Friday, October 31, 2008

Treat....or Trick?

The fix is in! No, Macro Man has not ordered a tin-foil hat and isn't quite prepared to believe that the Rosicrucians,et. al are running the show....yet. No, today is all about rebalancing flows for the month-end fixing in currency, bond, and equity markets.

While this is always an issue at month end, the sheer scale of the moves in equity markets this month make this the most widely-anticipated month end fixing that Macro Man can recall in his fifteen-plus year career. Stories are circulating that passive and active global equity funds will need to buy something like $35 - $50 billion USD at the 4 p.m. London fix today, and that pension funds will sell cartloads of government bonds to buy equities, as they are now overweight the former and underweight the latter.
Now, there is almost certainly something to this, because these sorts of flows do exist. So it would appear to be easy money to go long USD now, and lob them out to the poor slobs who will be buying later this afternoon. Call it an early Halloween treat!

Ah, but finance is rarely that straightforward. The DXY has already rallied 1.5% since the New York close, which strongly suggests that some punters are already short. What odds that there is a nasty short squeeze in EUR/USD between now and this afternoon to shake out some of the punters? And when exactly are you supposed to take profit on your dollar longs? EUR/USD sagged into the fix yesterday, but then rallied just before 4 pm, wiping out most of the profits from a fix-related short. While there may well be a treat from playing today's fix, so widely has it been discussed that Macro Man can't help but worry that Dr. Market is preparing a trick for unwary punters.

Ditto the equity/bond rotation, which looked like having legs earlier in the week but has frankly disappointed the last couple of days. As noted yesterday, while it is eminently reasonable to suggest that bear fatigue has set in, we do remain in a secular bear market. Should the expected pile-driver rebalancing not materialize today, what odds of a sharp drop in stocks into today's close? Macro Man has got nothing equities (having taken profits on his tiny tactical long on Wednesday), and remains leery of playing stocks 'til the dust settles on month end and the election.

Elsewhere, the news just gets better in Europe. Yesterday's Eurozone economic confidence indicator recorded its largest drop in the history of the survey (how often have we heard that phrase recently?), and UK flagship retailer John Lewis has seen sales fall 9.8% y/y.

More ominously, there is a serious gap opening up between core and peripheral government bond yields within the Eurozone...which is pricing in a serious chance of either default or a fracturing of the single currency zone. Ten year Italian government bonds now yield 1.25% more than their German counterparts. The 10 year CDS spread between the two is 75 at least some of this spread widening appears to be pricing in the chance of the Eurozone not reaching its 20th birthday.
And while that would be a nasty trick for a certain Monsieur Trichet (or his successor), is it churlish to speculate on what a treat that would be for macro punters?

Thursday, October 30, 2008

Bears Have Rallies, Too

Bear markets are famously difficult to trade. Why is that? Perhaps it's because most investors are natural buyers and owners of risk assets, so the secular market direction leaves them out of pocket and damaged psychologically. Thus when the faintest whiff of a trend reversal, however temporary, materializes, they are naturally inclined to jump all over it, generating out-sized short-term returns. This is why Macro Man asserted yesterday that 10% daily rallies don't occur in bull markets.

Of course, when reality sets in once again and the underlying bear emerges from his hibernation, risk asset longs are left more out of pocket and more discouraged than before. Lather, rinse, repeat.

In any event, it seems that the dawning of the latest bear market rally is here. Perhaps it's driven by month-end rebalancing considerations. Perhaps it's driven by the forthcoming election of St. Barack. Or perhaps it's just driven by bear fatigue. Yesterday's late session swoon by US equities notwithstanding, it does seem like it's here. (Of course, there's also been news...but since when did that matter?)

Of the three explanations above, Macro Man favours the first and the third. The first speaks for itself and should pass within the next few trading days. The third represents a waning downside momentum as sellers of risk assets received a deteriorating marginal bang for their buck. Positive divergence (rising momentum with lower prices) has been observed in both the SPX....
...and the AUD, among a host of other currencies. With market liquidity getting worse by the day (who knew that markets would join Wal-Mart in starting the Christmas season before Halloween?), it doesn't take a whole lot to push things a long way. Currency markets are now in full-fledged "buy back your risk currency shorts" mode; USD/CAD has fallen as far as 8.5% from Tuesday's high!
So what do you do from here? Stick to your risk-asset shorts and wear the short-term pain, which might be very substantial indeed? Or go long risk for a rental and hope you can sell out to someone else before the music stops? For Macro Man, the answer is "neither." Bear market rallies are like bad oysters; if you partake, you've gotta be pretty lucky not to end up being sick. He'll pass, thanks, trim his bear market risk and concentrate on stuff with a more powerful, long-term macro theme (oh, and where he has his risk in limited-loss strategies.)

Macro Man decided to pursue yesterday's line of historical enquiry a bit further to try and get a sense of how the current market stacks up to history. The chart below shows every daily return in the Dow since 1995. Two things quickly emerge from the chart: 1) how quiet the market was from 2003-2006, and 2) the degree to which recent volatility has significantly exceeded that observed by anyone who's younger than, say, 45.
So how long do exaggerated periods of volatility last? The chart below shows daily Dow returns going all the way back to 1922, along with two standard deviation bands around zero. (Six months of rolling data were used to calculate the bands.) Here you can see how the recent upside volatility is unprecedented since the Depression. What's interesting to observe is that, '87 crash excepted, volatility (as expressed by the width of the SD cone) does seem to trend over multi-year periods. It's hard to escape the conclusion that even when things "normalize", markets will carry a significantly higher risk premium than they have over the past few years.
Finally, Macro Man thought it would be interesting to put recent activity in currency markets into perspective. The dollar's uber-rally (against everything but the yen) has certainly seemed impressive, but doesn't look particularly extraordinary in the context of the entire post-Bretton Woods era. To be sure, it has risen dramatically from the bum-clenchingly low volatility of 2006, but doesn't particularly stand out when compared to the heady days of the 1980's, for example.
For choice, Macro Man expects the dollar's strength to eventually re-emerge; it will take more than an equity bounce and a few swap lines to quench the market's thirst for dollars as the shorts of the past few years are bought back. But as with equities, it's likely to be a bumpier ride than many folk are used to.

Wednesday, October 29, 2008

Strange bedfellows

Strange times make for strange bedfellows, a fact which has been amply demonstrated by the financial crisis of the past fifteen months. Didja ever think you'd live to see the broad-based nationalization of the banking system in many Western, notionally-capitalist economies-including those governed by ostensible free marketeers?

The trend has continued apace this week. Consider the juxtaposition of the following pair of headlines, each of which is factually true:

1) "US Consumer confidence registers lowest-ever reading" and "Stocks rally more than 10%", each of which occurred yesterday;

2) "Over-leveraged emerging economies face crisis" and "IMF to lend up to five times its asset base to ease crisis". Uhhhhhh......OK. So the answer to a problem sourced in leverage is for a multilateral institution with a proud history of failure to lever itself up? Good luck with that. (As an aside, apparently the IMF has sought to re-mortgage its Washington, DC headquarters to increase its capital base. Unfortunately, they don't qualify for a jumbo mortgage and so couldn't obtain a loan.)

So what are we to make of yesterday's newsflow? The consumer confidence data was execrable no matter which way you slice it, notching up the worst reading in the nearly 40-year history of the Conference Board survey. Ominously, Macro Man's pet indicator the "jobs hard to get" component surged above the high of the early-Noughties recession, heralding more job losses to come.
And yet markets rallied.....err...because they decided to. Now, it is true that there is a negative correlation between the consumer survey and forward returns on equities, suggesting that it is indeed always darkest before the dawn. Yet the absolute value of the correlation is quite small, certainly not enough to justify a ten percent rally immediately after the print.

However, there is a lot of talk about month-end pension fund rebalancing flows out of bonds and into equities. Given the scale of the monthly moves, there is probably something to that talk. Certainly both legs worked yesterday (though not, it must be said, on Monday.) Macro Man had a plan to scale into a small equity long to take advantage of this expected flow; while he managed to execute a truly miniscule clip on Monday and Tuesday, he lad little interest in chasing yesterday's uber-rally.

And let's not forget; 10% rallies are not normal, and they don't occur in bull markets. Yesterday's price action managed to crack the list of all time best days on the Dow, which Macro Man published earlier in the month. The updated chart (which calculates lognormal rather than arithmetic daily returns) is below; this month now features two of the best and worst 15 Dow days of the past 80 years.
Not even the crash and Great Depression saw that kind of concentrated price action. Then again, we're living in a world where a German automaker briefly becomes the world's biggest company even as the global economy heads into a bone-crushing recession. Strange bedfellows, indeed.

Tuesday, October 28, 2008


How bad is it out there? Global finance resembles nothing so much as an enormous, multi-car pile-up, the kind that blocks traffic for many miles behind and even slows the flow of traffic coming the opposite way as drivers slow to gawk and rubberneck.

Credit guys, who have experienced the goriest scenes for most of the past fifteen months, can now stare at the commodity guys with a weary "been there, done that" mien. The commodity guys, who've lost more money more quickly than they ever thought possible, are now looking at the EM guys with and thinking "betcha didn't think it could happen to you!" And no doubt the EM guys are watching the equity guys scuffle. 30 S&P points in five minutes into yesterday's close? Child's play when you have endured the red-hot crucible of Russian equities or the Brazilian DI curve.

Here in Europe, the market development that's perhaps been the object of the most rubbernecking has been the ongoing VW/Porsche fiasco, as highlighted in a few previous posts, including yesterday's. Monday's price action in Vee-Dub was truly awe-inspiring, however, as the price of the common stock rallied nearly 300% into yesterday's close before falling back slightly. By itself, the stock added nearly 3% to the returns of the Eurostoxx-50, according to one to Macro Man's sources. Early quotes this morning have it doubling again.
And oh, by the way. VW preferred, which most arbs are long against a short common stock position, fell 20% yesterday. Talk about burning the candle at both ends!

Now, Macro Man will readily admit that rubbernecking is not a particularly noble pursuit. Of course, that hasn't stopped huge swathes of the journalistic community, and indeed the population at large, from rubbernecking as investment banks and hedge funds fall to earth with a sickening thud.

And even amongst those practitioners with some skin remaining in the game, rubbernecking and gossip have become a way of life; as the old saying goes, misery loves company.

From Macro Man's perspective, keeping abreast of the pain out there- both generally and with respect to specific trades like Vee-Dub- is a worthwhile exercise. Not out of any particular feelings of schadenfreude (certain stock markets in formerly communist states excepted), but because pain brings irrationality and forced, "shoulder-tap" selling.

Your author will welcome the time when he can revert to being a true "macro" man; highway driving through the scene of a gruesome accident is no fun at all. The most important consideration is to not lose one's concentration...and to avoid being the object of someone else's rubbernecking!

Monday, October 27, 2008

Back in Black

Macro Man has returned to the coal-face of global finance this morning after two days of following the mayhem from afar. It's really getting to the point where he will need to start a premium subscription service that will notify customers in advance of when he will be away from the market. Going long vol during his absences from the market has been close to an infinite Sharpe ratio strategy over the past few years, so those institutions that are left standing after this year should be more than happy to pony up.

In any event, Macro Man is engaged with the market but off the desk for the entirety of this week. This is because a) it is half-term school holidays and is a chance to spend some time with the kids, and b) the British rail authorities have finally decided to upgrade their infrastructure from 19th to early 20th century standards. As such, the engineering works will render it close to impossible for Macro Man to get to and from the office in anything approaching an acceptable time frame this week, so he's had to opt for telecommuting from his home office.

Regardless, markets appear to be wondering if today will be the newest entry in the pantheon of "black" market days. Market liquidity is execrable, to say the least, and fear is running high- though SPX futures and European markets are "only" down about 5% or so. That, however, may be down to the latest horrible squeeze in Volkswagen, where Porsche is turning the screws on a number of hedge fund shorts in VW stock (many of whom, ironically, probably drive Porsches....for now.)

Still, an out-of-the blue G7 statement on currencies has caught the eye, suggesting that the authorities are getting worried. The RBA was reported buying AUD/USD both Friday and today, and you know the Japanese aren't afraid of a little FX intervention every now and again.

USD/JPY realized vol has risen dramatically, exceeding that observed during the descent to all-time lows in the spring of 1995. However, it's still got a ways to go to breach the highs seen in the wake of the Russia/LTCM crisis in 1998. It would be a truly remarkable feat to do so, given that the likes of Soros and Tiger aren't sitting on tens of billions of long USD/JPY positions like they were a decade ago.
So why bother? Just because authorities are concerned about something doesn't mean that they can do a whole lot about it- just ask Ben and Hank! Still, Macro Man supposes they have to at least make a gesture- the downdraft has been impressive- see if you can find this month on the chart below.
Elsewhere, oil seems to have confirmed the thesis that its parabolic rise was a bubble, given that its descent has been equally parabolic. While peak oil may or may not be a reality, oil's trajectory this year is an object lesson that the fundamentals don't justify any price.
So Macro Man has found himself in a spot where he has emerged from last week's conference more bearish than ever but with relatively little risk on. Sure he's got a few bets on that (knock on wood) are working OK, but he has slashed his nominal position size to the bone. This opens up a philosophical question of how to trade these markets. Massive volatility brings massive opportunity...but also carries substantial risk.

So do you maintain a relatively normal position size, live with the volatility, and try and hit a home run? Clearly the magnitude of the moves we have observed offer the opportunity to potentially make one's year in a single month. Yet given what we've already seen and where implied vols are, adding fresh risk at current levels doesn't appear to offer tremendous risk/reward. And so any position that could make your year, even a long option position, could cost you a lot of dough if it doesn't work.

Or should one slash nominal risk to reflect the inexorable rise in realized vol and play with tiny positions, trying to maintain a relatively steady portfolio volatility and locking in a "very good" month while falling short of "epic"?

Macro Man has generally opted for the latter and is, broadly speaking, satisfied with the results. He has kept some skin in the game, allowing him to participate, but has mitigated portfolio risk to the extent that he hasn't had too much trouble sleeping-and in this market, a well-rested, alert mind is imperative. Yet after chatting last week with a couple of very successful managers, he's wondering if he's erred too far on the side of caution and not made enough hay while the sun shines (at least in terms of calling the market correctly.)

There isn't necessarily a right answer to this question- ultimately, we all need to do what works for us. At the end of the day, the name of the game is to remain in the black....regardless of what colour the day may be.

Wednesday, October 22, 2008


Macro Man's been birdwatching, and this evening he's seen another pink flamingo through his binoculars: emerging market fixed income. Ten year swap yields in Mexico have exploded higher, but actually look relatively well-behaved in comparison to other EM yield curves. Today's price action has the whiff of panic, so who knows how far how fast this stuff will move.
Macro Man will be at a conference on Thursday and Friday so may or may not post. He will, however, follow the comments; readers should feel free to use the comments suggestion as a forum for non-spam, non-troll dialogue.

Another One Bites the Dust

Macro Man sure is glad that he finally got on the distribution list for "the memo." Yesterday's memo about the breakdown of correlations and the underperformance of carry and EM proved to be timely; the Illuminati have done their job well over the past twenty-four hours.

Currency de-leveraging has had a particularly strong impact on EUR/USD; given that the euro was directly or indirectly the beneficiary of speculative flows funded by dollar borrowing for much of the past six years, the unwinding of these trades has been nothing short of spectacular. Macro Man's post-holiday expectation that the USD would range-trade has proven to be spectacularly incorrect; fortunately he did not follow up with any sort of nonsensical vol-selling strategy. Was it really two years ago that he was moaning about the lack of volatility? EUR/USD has fallen 20% in 3 months!
From a long-term perspective, the rally in the dollar has actually been pretty modest; the chart below shows USD/DEM monthly candlesticks since 1980. EUR/USD could sell off quite a bit further and the dollar bear market remain intact. Yet the buck seems to move in seven year cycles, and the current bear seems to be at or past its sell-by date. With the situation in Europe no better than the US-and one could argue the future newsflow will be worse- might the current unwind represent the genesis of some sort of deflation-driven dollar bull? (Think JPY in the first half of the 90's.)
In any event, it looks like FX carry is the latest strategy to blow up, following a distinguished line that includes high-yielding structured credit turds, equity long/short, fixed income RV, and energy/commodities. The chart below show the performance of a simple G10 carry basket as of last night- it should lurch down again on today's close.
The real pain, however, is being felt in EM. The Turkish lira has taken a beating, and anecdotal evidence suggests that local corporates are short USD. Latan America looks ugly, as does Eastern Europe. And Asian sovereign CDS blew up last night, including China (owner of the odd $2 trillion or so in cash), which rose 70 bps.

And of course, it wouldn't be any sort of crisis if Argentina didn't default, a development that now looks imminent. So after FX carry and the EM miracle have been taken behind the woodshed for a beating, Macro Man is left to wonder: where are the remaining sacred cows to be taken to the abattoir, the pink flamingos that have yet to be hunted? Because Macro Man has little doubt that another strategy will, like those before it, bite the dust.

Tuesday, October 21, 2008

A Memo From the Illuminati

TO: Goldman Sachs, Bill Gross, Warren Buffett, et al.

FROM: The Order of Rosicrucians, Pentavirate, and Illuminati

RE: Correlation Breakdown


This memo is to notify you with immediate effect that the 100% correlation across asset markets is now over. We have decided that despite the improvement in funding markets, the recovery in equities, and the decline in implied volatility that pro-risk market prices such as yen crosses should continue to be sold aggressively today. Moreover, we have decided that emerging markets will remain under sever pressure. We have therefore directed agents to weaken emerging currencies across the board, a policy which we will continue until further notice.
Finally, we have also determined with immediate effect that daily shifts at various points of the US yield curve will be determined by a random number generator. Every morning you will now receive a communication disclosing the output of the random generator.

We trust you are all keeping well and looking forward to seeing you at the annual end-of-year conference, which this year will be held at the headquarters of the Globex Corporation. This year's agenda is particularly important, as we will map out our plans for the new US Administration.


The Order of the Rosicrucians, Pentavirate, and Illuminati

Monday, October 20, 2008

A Damascene Moment

Financial markets appear to have had a Damascene moment on Friday evening, receiving an epiphany that has carried over into today's trading. Simply put, markets seem to have decided at some point on Friday afternoon that the dizzying array of bailouts, programs, packages and nationalizations that have been directed at the money markets is finally enough to fix the problem.

Swap spreads started to tighten aggressively on Friday p.m. and have continued to do so today. US 2 year spreads, the locus of recent madness in the funding markets, have tightened 40 bps in the last week. They remain at historically sky-high levels, so there remains ample scope for further tightening of the spread. At the same time, LIBORs are being called quite a bit lower; again, while they remain at starkly exaggerated levels relative to policy rates, it now appears as if the worst has passed and that they will continue to be marked lower moving forwards.
Tomorrow's Lehman CDS settlement remains one prominent possible thorn in the side of policy normalization. So risky markets may struggle to tack on much more upside until tomorrow's settlement is successfully resolved.

Assuming that does come to pass, Macro Man would not be surprised to see a decent rally in risky stuff. The combination of an easing of the worst of the crisis and the impending US election could give markets all the excuse they need to rally.

And there is, of course, nothing wrong whatsoever with making money on that rally. Yet once the passing of the crisis has been fully digested, where will we be left? Still staring into the jaws of a bone-crushing recession. And while US equities are certainly less expensive than they were a few months ago, Macro Man's analysis suggests that they are far from cheap.

His macro equity model, which attempts to forecast 12-month forward returns for the SPX, registered its two lowest readings in history at the end of August and September- one reason why he was happy to run short equity deltas for most of the last six-seven weeks. He has re-run the model for October, using his best guess for those inputs which have yet to officially print this month.

As you can see, while the forecast is less awful, it still ain't good. While Macro Man can see a scenario in the next six months where the outlook turns quite positive, by his reckoning we ain't there yet. Thus while Friday's Damascene moment may signal the beginning of the end of the funding crisis, there appears to be a long, hard slog ahead to convert equities into a bull market.

Friday, October 17, 2008


Macro Man isn't normally one to say "TGIF" on a Friday; while he certainly loves his weekends, he also does legitimately enjoy the weekly battle to figure out (and extract money from) global financial markets.

But this morning, he can't help but think "TGIF". Maybe it is not being able to get back to sleep this morning after waking at 4.30. Maybe it's the surreal sight of seeing that Macro Boy Jr. (aged 5) pulled up and attempted to log onto Macro Man's home Bloomberg terminal while he was in the shower. Or maybe it's just the mental fatigue of seeing the economy slide into recession and market prices exhibit hyper-active Brownian motion.

And let's make no b0nes about it- the US (and almost certainly the world) economies are sliding into recession, if they ain't there already. Yesterday's monthly drop in industrial production (2.4%) was the lowest since Mrs. Macro was born (i.e. 1974.) Ex-post, of course, the figure was spun off as being negatively impacted by the hurricanes and Boeing strike last month.

This, of course, begs two questions:

1) Haven't there been other hurricanes and strikes in the last 34 years?
2) It's not exactly new news that there were hurricanes and strikes last month, so why weren't they in the economists' forecasts (which expected a 0.8% monthly drop)?
Meanwhile, the Philly Fed index notched its lowest reading since the early 90's and the biggest monthly drop in history. Yep, the good news keeps on rolling!
Of course, none of this necessarily means that stocks will go down. Hell, they didn't yesterday, though some of the late-session rally may be related to today's option expiration.

And St. Warren of Omaha has issued what some may take as a clarion call to buy US equities in today's NY Times; it makes an interesting contrast to Cramer's recent "sell everything and buy tinned beans and a shotgun" message.

Still, any Buffett-induced rally may well represent yet another selling opportunity. Buffett himself claims no particular ability to time markets on anything but a very long-term basis. And while he may be correct that stocks start to pick up before the economy, Macro Man has difficulty in believing that stocks will meaningfully bottom until earnings do; certainly that's not been the case yet. Worryingly for equities, as of the end of last month analysts still expected S&P earnings for 2009 of $83 per share (versus $50/share trailing.)
And of course, a country like Japan is 18 years past its equity market peak, which probably falls into even Mr. Buffet's categorization of "long term." Yet the Nikkei is still some 80% or so off its peak- hardly a ringing endorsement of blind long-term investing.

Nevertheless, Macro Man will concede that Mr. Buffett is probably right in the very short term and the very long term. For his intermediate term "sweet spot"m however, Macro Man cannot help but think that more downside awaits.

Thursday, October 16, 2008

The Good, the Bad, and the Ugly

The Good: Good news has been in short supply, at least judging by financial market price action. But under the surface, the authorities are at least taking steps in the right direction. Jean-Claude Trichet has exchanged his hair shirt for a leisure suit; yesterday's announcement that the ECB would relax its collateral guidelines represented an abrupt about-face from the recent tightening of such requirements that encouraged Macro Man to re-short European equities last month. The decision to provide dollar liquidity via FX forwards is significant, as for the first time it allows European banks to borrow dollars without stumping up capital.

Meanwhile, the decision of Dr. Evil and Mini-me (pictured, left) to buy bank shares, rather than turds, with the TARP money should deliver the taxpayer and the authorities much more bang for the buck.

So in terms of markets, the one bid of good news is that money market rates have started to edge lower; both ICAP and LIBOR dollar funding rates (3 month LIBOR is pictured below) have turned down, though they remain at elevated levels.

The Bad: So the funding markets are saying "hey, we think you may have cracked it" and started to normalize a tad. The bond market, however, has chimed in with a rather awkward question: " exactly do you plan to pay for this?"

So we're left with a situation where risk assets and economic data have been horrible....and bonds have sold off on concerns over the supply. Yield curves have steepened dramatically, finally introducing the sort of term premium that Macro Man was musing about a few weeks ago.
And as noted above, beyond all the financial crisis hurly-burly, there is still the small matter of a recession to navigate. As the impact of the US stimulus package wears off, the tone of US data has turned truly execrable. Yesterday's retail sales figures were just the latest in a skein of wretched US economic figures; somewhat frighteningly, the rest of the world is probably lagging the US by a couple of quarters.
The Ugly: There's too many items that fall under this category to provide an exhaustive list, so let's just look at a few:

* Citadel reports its worst monthly return ever. Over the past few years Citadel has been morphing from a pure hedge fund into more of a quasi-bank. The appear to have completed the transformation last month and generated bank-like returns.

Word on the strasse is that yesterday's late session meltdown in the Spoos was Citadel selling; Macro man has no idea if that is true or not, but the price action was certainly ugly.
So much so that we have a new entrant onto the list of worst Dow days ever (logarithmic return version.) U-G-L-Y.
Meanwhile, the drumbeat of political backlash against market risk takers grows ever louder. Italian finance minister Tremonti has called for the "destruction" of "hellish" hedge funds and promises to push that agenda when Italy begins presiding over the G8 in January. Perhaps what really concerns him is the hellish performance of the virtually eponymous hedge fund indices in September?

In any event, market liquidity and risk appetite is best described as "anorexic." USD/ZAR is just another example of a rupture in the liquidity continuum; last night it gapped in New York from 9.80 to 10.50 with a grand total of 5 trades going through. Since this chart snapshot was taken earlier this morning, USD/ZAR has traded as low 9.82, and is now back at 10.10. It's safe to say that we can file this candlestick pattern in the "scowa" (Satan's Can of Whup-Ass) category.

The BOE announces changes to its money market regime this morning, and rumours are swirling of another coordinated rate cut later today. Macro Man really has no idea whether that will happen or not, but is pretty sure that there is more bad and ugly news in the pipeline.

Wednesday, October 15, 2008

It ain't over til it's over

So, did you enjoy yesterday's calm, rational, and frankly boring markets? Spoos only managed an 8% daily range.....this stuff is child's play!

So the zillion dollar question is whether we are now on the long road to recovery. While it's true that short term sentiment always swings to extremes, it's also the case that we have the small matter of a global recession to navigate, with the concomitant hit to growth and earnings.

To get a perspective on recent history, Macro Man has recently been re-reading Barton Biggs' Hedgehogging. While the anecdotes and thoughts on portfolio construction are consistent with what you'll get from most books of this type, Macro Man is reading the book because it contains a snapshot of Biggs' and others' views on equities in late 2004 and 2005.

What is remarkable is the number of managers who are quoted as looking for an eventual relapse in US equities back towards 2002 lows. Obviously, such an out-turn is coming to pass before our very eyes.

Biggs also included a chart on previous financial market bubbles and how the price action played out in the year before and after the peak. Macro Man has updated the chart, using monthly data, and added a new bubble (oil) to the mix. The message, based on previous bubbles, is not to expect a massive rally over the next year.
On a more real-time basis, the fallout from the current crisis brings fresh pain to light seemingly every day. In Ireland, the government has hiked taxes across the board and even taken a pay cut (thereby downgrading an Irish ministerial post from a boondoggle to a sinecure.) Charlie Haughey must be rolling over in his grave!

We're also seeing the falloout from the crisis broaden in terms of markets. Most countries/markets/strategies that have depended on credit to fund growth in recent years have been decimated. An obvious exception has been Eastern Europe, which has weakened in recent weeks, but only back towards end-of-2007 levels.

Of the CEE-4, Hungary is clearly the most vulnerable. Its housing market has famously been financed via Swiss franc mortgages; the door to that particular liquidity tap is in the process of being slammed shut. Rumours have started to swirl that Hungary will approach that venerable dinosaur, the IMF, for assistance, as it lacks the domestic fiscal ability to fund a bail-out.
That today's cheap dollar funding in Europe (the 1 week "unlimited dollar" tender was offered at 2.277%) hasn't prevented European equities is another ominous sign that the correction may be over almost as soon as it's started.

That's the thing about a bear market: it ain't over til it's over.

Tuesday, October 14, 2008

The Company You Keep

Holmes is back in Europe this morning, enjoying a well-earned break. It seems as if Hank and his European counterparts were busy as Holmes and Watson traveled back to London, as the past 48 hours have seen a swathe of capital injections and deposit/debt guarantees on both sides of the pond. Macro Man will leave it to others to sift through the proposals; suffice to say that injecting equity capital directly into banks is a far more efficient solution to simply buying turds off of them.

The news has obviously had a beneficent impact on equity markets, and most major indices have put in a year's worth of rally in the span of two trading days. Such conditions are not, ahem, normal, and Macro Man is frankly pretty happy to have risk dialed right down at the moment.

It's said that you can tell a lot about someone by the company he keeps, and the same is true of financial markets. The extreme price moves of the last few days are fairly historic in nature; small wonder, given that a day's price action is what an index could reasonably be expected to gain or lose in a year. By way of perspective, yesterday's rally in the Dow would be in the top half of yearly performances since 1922, coming in 42nd place.

Drilling down into daily data, the recent extreme swings in US equities- both down and up days- are close to unique over the past 80-90 years.

There are essentially two kinds of markets that resemble the last month or two: 1987, and the stock markets of the Great Depression.

Judge for yourself which, if either, is the appropriate historical analogue. Certainly some aspects of the newsflow suggest the latter environment is closer to today. If that's the case, then we should probably expect the sky-high vol environment to continue.

More immediately, where to from here? Macro Man is left scratching his head. The Eurostoxx, for example, as already re-traced nearly 50% of its collapse since the beginning of September. 3 month Euribor, which fixed lower by 8 bps today, has retraced 38% of its move from the same period. Given that the latter has, ultimately, been the driver of the former, it's probably safe to say that equities are now pricing in a lot of the good news. There's still the small matter of a global recession to navigate in the quarters head....
Regardless of where equities go from here, it's safe to say that the stress of the past few weeks have created some strange bedfellows. The chart below shows the S&P 500 overlaid with the gold:oil ratio, which in normal may not mean very much but in times of stress represents some measure of the divide between fear and greed. As you can see, there has been a virtual 1:1 correlation between the two in recent weeks.

Frankly, Macro Man isn't sure what it means when equities and gold/oil keep such close company, other than "financial markets have been buggered". Anyone with a deeper insight is welcome to share we begin the stretch run to the end of the year, Macro Man's mind is officially open to new trading ideas...

Monday, October 13, 2008

The Mystery of the Stolen Plans

“Watson,” said Mr. Sherlock Holmes one day after the resolution of a particularly mundane case involving a missing wedding ring and a pet spaniel, “we need a change of scenery.” It was true that the London underworld had been singularly uninspired of late, failing to present my friend with an opportunity to exercise the unique talents which have become so well-known to the public in recent years. In such times Holmes was apt to fall into a torpor, and I had recently seen him once again gazing longingly at the lacquered box containing the syringe which had formerly been his companion during such periods of lassitude.

“Tell me,” he continued, “do you recall the case in which we first met?”

“Why of course, it was the Study in Scarlet.”

“And that business at Birlstone House, do you remember that?”

“Holmes, you know very well that that was the affair of Mr. Douglas, who as Birdie Edwards had penetrated the Valley of Fear.”

And the unfortunate case of young Openshaw?”

This was one of the rare cases that my friend had failed to conclude satisfactorily, such was the sinister nature of the criminals involved. “That was the mystery of the Five Orange Pips.”

“Now let’s see how this waning of the British criminal has dulled your senses, Watson. What do those cases have in common?”

“Well, let me see, Holmes.” I thought for a few moments. “Why...yes! In each of those cases, the criminal agent, or at least the force behind him, came from America.”

“Capital, Watson! I congratulate you, my dear man, for retaining your powers of observation and deduction. Yes, we have crossed swords with the American criminal on more than one occasion and found him to be a worthy foe. As his British counterpart has lost his imagination, I suggest to you, my friend, that if the interesting cases won’t come to us, we must go to the interesting cases!”

And so it came to pass that Holmes and I embarked on a grand tour of America. My friend’s intuition had proven to be correct, and we became involved in a number of high-profile cases which attracted public notice. Holmes successfully solved the case of the kidnapped Virginia twins, Fannie Mae and Freddie Mac. In Kentucky he managed to locate a famous sporting trophy which had been missing for nine years. And in New York he was involved in the strange affair of the vanishing banks, the details of which I swore solemn oaths, at Holmes’ insistence, to leave out of my memoirs until sufficient time had passed.

After these adventures, Holmes and I eventually found ourselves at the Mayflower Hotel in Washington, D.C. Holmes was never much of a tourist; while his criminal investigations had taken him far and wide in Europe, so single-minded was my friend in pursuing the solution to a crime and the apprehension of its perpetrator that he never paused to take in the sights, wherever his travels took him. Thus it was with the greatest reluctance that he allowed me to drag him to see the various monuments and memorials in America’s capital.

“When one has wrestled on the Acropolis with Paleologos, the Greek forger,” he sniffed, “why should he then wish to be jostled by sweaty tourists from Omaha merely to catch a glimpse of structures more than two thousand years younger than the Parthenon?”

So it was with great relief that Holmes received the concierge of the Mayflower as we took tea in the salon of the hotel.

“Mr. Holmes,” the fellow said after stealthily approaching us, “may I have a private word? It is of the gravest urgency.” He threw me a furtive glance, which I took as an invitation to depart, and so rose from my chair.

“Stay where you are, Watson!” exclaimed Holmes. I froze. “My dear sir, Watson is my friend and confidant. Anything you wish to say to me, you may also say to him!”

The concierge looked at me warily, then nodded and turned his gaze back to Holmes. “Very well, sir. It’s just that I have been instructed to speak to you in the strictest confidence by the highest of authorities. This authority is waiting for you in one of our suites, and requests an urgent meeting on a matter of supreme importance.”

“Ho, ho, Watson, I told you that a change of scenery would do us good! Very well, lead the way, my good man. I can only hope that your mysterious authority provides us with as much stimulation as the illustrious clients that we’ve had back in England.”

We rose and the concierge signed our bill. He led us out of the salon, though the main lobby, and down a discreet corridor, where we entered a small lift. The fellow pressed a large button embossed with the letter P, and the lift bore us upwards in silence for the better part of a minute. When at last the doors opened, they revealed a palatial suite of rooms that looked fit for a Roman emperor. We walked past a tinkling fountain in the entryway into a huge, marble-floored living area filled with overstuffed chairs and comfortable-looking couches. On two of the latter sat individuals whose faces we had seen on the morning news.

“May I present Mr. Sherlock Holmes and Dr. John Watson. Mr. Holmes, Dr. Watson, you may call these gentlemen G and H.”

“Thanks, Wilson, that’ll be all,” said the first of the men with a pronounced drawl. “We’ll ring for you when we’re done.” The concierge bowed and walked back towards the lift. We heard its doors open and shut as he got in and descended.

“Well,” he said once the concierge had departed, “Mr. Holmes, Dr. Watson, on behalf of the American people I thank you for seeing us. We sure are in a fix and could use some help from our friends in Britain.”

“Why don’t you tell me, sir, about your problem and how I may be of service.”

“Okay, then. Well, you may have heard about the financial crisis we have in this country and all over the world. It’s a bad one, I can tell you. We’ve got banks and insurers dropping like flies and the stock market’s tanked. We owe it to the hardworking people of America to find a solution to this problem, regardless of how difficult the legislative process may be. Decisive action is required, a plan to get our economy back on the path of growth and job creation.”

“Pardon me, sir,” said Holmes, “but I am hardly a banking expert. While I have dabbled in the world finance, such as in that curious case of the vanishing bid” (here he glanced at me),” I’m not sure how I can help you.”

“Oh, but you can!”replied G. “You see, we’ve actually come up with a plan for how to resolve this crisis quickly and safely, and at a relatively minimal ultimate cost to the taxpayer. The brightest financial minds in America, including H here”- he gestured at his companion-“have worked together to develop these plans, which we want to implement with all due speed.”

“My dear fellow, what do you need me for?”

“Well,” said G, hanging his head, “last night disaster struck. H here had ‘em when he left his office, but by the time he got to work today, they were gone! Someone has stolen ‘em! You’ve got to understand, Mr. Holmes, these plans are vital to saving our financial system and our economy. You need to help us get these plans back, Mr. Holmes. If we don’t get ‘em back soon, this sucker could go down!”

“A-ha,” said Holmes. “Now we’re getting somewhere! H, why don’t you tell me what happened. Leave nothing out, please, sir.”

H was a tall chap who was almost completely bald and spoke in the manner of someone who was used to having his commands obeyed. “Well, Mr. Holmes, I left my office on Pennsylvania Avenue at 5.30 last night with the rescue plans in my black briefcase, which I have here.” He held up a small black leather valise with the initials “HMP” monogrammed in gold near the clasp. “I went straight to my friend B’s office on Constitution Avenue, where we spoke for about an hour and a half about the crisis. B invited me to dinner, but I had an errand to run so declined. After leaving his office, I went to the Chinese laundry at 356 Wisconsin Avenue to pick up a couple of Mr. Lloyd Blankfein’s suits, then headed home. I had dinner with my wife, spoke to G on the phone, and went to bed.”

“Did you have the briefcase with you the entire time?” inquired Holmes.

“Well, not quite. I brought it with me when I went to B’s office, but left it with him when I had to use the john. It was alone with him in his office for maybe three minutes. Then, when I went to the laundry to pick up Mr. Blankfein’s suits, I left the case in the car for maybe five minutes. I had to wait in line. Other than that, it was with me the whole time.”

“And when you got home?”

“Surely you don’t suspect my wife, Mr. Holmes!” laughed H.

“I rule nothing out, and nothing in,” replied Holmes coolly. “My job is to collect the facts and sort the evidence. The facts tell me which possibilities to eliminate. Whatever is left, no matter how fantastic, must be the solution to the crime. Now, you were saying, when you got home?”

“Well, I left the case on the kitchen table, just like I always do. It was there when I had my breakfast this morning. I took it into work as usual, but when I opened it in the office, the plans were gone!”

“It must have been someone who hates freedom!” interjected G.

“Now, now” said Holmes, “let’s not be hasty. Watson, I think we’d better do some digging. Gentlemen, I thank you for bringing this case to my attention. I shall direct all of my powers towards its solution. Why don’t we meet tomorrow morning at, say, 10 a.m.?”

“Alright then!” said G, slapping his knee. “We’re damned glad to have you on board, Mr. Holmes. I sure hope you can find these plans for us quick.”

“I shall do my very best. With Watson here to help, I am sure we can bring the case to a speedy resolution.”

G rang for the concierge, who took us back down the lift and through the discreet corridor back into the lobby.

“Quick, Watson!” cried Holmes. “We have no time to lose. We must retrace H’s steps while the trail is still warm!”

So we jumped into a taxi and drove to the Marriner S. Eccles building on Constitution Avenue. The receptionist tried to shoo us away, but Holmes employed that special charm that he can, on occasion, exercise on members of the fair sex, and soon we were being ushered into B’s luxurious office.

B turned out to be a small, balding man with a graying beard. “What can I do for you gentlemen?” he asked nervously.

“Do you know why we’re here?”

“Well, well...of course I know your reputation, Mr. Holmes. B-b-but I have no idea what you could want with me.”

“Did H come and visit you last night?”

“Wh-wh-why yes, yes he did. We had important matters to discuss about enhancing liquidity and saving the banks.”

“What do you know about the plan to rescue the financial system?”

“Ah, w-w-w-well, H mentioned that he was working on something, and asked me if I would go along with whatever he came up with. “

“And how did you respond?”

“Of course, I said that I and my organization would help in any way that we could.”

“Did H have his briefcase with him?”

“H-h-h-his b-b-briefcase? Why, yes, I think he did.”

“And was he with you and it the whole time he was here?”

“He went to the toilet once for a few minutes.”

“He left his briefcase here?”


“Did you open it or fiddle with it in any way?”

“Wh-wh-what are you trying to insinuate, sir? No, I did not touch the briefcase at all! If you haven’t any more questions, I’ll bid you a good day, because I’m a very b-b-busy man!”

B’s secretary ushered us out, though Holmes paused for a “pit stop”, as he colloquially called it, on our way out. “Well Watson,” he asked upon leaving the building, “what did you make of our friend Mr. B?”

“He had a guilty air, Holmes. He spoke like he was nervous about something. What could make him more nervous than stealing the plans and then being immediately confronted about it, by Mr. Sherlock Holmes, no less?”

“Ahh, Watson, you flatter me,” said Holmes, smiling.

“So you agree? B is guilty?”

“Perhaps, perhaps, my dear Watson. All in good time, however. We still have the laundry and H’s wife to interrogate.

We visited Renminbi’s Laundry on Wisconsin Avenue, but achieved little of value. The staff made us wait an extraordinarily long time and seemed disinterested in our problem. When they finally deigned to speak with us, they were slow to respond to our queries.

“They were hiding something, I’m sure of it, Holmes!” I fumed as we left the laundry. “Why else would they be so uncooperative?”

“Perhaps they just don’t care about any business but their own,” said Holmes. “I doubt we’d get anything more out of them if we came back.”

We then journeyed to H’s own home, where we encountered his wife. The woman looked somewhat surprised to see us, even when my friend introduced himself. “No, my husband’s briefcase wasn’t touched after he got home,” she said. “He set it on the kitchen table, as he always does, and didn’t return to the kitchen until morning. Neither did I.” There were no servants in the home, though there was a state-of-the art alarm system which would warn of any intruder into the house.

“So what do you make of it all, Watson?” inquired Holmes as we dined that evening at the Mayflower.

“I’m deuced if I know, Holmes. B seemed nervous to me, and he was left alone with the case. He could easily have opened it and taken the plans while H was out of the room. And yet those people in the laundry were suspicious too. Why were they so unhelpful? H told us that they made him wait for his laundry pickup...perhaps they did so intentionally so they could steal the plans from his car while he was in the laundry? And if the briefcase really was left alone for a number of hours in H’s house....why, who’s to say that some clever thief could not have circumvented the alarm system, broken into H’s house, and removed the plans from his briefcase?”

“Good questions, all. Perhaps a pipe or two will bring new considerations to light.“ Holmes filled his pipe with fresh tobacco from his pouch and was in the process of lighting it when two tutting waiters descended on our table and demanded that he extinguish the light. I started to object, but the waiters pointed to a large sign over the door bearing the slogan “No Smoking”.

“Ah, Watson,” chuckled Holmes with a wry smile as he tucked pipe and pouch back into his coat pocket, “it’s just as well that you cured me of my dependence on the syringe. Imagine the reaction of those two worthies had I attempted to stimulate myself in that fashion. Very well, if we’re to have no pipe over which to ruminate on the case, perhaps we’d better sleep on it instead.”

The next morning, Holmes was nowhere to be found at breakfast time. As I sat down to a solitary breakfast, the concierge sidled up to me. “Dr. Watson, good morning, sir. Your friend Mr. Holmes begged me to send his apologies, but he is, ahem, engaged this morning. He will meet you in the salon at a quarter to ten. I you shortly thereafter for another meeting upstairs.” I thanked him and tucked into my eggs and The New England Journal of Medicine.

At quarter to ten, Holmes appeared in the salon with a large manila envelope tucked under his arm. I raised a quizzical eyebrow, but Holmes shook his head, saying “All in good time, Watson.” He managed to down half a cup of tea and a scone before the concierge appeared and once more led us up to the sanctum of G and H.

Both men rose from their seats as we entered the palatial living area of the suite. While H appeared relatively calm, G seemed fidgety and looked as if he hadn’t slept. When his gaze shifted to the manila envelope that Holmes was carrying, his eyes lit up hopefully.

“Come on in, boys!” he said, and gestured to a leather sofa near to his. “How is the investigation going? What have you got for us?” he asked as we sat down.

“Sir, I am pleased to say that I have recovered the plans in their entirety,” said Holmes. G whooped exultantly while H looked stunned. Holmes passed the manila envelope to G, who ripped it open greedily.

“Say, Mr. Holmes, is this supposed to be some kind of British joke? There’s nothin’ in here!”

“Precisely, G. Yesterday Watson and I retraced H’s steps as he described. We visited B, who confirmed that H had indeed visited to discuss the crisis. He seemed nervous and agitated, which led Watson here to presume that he had pilfered the plans. However, when we inquired about the plan that H had discussed with him, he told us that it was something that H was still working on. It is my belief that he was nervous because nothing had yet been finalized, and the financial system was drowning before his very eyes.”

“Nonsense, Mr. Holmes! “ said H. “I did have plans. He must have stolen ’em from my briefcase while I was in the john!”

“Au contraire,” said Holmes. “When we were in B’s building, I, too went to the toilet on the off chance that something may turn up. As it happens, there was a member of the maintenance staff repairing it, so I couldn’t go. However, it turned out that this chap was also fixing an air conditioner in B’s office when you were there, and he was still in the room with B when you stepped out. He confirmed to me that B in no way touched or molested the briefcase in any way.”

“That proves nothing!” said H sullenly. “Someone else must have taken it!”

“Highly doubtful, my dear fellow. The people at the laundry made us wait a long time without even knowing the purpose of our visit. It seems as if they just like to do things slowly. In any case, how were they to know the contents of your briefcase? No, I think we can absolve them of this crime. In any event, I took the liberty of inspecting your car early this morning. There were no signs of forced entry.”

“Well then, someone must have stolen the plans from my house!”

“Ah, there’s another interesting little fact,” said Holmes. “We went to visit your house yesterday and spoke with your wife. She seemed surprised to see us and knew nothing about the stolen plans. Now, when a man misplaces something, what’s the first thing he automatically does? He asks his wife where she has put it. You, sir, did not even mention the plans to your wife.”

H reddened.

“And so, H, I consider the facts before me. B didn’t tamper with the case and seemed unaware that there was a fully-developed plan. The Chinese are only interested in their own business; it appears highly unlikely that they would tamper with these plans. And your wife was unaware that any plans had been stolen. I can only conclude, sir, that you are making things up as you go along. No complete financial system rescue plan exists. And that, sir,” he said, looking at G, ”is what I have returned to you. An empty envelope.”

The room was silent for a few moments, then G whacked H on the head with the empty envelope. “Dammit, H, are you trying to make me look dumb? We need a strategery that does more than just make sure Goldman stays afloat!”

“I think, Watson, that now may be a good time to adjourn,” murmured Holmes as G continued to berate his companion.

We descended in the lift and repaired to the outdoor terrace of the hotel salon. “And now for that pipe,” smiled Holmes, reaching into his pocket. As he was extracting some tobacco from his pouch, however, the concierge hurried up to our table with a worried look on his face.

“I am sorry to bother you again, Mr. Holmes, but there is an urgent telephone call for you. It seems as if you’re needed in Europe......”

Friday, October 10, 2008

It's delightful, it's de-lovely, it's de-risking

Enough is enough.

Markets are completely imploding, both in terms of price and liquidity. When the FTSE future opens 11% lower (!), that's not a market, it's a financial Chernobyl. And unless you're equipped with the proper equipment to deal with hazardous waste, you're best advised to flee the area.

We have now reached the point where even when you're right, you're wrong, in the sense of not being able to crystallize the P/L that you think you've made. At least that's the case for any type of option structure, judging by the quotes Macro Man has received over the past 48 hours. Of course, one can always opt for naked futures or spot exposure.....the problem, of course, is that being wrong leaves one open to virtually unlimited downside. Perhaps in the glory days of macro punters in the 1980's or 1990's, that sort of risk/reward was acceptable; these days, Macro Man would be surprised if any investors would allocate capital to a fund that isn't focused on managing the downside in this market.

And so Macro Man has decided to bid adieu to an old friend, his equity short position. Most major indices are down 20%-25% this month alone. While it is of course foolish to suggest that further downside is impossible, Macro Man now believes that prices are discounting a bone-crushing recession and could actually be cheap. At the same time, the Four Horsemen of the Investment Apocalypse- Risk Aversion, De-leveraging, Illiquidity, and Panic- stalk the land like hounds from the bowels of Hell.

Macro Man thought that the coordinated rate cut would shore up confidence and generate a decent bounce in equities. That opinion was wrong. Fortunately, he is paid to take investment decisions rather than render opinions; after going long at 12.01 on Wednesday, he was short again within the hour. However, the moves that we have seen over the last sixteen hours are enough. The strain of keeping track of every single development, every gut-wrenching reversal, and trying to extract as fair a price as possible for his positions has reached an extreme.

So, too, has bearish sentiment and interest in the market. The blog traffic-o-meter has literally leapt off the charts recently. Perhaps Macro Man's writing has improved or his insights become more accurate. More likely, however, is that visitors flock to financial websites during market extremes, much like rubberneckers gawk at a gruesome highway accident.

Macro Man observed yesterday that the Lehman CDS settlement could serve as some sort of market flashpoint or the apotheosis of the Four Horsemen, and that indeed looks likely to be the case. Macro Man really has no idea what the next 48 hours of trading will hold, nor the weekend that splits today from Monday.

So he has decided to ring the register, take the "opportunity profit" hit and close just about all of his bets on near-term market direction, and re-charge the mental batteries. He has an 11.46 tee time today and the Blackberry will be left at home. De-risking: it's delightful, it's delicious, it's de-lovely.

Thursday, October 09, 2008

Dislocation, Dislocation, Dislocation

It's said that the three most important things in real estate are location, location, location. Given that US housing was the genesis of the current global financial crisis, it's worth keeping that little aphorism in mind, as the story of yesterday- and indeed the whole crisis- can be summarized as dislocation, dislocation, dislocation.

Wanna see someone getting screwed? You don't have to be choosy in your search. In FX, as Macro Man documented yesterday, USD/MXN completed melted up......and then, in a Wile E. Coyote moment, collapsed right back down. While explanatory rumours swirled, Macro Man has yet to hear a completely satisfactory explanation for the roller-coaster ride.
Fixed income? Look no further than swap curves. One would normally expect that a 50bp easing to steepen the curve, but these ain't normal times. 2 year swap yields are nearly 40 bps higher than they were at 11.59 London time yesterday, while 30 year swaps are close to 10 bps lower. The result? A massive flattening of the 2-30 swap curve: pretty much the opposite of what both the textbooks and common sense would tell you to expect.
While the pain is all too evident in equity indices, you don't have to look too far beneath the surface to see an absolute horror show in single-stock land. Perhaps the most obvious example of the distress in equity land is the distress surrounding Volkswagen stock. While there are a lot of moving parts to the background (a Porsche stake in VW, Lehman facing trades blowing up, etc.) the basic premise of the trade is classic RV. Take two economically-similar share classes...and when the share prices diverge, sell the rich one one buy the cheap one on the expectation that they will re-converge.

When it works, you make a bit of dough. And when it doesn't, you get charts like this:

So where from here? At the time of writing, AUD/JPY is up 8.5% from NY yesterday's close, so normal service has clearly not been resumed. As Macro Man has noted over the past few days, he thought that a coordinated policy response would generate a bounce in stocks. So after yesterday's 50-beeper, he went net long....for about half an hour, then cut his purchases at a tiny profit and resumed normal short service.

It's probably premature to call the policy easing a failure, however. After all, 24 hours after Hank Paulson announced plans for the TARP on CNBC, the SPX was 8%-10% higher than just before the announcement...and we can all probably agree that that didn't ultimately support equities.

The next couple of days may ultimately mark the bottom. With the resumption of short-selling in the US today, the door will once again be open for squeezes. And tomorrow's Lehman CDS settlement auction is an obvious flashpoint; while it could prove to be a disaster, it could also ultimately become the cathartic moment that equities need to rally.

The old magazine-cover indicator is also suggesting that panic may be setting in; certainly the dislocations that are evident across markets are symptomatic of panic. So Macro Man once again finds himself prepared to acquire a net long delta, though at the moment he wants to see how equities digest higher LIBOR fixes. Of course, that view is a flexible one; anyone with skin in the game knows that this is no market for simplistic worldviews or sweeping generalizations.

After all, simplistic assumptions are one of the root-causes of these market dislocations; Macro Man is doing his damnedest at this juncture to keep an open mind and a black P/L.

Wednesday, October 08, 2008

Open thread/Running Diary/Brain Dump

Macro Man isn't mentally or physically capable of writing a considered thought piece this morning, because a) the market is too busy b) he is mentally drained and c) his only strong view is a desire to play golf rather than watch this crap.

8.26 am Suffice to say that the authorities are moving in the right direction- the Fed's CP purchase, the UK package- yet the obvious gesture to tip short-term sentiment is still lacking- e.g. rate cuts. And given that this is a sentiment-driven market, the authorities should realize that a little gesture can go a long way. Rate cuts need not be taken back, in the fullness of time, in a "measured" fashion over a "considerable period".

Macro Man's experience this morning has probably been echoed throughout the market- losing trades are decimated, while winners barely budge (the offer price reflects the market call, but the bid price doesn't budge) it's been a reaaaaaalllllll fun morning so far. It's tempting to just turn the screens off and play Urban Golf instead. For now, however, it's head down and manage things as best as possible. At this point, it's hard to know if today will be Armageddon, Ragnarok (particularly in Iceland), or even Nirvana should a coordinated response emerge.

Stay tuned, and feel free to chime in with views and war stories.

8.58 am It's the end of the world as we know it. Does anyone feel fine?

9.14 am South Africa's ANC party splits. The first campaign in the worldwide revolution?

9.34 am Something's rotten in Denmark. Lost in the world ending was last night's shocking news that Danmarksbank hiked rates, in a rather emerging-marketesque strategy of introducing a yield premium to defend the currency. This a currency, by the way, that is very closely pegged to the euro and had generated fringe interest from macro punters as a blow-up trade. By focusing attention on their concern over the currency , they may be inviting a more robust speculative attack. Certainly there are now rumours that the ERM peg will be abandoned. Could be a rather spectacular own goal....

Meanwhile, EUR/ISK is quoted 212/285 on the Reuters dealing platform....

10.02 am So now that things are settling down, do we start buying equities in expectation of the coordinated rate cut at 1.15 London time today? Dunno, but having paid up in futures to to hedge some of his equity puts, Macro Man is confident that things can now shank again. Certaibnly new lows in USD/JPY are sending that message.

10.26 am With winter around the corner, Macro Man is growing out his summer "#3 all over" haircut. This prompted Mrs. Macro to observe recently "Man, you're gray". Hardly a surprise, given this market! Fortunately, Sonny Rollins' Live at the Village Vanguard arrived from Amazon last night and went straight onto the iPod this morning. Macro Man can particularly recommend disc 2 of the re-mastered 2 CD set....

10.38 am Carry carnage continues. AUD/JPY is down 6% in the last 45 minutes.

Meanwhile, rumours swirl that the BOE has cut 100 bps and not bothered to tell anyone.

11.24 am No gym today as Macro Man doesn't feel like he can leave th desk. Still, his heart rate is getting a good workout. He bought USD/JPY twice today below current rates (99.40) and yet has lost money both times, such is his unwillingness to warehouse directional FX spot risk for any but the shortest of time frames.

There is a stiff drink somewhere out there that has his name on it this evening....

11.58 am So the Fed and the UK come up with great plans to shore up the banks.....and 3m $ LIBOR fixes 20 bps higher and 3m £ LIBOR fixes unched. Thanks for playing.....

12.02 pm BOOM! Coordinated cuts! Macro Man now has a long equity delta.

12.45 pm Well, 45 minutes into the brave new world, risk assets have firmed....but I have to say, it's a slightly disappointing reaction. Macro Man is up on the day, but has probably cost himself 15-20 bps of portfolio P/L with his misadventures in foreign exchange day-trading.

Still...he would have expected a somewhat better return on his equity book from trading his long gamma position; it probably would have helped if he hadn't have sold out some of his futures hedge at 11.57 this morning after the fixings hit the tape.

Still, it could be worse. Quote of the day from the chap next to me: "I've spent the last four days chained to my desk from 7 am to 10 pm because I'm short stocks....and the f***ing cut rates when I'm off the desk making a cup of coffee."

1.05 Someone forgot to tell the Brazilians that it's party time for risk assets. USD/BRL trades up to 2.44 (+5.75%) 5 minutes after the BMF opening. OUCH!

1.27 pm USD/MXN up 6.5% today to an all-time high of 13.15. Last week, Macro Man closed a small long at 11.00. This market ain't fixed by a long shot.

1.41 USD/MXN now 13.85. This isn't a black swan so much as a flock, or whatever a group on swans is called.

What's the f***ing point of Brazil, Mexico, Korea et al accruing all these reserves if they aren't there to stabilize things when it all goes tits up? This isn't about bailing out carry traders- they deserve what they get in this, and Macro Man hasn't got any horse in this race. But for the Latams in particular, why piss away a decade's worth of inflation-fighting credibility in the span of about a week by not at least trying to aggressively stem the market?

Equities are now careening back towards their lows of the day.

This is scary.

2.19 Do the Latam CBs read MM? Stories now circulating of onshore spot market intervention in Brazil, while Banxico also reported to be selling $/MXN. The latter is down roughly 1 peso from its highs.

2.45 13.00 offered USD/MXN. Holy shit.

15.00 Lunch at last. Here's everything you need to know about today: September 2009 eurodollar 100.00 calls traded at 1 tick today. For that trade to make money at expiry, LIBOR needs to go negative.

USD/MXN 12.65 offered. That's down 12% from the highs. In about ninety minutes. Three months ago, USD/MXN 1 month implied vol was 6%. Ay caramba!

15.21 I think we can officially retire the phrase "easy money", because nothing...I mean nothing...about this market is easy.

15.52 Is it beer o'clock yet?

16.10 And with 20 minutes to go til closing, Eurostoxx plummet down towards the lows of the day.


16.57 Equities and bonds getting mullahed, the latter thanks to the Treasury re-opening some off-the-run issues and labeling the Street with auctions. Barbrous relic crowd, now is your time to shine.....

17.18 Let's end on a lighter note. Apparently the Nigerian govt has warned its citizens that if they get any e-mails from Irish banks, promising govt-backed deposit security and seeking bank account details, that its a scam...

18.52 Home, and about to crack open a nice bottle of red. Who knows where the last two hours of equity trading will hold; nothing between 970 and 1050 as a cash close on the SPX would surprise me, and nothing inside of 900 and 1100 would come as a total shock.

Nice to see Banxico announce a new dollar auction mechanism. You gotta say that they called the bottom in USD/MXN bang on...I think spot was 10.03 when they ceased their prior dollar auction mechanism.

So do Ben and co. do another 50 bp at the end of the month? If they follow TIPS breakevens religiously, it would be close to a dead cert....

21.17 With 10 minutes to go, I thought we might actually finish unched on the day. No such luck, however. USD/MXN traded on 4 different handles today: 11, 12,13, and 14. As of this writing, its nine centavos from yesterday's NY close. Forget Satan's finger or Satan's fist; that candlestick is called "Satan's Can Of Whup-Ass", or "Scowa" for short.

Unfortunately, there's been more than a few on the receiving end of that particular treatment today in any asset class or strategy you care to name. Methinks it's early to bed this evening; Macro Man wishes all readers a good night's sleep and good luck on the morrow.