Tuesday, November 25, 2008
Repeat after me: 6.5% rallies only occur in bear markets....6.5% rallies only occur in bear markets....
Yesterday's equity love-fest was just the latest iteration in what has become a seemingly endless sequence of bum-clenching drops followed by spine-tingling rallies. Obviously, the net impact has been to drag stock prices lower...but man, what a ride!
Goldman's sales desk put out a remarkable stat yesterday that warrants passing on (even if Macro Man is too lazy this morning to personally verify it.) Apparently, between 1950 and 2000, there were exactly seven days in which the S&P 500 had an intraday range of 5% or more. Since the beginning of October 2008, there have been 22. Yowsah!
CORRECTION: Looks like Macro Man needs to get his eyes checked. Apparently it's 27 occasions of greater than 5% intraday ranges from 1950-99, and 7 from 2000-06. So with only 22 occasions over the last seven weeks.....it's been a snoozer!
In any event, yesterday's rally took the SPX back to the friendly environs of Team 850's erstwhile bid zone. Having been prior support, it could well turn into a bit of a resistance zone, though the lure of trying to breach the downtrend line of the last few weeks' price action may prove irresistible to futures jockeys and other momentum-driven "investors."
Unfortunately for the risk-asset love-fest thesis, the wheels already appear to be coming off. The Japanese seemed happy enough to take advantage of yesterday's rally to slot yen crosses; AUD/JPY trading down 4% from the NY close does exactly engender a warm feeling for holding equities, even for a short-term punt.
One "pro-risk" market where Macro Man is broadly constructive is in Brazil, specifically the fixed-income market. The instrument of choice for offshore punters such as your author is the DI curve, which is essentially an exchange-traded swap curve. The DIs are still pricing in higher rates over the next year, despite the global slowdown and strong disinflationary impulse of lower commodity prices- many of which Brazil exports. Wholesale price inflation is beginning to edge lower, even as the currency pass-through has pushed expectations a bit higher.
While it's been a bumpy ride for Macro Man's favoured point on the curve, the Jan 10's, he has manged to retain exposure via options. And with other high-yielding CBs (Turkey, Hungary, India, Indonesia) cutting rates, he expects that it's only a matter of time before Bacen follows suit. To him, receiving in this exposure offers much better fundamental value and risk-reward than trying to catch the falling knife in stocks in the early stages of a bone-crushing recession.
Finally, Macro Man would be remiss in not mentioning yesterday's pre-budget report in the UK. It is hard for someone who's never lived in Britain to understand the attention paid to budgets; what in the US is a dreary, drawn-out affair is transformed into a carnival-style spectacle here in the UK.
The sights and sounds of rival parties hooting and hissing at the speeches of front-benchers, with the florid Speaker of the House (who appeared to come straight from the pages of a Dickens novel) vainly shouting "order! order!" is not to be missed.
Beyond the spectacle, however, lies the substance....most of which left Macro Man scratching his head. The notion that a modest drop in VAT will stimulate the economy is well-nigh preposterous, as is the insistence of the government that hiking national insurance payments isn't an income tax. The rise in the top rate of income tax was predictable, as indeed was the delay of said tax hike until after the next election.
Most puzzling of all were the economic projections of the Chancellor, Alistair Darling, which anticipate a short, relatively mild recession before a resumption of growth in late 2009 and into 2010. When he claimed that trend growth in the UK was 2.75%, Macro Man just about lost it.
Mr. Darling seemed happy with his forecasting ability, however; so happy, in fact, that a little-known provision of the pre-budget report provides for a merger of the UK Treasury and the Met Office. Henceforth, it will be Mr.Darling who forecasts the weather. Macro Man was pleased to see that the next month is predicted to be 25 deg (77 deg F) and sunny.
Unfortunately or Mr. Darling, forecasting is a tricky business. The remainder of his time in office (both economically and meteorologically) is likely to be very rainy indeed.