Tuesday, November 25, 2008

Raindrops keep falling on my head

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.


Anonymous said...

If you are right a good bet would be:

1 - Long Brazil domestic market stocks
2 - Short Brazil commodities stocks
3 - Short BRL

How about that?

Macro Man said...

For my money, I prefer the simpler trade with few moving parts and, assuming it finishes in the money, positive carry. Fewer things to go wrong...

Sean Maher said...

Dubious sounding stats, and never believe everything you hear from GS..remember $200 oil? There have been 73 days when the Dow has moved over 5 standard deviations in a day since 1920, which computes to over 5% given daily sd of just over 1%.

Macro Man said...

Sean, that includes gaps. This is intraday volatility that excludes gaps, which as you know occur quite often in equity-land.

And see the correction...I mis-read the email, it's been 27 times rather than 7 in that 50yr window...

Anonymous said...

MM, the correction is still incorrect, I mean the last sentence.

Anonymous said...

TY to the sky...why would TY be up so high when it's looking at ES +21 at it's weekly r1 (869.5)...gold saved from a test of 800 by the 600 bil abs announcement, printing presses still rolling at breakneck speed

Anonymous said...

MM way to weather through the storm w/ DI. I'm surprised your still in the fight however... Since the vicious gap in odf0, crude is down 24%. They did however pick up swap lines, but can you ever trust the hand that feeds you. Being labeled risk in a gapping mkt is never a good thing. I'd roll your options up, take off premium & exposure, and enjoy your holidays more.

jdc said...

There is a very important political (electoral) reason why National Insurance is different from Income Tax!

Camabron said...

You know how much is a trillion dollars ?

Well, if you spent $947.50 dollars every minute of every hour, of each day and night since the time Jesus was born in the year zero of our era and up to the year 2008; you'd end up spending ONE trillion dollars.

That's $947.50 spent every minute for a solid 2008 years and you'd spend "just" one trillion. Now how much do the obligations in the US amount to ? How many trillions ? Food for thought.

Camabron said...

Jim Rogers on Bloomberg TV last night, always interesting http://www.policevideonews.com/index.php/2008/11/24/night-talk-an-interview-with-jim-rogers/

tastexperience said...

Macro Man,

You say that the DI curve is exchange-traded... where is it listed?

Many thanks,

Anonymous said...

Politician's forecasts are always rosier than reality. The exceptions only prove the rule, as a subrosa forecast means the economy is in the final stages of overheating before entering a recession.

Anonymous said...

"Jim Rogers on Bloomberg TV last night, always interesting"

I can't argue with that, but to me he is truly one of the most clueless people in the industry.

Once again he blathers about the U.S. dollar losing reserve currency status. That is certainly possible in the long term, but at this moment, there is absolutely no plausible alternative on the horizon.

Anonymous said...

"DI curve" - do you mean dividend curve?

Macro Man said...

The DI curve is an interest rat swap curve traded on the BMF in Brazil. Offshore punters like me do not have direct access, but can trade a piggybacked version of the contract with someone who does have onshore access. Prices are a tad wider than onshore, and there is a mechanism wherein the offshore bank extracts their pound of flesh...but to all intents and purposes it's the same trade.