Thursday, November 20, 2008

Interesting, If Not Lucrative

Where to start? The newsflow over the past twenty four hours has been very interesting indeed, as has the price action. Not that it's been a particularly lucrative twenty four hours....despite trying to rise above the noise, Macro Man has managed to top and tail himself a couple of times. Fun, fun, fun.....or B.

So yesterday, US CPI fell 1% m/m, the largest monthly decline in the history of the series by a fairly wide margin. Frankly, Macro Man isn't quite sure what to make of this. On the one hand, the absolute value of the decline, coming in a month of historic commodity price moves, was well below that of many, many monthly rises. This would appear to confirm that prices are stickier to the downside than the upside- thus providing some comfort against the threat of deflation. On the other hand, the print was so much more negative than any prior observation that it suggests that something has indeed changed, and corrosive, demand-driven deflation is a legitimate threat.
Certainly some central banks are taking that view, most notably the Fed. The October minutes suggest quite a bit of concern over a downward spiral, and yesterday Don Kohn confirmed that the Fed is indeed pursuing quantitative easing. There remains a a school of thought that this will spell disaster for the dollar; colour Macro Man skeptical.

Evidently, the Fed is not the only central bank focusing on the downside. The Central Bank of Turkey surprised markets yesterday by cutting rates 0.50%, despite a weak TRY and inflation currently well above target. That they did so with the IMF vultures swirling over Ankara was particularly surprising.

Switching gears, there a couple of market price developments that merit comment. The most obvious development yesterday was the SPX finally closing below 850.....from here, the next layer of support rests at the 2002 low around 762.

Slightly further off the beaten path, however, there are strange things afoot in credit markets. CMBS, a widely-owned asset class on banks' balance sheets, have been absolutely cratering in a parabolic fashion. The chart below shows the spread on a Markit AAA-rated CMBS index over Treasuries...this is likely to be the cause of the next wave of writedowns/capital raises/bankruptcies.


Bizarrely, however, long-dated swap spreads in the US are now quite sharply negative. In other words, despite the fact that banks hold a load of turds and their share prices are plummeting, markets are now pricing them as better credits than the US government over a 30 year horizon (despite being a substanitally worse credit on a 2 year horizon.) Anyone who believes that deleveraging and forced position liquidation has come to an end is invited to explain that one....
Speaking of position liquidation, short-term punters got it in both directions yesterday in currency-land, as EUR/USD inexplicably went uber-bid in the middle of the afternoon, prompting much sturm und drang over a trend breakout....only to inexplicably go uber-offered a few minutes later, closing at the bottom of the recent 1.25-1.30 range.
Recent price action and the staunch support at 1.25 brings the heady days of the summer of 2006 to mind. While it may be hard to believe given the rollercoaster ride on 2008, EUR/USD spent six months between 1.25 and 1.30 before finally breaking out near the end of the year and accelerating higher.
Observe that this was a continuation pattern....in other words, the formation ultimately resolved itself in the direction of the underlying trend. Macro Man looks for a similar outcome this time around.

Finally, he would be remiss in not calling attention to the farce that is the US automotive industry. Regular readers will know that your author is not particularly enamored of the US Government (either party), and generally dismissive of the efficacy of the US Congress.

However, he has to give Congress a tick for raking the chief executives of the Little 3 over the coals yesterday. How these bozos have the temerity to fly on private jets to DC with hats in hand to demand a bailout defies belief.

Perhaps if they drove to DC from Grosse Pointe (or Seattle!) in one of their poorly-built, gas-guzzling products, they'd gain a further grasp of why their companies are in such dire straits to begin with.

17 comments:

Anonymous said...

Any comments on the crack ratio? This seems to have made a come back..

Macro Man said...

I hadn't noticed that, thanks for pointing it out. I suspect that that comes a lot more from the denominator than the numerator!

Anonymous said...

Macro Man,

Another round of dizzying questions.
Pls help me understand on €/$, you mean usd will trend revaluation in the next 2qs, or trend down vs €?

Best

AO

Damcanu said...

MM, I don't know if this will cheer you up in a world full of bad news but somebody has made a observation on the BBC sport blog regarding the English team last night.

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It's noticeable that all the best players were current or ex-West Ham players! What a suprise....

Technique = West Ham.

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It's a pity, if Zola had some cash (GBP instead of weak krona) maybe he could bring a few back to their old club.

Anyway, at least one current WH player scored last night for my national team.

Macro Man said...

AO, the interpretation is that the range will break in the direction of the underlying trend- in this case, lower (i.e., a stronger dollar, weaker euro.)

Damancu, it is a well-established principle that England rarely beat the Germans without West ham players scoring...and last night was no exception!

Anonymous said...

s&p financial index off -22% since paulson opened his mouth about the tarp a week ago, his detractors now saying nobody forced him to say anything about it at the time...
euro currency bears hoping today's emerging market tankage will lead to another leg down, due to the massive em subprime debt owned by the european banks... had noticed the first time russia closed stock market gold had a good run up, and today gold fighting well again despite us dollar and crude oil moves that would usually bring gold down..
-deac

Anonymous said...

damcanu, "GBP instead of weak krona"? er....

Damcanu said...

Yes I know, the GBP is also pretty weak.

I've got a mate who's off on long arranged trip to take his girlfriend to Vegas tomorrow and he's been crying to me for the last few weeks about how few USD he getting at his local travel exchange.

BTW MM, the WH player I was refering to, was Bellamy who scored for Wales last night.

Macro Man said...

Damancu, Matthew Upson, who scored England's first goal, is also a West Ham player.

Everything you need to know about West Ham can be summarized by the fact that the likes of Gerrard, Lampard, and Ferdinand (the latter two ex-WH players, of course) never want to play in non-=glamour England games so they can play for their clubs.

Bellamy never plays for West Ham, but magically gets fit whenever there's a (non-glamour) Wales match....

Damcanu said...

Yes MM, it does make you wonder ....

and yes I knew about Upson.

Anonymous said...

if team 750 don't step in crimbo is cancelled..

Damcanu said...

Anon - hold that cancellation.

S&P e-mini just put in a bounce of the 15 min channel lower support and there was some good volume coming in on the FTSE future as well.

SD said...

Anybody have a theory on the whole 30yr SWAP spread move into negative territory?

Anonymous said...

why is it that market commentators who dismissed the CPI as biased and irrelevant when it was north of 5% suddenly think CPI is the indicator to watch when it is negative?

Why does Bernanke (and others) make so much of asset price deflation, but he was silent for years of asset price inflation?

If home prices climbing 15% per annum didn't warrant 15% Fed Funds rate, why do negative home price changes suddenly justify 0% Fed Funds?

There is a basic inconsistency in the "logic" here

sharpe_mind said...

Anyone notice how Chinese A-shares have stabilized lately (and massively outperformed)?

RebelEconomist said...

Macro Man, SD,

Regarding the negative thirty year swap spreads, I recall similar shenanigans in Japan around 2000ish. Apparently, the explanation for that was that life insurance companies did not have to mark "hedging" derivatives contracts to market, unlike government bonds. In the absence of any chance of rising short rates for a long time, receiving fixed at the long end allowed the lifers to generate positive carry without having to report losses if long yields rose. This meant that fundamentally insolvent lifers were able to generate the cashflow to keep paying guaranteed annuity rates in excess of the return on their investments, in the hope of something turning up in the meantime to save them. Perhaps a similar explanation applies to thirty year dollar swaps now.

Anonymous said...

Macro Man,

The negative 30 yr dollar spread may have to do with hedging of exotic structures sold in recent years- i would think non-inversion notes,and leveraged steepeners.Since these products require hedging of digital options as spreads approach zero,it may exaggerate moves,esp because of the poor liquidity in swap rates on the long end of the curve.