TGIF

Macro Man isn't normally one to say "TGIF" on a Friday; while he certainly loves his weekends, he also does legitimately enjoy the weekly battle to figure out (and extract money from) global financial markets.

But this morning, he can't help but think "TGIF". Maybe it is not being able to get back to sleep this morning after waking at 4.30. Maybe it's the surreal sight of seeing that Macro Boy Jr. (aged 5) pulled up and attempted to log onto Macro Man's home Bloomberg terminal while he was in the shower. Or maybe it's just the mental fatigue of seeing the economy slide into recession and market prices exhibit hyper-active Brownian motion.

And let's make no b0nes about it- the US (and almost certainly the world) economies are sliding into recession, if they ain't there already. Yesterday's monthly drop in industrial production (2.4%) was the lowest since Mrs. Macro was born (i.e. 1974.) Ex-post, of course, the figure was spun off as being negatively impacted by the hurricanes and Boeing strike last month.

This, of course, begs two questions:

1) Haven't there been other hurricanes and strikes in the last 34 years?
2) It's not exactly new news that there were hurricanes and strikes last month, so why weren't they in the economists' forecasts (which expected a 0.8% monthly drop)?
Meanwhile, the Philly Fed index notched its lowest reading since the early 90's and the biggest monthly drop in history. Yep, the good news keeps on rolling!
Of course, none of this necessarily means that stocks will go down. Hell, they didn't yesterday, though some of the late-session rally may be related to today's option expiration.

And St. Warren of Omaha has issued what some may take as a clarion call to buy US equities in today's NY Times; it makes an interesting contrast to Cramer's recent "sell everything and buy tinned beans and a shotgun" message.

Still, any Buffett-induced rally may well represent yet another selling opportunity. Buffett himself claims no particular ability to time markets on anything but a very long-term basis. And while he may be correct that stocks start to pick up before the economy, Macro Man has difficulty in believing that stocks will meaningfully bottom until earnings do; certainly that's not been the case yet. Worryingly for equities, as of the end of last month analysts still expected S&P earnings for 2009 of $83 per share (versus $50/share trailing.)
And of course, a country like Japan is 18 years past its equity market peak, which probably falls into even Mr. Buffet's categorization of "long term." Yet the Nikkei is still some 80% or so off its peak- hardly a ringing endorsement of blind long-term investing.

Nevertheless, Macro Man will concede that Mr. Buffett is probably right in the very short term and the very long term. For his intermediate term "sweet spot"m however, Macro Man cannot help but think that more downside awaits.
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16 comments

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October 17, 2008 at 11:51 AM ×

Sure, until when analyst will change their fancy expectation we will not reach the bottom...
About nikkei, it's the saddest market in the world, i've too often lose money on it, but at least NOW at P/BV of 0.8 it's a real long term opportunity.
However mkt is absolutely incredible, and here free lunch exist! The most easy way to make money until year's end is to buy TIPS 3 7/8 january 2009, is there any one interested in a 9% yield to maturity US bond??

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cfarley
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October 17, 2008 at 12:10 PM ×

I'm just interested in a couple more days of fool's rally in the S&P 500. Need to cover a big SDS short...

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Anonymous
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October 17, 2008 at 3:19 PM ×

mm--never a good idea to give the mrs actual age or g-d forbid weight---ur young so you may be forgiven but tread carefully--my 5 year old like to look at my bloomie on blackberry--his comment tuesday--why are so many number red--smart kid--good weekend ted's comming in maybe we can more from financial crisis to econ slow down which ain't pretty but better than the latter

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Sundblad
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October 17, 2008 at 4:51 PM ×

TGIF indeed...the SPX trailing earnings chart is interesting. Is the data for it available on the web?
Have a good weekend!

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Anonymous
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October 17, 2008 at 5:07 PM ×

It's interesting that Warren Buffett is buying stocks for his personal account but not for Berkshire Hathaway. Possibly because it is easier to find smaller companies whose prices have been hammered more but whose sizes makes them unable to make a large dent in Berkshire's tens of billions. This suggests the large cap companies aren't buys yet.

It's also interesting that up until now his own money was in treasuries. If he's a long term investor, why didn't he have stock from previous purchases? He may not be as casual about the overall level of the markets as he suggests he is.

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mikarsky
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October 17, 2008 at 5:41 PM ×

Did we today see a new sign of decoupling? While the DJI almost fell into yet another black hole at opening, Europe's DAX FTSE CAC SMI continued climbing. Frommy perspective, this type of decoupling is due sooner or later.

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Macro Man
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October 17, 2008 at 6:14 PM ×

Uhh....no. SPX futures are 14% off their lows. Eutostoxx futures are.....14% off their lows. How is that decoupling?

Anon @ 3.19, I cleared it with her!

Sundblad, I think you can get some of this kind of data at the S&P website.

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Anonymous
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October 17, 2008 at 7:28 PM ×

Cramer and Buffett: a perfect example of market-making.

--Charles of MercuryRising
www.phoenixwoman.wordpress.com

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Chidambaram
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October 17, 2008 at 10:24 PM ×

Along with Buffett, SWFs, and other smart, large funds and players must be going long right now.

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Chidambaram
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October 17, 2008 at 10:30 PM ×

1) The SWFs and their proxies in the US were long speculative commodities which took the oil price from $68 to $140+in one year.
2) This was brushed off as a result of spiralling demand, etc till in june 2008 Congress wrote to CFTC,and CFTC did an investigation, finding that around 81% of commodity futures position were speculative.
3) The sudden increase in oil prices, caused home values to first steady and then depreciate, leading to the mortgage crisis.
4) Since July 2008 the SWFs have been forced to come out of long oil futures positions, and this is reducing the dollar supply, and helping the dollar to hold steady and rally.
5) The SWFs and their big pals are likely to be going long in a slow and steady way, while various economics engage in a spurious debate on 'The Return of the Great Depression'.

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Chidambaram
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October 17, 2008 at 10:30 PM ×

1) The SWFs and their proxies in the US were long speculative commodities which took the oil price from $68 to $140+in one year.
2) This was brushed off as a result of spiralling demand, etc till in june 2008 Congress wrote to CFTC,and CFTC did an investigation, finding that around 81% of commodity futures position were speculative.
3) The sudden increase in oil prices, caused home values to first steady and then depreciate, leading to the mortgage crisis.
4) Since July 2008 the SWFs have been forced to come out of long oil futures positions, and this is reducing the dollar supply, and helping the dollar to hold steady and rally.
5) The SWFs and their big pals are likely to be going long in a slow and steady way, while various economics engage in a spurious debate on 'The Return of the Great Depression'.

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D
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October 17, 2008 at 11:39 PM ×

This will be more like a great aggression.

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Rich
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October 18, 2008 at 3:28 AM ×

With some stocks at what appear to be low prices, and credit instruments at quite high yields, Mr. Buffett's call is quite reasonable.

BRK also has written long term European puts maturing in 2019-27 on the S&P and other indices, so he's talking his book as well.

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That captcha was a gotcha
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October 18, 2008 at 12:46 PM ×

Your boy dragged the terminal into the shower?

Maybe, while sitting in the front of that terminal, you intoned a mantra of "lather, rinse, repeat" once too often?

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Steve
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October 19, 2008 at 1:39 AM ×

I don't pay much attention to sell-side analysts, and I don't think the market does either. They're a bunch of kids in the scheme of things, and hopelessly behind the ball.

The S&P at 930 is looking for $62 assuming a P/E of 15, which is probably higher than necessary given that 10-year notes are trading below 4%. Although I agree with you, MM, that we will test and probably take out the lows, I have begun selectively buying for my own account (particularly closed-end funds trading at a deep discount), and am currently a very small S&P long for the boss.

I do favor fixed income, though, given the deflationary environment we're in, and given TIPs breakevens. Hard to beat 4% 10-years with expected inflation at 1%.

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Anonymous
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October 20, 2008 at 11:59 AM ×

Interesting point re analyst earnings forcast but surely much of that disconnect is priced in? I mean since when did anyone believe that the last month or so we have been trading fundementals?? Certainly current volitility does support that.. Or else you gotta say there must be a heap of conflicting data.

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