Tuesday, November 18, 2008
Markets remain edgy today, with SPX futures current trading down 2% from Monday's limp close. Last week's 11% intraday rally seems like a long time ago in a galaxy far, far away.
At this point, however, Macro Man is refraining from embracing the downdraft with both arms. There have been too many intraday reversals to make him comfortable; while that may be a precondition for the next leg lower, the burden of proof is on the index to close lower. Sometimes looking at a simple line chart can provide insight; as the graph below demonstrates, the SPX has yet to close meaningfully below 850 despite plenty of intraday action below that level. A close anywhere near current futures prices (834) would therefore be significant.
There is a similar pattern in currencies, where EUR/USD, for example, has been confined between 1.25 and 1.30 on a New York closing basis, despite plenty of price action on either side of that range. For choice, Macro Man favours a break lower, as his sense is that there remain plenty of embedded overweight, offside euro positions out there.
Perhaps we might need to see vol sellers come out of the woodwork before a break can happen, however. While currencies have been tracing out (admittedly broad) ranges for pretty much all of November, a broad measure of implied currency vol remains near its highs. Markets being markets, this might nEed to come lower before realized volatility can increase again.
Elsewhere, Macro Man had to laugh at a Bloomberg story about one of the Fed's alphabet soup programs, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Incredibly, this program seems to go by the shorthand acronym ABCPMMMFLF, which appears to be less a government liquidity program than the product of wiping spilled coffee off a keyboard.
Clearly, there is a gap in the market for snappily-named government programs. Image, as Andre Agassi used to say in the early 90's, is everything- and what sort of image does a program called the ABCPMMMFLF convey? "We don't know what we're doing".
What the situation requires is a public-spirited advertising agency to rebrand the dizzying array of government rescue packages in a way that will capture the public's imagination and boost confidence in the economy and financial markets.
In the absence of such an agency, Macro Man is happy to step into the breach. He has cobbled together a series of programs that should do a much better job of conveying their purpose to the public, and thus restore confidence in policymakers.
The first port of call is to revamp the liquidity and asset support programs. In the Macro Man Program (MMP), there will be two primary facilities:
* The Commercial paper Recovery Assistance Program (CRAP), and
* The Treasury Unsaleable asset Recovery Directive (TURD).
The MMP also provides for two programs that are designed to help banks shore up their financial standing:
* As previewed in this space last month, the Special Capital Raising/Extended Writedown Undertaking (SCREWU) will enable financial institutions to increase their capital base while reducing holdings of dodgy assets.
* Meanwhile, a special accounting framework for structured credit will be instituted until market conditions normalize: the Special CDO Accounting Mechanism (SCAM).
What to do with the GSEs? "Conservatorship" is an ugly word that is difficult to understand. Much better for the government to manage them under the auspices of the:
* Federal Residential Agency Unwinding Directive (FRAUD).
Meanwhile, we should probably assume that Ms. Pelosi's desire to divert some government funds to the automotive sector will be successful. This will be accomplished via a:
* Automakers' Recovery and Stability Enhancement (ARSE) program.
Let's not forget the international efforts at crisis resolution, either.
* The primary outcome of the weekend G20 meeting will be a new Liquidity Enhancement and Modality Origination Network (LEMON). As an aside, Macro Man has thought about it for another 24 hours....and he still doesn't know what a "modality" is.
* In Europe, where banks are behind the curve in owning up to losses, policymakers are rushing to create a Harmonized European Accounting Directive for Implementing New Standards for Assets and Nonstandard Derivatives (HEADINSAND).
Finally, it is worth observing that amongst the plethora of government programs produced over the last few months, very little has been done to address the original source of the crisis: US homeowners.
In conjunction with consumer advocacy groups, Macro Man has designed a program that seeks to aid troubled homeowners. Congress can expect to see lobbyists agitating for its passage in the new year:
* A Single Home Owners With Mortgages Extended Treasury Home Equity loan Modification with Offsetting New, Equilibrium Yields program. A bit of a mouthful, to be sure, but its acronym is sure to resonate with an irate electorate: SHOWMETHEMONEY.