Thursday, July 31, 2008
Readers in Europe may not be aware of the American phenomenon known as the "fantasy camp." This is a primarily (though not exclusively) sporting phenomenon wherein members of the public (usually middle-aged men) pay a not-insubstantial sum of money to spend several days playing with old and retired professionals, many of whom are nonetheless younger than the customers.
The camps are sold as offering a taste of "big league experience", though unsurprisingly the quality of play is anything but big league, as this photo from the Chicago White Sox fantasy camp suggests.
Macro Man is pleased to offer readers a bit of a "macro trading fantasy camp", which aims to give them a taste of what it's like in the market crucible (while carrying the added benefit of being free of charge and not requiring you to dress up in an unfeasibly tight-fitting suit in public.) The incident described below actually occurred yesterday, though some of the key particulars are hypothetical. Enjoy!
Fortunately, you had a nice June hopping on the short equity train, and you even had the foresight to get out early this month in the vague neighbourhood of the lows. This has left you up 4% year-to-date. It's better than cash, but you're going to need to do better than that if you want to outbid the kleptocrats for that chalet in Courchevel you've got your eye on.
There's one small problem, however. The ruling party in Turkey, the AKP, has overseen an unprecedented period of growth and stability in Turkey, and even helped kick-start the arduous EU application process. Unfortunately, they also have ties to the conservative religious community, which is a no-no to the fiercely secular armed forces and constitution.
It's such a no-no, in fact, that a lawsuit has been filed to outlaw the AKP and to ban Prime Minister Erdogan from public life. It's possible that the AKP could be banned, but Erdogan still permitted to hold public office. This wouldn't be too bad, as the members of the ruling party could simply regroup under a different banner.
The case is being heard by Turkey's Constitutional Court. You have done a scenario analysis , and come up with the following:
1) AKP and Erdogan survive. In this case, you'd expect USD/TRY to fall 2% on the day and 7% within a month. Call the agent immobilier and tell him you'll be on the Netjet to pick up the keys to your new chalet in a month's time.
2) AKP is banned, but Erdogan survives. In this case, you'd expect choppy price action on the day, with an unchanged USD/TRY by year end. You'll make a few bucks, but you'll be renting when you ski next February.
3) AKP and Erdogan are banned. This means that the Turkish government is, in effect, declared illegal, leaving a political vacuum that could potentially be filled by the military. You believe that at best you lose 4% if you get out immediately; if you hold the position until year end, you'll lose 10% on it- even including the carry. In this case, you'll be using the student travel agency to book your ski trip.......in Scotland.
However, the afternoon drags on with no news but plenty of rumour. Finally, at 4.10, your phone rings. You glance at the Turkish newswire that you've been reading all afternoon, but nothing's come up...not even in Turkish.
You pick up the phone, and the first thing you hear is "The AKP's been banned! We're hearing it out of Istanbul! AKP's history! You look at your intraday USD/TRY chart, and this is what you see:
SO WHAT DO YOU DO? Do you start buying your position back- you see that at another bank, someone else is already paying 1.20- or do you sit tight?
Welcome to macro fantasy camp, as this is exactly the sort of position that traders find themselves in with alarming frequency. Make your choice, then scroll down to see the outcome.
USD/TRY starts drifting lower, but there's still nothing on the newswires. To add a bit of spice to the equation, your daily P/L mark occurs in 1 minute: you have no idea if this will be a great day, a horrible one, or something in between.
Then it comes. A fiery red Bloomberg headline appears on your newswire:
TURKISH COURT REFUSES TO BAN RULING PARTY
"YEAH, BABY!", you shout, no doubt deafening your poor salesperson on the phone. You hang up and high five the guy next to you, thankful that you didn't panic and pay up to cover when spot jumped.
While this little bit of role-playing is fantasy, there is more than a kernel of real-world truth in it. If you do this job long enough, you get to experience plenty of make-or-break flashpoints over which you have no control.
In this case, not paying up was the right thing to do, though had the AKP and Erdogan been banned, you'd be kicking yourself. However, insofar as there's a moral to this little story, it's that it's generally better to make a later, informed decision than an earlier, uninformed one.
Well, either that, or to hedge yourself ahead of time.
Wednesday, July 30, 2008
Oh dear. So Merrill Lynch (who really ought to merge with Villeroy and Boch) announces another "kitchen sink" write-off....and the financials (and, by extension, the broader market) stage a furious rally. This left Macro Man considering the following conundrum: how can both Merrill and other banks rally?
To wit, if this really were the final write off from Merrill, and at levels much more conservative than those on other banks' balance sheets, surely other banks should be getting caned on the expectation of the coming "reality check" losses? But if other banks are OK, and this really is a Merrill specific issue....surely Merrill should get whacked on the basis that there are yet further markdowns in the pipeline?
The resolution to the conundrum can be found in one short phrase: short-covering. The price action in Merrill was hideous, as the stock rallied nearly 8% on truly jaw-dropping volume (293 million shares.) What's particularly nasty is that a large chunk of that volume was near the high print of the day, and involved lifting offers, as the chart below illustrates.
Merrill actually lagged the BKX, which tacked on 8.7% in Tuesday's trade. This, combined with the oil price getting drilled (boom, boom), led to another day of unfortunate price action in the trade known as "equity market crack": long energy and short financials. This trade, as proxied by the XLE/XLF ratio, plunged 8.6% yesterday. Ouch!
Unfortunately, it seems as if many market punters have been unable to "just say no" to equity market crack. As the chart below indicates, most "market neutral" hedge fund performance can be explained by the equity crack ratio. Why spend a percent or so in transactions costs and ETF fees when you could pay a friendly hedge fund manager 2 and 20 to do the same trade for you?
The chart suggests that market neutral guys doubled down recently, given the sharp rise in the HFR index alongside a relatively modest rebound in the crack ratio. One can only presume that yesterday was not a particularly enjoyable day for these chaps....'twill be interesting to see the HFR index when it updates for yesterday. Suffice to say that many of these funds probably wish that they'd listened to Nancy Reagan.
Let's not kid ourselves, however; this relative rally in financials is all about pain. While it may be tempting to pick a bottom on the basis of "valuation", surely Merrill's ongoing travails suggest that notions such as "book value" for financial companies is worse than useless? Macro Man is generally a believer in looking at what people do and not what they say. And when he sees KKR looking to peddle stock in itself to the public, that tells him everything he needs to know about equity valuation.
Finally, yesterday's comparison of short NZD positions to Rocky Balboa proved timely. While the kiwi traded horribly for much of the day, when the USD caught a huge bid in the London afternoon, NZD/USD inexplicably turned around and ground 2/3 of a percent higher in a straight line, breaking back above the vital 0.7380 level in New York. If you sold the break of support, that's probably where you left your stop.
Subsequently, the NZD has been shot down again courtesy of some dovish commentary from RBNZ governor Bollard. It's a reminder to "just say no" to leaving tight stop losses in the kiwi; more often than not, you're going to get filled by Clubber Lang or Apollo Creed.
Tuesday, July 29, 2008
Sigh. Another day, another writedown at good old Merrill Lynch. And indeed, another asset sale by Merrill that Merrill itself is financing. It's safe to say that someone had an inkling that something might happen, given yesterday's BKX-led meltdown in US equities. It seems as if the NAB news might have put the scare into Merrill...you can just imagine John Thain waking up last Friday and saying, "Ten cents on the dollar? Dammit, we're marked at 35.....quick, someone get me a bid!"
In any event, these writedowns are coming with alarming regularity, especially for Merrill employees and shareholders. Macro Man's sources within #4, World Financial Center have indicated that as a cost-cutting measure, Merrill's corporate communications department have written a boilerplate letter that can be send to shareholders in the event of future writedowns. They've managed to obtain a copy, which he has reproduced below:
Elsewhere, the growth versus inflation conundrum highlighted yesterday is impacting more
countries than just China and Mexico. India, for example, is particularly vulnerable, given its widening current account deficit (and concomitant reliance on foreign capital flows.) It's good to see that the country is taking some unusual measures to combat inflation, including naming a non-national (pictured, left, at the announcement of his appointment) as the new governor of the RBI. This morning, Governor Dogg surprised markets by hiking rates 0.50%, thereby showing his commitment to keeping the inflation genie within its kennel, er, bottle.
Finally, the good old New Zealand dollar has taken a battering today after a horrible set of building approval data and the news that another finance company/fund is going under. While NZD/USD continues to hover above the key 0.7380 support, the EUR/NZD cross has broken multi-year highs. All of this comes, of course, after a rather nasty short squeeze in the NZD after last week's RBNZ rate cut.
In many ways, carrying a short NZD position is a bit like being Rocky Balboa. You know you're going to win in the end, but you might have to take a hell of a battering along the way. Still, things could be worse. At least a short NZD position doesn't have shareholder letters (and CDO skeletons) in its closet.
Monday, July 28, 2008
Why is it that the office air conditioning only goes out on the hottest day of the year? Such is the case today; while Macro Man is usually loathe to criticize UK weather for being too warm, he has to concede that being trapped in a trendy building with no open-able windows and no aircon is not the most pleasant environment in which to confront a new week's trading.
First things first, however. Macro Man is proud to announce the winner of the first annual Banking Dead Pool. It was a close vote, and at least one reader suggested privately that he had followed Al Capone's maxim to "vote early and vote often", which casts some doubt on the validity of the result. But the contest auditors
have verified the poll results, and the winner is.....Lehman Brothers (pictured above, left.) Macro Man extends hearty congratulations to LEH and is pleased to present them with the coveted Golden Coffin Trophy, pictured left. Better luck next time to Bradford and Bingley, which missed out on victory by the narrowest of margins (2 votes out of 477 cast.)
The market has a clearly summery feel to it, and you can easily see a few days of back-and-fill price action before US Q2 GDP on Thursday and Unenjoyment Day on Friday.
In the meantime, there are a few developments in the EM space that Macro Man is tracking:
1) Mexico becomes embroiled in the currency/inflation conundrum. Until a few months ago, the market consensus had Banxico on hold and USD/MXN was going nowhere fast. Since then, Banxico has hiked rates 0.50% and looks primed to do more, thanks to rising headline and core inflation (chart below.) Unsurprisingly, this has lent a bid to the peso, which has strengthened 4% against the dollar since the end of April. It was 5 percent, as USD/MXN spent the middle part of last week just above 10.00, and looked a dead cert to hit "El Nueve" imminently. On Friday afternoon, however, Banxico announced that they were halting their dollar selling program, which spurred a rather nasty short squeeze in USD/MXN. In the fullness of time, will Mexico choose to fight inflation or go fort growth? Inquiring minds want to know.
2) China switches tack. One country that does appear to have made the decision to go for growth is China, where the Politburo made a weekend policy announcement suggesting that China is moderating its inflation concern to support growth. This has led to a bit of short-covering in USD/RMB. Usually, it would mean a bid for something like AUD/USD, but the news of losses at ANZ have taken the lustre off of the Ozzie for the time being.
3) Big decision in Turkey. Will they or won't they? We'll hopefully get a decision this week on whether the ruling AKP party will be banned or not. Turkey is a darling of the carry crowd but has ground to a halt recently in the build-up to the decision (though the equity and bond markets have been pummeled over the last few months.) There should be quite a tasty move in either direction once the decision is announced.
Friday, July 25, 2008
Just when you thought it was safe to go back in that water.....a great white shark from the Great Barrier Reef goes and bites your leg off. While yesterday's US equity market meltdown was home-grown, it left the SPX in no man's land. A month ago, short equity risk was far and away Macro Man's biggest position, but now he has virtually nothing in equities except the tiny, wretched remains of the large cap/small cap trade and a modest long vol position in Europe.
For Macro Man, the most interesting recent developments have come from Down Under (and Just Over). While it has yet to garner too many substantial headlines, the news that National Australia Bank (NAB) has written down its US RMBS portfolio to 10 cents on the dollar could send shockwaves through the financial system.
Much of NAB's book was made up of AAA securities, so to mark them down so drastically certain suggests that "the model", whatever it is, is broken. Now, when you consider that a whole host of banks are either marking this stuff much higher on their balance sheets, or have moved it to the limbo of "Level 3" make-up-whatever-price-you-want assets, a publicly-disclosed 90% write-off on similar assets could represent a rather unpleasant dash of cold water in the face of much larger fish than NAB. No doubt a host of banking execs are cursing NAB into their Cheerios this morning; after all, nobody likes a whistle blower, especially when there's plenty of other bad news to deal with.
Meanwhile, we may have seen the first SWF stop loss in the financial sector. Rumours are swirling that Temasek, Singapore's "other" SWF, has puked some of its stake Merrill Lynch. So far from being the White Knight who saves the day with their hordes of cash, it appears that SWFs may exacerbate some of the selling pressure. Oh dear.
In any event, recent developments may tempt punters back into a trade that can only be described as "equity market crack", long energy/short financials. While it's tempting to call the recent, ahem, "setback" in that trade "just one of those things", Macro Man cannot help but wonder if the sharp reversal of fortune hasn't exacted more enduring damage, or is at least telling us something about slowing growth outside of the US. Remember, kids, don't believe the pipe!
Finally, it's worth noting that the 1 year anniversary of the beginning of last year's FX carry collapse has just passed. Macro Man mused last week about the chances of history repeating or rhyming in NZD/JPY....and sure enough, the cross has started coming a bit lower. Will the same hold true in EUR/JPY, where the pattern is almost identical?
If so, it will require Mrs. Watanabe and the reformed DOTW to capitulate. Recent data suggests record retail longs in NZD/JPY, so one lives in hope...one lives in hope.
Thursday, July 24, 2008
Well, the RBNZ did the right thing last night (at least for Macro Man's portfolio!), cutting rates by 0.25% and suggesting that there's more easing in the pipeline....at least as there's no "excessive" exchange rate depreciation. Given that the last Monetary Policy Statement forecast a 10% or so decline in the TWI over the next couple of years, you'd have to posit that there should be a lot of room to the downside before NZD weakness gets "excessive." NZD/USD is butting up against decent support around 0.7385 or so, and it might be a bit of a tough ask to look for a break today. But when the level goes, expect the kiwi to drop like the flightless bird that it is.
Elsewhere, there's been quite a few key datapoints released since last night's New York close....a veritable data dump for the macro punter. It kicked off with Japan, where the trade surplus was literally off-the-charts low. What's interesting here is that export growth has really tailed off; y/y export growth is negative to the US, UK, EMU, and North Asia. As the chart below demonstrates, this could ultimately exert significant pressure on the yen to weaken.
In Europe, meanwhile, further evidence emerged that the economy is an egg that's just hit the brick wall of ECB tightening. The ifo, highlighted here as a good leading indicator of ECB policy, took another surprisingly large lurch lower this morning. The expectations component is the lowest since the last recession, and the disparity between the current conditions and expectations components is the widest since unification. Are you watching, M. Trichet?
In the UK, meanwhile, we had the release of June's retail sales, which showed a monthly record drop. Quite a coincidence, given that the previous month showed a record rise. Oi, ONS, here's a quid.....go buy a clue!
So the dollar is trading well, consolidating beyond the levels highlighted yesterday. Anything can happen over the next couple of days, of course....but Macro Man finds himself nursing an increasingly insistent urge to get bullish dollars as the other shoe starts to drop elsewhere in the world. He can only hope that his positioning doesn't end up in another sort of dump.
In the last day of voting, it's neck and neck between Lehman and B&B in the Banking Dead Pool. Vote now: you could decide the "winner"!
Wednesday, July 23, 2008
Macro Man forwarded yesterday's modest proposal to the Congressional Budget Office, where it received an enthusiastic response. He also contacted the major networks as well; expect to see the Macro Man Plan feature prominently in the autumn McCain-Obama presidential debates.
Moving back to the more prosaic world of financial markets, we seem to be at a critical juncture. One market that shows signs of reversal is interesting; two might be a coincidence. But when a whole host of markets break supports/resistances simultaneously, Macro Man sits up and takes notice, because such behaviour is characteristic of thematic turning points (even when the theme switch is from "everyone makes money" to "everyone loses money".)
Let's start with the obvious: banking stocks. The sea change there is best exemplified by Wachovia, which posted shocking results yesterday, delivering a much larger-than-expected loss....and rallied 27%. Would that have happened a week or two ago? Nope. Over the past six days, the BKX has rallied 45%. Holy cow! For any basket of stocks to move that far, that fast is truly stunning, and almost certainly represents a (very) painful scramble to cover shorts.
A short-covering break of resistance is occurring in broader indices as well. Yesterday's SPX recovery was truly impressive, and has fed through into the Eurostoxx, which has broken the resistance created during the consolidation period that registered so strongly on Macro Man's chop-o-meter a few weeks ago. You'd have to think that there's a decent chance of follow-through as shorts scramble to cover.
The dollar is also poised to confound the bearish consensus. Yesterday, EUR/USD broke through the support of the uptrend from mid-June. The move has followed through today.
Similarly, USD/JPY has broken the downtrend line off the mid-June highs, as well as the widely-watched 200 day moving average.
Slightly further off the beaten track, you can find even more stunning reversals. Yesterday, Czech CB governor Tuma suggested that the CNB could trim rates next month in response to CZK strength, even though inflation's shown little sign of moderating. There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way. Yesterday was reportedly the largest one-day move in EUR/CZK of all time; while Macro Man has not confirmed that statistic, there's little doubt that the reversal has exposed a very small exit door in long CZK positions.
Two other central banks who are straddling the growth/inflation divide are the BOE and RBNZ. The former released the minutes of the July meeting this morning, and treated the market to the odd spectacle of one member voting for a cut, another voting for a hike, and the remainder sitting on their hands. This has prompted another nasty reversal (yes, there's that word again) in short sterling, which one would have to presume has not been a profitable one for market punters.
The RBNZ, meanwhile, announces rates tonight (or tomorrow, depending on your time zone), with the market split 50/50 as to whether they'll cut rates. Really, it's only a matter of time before they do go, but with NZD positioning extraordinarily heavy relative to the size of New Zealand's GDP, expect fireworks no matter what the outcome.
Whether this week turns out to be an intermediate (1 month) or even longer term turning point, or just another head fake, will only be known in the fullness of time. But after the length and scale of many market moves in June and July, there'd appear to be worse market strategies than betting on a position squeeze and reversal of recent market fortunes. If the CTAs are going to engage in a stop-loss feeding frenzy, it's best to let them have at it.
Tuesday, July 22, 2008
Regular readers may recall that despite residing in Europe (and, briefly,
What he’s come up with is a modest proposal that should restore the fiscal health of the
The first port of call is to take profit on a number of 18th century transactions conducted by the US Government. Top of the list is the
Next up on the auction block is the Gadsden Purchase, which would sell
The final bit of profit-taking would involve selling
(Two asides on this one. The national security implications of giving Russia a foothold on the North American continent can be dismissed, as Canada represents a large-and soon to be growing, as you’ll see below- buffer between the US and Russian Alaska. It’s also worth noting that under Macro Man’s calculations, the CAGR on the Alaska Purchase (6.7%) is superior to that of the
Having done the easy work in selling back some assets to their “original” owners (sadly, the Native Americans can’t afford the price tag so are out of the running), the US Government will have to find buyers for some of the United States’ other saleable holdings. Naturally, they’ll need to enlist the help of investment bankers, who are blessed with a unique ability to match buyer and seller for hard-to-value assets. Ordinarily, Macro Man would suggest that the banks waive their fees for helping the government- call it a long-overdue payment of the premium for the Greenspan/Bernanke put. Given the current fragile state of the financial system, however, hefty investment banking fees are just the thing to restore institutions like Merrill Lynch and Lehman Brothers back to health.
To expedite the healing process, Macro Man has come up with a roadmap for more US Government capital raising. The first port of call should be
At this juncture, Macro Man's scenario analysis suggests that Texas, seeing the fire sale elsewhere in the country, would not want to be messed with, and thus secede from the Union, reverting to an independent republic. Frankly, Macro Man isn't sure that the Texans will be missed...after all, each of the Texan presidents (Eisenhower, LBJ, Bush I and II) have seen the US embroiled in some sort of military conflict. Good riddance!
Anyhow, another potentially rich source of funds are the world's oil producers, who have a surfeit of dollars that they'd like to get rid of- a match made in heaven! Canada should be a willing buyer for Michigan (if only to acquire a successful hockey team), Washington state (Seattle would fit in nicely with B.C. culture), Maine (you could argue that it used to be part of what is now Canada), and Vermont (appease Quebeckers by acquiring another territory with a French name.) These states should raise an additional $1.1 trillion. Selling all of these Northern states would also increase the buffer between the remaining United States and Russian Alaska.
Illinois could be sold to the cash-rich Abu Dhabi Investment Authority in a deal that can only be described as win/win. The US would raise $877 billion, and Abu Dhabi would get access to a cooler climate, loads of fresh water (in Lake Michigan), and immediately catch up to Dubai in the cool skyscraper sweepstakes.
Utah, meanwhile, could be sold to the Saudis. Similar to the deal above, the state's cool climate would be a welcome change from the searing heat of the Arabian peninsula. Moreover, Utah's reputation for clean living and penchant for polygamy would represent familiar territory to the House of Saud. At $152 billion, the price would be a snip.
Idaho could be sold for $73 billion to Norway, for whom the cold weather and mountainous terrain would be just like home. Although the UK budget is stretched to the breaking point, the recent suggestion that the rules could be bent might allow room for Gordon Brown to buy Nevada for $183 billion, and thus render moot the debate about supercasinos in Britain.
Oregon could be sold to the peace- and nature-loving Swiss for $227 billion; perhaps the IRS could agree to look past UBS as a quid pro quo to smooth the deal. The Germans would no doubt be more than happy to spend some of their euros ($334 billion worth, to be precise) on Wisconsin, well known for its sausages, beer, and large-framed residents. Finally, Florida could be sold to GIC for $1.05 trillion. The heat, humidity, tourists, and nasty insects would be familiar to the Singaporeans, but the 151,000 sq. km would represent a welcome increase in the space available to the city-state's residents.After these sales, fourteen states would remain: Delaware, Pennsylvania, New Jersey, Georgia, Connecticut, Massachusetts, Maryland, South Carolina, New Hampshire, Virginia, New York, North Carolina, Rhode Island, and West Virginia. By a stunning coincidence, these fourteen states comprise the territory of the original thirteen colonies represented by the stripes on the US flag, so there'd be no need to change that (other than knocking off the odd star or two.)
According to Macro man's calculations, the asset sales would raise a total of $11.55 trillion (less investment banking fees, of course)....easily more than enough to retire the publicly held debt of the Federal, state, and local governments. The excess cash (comprising some $4 trillion or so) could be used to directly back most Fannie and Freddie mortgages on a dollar for dollar basis, thus getting rid of that nasty problem.
Looking ahead, the Macro Man Plan will make life a lot easier for the remaining United States. The worst housing markets (Florida, California, Las Vegas) will now be someone else's problem. Ditching Florida and Arizona will significantly reduce the Social Security burden in years to come, while the secession of Texas should bring about a welcome reduction in future military spending. The environmental costs of California smog will now be borne by China, while Canada can pay for the benefits of Detroit autoworkers.
Sure, the Macro Man Plan will entail a modest loss of American international prestige, but that's a small price to pay for restoring the nation to economic health. Wall Street will still be part of the USA, so the investment banking billions will stay within American hands. And hey, in ten years' time when the next "once in a lifetime" financial crisis rears its head, the US will still be able to sell Washington, DC...that is, if a willing buyer can be found.
Monday, July 21, 2008
While the weekend weather didn't always feel like summer, today's market price action certainly does. What better time, then, to play another round of Macro Man's favourite occasional game, 20 Questions?
1) Should we be using last quarter as a model, wherein the equity market weakness from the end of the previous quarter resolves itself into a painful, vol-crushing seven week drift higher?
2) Or should we be looking at July 2007, when FX carry was remarkably resilient.....until it wasn't?
3) Given the stagflationary dataflow, shouldn't the US yield curve be steeper?
4) After Tiger won the US Open with an bum knee and Padraig Harrington the (British) Open with a dodgy wrist, how many golfers will intentionally injure themselves ahead of next month's PGA Championship?
5) How sad is it that an online poll has Tsar Nicholas II and Stalin running neck and neck for the title of Greatest Russian of All Time? The American equivalent would probably be something like Nixon versus Millard Fillmore.
6) When will EUR/USD break out of this 1.54-1.60 range?
7) What, exactly, was the ECB trying to accomplish by leaking hawkish commentary on a Friday afternoon markets finally showed signs of calming down?
8) Do the folks at Barron's understand the degree to which people view them as a contrary indicator?
9) Will the RBNZ cut rates this week?
10) Does anyone understand what's driving the oil market at the moment?
11) Similarly, can anyone provide a fundamental rationale for the stunning performance of CEE-4 currencies other than "the trend is your friend"?
12) Will Gordon Brown survive until the next election?
13) Are there any macro punters out there who don't love Brazil?
14) What's the next big trade in Asia: long, short, or RV?
15) Did you know that the May-July deterioration in global risk appetite was, according to Macro Man's measure, the largest of the last several years?
16) Will FIFA take the 2010 World Cup away from South Africa? If so, who will get it?
17) Is there a commodity trade to be made around the Beijing Olympics, or is it all a bit of a red herring?
18) Cristiano Ronaldo in 2008-09: Man U or Real Madrid?
19) When will the ECB cut rates?
20) Have you voted in the Banking Dead Pool yet? Lehman currently holds a slim lead over Bradford and Bingley.
Friday, July 18, 2008
Macro Man rarely writes about single name stocks, because that's not his area of relative expertise. He's not called "Micro Man" for a reason. On occasion, however, developments in a single name can have broader macro repercussions- Fannie and Freddie, or Northern Rock, for example.
Such is the case today for punters of equity indices, which have seen recent upside momentum wane considerably since 9.05 London time last night. The reason, of course, was the appalling "earnings" report from Merrill Lynch. Sure, Google and MSFT also missed, but the real story was MER, which lost $4.66 per share, nearly three bucks worse than consensus.
Now, as he's already explained, Macro Man is no equity analyst, so perhaps readers who are more comfortable breaking down corporates can help him. But one of the things in the announcement was particularly striking to Macro Man. Merrill is selling its stake in Bloomberg back to the company, and is also looking to flog its stake in Financial Data Services. That's all well and good; we know that the bank needs to raise cash and capital, and this is as good a way as any do to so in the absence of benevolent investors. But in this case, Merrill itself is loaning the money to finance the sale!
Think about that for a second. In practical terms, Merrill is not receiving any new cash, since they're just giving some of their money to Bloomberg, who's giving it back. Sure, they'll get interest and, eventually, the principal, but after a year that's seen them lose more than $22/share, surely they need the cash now?
Put it this way. We're now living in a world where LIBOR spreads are wide because unsecured lending is unattractive compared to secured lending. But in this case, Merrill is both making a loan and forking over an asset! Is it any wonder that the bank hasn't made a bean since Q4 2003? Now, allow Macro Man to say that the people with whom he personally deals at Merrill are first-class. So in a very real sense, it pains him to see his friends there get buggered by things out of their control. Given that a number of structured credit turds remain on the balance sheet, what odds that we go through the same painful exercise three months from now? In a
whole host of ways, "Mother Merrill" has turned into another phrase that also beings with "mother".
From Macro Man's perch, the only thing that can save the market from a potentially ugly day is Citigroup earnings, due out at 11.30 London time this morning. In many ways, that's like asking Robin to defeat the Joker, the Penguin, and the Riddler all at once after Batman's already been vanquished. Perhaps the Boy Wonder can pull a rabbit out of the hat....but on recent form, the odds don't look good.
For a bit of levity in a trying time for those readers whose deferred comp portfolio has plummeted this year, Macro Man is proud to introduce the first annual Banking Dead Pool. Vote in the poll on the right for the first institution that will go bust/get taken over...and hope it's not yours. Let's see how astute you are....and at least it will give you something to watch over the summer!
Elsewhere, the worm is turning yet again in Asia. Pain has started to rebound back on itself,as evidenced by, for example, the Philippines. Long PHP was a highly popular trade for most of the last couple years, but it went badly wrong earlier this year. More recently, a number of banks and punters have hopped on the long USD/PHP bandwagon. Doh!
Yesterday, the BSP hiked rates by a greater-than-expected 50 bps after the market had closed, leading to a nasty gap lower in USD/PHP with no trading. Macro Man had been long USD/PHP for the past three months, but is now out, thankfully at a tasty profit.
For the first time since late March, Macro Man has no position in anything related to EM Asia. The scuttlebutt from China suggests that both the economy and policy may be at a turning point. For the time being, therefore, he's happy to wait, watch, and collect more data before deciding on his next trade.
In the meantime, at least he has the Banking Dead Pool to keep his interest over the summer!
Thursday, July 17, 2008
You knew it was coming.....you knew it was coming...you knew it was coming.....BAM! Yesterday it finally came. Macro Man refers, of course, to the dreaded short squeeze, which finally arrived with a bang last night. Yesterday's 2.5% rally was the largest since April Fool's Day, which set the stage for the painful short-covering rally of April and most of May.
It would appear that the market is liable for a further squeeze from here. A number of of factors that Macro Man watches are flashing red. Consider the XLF, which posted enormous volume on Tuesday while tracing out a doji-ish candlestick that often warns of turning points. The follow-up rally yesterday also occurred on high volume; it all looks a lot like capitulation selling earlier in the week.
Insofar as higher oil prices have represented a significant squeeze on consumers and non-energy corporates, yesterday also saw an equity-positive development in that space. Crude extended Tuesday's losses after yesterday's inventory data which showed both crude and product builds. What's significant about yesterday is that it represented the first time in the whole parabolic rally that a higher high has been followed by a break below a previous low. Is this a sign of a turning point and a deeper (presumably equity-positive) correction? Inquiring minds want to know.
Macro Man and others have also observed that financial blog traffic tends to spike at panic bottoms. While there hasn't been a Bear Stearns-type surge in Macro Man's visitor figures, he does think it's telling that this week has seen the three highest traffic days of the past few weeks by a healthy margin. Another sign of a panic low, perhaps?
The S&P 500 closed right at the resistance level that Macro Man's been eying...1245 on yesterday's chart, 1241 on today's. A close above would give tape-readers reason to build at least short term longs. Of course, everything could turn on a dime, based on how today's earnings announcements pan out. Thus far, the expected earnings shortfall has not materialized; this month 26 out of 34 companies (76%) have beaten expectations, slightly better than this time last quarter, when 73% of companies had beaten.
The next 24 hours will see a number of key reports, including Merrill and Google tonight, and Citigroup before the open tomorrow. The noise quotient will be high, and it wouldn't be a total shock to see the SPX below 1200 at some point tomorrow. After all, the underlying environment remains dangerous , to say the least.
Yesterday's CPI was pretty ugly, showing the highest rate of inflation since the first Bush presidency. And while "core CPI" apologists might maintain that the inflationary phenomenon is confined to headline, but Macro Man cannot help but observe that small businesses are more determined to pass on higher prices than at any point in the past 20 years. While this willingness doesn't necessarily correspond to an ability to pass on higher prices, it certainly suggests that some of the "core inflation complacency" that Macro Man observes may be misplaced.
Wednesday, July 16, 2008
Well, what can you say? Yesterday was a "sell everything" day.....at least until that list included oil....after which it became a "buy everything" day. That is, until there were 45 minutes left in yesterday's US equity session, at which point it became a "sell everything" day again. Fun for the whole family!
As observed a few times over the last week or so, Macro Mas has found trading conditions evolve from pretty relaxing to downright terrifying at times. He's found it pretty easy to second guess every trading decision he makes, often after only a few minutes. That's an urge that he is trying to fight; in all conditions, but particularly when it gets a touch difficult, it's important to look forward rather than back.
In any event, it doesn't take much digging to confirm that conditions have been tricky, and that Macro Man hasn't dropped 50 points of trading IQ since the 4th of July. Consider that over the past 10 trading days, a period in which the SPX has dropped 5.1%, no less than seven of those days have witnessed an intraday rally of at least 1.5%. Unless one is a brilliant intraday trader- and Macro Man is not- this sort of market naturally lends itself to trades that have a, ahem, "suboptimal P/L impact."
Elsewhere, yesterday's post was a perfect example of the market Heisenberg Uncertainty Principle in action. In observing the strange lack of volatility in GBP/JPY, Macro Man evidently changed the dynamic, as the cross finally broke away from the 211 tractor beam to close New York at 210. At the time of writing, it's now in the mid 208's.
The ability of the yen crosses to withstand equity market volatility has certainly been puzzling, but it's not completely without precedent. After all, it was last June and July that the collapse of the Bear Stearns (remember them?) hedge funds sent the initial shockwaves of the current crisis through financial markets. For most of those months, FX carry was unperturbed: NZD/JPY rallied 8.8% from the end of May to July 23!
After that, of course, the wheels came off rather badly, as the chart above demonstrates. Now, Macro Man would not suggest that we'll see a sell-off in yen crosses of a magnitude similar to last year, for the simple reason that aggregate positioning (at least among gai-jin) is much smaller. Curiously, next week's RBNZ announcement is slated for the 23rd/24th of next week (depending on your time zone)....what odds that history repeats, or at least rhymes?
Finally, Macro Man supposes that he should write a few words about the regulatory regime in the US, where the SEC has temporarily banned naked short selling in certain institutions. While there may be some merit in banning naked shorts, the move does smack of desperation- particularly when one considers that a number of firms on the protected list are probably themselves perpetrators of the strategy in one way or another. What's next? Banning puts? Banning sales altogether ("So sorry...this stock has a 100 year lock up period")?
It's enough to make one shake one's head in despair. Macro Man had to laugh at yesterday's Bernanke testimony, where Sen. Jim Bunning delivered a philippic of such vitriol that you've gotta say that he's still got the fastball that propelled him to baseball's Hall of Fame! If you haven't seen it, click on the link for the video- it really is quite amusing.
Tuesday, July 15, 2008
Freddie Krueger came back to haunt the market again yesterday, as the market adopted the Rod Tidwell approach to the government's plan for the GSEs: show me the money! Today feels like sort of a "sell everything" day so far (though on recent form, that means you should buy everything for a squeeze into the US close.)
1) Sell stocks, particularly financials. US banks had their worst day since 1989, and the SPX is threatening the last bastion of support. European indices have already cratered through theirs.
2. Sell the dollar. We're seeing something of a dollar de-rating here. EUR/USD is back at 1.60, knocking on the door of its all-time highs.
USD/JPY has also rolled over; a break below the recent 104.99 low could get a bit ugly.
Heck, even NZD/USD has gone uber-bid, despite the release of slightly lower than expected non-tradable CPI in New Zealand last night (Admittedly, headline was higher than expected.) The joys of the NZD trade are amply demonstrated by last night's headlines immediately after the CPI release; what's a rational trader to make of that?
3. If equities vome back, then presumably bonds will sell off. UK CPI came in above expectations, and RPIX printed its highest level since June 1992.
The one oasis of stability in all of this has been, perversely enough, FX carry, which is defying all logic. (Literally) unbelievably, GBP/JPY has closed NY on a 211 handle every day since June 26, according to Bloomberg data. The chart looks more like USD/CNY during one of SAFE's periodic hissy fits than one of the ne plus ultra FX carry crosses during a time of heightened financial duress.
The 10 day historical vol of GBP/JPY is currently just over 3%. Thats in the lowest 1% of 2 week vol readings in BP/JPY since 1980. WTF?!?!?!?! Until recently, GBP/JPY vol (and NZD/JPY, etc) has followed the VIX quite closely. This time around, it's been quite the contrary. Given that some of the best performers have been the currencies with the worst fundamentals, this is another 1984-type scenario: call it Revenge of the Turds.
For the remainder of the day, there is very little that would surprise Macro Man. The highlight of the day is Bernanke's Senate testimoney....but what is he supposed to say? "Theeconomy'sOKbutinflation'stoohighbutdon'tworrywe'llsavethebankingsystembutwealsowantthedollartogoup"?
Some variation on that, to be sure. Which aspect of that stream of consciousness he chooses to emphasize should set the tone for this afternoon's trading. At this point, it seems like just about anything could happen....so Macro Man is trying to keep relatively nimble. Some of his best trades of the last week or so have been micro-term in nature. In a world where there is little in the way of price action that can shock, his primary concern is avoiding a (nasty) shock when he looks at his P/L, while still maintian some exposure to favoured themes.
Monday, July 14, 2008
While Macro Man is tempted to hit shift F9 again, perhaps the optimal strategy in this market has been pretty easy. Stay short equities, particularly financials, until and unless the Feds get involved with Freddie and Fannie. And while the details are pretty nebulous, it looks like the US government will do whatever it takes to keep the GSEs afloat. So anyone who went home short equities on Friday might be about to experience A Nightmare on Wall Street: Freddie's Revenge. Allow Macro Man to suggest that if the US government buys equity in FRE, they should change the name of the company to Freddie Krueger.
And while it should surprise no one that the government is stepping in to prevent the Agencies from blowing up, Macro Man cannot help but think that we are perched on the edge of a slippery slope. Buying an "unlimited" amount of equity in these firms is highly reminiscent of the "price keeping operations" conducted by Japan's MOF and the HKMA in the 1990's. And while Mr. Paulson has talked about protecting the downside for taxpayers, Macro Man is frankly more worried about the upside. As noted on Friday, he has little interest in his tax dollars protecting existing shareholders from losing their investment without enjoying the benefits of future upside- both in terms of earnings and share price appreciation. And it looks like we've taken a step closer to the convergence of Agency and Treasury bonds, in de facto if not de jure terms.
At the same time, we have news that the SEC is looking at policing market rumours, particularly those surrounding the financials. Something tells Macro Man that this will be a one-way street; anyone suggesting that, for example, PIMCO and SAC have pulled Lehman's line will face reprisals, but anyone suggesting that Warren Buffett is going to buy Lehman for $100 per share will remain unscathed. The UK has a head start on this particular slippery slope, with the FSA pursuing banking sector rumour-mongers and imposing farcically low disclosure thresholds for short interest in banks doing rights issues.
It's all vaguely 1984-ish to Macro Man. If you use inappropriate language about a bank, they'll do you. If you sell the wrong bank short, they'll do you. If you wonder aloud on possible forthcoming bad news about a bank, they'll do you. Perhaps sellside analysts should just cut to the chase and rate every financial out there with a "Doubleplusgood" rating. Who knew that MiFID stood for the "Ministry of Financial Information Dissemination."?
And so we're left in an uncomfortable position. The financials are still in lousy shape, as the collapse of IndyMac amply demonstrates. But if being bearish on banks is turning into a thoughtcrime, and the BKX has been oversold since late May, what odds on a nasty short squeeze this week? There are a number of banks reporting over the next few days, but if their reports are filtered via the Ministry of Truth they can say more or less whatever they want without fear of regulatory reprisal- all in the name of "financial stability." Heck, maybe the US Treasury will buy a few million August 60 calls on the BKX just to get the ball rolling!
Or, the US could adopt the UK model. This morning, beleaguered mortgage lender Alliance and Leicester announced that they were in takeover talks with an "undisclosed buyer" in a deal that values A&L at 317p/share. This compares with a closing Friday price of 219.5p per share- nearly a 50% premium! It's hard to understand why someone would pay that kind of premium in this kind of market, but the announcement did the trick, conveniently taking A&L to a high of 338p/share this morning.
If this is the new model for Anglo-Saxon markets, it will make it bloody difficult to remain short. After all, any crappy company under the cosh could simply announce a "mystery buyer" at a ludicrously inflated premium, and the market would be forced to take it at face value. Any suggestion that the story could be a fabrication would be met with [REDACTED ON ORDER OF THE THOUGHT POLICE. THE AUTHOR HAS BEEN APPREHENDED AND TAKEN TO ROOM 101. TO READ MORE 'MACRO MAN' CONTENT, PLEASE CONTACT THE MINISTRY OF LOVE. POVERTY IS PROSPERITY. INSOLVENCY IS ADEQUACY. REGULATION IS FREEDOM.]
Friday, July 11, 2008
Fabian: Butch, whose bond yield is this?
Butch: It's a stock price, baby.
Fabian: Whose stock price is this?
Fabian: Who's Fred?
Butch: Fred's dead, baby, Fred's dead
-Pulp Fiction, alternative universe financial version
Now, let Macro Man say right at the outset that he is not intimately acquainted with Freddie and Fannie's balance sheets, and does not run his own models on their capital adequacy/requirements. That having been said, he's been reading stories of their misadventures for years, and could see with his own eyes how they aggressively expanded their balance sheets even as the US housing bubble was inflating and deflating. Moreover, the graph of the share price, which is presumably set by people more intimately familiar with the firm's financial standing than your humble scribe, conveys only one message: Fred's dead, baby, Fred's dead. The similarity to the stock chart of Bear Stearns (and Northern Rock, and Bradford and Bingley) is telling.
So the question then becomes what to do with Freddie and Fannie. Clearly, allowing them to die is a non-starter, as it would eviscerate the financial system and send the housing market into a full-fledged depression. That's obviously politically unpalatable, particularly in an election year. Government intervention would appear inevitable, therefore. Of course, if the Feds step in, private sector shareholders should be left with a goose egg. As a US taxpayer, Macro Man can assure you that he has little interest in paying to clean up someone else's mess, only to see them reap all the rewards after the fact. The NY Times suggests that plans are being readied for some sort of nationalization.
The more interesting question is what becomes of Fannie and Freddie's bonds? The rapscallion in Macro Man would like to see substantial losses for the bondholders as well. After all, people like Voldemort and the Russkies have been buying a helluva lot of Agency bonds with the proceeds of their FX piss-taking. If globalization has brought about of economic realpolitik, it would be refreshing to see SAFE, CBR, et al hit with hundreds of billions of losses as a "reward" for their currency manipulation.
Obviously (and sadly), that's not going to happen. Somehow, the quasi-government guarantee on Agencies will likely to become more formalized. The implication is that 1) the stock of US Treasury debt may be about to go up- by a lot 2) The spread between Agency and Treasury bonds could converge to zero 3) Irritatingly, the FX reserve managers will receive a windfall proceed from their piss-taking. Come on, Hank, grow a pair and tell 'em to quit taking the piss or they'll get nowt for their Agencies!
So we're left with the seemingly ironic scenario wherein the lower Freddie's share price goes, the higher its bonds could/should trade relative to Treasuries. So far, that's not been the case, but one wonders if the fixed income RV traders will start making those bets. Of course, another way to play a Federal assumption of Agency debt would be to simply sell Treasuries. US CDS have ticked wider this morning on the notion that the stock of UST is about to get a lot bigger.
Finally, a word on oil. Macro Man has some sympathy for the notion that a lot of the oil price rise over the past few years has been demand driven, and has met with an inadequate supply response. And he's not totally convinced by the spec-bashing of a guy like Michael Masters, who happens to be long a lot of stocks in a crappy industry (airlines) that is badly hit by higher oil prices.
But still. Perhaps those who say that fundamental supply and demand are the only driver of price can tell the rest of us how that dynamic changed between 19:12 and 19:25 London time last night to generate a four buck rally in the price of crude?
Thursday, July 10, 2008
One of the refreshing things about this business when you run risk is that you have a very clear criterion of right and wrong: your P/L. Now, for a (M)acro (M)an, it is the medium-term evolution of his P/L that is the statistically significant criterion in determining the accuracy of his views. As he has explored in the past, short-term swings for even the most astute of traders are largely random.
That said, on a short term horizon Macro Man's decision to cover some more of his equity short was clearly wrong, given the meltdown in the US last night. In many ways, of course, being wrong is not unexpected. Macro Man's style is to scale into positions as conditions become more favourable to his views, and scale out as conditions become less favourable (more on this below.) Whilst employing such a strategy, it is highly likely that some profit-takes will go offside.
Still, Macro Man cannot help but laugh at what passes for analysis these days. Yesterday, he received a Bloomberg message from a large bank before the US open, trumpeting that one of their analysts was looking for a 10-15% bounce off the lows in banks stocks.
Mind you you, this came the day after a $4.19 rally in the BKX. Hmmmmmm. When Macro Man did a bit more digging, this call became even less insightful. Measured off of Monday's low, the BKX had already rallied 10.1% from its lows. Gee, thanks for the heads up there. Of course, yesterday the BKX rallied another half a buck and then collapsed. So while this chap may have technically been right in analyst world, under the more exacting microscope of a P/L one cannot help but think that his call would have been proven disastrously wrong.
In any event, Macro Man stands by his view that conditions are making equity shorts less comfortable to hold. Intraday volatility has risen dramatically, particularly in comparison to close/close volatility. Frankly, Macro Man isn't whether this heralds a bounce or collapse. To get a flavour for how this choppiness relates to historical precedent, he constructed a "choppiness index" for Eurostoxx, which compares the average daily range with relatively recent price history.
He calculated this index back to the beginning of 2001. When he ran the numbers, he found that the recent price action has been in the 99.5th percentile of choppiness over the past seven and a half years. Yowsah! No wonder it's been so confusing!
Although Macro Man hasn't performed an exhaustive study of how prior episodes of chop have resolved themselves, intuitively it makes sense that they would produce either countertrend moves (as directional positions are covered) or high-volatility continuations (as trend faders/Maginot Liners give up the ghost.)
How the present period of chop ends will likely depend on earnings season. Given that modern corporate earnings announcements are little more than a public exercise in creative accounting, Macro Man has little wish to go in with heavy positioning in one direction or another. Far better to flatten exposure and remain nimble, adjusting the view as fresh data emerges. And with that game plan in mind, even though yesterday's profit-take was the wrong thing to do in the micro term, from a more strategic perspective it was right.
Wednesday, July 09, 2008
Yesterday was an instructive (and, for equity shorts, expensive) lesson that it's not how you start, it's how you finish. Tuesday might have started ugly early, but provided evidence that the equity market Maginot Line is providing a more effective resistance to the marauding hordes than the real one ever did.
So what now? Macro Man can feel the near-term conviction draining out of him like water out of a bath. That VIX came off so sharply (2.5 points) with yesterday's rally makes him concerned that the real pain trade out there is long equity vol. The same held true in April, and we got a horrible, drawn out squeeze in cash indices as a result.
From a technical perspective, momentum is waning. The Eurostoxx is exhibiting signs of classic bullish divergence, with marginally lower prices accompanied by a rise in momentum oscillators (in the chart below, RSI.) Such conditions are usually followed by a squeeze. Having had a great run shorting European equities (he first sold above 3800), Macro Man is wondering if enough is enough for the time being. With earnings season upon us, perhaps the Keyser Soze equity sellers (i.e, the Usual Suspects, in this case, mutual funds facing redemptions) will hold off for a bit, thereby allowing for a squeeze. Perhaps the best advice here for anyone contemplating a fresh equity short is "patience, young grasshopper....better levels will come."
Someone else saying "enough is enough" is the Bank of Korea, which continued its campaign to strengthen the won. Anecdotal reports suggest that they have sold $5 -$7 bio today, jamming stop losses from momentum models and other punters looking for a higher USD/KRW. BOK is at the vanguard of emerging market central banks, erstwhile currency piss-takers, who've had enough of the collateral (inflationary) damage from years of partially sterilized intervention to weaken the domestic currencies. India, Indonesia, and the Philippines have also been in over the past few weeks, albeit with mixed performance.
Heck, even Macro Man's best mates the Russkies have joined the party, allowing the rouble to appreciate roughly 35 bps against the dollar and euro basket this morning. The move is unusual for two reasons: it's followed swiftly on from the previous revaluation (usually they wait a few months), and comes after persistent central bank promises to screw speculators who buy the rouble. Instead, these dastardly foreigners have been rewarded.
The rouble revaluation comes just a day after President Medvedev suggested that the rouble become a reserve currency alternative to the dollar and euro. Uhhhh...Dmitry....sock puppets don't usually know much about foreign exchange, so you might like to know that turning the rouble into a reserve currency when you have broad capital controls and a central bank that promises to screw anyone who buys it might be a bit of a tough ask. Still, the timing of the revaluation with respect to Medvedev's comments is curious to say the least. Macro Man can only hope that Russia is close to saying "enough is enough" to currency piss-taking.
UPDATE: Psych! Looks like the new kleptocracy is same as the old. The rouble basket is back up close to its previous level, but only after there was some suspicious "private sector" buying of dollars. It now looks like the "revaluation" may only have been a good-old fashioned market manipulation to let an onshore operator buy cheap dollars. Heaven forbid that the CBR fulfill local dollar demand at the market rate from its pile of $534 billion of FX reserves.....