw - I hope someone had a handycam in the Porsche HQ offices yesterday. Must have been a fun party. As for the London hedgies who chose "tails"... look at it philosophically... today is another day (JobCentre opens at 10am I believe)

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t
admin
October 29, 2008 at 11:08 AM ×

"Note: Art Laffler wrote an enlightening column in yesterday's Wall's Street Journal Opinion cloumn."

Laffer is an idiot and a shill. Listen to him in '06:

http://uk.youtube.com/watch?v=IU6PamCQ6zw

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cfarley
admin
October 29, 2008 at 1:15 PM ×

Spooz touching 1065 would make for an excellent weekend.

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Anonymous
admin
October 29, 2008 at 1:49 PM ×

To me this looks like a mega short squeeze in equity, and as we have learned from vw recently, could go further on (of course not expecting same degree of squeeze) enough to see some pain, before mkt resumes a quite sure downtrend. Who are these shorts? guess some of them are illiquid assets hedgers. Wishful thinking? we will see...

sick trader

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Druff
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October 29, 2008 at 2:05 PM ×

Hasn't there been one parallel?

In late October 1929, 3 of the worst days were 10/28/1929, 10/29/1929, 11/6/1929, and 2 of the best days were 10/30/1929, 11/14/1929. This was a span of around 16 days.

That was after the initial huge slump in their market, before a major rally, but a long ways from the bottom, both in terms of time and market downside.

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Macro Man
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October 29, 2008 at 2:13 PM ×

Yeah, I suppose I was being anal by just looking at calendar months. Still....hardly a ringing endorsement of current circumstances, is it?

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October 30, 2008 at 4:01 AM ×

Macro Man, there was some news of hope in the housing market in Florida recently. I think that people grasping for any good news would jump on this, given how the seeds of this crisis seem to have sprouted in the housing sector.

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