Monday, March 31, 2008
At last, we've reached the end of the month and quarter (or, if you're Japanese, the fiscal year.) Depending on your positioning, it's been the best of times or the worst of times so far in 2008; indeed, for many managers, it's been both (if the stories of horrible macro hedge fund returns in March prove to be true.)
Macro Man retains a pretty risk-averse stance at the moment; while there's a lot of pain out there, there is nothing to say that the passage of month end will prove to be a panacea for risk-taking. Indeed, while managers may well choose to re-deploy their risk budgets tomorrow once the MTD P/L slate is wiped clean, Macro Man retains a lingering concern that those eager to re-enter trades may prove to be April Fools.
Japanese fiscal year end came and went without the massive hullabaloo that has accompanied the 31st of March for most of the past couple of decades. It's ironic, really, when you think about it; after all, this was the year when the yen actually did move, which one might have thought would have required some action near year-end. If anything, however, it was demand for dollars that prevailed in the Tokyo fix, which may be as good a signal as any that something really has changed with respect to the USD/JPY dynamic.
Elsewhere, the ECB's ongoing hawkish stance was justified this morning with the release of the flash estimate for March CPI; this printed 3.5% y/y, well above the consensus expectation. The euro has unsurprisingly benefited from this out-turn, rallying back above 1.58 this morning despite more rumours of trouble in the European banking sector this morning. Eventually, the ECB will be forced to capitulate, and there will be some superb trading opportunities when they do. Until they do, however, the best trade you can do is to sit on your hands and not trying to front run them until the data turns.
Friday, March 28, 2008
How tough is this market? Consider the confluence of the following headlines:
* Rice prices rise 30% y/y as exporters cut back on foreign sales and/or raise export prices
* Japanese core CPI rises to its highest level since 1998; stripping out the consumption tax "hump" from 97-98, it's the highest in nearly 15 years (see below.)
* The inflation breakeven on iJGBs turned negative, thanks to massive liquidiation of losing positions.
Yowsah! If you needed any more evidence that these markets are trading on pain and positioning rather than macro, this is it. Eventually, these unwinds will provide attractive entry levels in a number of trades (linkers in Japan and the US, curve trades in Europe and the UK, etc.), but for now Macro Man is content to sit on his hands. It's probably just as well that his data systems are not yet up and running; he's only done one small trade over the last week and a half, and like most other people, he's seen it go against him.
One trade that Macro Man had in the old blog portfolio was a high-conviction short sterling position, against a 50:50 basket of dollars and euros. If only he'd put that on in real life instead of trying to gauge positioning; the newsflow from the UK has been broadly poor, and the market reaction has been telling; sterling's been beaten like a rented mule. Overnight, consumer confidence came in at its lowest reading since the aftermath of the ERM crisis (see below), while Nationwide house prices showed their lowest growth rate in a dozen years.The fact the sterling shrugged off much better than expected current account data is telling, and suggests that depite high levels of bearishness on the UK, positioning is currently moderate. That having been said, price is at an extreme, and until he is fully back into the swing of things Macro Man is somewhat uncomfortable paying tops. One benefit of Macro Man's new professional home is that he is amongst kindred spirits when it comes to thinking about the UK; when one sees blatant incomptetence like the Heathrow Terminal 5 screw up, one can only conclude that Martin Samuel is right. (One wonders if he is a closet MM reader....)
In any event, Macro Man is wondering how to play the UK. Sell sterling? It's at a bit of an extreme. Short the FTSE against, say, DAX? You'll be short commodity beta. Put on a steepener? You've got plenty of company, and you need Merv the Swerve to blink. Macro Man is struggling to come up with the best trade; perhaps the answer is to do a little bit of each and hope that diversification does its thing.
It's been more than a year coming, but Macro Man's bearish conviction on the UK remains as strong as ever. And after the current quarter end screw job is in the rearview mirror, the time for action may well be upon us.
Thursday, March 27, 2008
OK, so the TSLF result is in.....and it left your humble scribe scratching his head. Given the daily moans concerning the "worst banking crisis since the Depression" (has that phrase been trademarked yet?), one would have presumed that a facility that enabled banks to replace soiled MBS turds with shiny Treasuries would have generated quite a bit of interest.
In fact, the result was pretty damned tepid. Bid-to-cover was a paltry 1.15; by way of comparison, the bid-to-cover at today's 5 year Treasury auction, which most observers characterized as "mixed", was 1.98. The lowest bid-to-cover at any of the TAFs was 1.25, and the rest of them have been closer to 2, if not more.
So what gives? Are banks in dire straits and in need of money for nothing? (Sorry.) If so, why couldn't they be bothered to bid more aggressively in the TSLF? (Only 7 banks submitted bids.) And if they don't need the liquidity, then why the bloody hell is the Fed helping JPM buy Bear? And if (relatively speaking) no one was going to use this facility, why did its announcement prove to be such a fillip for risk assets?
Any fixed income geeks who are more familiar with the "plumbing" of these Fed facilities than Macro Man, please feel free to chime in and enlighten him as to what he's missing. 'Cause as things now stand, this TSFL mularkey is creating more questions than answers.
Since the Fed backstopped risk assets with the announcement of the term securities lending facility the other week, it's been happy days for those hardy souls brave or inertial enough to have been long equities/credit and short govvys. To a degree, it's put up or shut up time today, as the first $75 billion of TSLF lovin' comes through this afternoon.
The degree to which the TSLF has worked its magic can be seen via the fairly impressive SPX rally off the lows, or even by something as prosaic as swap spreads. Observe that the US 10 year swap spread has narrrowed considerably over the past couple of weeks (the white line in the chart below), while European spreads have only recently started to edge lower....and not by much.
So does this mean we should sound the all clkear for risk assets and let the good times roll? Not necessarily. After all, it's easiest to feel comforted when you know that help is on the way, without the knowledge of whether that help will be enough. It's not like the TAF didn't support equities for a period....as did prior Fed funds cuts...and indeed the discount rate cut in August.
Moreover, it's not like all the rottenness has been cleared out. The US data is still appalling, with yesterday's durable goods figure the latest to suggest that recession looms (if it ain't here already.) And what odds that the whole JPM/Bear/Fed menage a trois comes under investigation eventually? Surely there must be some conflict of interest issues in the NY Fed guaranteeing a deal consummated by one of its own board of directors? Isn't that the sort of 19th Century cowboy capitalism that one expects to hear about only in banana (or otherwise dodgy) republics, not involving the Federal Reserve?
Regardless, markets seem content to accentuate the positive this morning, as the DAX appears to be breaking out of its 2008 downtrend on no real discernible news. A hedge fund short squeeze? To a degree. Quarter end window dressing from real money longs? Perhaps. Does it make Macro Man eager to get stuck into equity markets (in either direction)? Not in the least.
Wednesday, March 26, 2008
There are a number of people, including Macro Man, who seem to be caught between a rock and a hard place. The problem facing Macro Man is fairly easy to understand....after a couple of months of watching markets as a spectator rather than a participant, it is natural for it to take a bit of time to get back up to speed. He feels as if he's driving up an intellectual sliproad, trying to pick up the speed to safely merge back onto the market highway.
The market environment isn't exactly a forgiving one, either. The macro trends that dominated financial market pricing over the last couple of months seem to have been put in abeyance by the Fed's recent actions; while Macro Man presumes that this is a temporary phenomenon, there's no telling how long it may persist. Recent price action in EUR/USD provides a useful guide to the volume of noise in current market pricing; since Macro Man's first day in the office a week ago, the rate has executed a rather messy round trip between 1.5725 and 1.5350.
Tuesday, March 25, 2008
They say you can never go home. Now, Macro Man doesn't really know if that's true or not, but he gave it the old college try over Easter weekend, visiting a city that, if not "home", at least provided a relatively happy residence for a few years earlier in the decade.
It's nice to know that some things never change; the weather in Dublin is still "bracing", to put it euphemistically, and the traffic laws appear to more suggestions than hard and fast rules.
For the most part, however, Macro Man and Mrs Macro were flabbergasted at the change in the city that they left little more than four years ago. For one thing, it appeared to be less of the Irish capital than Cracow-on-the-Liffey. While there's certainly been a huge influx of Eastern European labour into the UK, to a degree the scale of it has been dwarfed by the sheer size of Greater London. Dublin is a city a little more than a million souls, so the sudden emergence of Polish food shops on every street corner is pretty noticeable.
Even more noticeable, however, was the massive increase in the price of...well...everything. For starters, Macro Man's old house would now go for roughly twice what h sold it for in December 2003- and that's with the assumption that prices have started to roll over. Beyond that, Dublin (and, more likely, Ireland as a whole) provides a useful rejoinder to those who seem to think that monetary inflation is extinct.
Pizzas at the old neighbourhood eatery, which cost roughly eight euros four and a half years ago, now go for 14.95. A simple cab ride from Ballsbridge to O'Connell Street cost 15 euros with tip- it's probably a mile and a half as the crow flies! On the plus side, however, at least the water is still free (and there's not many places these days that have that going for them.)
Still, it was really striking to see what an extended period of too-low interest rates can do do prices, and provided some comfort to Macro Man's view that the ultimate outcome of the Fed's policy action will be inflation. There wasn't really a trade that emerged from the long weekend (indeed, Macro Man is struggling at the moment to grasp onto any macro trades), but that's not to say that it wasn't educational. Far from it!
He learned that you can go back home....you just can't afford to stay for very long.
Monday, March 24, 2008
Things just get curiouser and curiouser. Not only has JP Morgan managed to dig under the sofa cushions and find enough dimes to quadruple its bid for Bear Stearns....but the New York Fed has put its side of the deal (eg, the loans that guarantee some of the shite that Bear owns) into a SIV, of all things, to be managed by Blackrock. Sure, if things go belly up, JPM is on the hook.....for a whole $1 billion. Gee whillikers!
Will one be able to effect stock transactions through Fedbroker.com?
Will the Fed start offering consumer loans?
Will one be able to ring up Ben Bernanke and receive, Cramer style, a three word answer to investment queries?
Macro Man has a funny feeling about this one.....
Friday, March 21, 2008
After a brief foray into historiography, normal service is resumed today, albeit in heavily abbreviated form. The market sure hasn't gotten any easier, has it?
We've seen a 30 point SPX round trip the last two days and enough rumour and innuendo to last a lifetime. The real interesting action has been in the commodity complex, however, which has been absolutely roasted since the "hawkish" outturn of the 6ed meeting.
Gold is the poster child for the decline, as its shed more than $100/oz. However, action in other contracts has been even more ferocious; silver, for example, was nearly 21 a few days ago, closed yesterday below 17. *y caramba!
So is this the start of the deflationary crunch feared by so many? Macro Man finds that difficult to credit. After all, the commodity carnage has come over a time period when stocks have rallied on aggregate. No, it looks like good old-fashioned profit-taking to Macro Man....though it does provide a hint of how hideous true asset deflation could be.
Wednesday, March 19, 2008
Regular readers will know that Macro Man tends to avoid political discussions like the plague, given his generally low opinion of most of the individuals who choose politics as a profession. But there's one issue that's been gnawing at his mind recently, and given that he's travelling today now is as good a time as any to throw it open for consideration.
The clue is, of course, in the title of the post. In 2005, the Wall Street Journal ranked all the US presidents save W.H. Harrison and James Garfield, both of who died early in their terms. At that juncture, G.W. Bush was the very personification of mediocrity; of the 40 presidents ranked, GWB was #19 (two spots above his old man, funnily enough.)
Since that point, of course, we've had Hurricane Katrina and the abject mismanagement of its aftermath, no end in sight to the military effort in Iraq, the Republican loss of the House of Representatives, the housing bubble, its subsequent implosion, the financial market crisis resulting from that, and the recession that is apparently resulting from the crisis and the aftermath of the bubble.
All in all, it doesn't make pretty reading. There's not many presidents that can claim to have started their term with the economy in recession and a financial bubble bursting, and ended their term with the economy in a different recession in the aftermath of a different bubble bursting. Ay caramba!
Now, asking where Mr. Bush ranks is an invitation for people of a certain persuasion to let forth a cannonade of vitriol. Macro Man would ask readers to refrain from doing so, particularly those who have no real idea how Mr. Bush ranks in relation to, say, Millard Fillmore.
The temptation is of course to relegate GWB to the bottom of the pile...but was he really as bad as Warren Harding? Richard Nixon, for that matter? Herbert Hoover? Macro Man would be curious to hear from those with an informed view; how much has the current president slipped since 2005, and where will he go down in history?
(Bonus for those who proffer informed views on the legacies of Messrs. Blair and Chirac as well....)
Macro Man has spent most of the day bedding in, getting his technology up and running at his new job. Despite this, so far today he's seen/heard:
*Rumours that UBS is going under and needs to be rescued by Credit Suisse
*Rumours that HBOS is going under
* Rumours that Lloyds bank is going under
* Rumours that the Bank of England has cancelled all staff holidays over Easter
* A cheeky 20 handle range on the SPX
* Close to a 2 yen range in USD/JPY
As Pip from great Expectations might say, "What Larks!"
Tuesday, March 18, 2008
If each marginal Fed action was relevant to the continued health, well-being, and solvency of this market and financial institutions....shouldn't a disappointment of "only" 75 bps have knocked something off the S&P?
And if each Fed action doesn't really mean that much, or anything at all, then why are they cutting so much when they're clearly worried about inflation (or would be, if they weren't worried more about other stuff)?
Perhaps the Bear Stearns failure really was the climactic event that marks a short-to-intermediate term bottom...though the index price action on the day was hardly climactic.
Or maybe this is just the latest sucker's rally, a hallmark of bear markets.
But if markets are rallying because they think that the Fed has its mojo back (in terms of getting traction on policy easing), shouldn't gold be rallying?
Maybe the real answer is that these short term reactions are all noise, to be forgotten as distant history in a week's time.
Monday, March 17, 2008
Limbo. It's a strangely apt word to describe financial markets at the moment. Limbo is a strange place, a sort of karmic holding pattern between heaven and hell. In today's financial world, it's a place inhabited by a myriad of institutions, all awaiting knowledge of their final fate: will they reach the Nirvana of solvency and survival, or become the latest victim of a Faustian bargain made long ago, and so enjoy a one-way ticket to the Inferno of oblivion?
One might reasonably question how Bear Stearns descended from Nirvana with only the briefest of stops in Limbo before evidently disappearing forever. Such is the perils of leverage! Sure, BSC appeared to have a book value of $10 billion, which is more than even the Kerviels of the world have managed to lose. But when savagely levered, that $10 billion of book value represents $400 billion of assets on the balance sheet.....and $390 billion worth of liabilities. It's the equivalent of putting down $10k, taking out a $390,000 mortgage, and buying a $400,000 house. (Dare we label this the subprime business model?) And as both Bear and subprime borrowers have learned to their chagrin, you don't need to take much of a haircut on your assets before you're completely wiped out.
While it appeared this morning that markets were set up for a doomsday scenario, the ultimate price action in equities was unsatisfying for just about everyone. We didn't get the climactic downdraft that often marks out a bottom, but nor did we get a strong bounce that might suggest a short-covering rally is in the offing. So equities, too, are in Limbo, having plowed most of the way towards the downside targets of the current move, but still lacking the appetite to start pressuring the shorts. Ugh.
And of course, Limbo is a word that conveys overtones other than the religious/philosophical. It's also a party game, found most often on cruise ships and Club 18-30 holidays. The game is about arching one's back and walkign under an increasingly low-level bar or rod; the one-sentence summary of the game is How Low Can You Go?
And that is a question confronting the Federal Reserve today. A few weeks ago, markets were lookign for a 0.50% cut at today's meeting. With equities lower and CPI defying logic to print lower, that was raised to 0.75%. And now Bear has pretty much cemented expectations of a full percent. Apologists might suggest that rate cuts of this magnitude are required to fix the problems with the financial system...but are they? Surely the scale of the issue now transcends monetary policy, and requires a toxic waste dump for people to use to clean up their balance sheets and reduce their leverage.
If the Fed cuts 1% today and things don't durably improve, how long before the market starts to fret that the Fed is "running out of bullets"? Macro Man doesn't know the asnwer, but presumably it won't be far off. We have exited the world of fact-based reality and entered a world of superstition, sentiment, and psychology. Or at least, those items are the new "facts." As foretold by Cassandra, counterparty risk is now at the tip of everyone's tongue; unlike 1998, and unlike 2001-02, we've seen a bank go under, with the potential for more in the pipeline. Whether that happends depends on sentiment and, dare it be said, a fiscal solution to clean up the financial system.
As Macro Man sees it, Helicopter Ben and his 1% rate cut won't make a damn bit of difference.
With apologies to the Charlie Daniels Band:
The devil went down to Wall Street, he was looking for a soul to steal.
He was in a bind ‘cause he was way behind: he was willing to make a deal.
When he came across this young man trading credit, oil, and stocks.
And the devil jumped on a trading desk and said: “Boy, let me tell you what:
“I bet you didn’t know it but I’m a Wall Street trader too!
“And if you’d care to take a dare, I’ll make a bet with you.
“Now you got good performance, boy, but give the devil his due:
“I’ll bet a Ferrari of gold against your soul, that says I’m better than you.”
The boy said “My name’s Johnny and it might be a sin,
“But I’ll take your bet , you’re gonna regret, ‘cause I’m the best there’s ever been!”
Johnny, check your Bloomberg now and watch that market hard
‘Cause hell’s broke loose on Wall Street and the devil deals the cards.
And if you win you get this shiny Enzo made of gold.
But if you lose, the devil gets your soul!
The devil logged in at a desk and said “This starts with me.”
And made a hundred million bucks shorting the S and P.
As mortgage-backs took a big dive he made an evil hiss.
And showed Johnny his P/L, and it looked something like this:
When the devil finished, Johnny said: “Well, you’re pretty good old son.
“But you just sit down in that chair right there and let me show you how it’s done!”
Lever up the balance sheet, fifty-to-one
We look like the Land of the Rising Sun
A bull market baby, limit long
And pray like hell when things go wrong
Johnny bowed his head because he knew that he’d been beat
And he laid his Bear Stearns shares down on the ground at Satan’s feet
The devil said: “Boy, just come on back if you ever wanna try again,
I done told you once, you son of a bitch, I’m more powerful then Ben!”
And he sang, “Lever up the balance sheet fifty-to-one!
“You look like the Land of the Rising Sun
A bull market baby, limit long
But you gotta pay the devil when things go wrong.”
It's pretty hard not to have some sympathy for the devil this morning. For years, many financial market participants have engaged in a sort of Faustian bargain involving leverage, strategies that seemed too good to be true in real time, and betting large sums of other people's money. Now that the devil has come back to claim his own, should we really be surprised?
The Fed is attempting its best Daniel Webster imitation, but is finding it difficult to defend the indefensible. In return, the devil seems intent on dragging Bernanke and co. into the bowels of hell as well.
And as for Bear? Surely they are Berlioz, sentenced to a grisly death by Woland for not believing in the devil's existence. How else to explain Jimmy Cayne's almost comic bridge-playing timing and the obvious lies uttered by Alan Schwartz last week?
Macro Man doesn't know if Bear's demise is the beginning of the end, or just the end of the beginning; what he does know is that this is what happens when the devil goes to Wall Street to reclaim his own.
UPDATE: After some consideration and a query from poster MP, Macro Man has decided to sell out his 96 June Euribor puts for 33.5 ticks. Chances must be rising that the ECB is forced to blink, and blink soon.
Friday, March 14, 2008
We're going on a BSC hunt
Going to catch a big one
I'm not afraid
'Cause I'm not long
Here's a big problem
Can't go over it
Can't go under it
We'll have to bail it out!
(In steps Mr. Market with a smoking shotgun in each hand)
The chart below does not do BSC justice, thanks to Bloomberg's 30 minute delay. At the time of writing, BSC is trading at $29 on what Macro Man can only presume is massive volume.
Suffice to say that anyone who is long BSC and hasn't sold probably has that horrible feeling in the pit of their stomachs that you only get when there's been a death in the family or a colossal F*** up of massive proportions.
This bear is badly wounded....perhaps mortally.
First things first. Regular readers will know by now that Macro Man's niche in the online financial world is not the detailed breakdown and explanation of complex issues for the benefit of the reading public. He has neither the time (OK, over the the last few weeks he has, but that is rapidly drawing to a close) nor the inclination to do stuff like that- it seems too much like school work. So anyone looking for a breakdown of Barney Frank's plan to save the world would do well to seek other pastures for that information.
However, permit Macro Man to occupy his natural milieu- that of pithy observation- and briefly touch on the Frank plan. The last large government-organized bailout of the US financial system occured 20 years ago in the wake of the savings and loan crisis. The creation of the Resolution Trust Corporation provided a dumping ground for institutions to deposit their crappy loans and thus clean up their balance sheets, and for some time Macro Man has thought that the endgame to the current situation would evolve around similar lines. However, this is the observation that Macro Man wishes to make: the RTC was established in 1989, the stock market didn't start rallying until early 1991, and the economy didn't feel as if it had improved until late '92/early '93. The moral of that particular story is that just because a plan of action is in place doesn't mean that things will improve immediately.....so view the late session bounce in the S&P with that in mind.
Elsewhere, yesterday was just another day and another dollar shag-fest. One wonders if the world's financial press have written a macro in their word processors; you know, hit Shift-F9, and the headline "Dollar trades at new all time low" magically pops up as the headline. Anyhow, the days of the emerging consensus of a dollar rebound seem like a long time ago now, don't they?
However, would you believe that there are some currencies that are doing even worse than the dollar? And no....Macro Man isn't talking about things like the Zim dollar, which don't really count as currencies. He means actual, real currencies, stuff that he has traded professionally within the last twelve months. So let's have a look at the company that the dollar's been keeping (note that on these charts, a trend to the upper right means that the dollar is appreciating):
1) ISK. Yes, the Icelandic krona has done even worse than the dollar, as USD/ISK has risen more than 10% this year. Bear in mind, it doesn't say much about the dollar when you have to compare it with the currency of a country with a double digit current account deficit and a population roughly the size of Toledo, Ohio, but hey- you gotta start somewhere! Remember, boys and girls: you can't spell "risk" without "ISK".
2) ZAR. Hmmm, what's not to love about the rand? South Africa has a bigger inflation problem than the US, a bigger current account deficit as a percentage of GDP than the US, and a less credible head of state than the US. Plus, there's nothing quite like widespread power cuts and rumours that the 2010 World Cupo will be moved, is there?
3) KRW. Perhaps the most surprising of the bunch, the Korean won is a real live currency from Asia- you know, the region that's home to the world's most chronically-undervalued currencies! Obviously the bulk of won weaklness has come in the last week or two, suggesting a pretty heavy flow. Bear in mind that Korea is one of the few Asian countries with a current account deficit (it's the worst of the best?), has a reasonably heavy foreign participation in its equity market, and has a hegemonic shipbuilding industry that has been chronically overhedged in the currency space (i.e., short USD/KRW.) Also, the KRW had strengthened the most of any Asian currency over the past several years, so perhaps some payback was due when things started to go wrong.4) TRY. While the Turkish lira has actually performed much better than expected amidst all this turmoil, it's still weakened modestly against the buck so far in 2008. Then again, this is a country with a large c/a deficit and high inflation....and oh, is early in the process of going cap in hand to the European Union and asking to be admitted to the club.
What's interesting is that all four of these currencies suffer from current account deficit countries, suggesting that external imbalances may be one of the underlying drivers of currency markets so far this year. Then again, AUD and NZD are at multidecade highs...so perhaps not.
All Macro Man can say is that if he takes his freshly-minted UK drivers' license and goes on a driving tour around Europe, say into France and Switzeralnd, he will undoubtedly blanche at the prices. Eventually, this will set up as an excellent trade to buy dollars (USD/CHF at parity is just wrong wrong wrong)....but like the US 2's trade, patience will be required before execution.
Thursday, March 13, 2008
The word of the day is "rout." The dollar is being routed, equities are being routed, and ominously, hedge funds are being routed as well. On the latter front, news is not terribly good; in addition to the recent collapse of Peloton, Carlyle Capital has imploded after those cruel, cruel prime brokers didn't look the other way on margin calls, and Drake Capital appears to be going the same way.
At this juncture, there's really not much excuse for hedge fund managers to maintain excessive leverage, unless the securities they hold are absolutely unsaleable. And if the securities they hold are unsaleable, then gee....did they really make all that money to begin with over the last few years? Although it's obviously too late for holders of many funds, it is still worth investors considering whether the funds they own invest in liquid securities; if not, they should probably try to get out if there is still time.
Global investors in US securities appear to be folowing the same advice, and if you look closely at the fine print on the SEC website, you can just about see the disclaimer "Will the last investor to leave America please turn out the lights?" (After all, we must all be concerned with green issues these days.)
USD/JPY is now at its lowest level in more than a dozen years and has broken the psychologically vital 100 level as Macro Man types this. To call this move "irritating" is the understatement of the year; having been a yen bull for the last several months, Macro Man has seen USD/JPY collapse just a week or two before he starts his new job. Naturally, it would have been pretty satisfying to have captured this with his first trade in the new shop; now, he is going to face the difficult choice of selling dollars at levels close to his initial targetes, or (gasp) going the other way and playing for a bounce. The latter course of action is fraught with psychological peril (do you really want to lose money going against your convictions?), so it looks like Macro Man will styart off on the sidelines while "his" trade makes money for other people. Ugh.
Of course, it's not all about the yen; the EUR has one again reached new all time highs, prompting a bit more muttering from Europeans. Of course, George W. Bush has made some comments as well, noting that the dollar's collapse was not "good tidings" for the strong dollar policy. Of course, if you looked away, you almost couldn't see the smirk on his face. When the history of the early Noughties is written, the strong dollar policy will go into a bin with "I will not be divisive" and "We have won the war". Macro Man trusts readers can form their own conclusions as to what the title of the bin would be.
And so, Macro Man sits at home, literally days away from starting his new job, and sees one of his high conviction trades play out before his eyes. Grrrrrr. That's almost as irritating as being forced to take a driving test after 20 years of accident- and ticket- free driving, which is how Macro Man will spend his afternoon. Wish him luck, as he's going to need it; it's bloody difficult to shake the driving habits of more than half a lifetime and drive like a grandmother, parallel park with two hands, etc. If he fails, maybe he should move back to the States; at the rate the dollar's going, he'll be able to buy half of California with the proceeds from selling his '98 Golf.
Wednesday, March 12, 2008
To: Chairman Bernanke
From: NY Fed Governor Geithner
Re: Alternative collateral
Date: March 11, 2008
We made the announcement today regarding the additonal measures we are taking, including the TSLF. Initial market reaction to the expansion of our lending program has been positive; stocks have done pretty well- hell, even Bear Stearns rallied today!
However, I believe that it would be prudent for us to make contingency plans in the event that the TSLF fails to relieve market stress. After all, initial reactions to the discount rate cut in August, the 2.25% of Fed cuts that we have put through since September, and the TAF were all positive.....and yet we are deeper in the mire than ever before.
I have consulted at length with staff here at the New York Fed, who in turn have spoken with their network of Wall Street contacts. We have reached the conclusion that the next step in our campaign to re-liquefy the system should be to accept a broader range of collateral for those seeking to borrow at either the TAF or TSLF auctions.
The staff has drawn up a list of recommended items that we should be prepared to accept as collateral in the event that the TSLF does not solve the problems that we are facing. I intend to submit this list for discussion at our next fortnightly meeting, but per our standing arrangment I am notifying you of its contents in this memo.
The staff recommends that the following be accepted as collateral:
1) The borrower's first-born child. The use of hostages to ensure compliance with a contract or treaty has been fairly common throughout human history, but has sadly fallen by the wayside in recent decades. The staff suggests that it could be effective in the current environment, however.
2) A T206 Honus Wagner card. These are among the scarcest securities in America, and should provide ample security for the borrowing of funds.
3) Gold Jewelry. It is the staff's understanding that pawn shops occasionally accept gold jewelry as collateral for funds. Given that the Federal Reserve's TAF and TSLF programs are beginning to resemble a financial pawn shop, it makes sense to start taking our cues from the original.
4) A copy of Shakespeare's First Folio. It's not as rare as the Honus Wagner card, but some might argue that it has slightly more cultural/historical significance.
5) A car. Staff report that the supply of autos on Bloomberg's CARS function is flourishing (see below.) Staff recommends that the Federal Reserve accept the Kelley Blue Book valuation for autos used in the US, and the What Car? valuations for foreign-used autos in determining the amount of funding to be granted.
6) A note from the borrower's mother. This tried-and-tested method works well in academia, and staff research suggests that it could easily be transferred to the Fed's auction prgrams. Staff findings suggest that a similar methodology underpinned certain segments of the housing market in the current decade.
7) A Barry Bonds home run ball. Given that the Federal Reserve is attempting to "juice up" the financial system, what collateral could possibly be more appropriate?
8) The Tales of Beedle the Bard. This is one of the rarest and most sought-after works in the world. Our international contacts suggest that the People's Bank of China would be particularly eager to accept it as collateral as part of a cross currency swap agreement.
9) Manure. While this is a bit unusual, staff feel that the bull market in soft commodities suggests that the value of fertilizing products is set to soar. Should manure prove unavailable, the Federal Reserve could consider accepting structured credit products, which share certain important characteristics with manure, instead.
10) Anything demoninated in euros. Man, have you seen EUR/USD?
Tuesday, March 11, 2008
Well well well, yesterday was just another run-of-the-mill day in financial markets wasn't it? The S&P dropped a cheeky 20 points, taking it within a few bps of the "Kerviel low" and a five-wave downmove. Bear Stearns was on the receiving end of a few rather salacious rumours with sent its credit default swap pricing to the moon and its share price to the bottom of the ocean. Now, Macro Man has no idea about the state of Bear's liquidity and solvency; frighteningly, he doubts that Bear does, either. Given that the current situation was ushered in by the failure of two Bear hedge funds last July, perhaps the gods of market karma will demand the collapse of Bear as a whole before it can end?
However, kudos for story of the day must surely rest with the State of New York, whose crusading governor Eliot Sptizer yesterday admitted to an involvement with a prostitution ring. As readers will no doubt recall, it was Spitzer's hammering of the securities industry early in the current decade that closed the door on the go-go Wall Street business model of the late 90's and usheered in, among other things, the Chuck Prince era at Citigroup.
It really boggles the mind as to what Spitzer was thinking when he put hookers on his speed dial (though it is less of a mystery as to what he was thinking with); the utter erosion of Spitzer's erstwhile idealism reminds Macro Man of nothing so much as the character of Willie Stark in Robert Penn Warren's superb All The King's Men. Perhaps, though, Spitzer was merely attempting to identify with the victims in the securities industry cases that he brought as New York Attorney General: you know, all those people who paid good money to the pros and ended up getting f****d.
Elsewhere, Macro Man has a couple of more observations as he eases his attention back towards financial markets. Who says de-coupling doesn't live? Not global equity markets, that's for sure. If you had told Macro Man a year ago that the S&P 500 would be down 13% year-to-date, that we'd have two consecutive negative payroll readings, and that Ben Bernanke would be slashing rates like some sort of horror movie villain, he would have been pretty confident that two of the three best performing global stock indices this year would not be the USA's NAFTA neighbours, Canada and Mexico. He'd have been pretty surprised that Brazil was the third, as well. The obvious unifying theme there is energy production, of course. Still...if the collapse of the credit market and an apparent US recession cannot put a meaningful dent in Canadian or Mexican equities....what's it supposed to do to China? Not to say that China is immune, of course. The Shanghai Comp is down a cheeky 21% year-to-date, though in volatility-adjusted terms that's peanuts. But it is clear that the US slowdown is impacting China. While the February trade numbers are pretty useless taken in isolation, given the seasonal adjustment issues surrounding Lunar New Year, the trend in Chinese trade with the US is pretty clear. Smoothed Chinese export growth to the US is now nearly flat y/y, while import growth is at its highest level in several years.
Remind me again why the exchange rate doesn't matter?
Monday, March 10, 2008
Bloomberg's back, baby! Macro Man 's interim subscription kicked in over the weekend, giving him an opportunity to catch up on markets and update the P/L at long last. While it's only been a week since BBG pulled the plug on his old login, in reality he's spent but a few days out of the last three weeks watching markets closely. As readers are no doubt very much aware, it's been as stormy as today's UK weather, which threatens to prevent Macro Boy the Elder from riding his new birthday bike when he gets home from school. Fortunately, today's football birthday party is being held in an indoor venue...
In any event, when catching up on what he's missed, Macro Man finds it useful to simply peruse the charts of key financial market prices and variables. He doesn't need a chart to tell him that Friday's payroll figure was bloody awful (though as always, the lower unemplopyment rate suggests that something in that data is awry!), but seeing the chart of the SPX, EUR, et al does offer a sense of persepctive. And so, without further ado...
1) SPX. Man oh man. This chart was was hit with an ugly stick, fell out of the ugly tree, hitting all the branches on the way down, and then was run over by the ugly truck whilst lying in the middle of the road. It's setting up for a fairly textbook five wave downmove- all that's needed is a break of the "Kerviel low"at 1270. Assuming that that is accomplished, a wave equality target of 1220 or so would appear likely. Thereafter, one can probably play for a tradeable bounce, but it's important to remember; a break of the Kerviel low would suggest that the underlying trend is down. (At this juncture it would take a break back above 1400 to negate the threat of a five-wave downmove.)
2) Commodites (as proxied by the CRB.) Bid no lid, as the saying goes. They want 'em but they ain't got 'em. How much of this is real demand, how much is a reflection of the parcels of dollars that Ben Bernanke is dropping from his Federal Reserve-issue Sikorsky, and how much is pure speculative excess is up for debate. But with oil zooming through $100/bbl and gold threatening a grand an ounce, the Seventies parallel is becoming more apt by the day.
3) Breakevens. Unsurprising, therefore, to see breakevens reach a new relative high. Recent comments suggest that the Fed is at least aware of the criticism that they don't care a hoot about the dollar and inflation....but at this juncture at least, the comments suggest that they just don't care. Yes, it would appear that the dual mandate does spell doom for the dollar!
4) June Euribor. Contrast the "cut at all costs" mentality of the Fed with the relatively Calvinist approach taken by the ECB. Charged with maintaining price stability as its sole primary policy mandate, Trichet and co. have taken a "no soup for you!" attitude towards policy relief. Macro Man's earlier expectation of a potential easing in May now looks very far-fetched indeed, as the ECB appears to be channeling the Bundesbank. Needless to say, Macro Man's option spread has worked a treat.
5) The euro. Or should that be the dollar? It's hard to know where euro strength ends and dollar weakness begins. Suffice to say that if one central bank doesn't give a crap about the purchasing power of its currency (or, to put iot another way, actively wants to reduce the purchasing power of its currency for a range of dodgy financial and residential assets) and another one does, then you're likely to get a big currency move. Kinda like the one below, actually.
Somewhat amazingly, despite all the turbulence of the first week of the month, Macro Man's portfolio is basically flat. He's completely missed the boat on the dollar move- if not intellectually, then in terms of market positionjing, which is the only creiterion that counts in this game- but his equity hedges and particularly his fixed income bets have worked well. At this juncture relatively small delta risk appears appropriate...Macro Man is hearing rumblings that prime brokers' collateral demands are being raised left, right and center. In this environment, you wouldn't be surprised if Peloton were the only Goliath to be slain by a margin call from David.
Friday, March 07, 2008
It's unenjoyment day today, and if the ADP report has any forecasting ability whatsoever, the outcome could well be ugly. Certainly financial markets seem to be leaning that way, what with equities, bond yields, and the dollar all plunging. At some point, US two year notes are going to be a tremendous sale. For the moment, a Bloomberg-less Macro Man is happy to sit tight; after all, yields keep falling. Hopefully they'll continue to do so until he starts his new gig, at which point the first trade will be easy to decide on....
Meanwhile, the ongoing collapse of the US dollar has Macro Man (and, he suspects, many others) shaking his head. Given that the buck isn't much good as a currency anymore, what are we to do with poor old George Washington? Here's are some of Macro Man's initial thoughts...
1) Wallpaper for low-income homes. Why spend good money on paint or wallpaper, when you can just slap a recurring portrait of America's first president on the wall? It's both cheap and patriotic!
2) Wheelbarrow testing device. No doubt the manufacturers of wheelbarrows test their products using some relatively weighty ballast. What better use for the dollar, then, to be bundled up in bricks and carted around a la its Weimar ancestor?
3) As a replacement for the Zim dollar. Can't get your hands on any Zimbabwean dollars? Never fear, the US will print up a batch of Yankee dollars for ya. Pretty soon, folks won't be able to tell the difference.
4) T.P. A pack of Charmin costs $5.20. A dollar costs $1.00. You do the math!
5) As a way of supporting a car whose tires have been stolen. Why waste good money on breeze blocks when you can just use blocks of Benjamins instead?
Thursday, March 06, 2008
As Macro Man sits at home, staring forlornly at the computer screen where flashing market prices used to twinkly merrily, he is learning to come to grips with his new, temporarily Bloomberg-less reality. He can take the time to read the joke emails about West Ham and exchange messages with old friends and colleagues that, if not representing a 21st century speed of communication, at least best that of most of the 20th century.
What is he to do with himself in the time it takes for emails to wing their way back and forth? Ruminate, of course! It's been an eventful year already, and it may be profitable to spend this downtime on considering just what we've learned so far in 2008:
* The US economy is in serious trouble. For most of the existence of this blog, Macro Man has been willing to give the US economy the benefit of the doubt, thanks to generally healthy corporations, decent wage growth, and latterly the beneficent trade impact of a weaker dollar. However, all three of these factors have waned somewhat, courtesy of the financial sector, inflation, and terms of trade. Whether Macro Man is late to this particular party is, to him, irrelevant; his job is not to be early (oft used as a synonym for "wrong"), but to make money trading financial instruments. And in that, he ahs been broadly successful.
* Major market equities may be perched on the edge of a bear market.... Although a recession will not necessarily produce a bear market in stocks, it sure as shinola won't help the equity market outlook. What's curious to Macro Man is how quickly some EM indices have bounced back towards all-time highs. Viva de-coupling!
*...though don't assume thatthere is a fundamental signal embedded in every large price move. Merci, Jerome!
* You can take Ben out of the helicopter, but you can't take the helicopter out of Ben. While Mr. Bernanke was a fine academic and is no doubt doing his best as Fed chair, his performance in January brought back memories of 2002-2003. At this point Ben resembles nothing so much as the shady bloke on a street corner, selling little plastic bags of smack to a long queue of badly-addicted customers.
* Contrary to popular belief, the dollar is still toast. With real two year govvy yields of -2.7%, why would anyone in their right mind hold dollars? The carry trade is alive and well (just see where AUD and NZD and BRL are trading!) but this time around, it's funded in dollars and not yen.
* The market is colluding to lie to itself about the monolines. In his fifteen year career in finance, Macro Man isn't sure if he's ever seen anything as odd as the willing suspension of disbelief surrounding AMBAC, FGIC, MBIA, et al. It's as if the market has collectively agreed to ignore reality, and that if CNBC runs a story often enough suggesting that a rescue package is imminent, perhaps someone will believe it and actually step up to offer one. Yep, this is likely to end well....
* Commodities 2008 = Nasdaq 2000? A study that Macro Man was hoping to run before his Bloomberg vanished was to do a simple overlay chart of the Nasdaq from 1996-2000 and whate from 2004-2008. It sure seems like the marked increase in volume and volatility are reminiscent of a blow off speculative bubble top, all the fundamental reasons for higher food prices notwithstanding. Obviously, if commodity prices collapse like the Nasdaq did, that would put paid to Macro Man's view of an inflationary world (at least for the near term), but one would presume that there would be some fireworks.
* Fixed income markets are buggered. The TAF may have helped, but it hasn't fixed the problems with fixed income markets. As on on Macro Man's buddies pointed out today, some long-dated, erstwhile high quality instruments are not clearing at yields that one hasn't seen in a long, long time. Meanwhile, two year govvys yield 1.6% nominal. Macro Man maintains that these latter instruments are moving close to the zone where one cannot afford NOT to sell them...but it seems clear that we ain't there yet.
* Credit rationing applies to EVERYBODY. I don't care who you are or what you made last year, baby. Show me the money or I'll show you the door.
Wednesday, March 05, 2008
Macro Man has P/L problems.....bad P/L problems. So bad, in fact, that he cannot bear to post the P/L sheet again this morning. What's that? Has his portfolio experienced an abrupt reversal of fortune, Peloton-style, that has seen him grasp defeat from the jaws of victory?
No, nothing so sinister. Unfortunately, however, Macro Man has temporarily been denied access to Bloomberg, which provides the pricing data used to calculate the P/L. And so Macro Man's big P/L problem is that he doesn't have the real time pricing required to calculate the profits and losses of his various positions- quite a big problem indeed!
How/why has this come about? For the very best of reasons, actually. An astute reader observed on Monday that Macro Man appeared to have lost his "zen", or perhaps mojo, in market timing his trades. Your humble scribe was not particularly surprised to hear this. For the last six weeks he has been living a life of relative leisure, going skiing, playing golf, picking the kids up from school, etc. You see, Macro Man left his old employer in January and will begin his new gig in a few weeks time.
Yesterday, his old Bloomberg account was finally terminated....hence the loss of access which prevents publication of the P/L. He should shortly be fixed up with a trial access, which will once again enable him to calculate his blog performance. (This, incidentally, is why he said to reader AT that he was "reasonably satisfied" with his blog portfolio performance: three and a bit percent suggests that Macro Man hasn't completely lost touch with the market while he's been funning it up!)
In any event, if you've observed a change in the tone, style, or content in this space over the last month or so, you now have your explanation for it. Once Bloomberg is back up and running chez MM, the P/L will reappear to provide Macro Man with an instant reminder if he's lost the plot with what's going on.
Moving forwards, the content in this space will probably alter slightly. The portfolio will probably be de-emphasized, at least temporarily; after all, Macro Man will have a real-world portfolio to get up and running and manage. Indeed, Macro Man will likely use the blog portfolio more exclusively as a laboratory in which to test out new ideas or products before implementing them in real life.
He certainly hopes, however, that this space can remain an exchange of ideas between market participants; as far as Macro Man knows, this is one of the few places where practitioners can anonymously chew the fat on global macro issues and trading for free. He certainly hopes that this continues and indeed expands moving forwards, as he finds that discussion and interaction amongst market particpants to be the most rewarding aspect of this entire endeavour.
In any case, that's all for today. Macro Man has to go shopping for Macro Boy's birthday present, hit the gym, whack a few golf balls, and maybe test drive a car. It's a touch life, but somebody's gotta do it!
Tuesday, March 04, 2008
What a great time to be a macro trader. At market inflection points, abrupt changes in policy regime, and at relative price extremes, there are is often a rich vein of opportunity that is not available to the long-only or single-product specialist. (The flip side, of course, is that when there is easy money to be made from the long side of equities, no one gives a hoot about macro!)
Certainly each of the above circumstances could held as true today. Equities, or at least US equities, may (and Macro Man still hasn't made his mind up about this one) be transitioning from bull to bear. The Fed has gone from hawkish at the beginning of August to slashing rates like a bunch of machete-wielding whackos. Many commodities are at all-time nominal highs.....and the dollar seems to be very cheap or very expensive against just about every currency under the sun. What's there not to love?
As the euro has ground through 1.50, the yelping from Eurozone politicians has begun to escalate in volume. Ecofin chief Jean-Claude Juncker, the so-called "Mr. Euro" (the world's least potent superhero!) notes his "increasing concern" about the single currency.
Of course, Europe has moaned off and on for four years, since EUR/USD first reached about 1.25. To date, they have done nothing to back up those concerns, unlike 2000-01 when there was sporadic FX intervention to prop up the overly-weak euro when it traded below 0.90. (How long ago that seems!)
Meanwhile, Macro Man's view that politics would hamstring the MOF from intervening in the yen has thus far been borne out, though the real stress test will likely occur below 100. Of course, if a strong currency were really as corrosive as finance officials actually believe, then central banks in both Europe and Japan have the opportunity to trim interest rates, which would both ease monetary conditions and dull the luster of the euro and yen against the dollar.
In the Middle East, a private sector bank in Abu Dhabi noted yesterday that the country is still studying an adjustment of its currency peg. So that issue may not be dead, either.
Here we are, then, with a number of currencies clearly misaligned against the buck, and a growing concern (though not in Australia!) about where it all ends. So who will blink first? Certainly not the Yanks, who have a bubble to re-inflate and an election to conduct. Macro Man isn't sure...so he opens it up to the court of public opinion. Fill in the poll below as to which policy change is enacted first.
Note that Macro Man has lost Bloomberg access this morning, so the P/L cannot be updated.
Monday, March 03, 2008
Holy Cow! Macro Man was away for a day and a half at the tail end of last week, and the world seems to have ended in his absence. It didn't come as a total shock, mind; risky assets can only ignore bad news for so long, and Macro Man did muse last Wednesday that equity risks were to the downside. Still....the reversal in market fortunes has been little short of stunning.
Where to begin? Thanks to all who responded to last Thursday's query on wheat. While Macro Man understands the long term dynamics behind the grain-intensive nature of protein-based diets, as well as the distortions caused by ethanol-related crop rotation into corn, neither of these adequately explain why the price has moved so much in 2008. The real reason would indeed appear to lie in increased speculative interest/participation....which itself brings a new set of problems....as MF Global can now attest. At least some of the hyper-volatility of last week would appear to be related to the unwinding of MF Global's positions.
Still....the wheat market fiasco is chump change compared to the stunning decline and fall of Peloton Partners. Peloton is a relatively new hedge fund, having been set up only a few years
ago by ex-Goldman guys, one of whom was most famous for not noticing when his secretary plundered £1 million from his bank account. However, Peloton was widely regarded as being full of smart guys...and small wonder, when one of their two funds returned 87% last year via short bets on subprime!
So it came as something of a shock to find that some of the guys who saw this mess coming have been carried away by the tidal wave of margin calls and restricted credit. While posting a picture like that to the left may be like shooting fish in a barrel, it probably tells you something about how difficult this environment is when even the guys who are short blow up. Perhaps Peloton's greatest weakness was that they didn't read enough poetry.
Macro Man, meanwhile, has received a first-hand reminder of just how difficult this game can be sometimes. Regular readers will know that he has maintained a short exposure to USD/JPY for most of the past six months, courtesy of some options that were finally exercised in December. The position has done very well indeed for him, but appeared to be stalling a month or so ago, prompting him to put on a low-risk hedging strategy that expired last Wednesday.
Well, the hedge finished in-the-money (barely)...which, combined with an additional USD/JPY cash sale, left Macro Man flat USD/JPY. Given that he knew that he'd be away from the market on Thursday afternoon and all day on Friday, Macro Man decided not to re-sell USD/JPY until he got back. In the meantime, of course, USD/JPY has absolutely cratered, and is now sitting perched precariously above a long-term double bottom in the mid 101's. %*&^!!!! It could have been worse, however...had Macro Man not hedged his hedge, so to speak, he could have found himself long and very wrong , which would have been nothing short of a disaster.Ultimately, however, last week's late volatility was a boon to the portfolio, given that it has a long implied volatility/long fixed income/short equity bias. While the returns were nowhere near as good as if Macro Man had stayed short USD/JPY, he still managed to notch up gains of nearly a percent and close the month at his high water mark for the year.
Unsurprisingly, February provided another strong piece of evidence that 2008 will be the "year of alpha". Macro Man's alpha portfolio is already up $8.77 mio this year, with particularly strong returns in equities and fixed income. Naturally, the beta portfolio has suffered mightily, but still...the year-to date return through two months probably isn't far off what one might reasonably expect to get from cash in 2008.
And as Peloton (and perhaps others) have learned recently, even a short beta position can have dire consequences if applied with sufficient leverage. On second thought, perhaps 2008 won't be the year of alpha after all. Maybe it will be the year of the Spectacular Blow Up- after all, we've already had three (SocGen, MF Global, Peloton), and 2008's just getting cookin'.