Friday, November 28, 2008

Over Before It's Begun

November has been a very strange month indeed.

For the entirety of the month, Macro Man has been trying to chip away and establish a P/L foothold from which to increase risk and try and put together a half-decent return. Suddenly, however, it's the last day of the month, and Macro Man is still trying to establish that foothold. Come Monday, November will be over, seemingly before it ever really began.

While November started (however briefly) with an Obama rally, it's ending with a rally of another sort- though Macro Man isn't sure exactly what kind of rally this is. Inbetween, of course, there was some truly horrible price action. To put things in perspective, consider this: over the past week, the BKX has rallied 41%....and it's still down more than 20% on the month! Moreover, when looked at on a year-long chart, the recent rally is barely noticeable.
Does this mean that there is scope for substantially more upside? Not necessarily, though it would, of course, be foolhardy to categorically rule out any potential outcome. Still, that the recent uptick in prices (the SPX is up "just" 20% in a week) has been accompanied by falling volume does not exactly engender confidence; it certainly does not suggest that massive buying/rebalancing is taking place.
Indeed, the pattern of 2008 would suggest a real risk that the current rally could end almost before it's begun.

Finally, month end also brings about passive currency rebalancing. While last month's proved to be all bark and no bite, it was widely discussed beforehand and thus perhaps discounted. Perhaps as a result, the month-end fixing has received relatively little attention this time around, despite decent potential for outsized moves, particularly given the thin holiday conditions.

As the table below demonstrates, there has been quite a disparity in monthly equity returns (and thus relative market caps in the MSCI indices), which should generate decent passive hedge flows. Eyeballing the chart, the dollar should be the primary beneficiary of those flows, most particularly against the yen but also against the euro.
Whether such flow pushes the market remains to be seen, but given that it's not being talked bout to nearly the degree as last month would suggest that this time around, there is potential for a decent move....after which it will be December, a new month (and for some, a new year!)

Whether the new month brings about a change in risk appetite remains to be seen....

Thursday, November 27, 2008

Ten Things I'm Thankful For

Hard to believe that it's Thanksgiving already. November, and indeed 2008, have flown by in a blur. Before settling into a day of heavy eating, NFL on the box, and very possibly a nap, Macro Man feels compelled to count his blessings after what has been an extraordinarily eventful year:

First, a few repeats from last year:

1) First, and most importantly, that Mrs. Macro and the Macro Boys are healthy and happy, as is he himself.

2) Although it may seem an odd year to say this, Macro Man remains thankful that he works in an industry that provides intellectual stimulation, indulges his competitive instincts, and offers plenty of fodder for his satiric side.

3) That his real-world portfolio has been empty of structured credit, ABS, MBS, leveraged loans, and all other manner of performance-killing credit turds.

Of course, given the traumatic events of 2008, there is plenty for Macro Man to be thankful for from his perch of relative comfort:

4) That he made the right choice when he switched shops in Q1 of this year

5) That the vast majority of his friends in the market have retained their jobs, and that those at Lehman and Bear managed to find new ones. Moreover, that those who have recently been let go are of a sufficiently high calibre that they should find new work relatively easily.

6) That he didn't have his life, or indeed any, savings in Icesave or any other dodgy, now-defunct, account.

7) That he is in no way reliant on astute policy-making from the US Treasury or ECB to guarantee his personal or professional success.

8) That the AKP survived....and that Macro Man subsequently took profits and got out of Turkey altogether in August.

9) That Macro Man had the sense to stick to his investment methodology, and that it has served him pretty well in what has been a difficult year.

10) That this space continues to attract a frankly baffling number of readers and a high calibre of interaction with other market punters and observers. Thanks for reading....

....and best of luck for the remainder of 2008.

Wednesday, November 26, 2008

Ricardian Equivalence

Another day, another program....or, in the case of yesterday, two.

Yesterday's announcement of a new ABS lending program and, perhaps more importantly, direct Fed purchases of GSE paper, has been taken as a significant step. MBS spreads have cratered, swap spreads have come in, and markets appear to have concluded that this represents the next step in the Fed's quantitative easing (QE campaign.) After all, this program will take the Fed's balance sheet to $3 trillion...20% the size of US GDP.

As a consequence, the dollar came under pressure against a broad range of currencies as markets concluded that Helicopter Ben is taking his chopper for a spin with a fistful of benjamins.

Macro Man remains dubious that this is the appropriate conclusion. His view is that the actions of both the Fed and the Treasury, however ineptly communicated (here's lookin' at you, Hank!) simply represent the principle of Ricardian equivalence at work.

The past few decades, but particularly the past few years, have seem enormous rise in private sector leverage....both through traditional lending and derivatives contracts. The past couple of years have seen the total face amount of outstanding derivatives contracts increase at a run rate of $150 trillion dollars per year, according to the BIS.

And guess what? The value of that stuff has gone down. Financial institutions and private sector actors have learned the hard way that assets may come and go, but debt lasts forever. UBS estimates that banks need to raise an additional $1 trillion in capital to offset the amount of forthcoming losses and writedowns.

At the end of 2007, Citigroup had more than $2 trillion of assets on their balance sheet. That number will be a lot lower by the time all is said and done. Not that US banks have a monopoly on absurd leverage, of course; at the end of last year Deutsche Bank had over €2 trillion of assets- that's 80% of German GDP. Again, trends in that figure are only going one way moving forwards.

So in Macro Man's view, any dollars "created" by the Fed to expand its balance sheet (and let's not forget, they have yet to really crack out the printing presses by not sterilizing their asset purchases) will merely partially offset dollars lost through de-leveraging and the implosion of the shadow banking system, rather than finding their way into new the purchase of fresh turds.

The impact of these programs will, in Macro Man's view, only submarine the dollar once the crisis is resolved and domestic demand begins growing organically again. That seems likely to be several years away, for there is another kind of Ricardian equivalence at work- the ballooning of the US budget deficit should be offset by a sustained rise in the US private sector savings rate.
For now, of course, Macro Man has to scratch his head at some of the pricing out there. US sovereign CDS have ballooned out.....
...and are now trading merely a dozen bps below BNP! Are you kidding me? The US government (a flawed beast, to be sure, but the owner of a printing press for the current world reserve currency) a similar credit to a French bank? Puh-leeeez......the phrase "SocGen, 2007 risk management house of the year" keeps coming to mind....
Elsewhere, the Chinese have declared that they mean business by cutting rates a whopping 108 bps today. The knee-jerk reaction was a predictable rally in risk assets, though perhaps sensibly they have since given back those gains. While Chinese policy easing may eventually have an impact, let's not forget that a) credit is primarily allocated by executive diktat rather the interest rate mechanism b) these things work with a lag, and c) it's generally easier to slow your economy down than it is to speed it up again.

Anecdotes are circulating of mass plant closures in Guangdong...something does seem to be rotten in the state of PRC. One interesting tidbit to observe is the collapse in sour-grade Asian crude oil; the Indonesian Duri crude is now trading under $30!!! That would suggest very little demand indeed from Asian-based consumers of distillates....such as....oh....China.
Macro Man is kind of surprised at the number of punters he speaks to who kind of fancy a late year squeeze. He will concede that such a rally, if it happens, will have little to do with fundamentals and will instead be driven by positioning and momentum jockeys.

Who has't heard the stories of hedge funds and real money guys sitting on huge piles of cash in anticipation of year-end redemptions? And hey, with the Fed backstopping MBS and China doing its thing, surely the pain trade is stocks higher and underweights scrambling to cover?

Perhaps.....but then again, perhaps not. Macro Man's futures positioning indicator shows the highest net hot money longs in two years. This has been driven largely a a raft of short-covering amongst futures specs, taking speculative shorts in the e-minis to their lowest levels since early last year.
So maybe there will be a squeeze....then again, maybe not. At current pricing and market conditions, Macro Man just cannot see how there's a good trade there in either direction- so he's flat. His methodology has served him well this year, and he has little intention of becoming another footnote when the history of today's Ricardian equivalence is written.

Tuesday, November 25, 2008

Raindrops keep falling on my head

Repeat after me: 6.5% rallies only occur in bear markets....6.5% rallies only occur in bear markets....

Yesterday's equity love-fest was just the latest iteration in what has become a seemingly endless sequence of bum-clenching drops followed by spine-tingling rallies. Obviously, the net impact has been to drag stock prices lower...but man, what a ride!

Goldman's sales desk put out a remarkable stat yesterday that warrants passing on (even if Macro Man is too lazy this morning to personally verify it.) Apparently, between 1950 and 2000, there were exactly seven days in which the S&P 500 had an intraday range of 5% or more. Since the beginning of October 2008, there have been 22. Yowsah!

CORRECTION: Looks like Macro Man needs to get his eyes checked. Apparently it's 27 occasions of greater than 5% intraday ranges from 1950-99, and 7 from 2000-06. So with only 22 occasions over the last seven's been a snoozer!

In any event, yesterday's rally took the SPX back to the friendly environs of Team 850's erstwhile bid zone. Having been prior support, it could well turn into a bit of a resistance zone, though the lure of trying to breach the downtrend line of the last few weeks' price action may prove irresistible to futures jockeys and other momentum-driven "investors."
Unfortunately for the risk-asset love-fest thesis, the wheels already appear to be coming off. The Japanese seemed happy enough to take advantage of yesterday's rally to slot yen crosses; AUD/JPY trading down 4% from the NY close does exactly engender a warm feeling for holding equities, even for a short-term punt.

One "pro-risk" market where Macro Man is broadly constructive is in Brazil, specifically the fixed-income market. The instrument of choice for offshore punters such as your author is the DI curve, which is essentially an exchange-traded swap curve. The DIs are still pricing in higher rates over the next year, despite the global slowdown and strong disinflationary impulse of lower commodity prices- many of which Brazil exports. Wholesale price inflation is beginning to edge lower, even as the currency pass-through has pushed expectations a bit higher.

While it's been a bumpy ride for Macro Man's favoured point on the curve, the Jan 10's, he has manged to retain exposure via options. And with other high-yielding CBs (Turkey, Hungary, India, Indonesia) cutting rates, he expects that it's only a matter of time before Bacen follows suit. To him, receiving in this exposure offers much better fundamental value and risk-reward than trying to catch the falling knife in stocks in the early stages of a bone-crushing recession.
Finally, Macro Man would be remiss in not mentioning yesterday's pre-budget report in the UK. It is hard for someone who's never lived in Britain to understand the attention paid to budgets; what in the US is a dreary, drawn-out affair is transformed into a carnival-style spectacle here in the UK.

The sights and sounds of rival parties hooting and hissing at the speeches of front-benchers, with the florid Speaker of the House (who appeared to come straight from the pages of a Dickens novel) vainly shouting "order! order!" is not to be missed.

Beyond the spectacle, however, lies the substance....most of which left Macro Man scratching his head. The notion that a modest drop in VAT will stimulate the economy is well-nigh preposterous, as is the insistence of the government that hiking national insurance payments isn't an income tax. The rise in the top rate of income tax was predictable, as indeed was the delay of said tax hike until after the next election.

Most puzzling of all were the economic projections of the Chancellor, Alistair Darling, which anticipate a short, relatively mild recession before a resumption of growth in late 2009 and into 2010. When he claimed that trend growth in the UK was 2.75%, Macro Man just about lost it.

Mr. Darling seemed happy with his forecasting ability, however; so happy, in fact, that a little-known provision of the pre-budget report provides for a merger of the UK Treasury and the Met Office. Henceforth, it will be Mr.Darling who forecasts the weather. Macro Man was pleased to see that the next month is predicted to be 25 deg (77 deg F) and sunny.

Unfortunately or Mr. Darling, forecasting is a tricky business. The remainder of his time in office (both economically and meteorologically) is likely to be very rainy indeed.

Monday, November 24, 2008

Oh What a Tangled Web

"Oh what a tangled web we weave,
When first we practice to deceive"
- Sir Walter Scott

"But when we've practiced for a while,
How vastly we improve our style!"
- J.R. Pope

This morning's press headlines provide plenty of reason for faith in humanity and the general goodness of people in the financial industry.

Consider the following web of stories:

Citigroup gets a bailout package from the Federales....

despite the fact that one of their primary "assets" is...err.....the tax benefit of their prior losses...

...and that Citi was one of the banks that made some, ahem, unsavoury bets against MS in September.....

...this being the same MS that went on a hiring spree in July....

....only to turn around and wield the axe in November....

....but of course, we all know how this is going to end!

Fortunately, there are some certainties in life, such as the singular inability of the British rail system to delivers its passengers to their destination on time and in comfort. Will any on Alistair's tax hike make its way into proving the rail system? There's about as much chat as that as of Macro Man being named Obama's Treasury Secretary today.

Moving on to markets, Macro Man has to give a tick to the Russkies, who've devalued the RUB again today. Theirs is a purer dishonesty which makes no bones about their desire to rip you off, unlike the sordid displays of "coming clean" that we've observed from (morally and literally) bankrupt Western financial institutions.

Elsewhere, the good news keeps on coming in Europe, where the ifo registered its largest monthly drop in history (tying the release after 9/11) and putting the index at its lowest level since the post-unification recession. Naturally, the euro's gone bid and Bunds have sold of sine the release; ah, the joys of illiquid, position-driven markets! As intellectually stimulating as reading a technical Finnish.

Finally, Macro Man feels compelled to pass on a technical observation that he made last week, and which he's only now coming to grips with. A number of punters have no doubt observed that the SPX has broken a double top from 2001 and 2007. What's particularly chilling, however, is that the price target of the neckline break is the same distane from the top to the neckline.
In this case, the size of the top is 811 points, with the neckline at 762. This puts the SPX price target at......-49!

It's been commonly said that this financial crisis will permanently change the nature of financial markets. Macro Man can only wonder if that includes the lognormal distribution of asset prices. What a tangled web that would be for your risk management system!

Friday, November 21, 2008

A few thoughts on banks


Just when you thought that Team 850 had managed to contain equity weakness, they pull their bid and stocks go down like a lead balloon. Yesterday's price action was frankly farcical, as Spoos caught a bid on news of a bilateral deal for the automakers....only to get cratered when news subsequently emerged that no deal will be passed any time in the foreseeable future.

CORRECTION: Yesterday in this space, Macro Man made some non-negative comments about the US Congress. This should have read "They're all a bunch of muppets." He regrets the error.

In any event, this was a particularly painful sell-off. While Macro Man was/is a strategic equity bear, he had expected to see a rally to sell into. As such, he has watched his view pan out without having a position (and therefore, a profit.) Very frustrating indeed.

The ruptures in fixed income markets alluded to yesterday picked up a significant head of steam, as the back end of the US curve engaged in what can only be called an uber-rally. 30 year Treasury yields fell by more than 40 bps....and they lagged 30 year swap yields by more than 25 bps! We have seen this movie before in Europe, with exotic interest rate structures blowing up and causing unprecedented volatility (and inversion) in swap curves. Needles to say, the movie doesn't end happily....though at least the US version won't be punctuated by a rate hike next month.

We are now at the point where the pricing of certain fixed-income markets appears to defy all rationality, and indeed belief. The chart below shows the US 2-30 swap spread curve, which compares 2 year swap spreads to 30 year swap spreads. An inversion shows that the environment is distressed- i.e., that bank credit is less desirable in the near term (2 years) than the longer term (30 years.) As you can see, despite 2 year swap spreads coming back in, the 2-30 swap curve has inverted massively. That's not good news.
One theme that's starting to get quite a bit of airtime to justify a bullish stance on equities is attraction of the dividend cover in the US. Incredibly (to anyone under the age of about 70), the current dividend yield of the S&P 500 is now higher than that of the 10 year Treasury bond. This is supportive of stocks, the thinking goes, because you get paid to hold them relative to bonds!

Perhaps, but there are two pretty good reasons why it would be very dangerous indeed to use this as a market-timing tool...or even a valuation device. The first, of course, is that a dividend paid last quarter will not necessarily be paid next quarter. Particularly in this uncertain environment, one in which earnings expectations remain too high, Macro Man would expect the realized dividend stream over the next twelve months to be less than the trailing divvy yield indicated on your Bloomberg screen.

More interestingly, those dividend yields need to be volatility adjusted. In case you hadn't noticed, equity volatility has gone up a bit recently. A 4% dividend yield on a 12% vol index isn't quite the same as a 4% yield on a 80% vol index. Hell, just ask the holders of structured credit turds how attractive their yields are!

In seriousness, this issue of volatility and risk premia has historically been an important one. From the beginning of the 20th century until the late 1950's, the SPX dividend yield stayed well above bond yields. It was only in 1959 (according to data from Robert Shiller at Yale) that the two yields crossed over, a relationship that they have held for the ensuing 49 years. But if we are talking about Deporession-style economic and market conditions...doesn't it make sense that the dividend yield/bond yield relationship reverts to type as well? Are equities not something of a damaged asset, as the business model of earnings growth funded by leverage is discredited?
Would it be that bad, or even surprising, if we reverted to a world where dividends explain a greater proportion of equity returns, and price appreciation less? It's certainly food for thought.
In any event, US banks are once again coming under pressure, with the once-mighty Citi looking like it's in trouble. Rumours of a merger (more on this below) are circulating throughout the market today, which have given futures a bit of a bounce. A number of punters that Macro Man speaks to are suggesting that banks now look cheap and worth a flutter from the long side.

In response, Macro Man asks them to have a look at the chart below. It is lagging, coming as it does from the Fed's flow of funds data- the last update was for Q2. And it is macro data- circumstances may be different for individual institutions. But insofar as the theme of 2008 has been "the great de-leveraging", it must be something of a concern that as of Q2, commercial banks' asset growth was a) still double digits, y/y, and b) still near the highs. Worrisome stuff, as it suggests still more pain in the pipeline.
Finally, Macro Man has a few quick-hit observations/tid-bits about banks and the market in general:

* Apparently, nearly 40% of the companies in the SPX no longer qualify for inclusion in the index. The S&P 314 doesn't quite have the same ring, does it?

* There are only 9 stocks in the S&P 500 that are positive y-t-d.

* Goldman Sachs is now below its IPO price in 1999 (and waaaayyyyyyy below its capital raise offering price in September.) Hank Paulson hasn't done much right, but getting out of GS stock at ~$200 tax free was a sensational trade.

* Citigroup's market cap as of yesterday's close was $26 billion. Assuming headcount were reduced to 300,000 today.....that would still value each employee at only $86,666. Still, it could be worse...GM's market cap only values its workers at $6,578 a head...which is close to their hourly wage.

* Although Macro Man cannot verify this, apparently UBS stock is now trading at a lower price than a Big Mac in Zurich. Attention UBS employees: if your boss tells you that this year's bonus will be a "whopper", that's not necessarily good news.

* Finally, in case you haven't heard it, the hot rumour has Citigroup merging with Goldman imminently. Apparently the new firm will be called "Sachs and the Citi".

Thursday, November 20, 2008

Interesting, If Not Lucrative

Where to start? The newsflow over the past twenty four hours has been very interesting indeed, as has the price action. Not that it's been a particularly lucrative twenty four hours....despite trying to rise above the noise, Macro Man has managed to top and tail himself a couple of times. Fun, fun, fun.....or B.

So yesterday, US CPI fell 1% m/m, the largest monthly decline in the history of the series by a fairly wide margin. Frankly, Macro Man isn't quite sure what to make of this. On the one hand, the absolute value of the decline, coming in a month of historic commodity price moves, was well below that of many, many monthly rises. This would appear to confirm that prices are stickier to the downside than the upside- thus providing some comfort against the threat of deflation. On the other hand, the print was so much more negative than any prior observation that it suggests that something has indeed changed, and corrosive, demand-driven deflation is a legitimate threat.
Certainly some central banks are taking that view, most notably the Fed. The October minutes suggest quite a bit of concern over a downward spiral, and yesterday Don Kohn confirmed that the Fed is indeed pursuing quantitative easing. There remains a a school of thought that this will spell disaster for the dollar; colour Macro Man skeptical.

Evidently, the Fed is not the only central bank focusing on the downside. The Central Bank of Turkey surprised markets yesterday by cutting rates 0.50%, despite a weak TRY and inflation currently well above target. That they did so with the IMF vultures swirling over Ankara was particularly surprising.

Switching gears, there a couple of market price developments that merit comment. The most obvious development yesterday was the SPX finally closing below 850.....from here, the next layer of support rests at the 2002 low around 762.

Slightly further off the beaten path, however, there are strange things afoot in credit markets. CMBS, a widely-owned asset class on banks' balance sheets, have been absolutely cratering in a parabolic fashion. The chart below shows the spread on a Markit AAA-rated CMBS index over Treasuries...this is likely to be the cause of the next wave of writedowns/capital raises/bankruptcies.

Bizarrely, however, long-dated swap spreads in the US are now quite sharply negative. In other words, despite the fact that banks hold a load of turds and their share prices are plummeting, markets are now pricing them as better credits than the US government over a 30 year horizon (despite being a substanitally worse credit on a 2 year horizon.) Anyone who believes that deleveraging and forced position liquidation has come to an end is invited to explain that one....
Speaking of position liquidation, short-term punters got it in both directions yesterday in currency-land, as EUR/USD inexplicably went uber-bid in the middle of the afternoon, prompting much sturm und drang over a trend breakout....only to inexplicably go uber-offered a few minutes later, closing at the bottom of the recent 1.25-1.30 range.
Recent price action and the staunch support at 1.25 brings the heady days of the summer of 2006 to mind. While it may be hard to believe given the rollercoaster ride on 2008, EUR/USD spent six months between 1.25 and 1.30 before finally breaking out near the end of the year and accelerating higher.
Observe that this was a continuation other words, the formation ultimately resolved itself in the direction of the underlying trend. Macro Man looks for a similar outcome this time around.

Finally, he would be remiss in not calling attention to the farce that is the US automotive industry. Regular readers will know that your author is not particularly enamored of the US Government (either party), and generally dismissive of the efficacy of the US Congress.

However, he has to give Congress a tick for raking the chief executives of the Little 3 over the coals yesterday. How these bozos have the temerity to fly on private jets to DC with hats in hand to demand a bailout defies belief.

Perhaps if they drove to DC from Grosse Pointe (or Seattle!) in one of their poorly-built, gas-guzzling products, they'd gain a further grasp of why their companies are in such dire straits to begin with.

Wednesday, November 19, 2008

20 Questions

On a relatively slow morning, it's time to play another game of 20 Questions....

1) Who gets to fill Team 850's (the new name of Team 1250) orders?

2) Could the news from Singapore get much worse?

3) Are NFL games now being fixed?

4) WTF was Mark Cuban thinking?

5) So now that consensus estimates have Goldman (gasp!) losing money in Q4 (see below), will they now play their usual games and manufacture a better-than expected result for the zillionth quarter in a row?

6) What exactly does David Cameron stand for, other than "modalities"?

7) Who knew that "change" was spelled "P-A-R-D-O-N-M-A-R-C-R-I-C-H"?

8) Would Nancy Pelosi's head explode if China's CIC offered, say, $50 billion for the Big 3 automakers lock, stock, and barrel?

9) Is duration a risk asset or the only realistic investment option in a deflationary environment?

10) What should be done about the Somali pirates (assuming a W-style "blow the bastards out of the water" solution is no longer acceptable)?

11) What is the blow-out in Berkshire Hathaway CDS saying (other than shorting 10 year puts on the SPX is a crappy idea)?

12) How buggered must the US consumer be if a nearly halving of gasoline prices has not managed to engender a rise in consumer confidence?

13) Does anyone know how to get an Apple Airport Express to work with a BT Home Hub wireless network and Windows PCs?

14) Where will the low be in BOE and ECB policy rates?

15) How big will the apparently-inevitable Russian devaluation be? (The chart below shows the spot basket and the 3 month forward)
16) Will the SPX be higher or lower in a year's time?

17) What would the world look like if Chine grew by only 5% next year?

18) Which trades first: $35 oil or $100 oil?

19) Who will the new Treasury Secretary be?

and finally.....

20) Will West Ham ever win a game again?

Tuesday, November 18, 2008


Markets remain edgy today, with SPX futures current trading down 2% from Monday's limp close. Last week's 11% intraday rally seems like a long time ago in a galaxy far, far away.

At this point, however, Macro Man is refraining from embracing the downdraft with both arms. There have been too many intraday reversals to make him comfortable; while that may be a precondition for the next leg lower, the burden of proof is on the index to close lower. Sometimes looking at a simple line chart can provide insight; as the graph below demonstrates, the SPX has yet to close meaningfully below 850 despite plenty of intraday action below that level. A close anywhere near current futures prices (834) would therefore be significant.
There is a similar pattern in currencies, where EUR/USD, for example, has been confined between 1.25 and 1.30 on a New York closing basis, despite plenty of price action on either side of that range. For choice, Macro Man favours a break lower, as his sense is that there remain plenty of embedded overweight, offside euro positions out there.
Perhaps we might need to see vol sellers come out of the woodwork before a break can happen, however. While currencies have been tracing out (admittedly broad) ranges for pretty much all of November, a broad measure of implied currency vol remains near its highs. Markets being markets, this might nEed to come lower before realized volatility can increase again.
Elsewhere, Macro Man had to laugh at a Bloomberg story about one of the Fed's alphabet soup programs, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Incredibly, this program seems to go by the shorthand acronym ABCPMMMFLF, which appears to be less a government liquidity program than the product of wiping spilled coffee off a keyboard.

Clearly, there is a gap in the market for snappily-named government programs. Image, as Andre Agassi used to say in the early 90's, is everything- and what sort of image does a program called the
ABCPMMMFLF convey? "We don't know what we're doing".

What the situation requires is a public-spirited advertising agency to rebrand the dizzying array of government rescue packages in a way that will capture the public's imagination and boost confidence in the economy and financial markets.

In the absence of such an agency, Macro Man is happy to step into the breach. He has cobbled together a series of programs that should do a much better job of conveying their purpose to the public, and thus restore confidence in policymakers.

The first port of call is to revamp the liquidity and asset support programs. In the Macro Man Program (MMP), there will be two primary facilities:

* The Commercial paper Recovery Assistance Program (CRAP), and
* The Treasury Unsaleable asset Recovery Directive (TURD).

The MMP also provides for two programs that are designed to help banks shore up their financial standing:

* As previewed in this space last month, the Special Capital Raising/Extended Writedown Undertaking (SCREWU) will enable financial institutions to increase their capital base while reducing holdings of dodgy assets.

* Meanwhile, a special accounting framework for structured credit will be instituted until market conditions normalize: the Special CDO Accounting Mechanism (SCAM).

What to do with the GSEs? "Conservatorship" is an ugly word that is difficult to understand. Much better for the government to manage them under the auspices of the:

* Federal Residential Agency Unwinding Directive (FRAUD).

Meanwhile, we should probably assume that Ms. Pelosi's desire to divert some government funds to the automotive sector will be successful. This will be accomplished via a:

* Automakers' Recovery and Stability Enhancement (ARSE) program.

Let's not forget the international efforts at crisis resolution, either.

* The primary outcome of the weekend G20 meeting will be a new Liquidity Enhancement and Modality Origination Network (LEMON). As an aside, Macro Man has thought about it for another 24 hours....and he still doesn't know what a "modality" is.

* In Europe, where banks are behind the curve in owning up to losses, policymakers are rushing to create a Harmonized European Accounting Directive for Implementing New Standards for Assets and Nonstandard Derivatives (HEADINSAND).

Finally, it is worth observing that amongst the plethora of government programs produced over the last few months, very little has been done to address the original source of the crisis: US homeowners.

In conjunction with consumer advocacy groups, Macro Man has designed a program that seeks to aid troubled homeowners. Congress can expect to see lobbyists agitating for its passage in the new year:

* A Single Home Owners With Mortgages Extended Treasury Home Equity loan Modification with Offsetting New, Equilibrium Yields program. A bit of a mouthful, to be sure, but its acronym is sure to resonate with an irate electorate: SHOWMETHEMONEY.

Monday, November 17, 2008

Everything You Need to Know About the G20 Statement in One Word

Well, that was exciting.

The weekend G20 meeting was evidently highly successful, at least if we are to judge by the length of the statement the resulted from the meeting. G7 statements are usually short and (relatively) punchy, and able to fit on a single printed sheet.

The G20 statement, on the other hand, was long and expansive, filling a full eleven pages when transposed onto Microsoft Word. If it were full of detailed policy prescriptions, the length could perhaps have been justified. As it was, Macro Man tried to read the whole thing but failed out of sheer boredom.

The sentence that did it for him was the following:

"Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome."

Macro Man has very few hard and fast rules in life. One of them, however, is that any document containing the word "modalities" is a complete and utter waste of time and space.

Moving away from the world of political junkets and grandstanding (come on down, Gordon Brown!), the world still looks like a complete mess. The deterioration in US consumption continues apace, as Friday's retail sales figures figures were execrable.

Meanwhile, Japan registered its second consecutive quarter of negative growth, joining the Eurozone in achieving that dubious feat. It's amazing to think that it was only a few quarters ago that "decoupling" was a popular market theme. A quick check of Google Trends offers a reasonable list of those economies most badly affected by global re-coupling: South Korea, India, Singapore, Taiwan, and Hong Kong comprise the top 5 sources.

Elsewhere, it's perhaps a tad ominous that LIBOR has started to edge higher again. Macro Man has previously observed the tendency of LIBOR spreads to widen into the end of the quarter; now that Q4 is half over, will this be the next thing to turn the screw on risky assets?
It remains to be seen (though there has been a massive squeeze in Russian yields today), but Macro Man is pretty sure of one thing. If there is indeed a relapse into the next leg of the financial crisis, the ultimate solution will come from a source other than a multilateral boondoggle like the G20.

Friday, November 14, 2008

Two Observations

Macro Man's a bit pressed for time today, so he'll confine today's effort to making two observations:

1) He's not sure exactly what explains yesterday's equity rally: Paulson's comments (yawn), hopes for groundbreaking policy initiatives at this weekend's G20 (good luck with that), or short gamma positions (possibly.)

But consider this: yesterday's intraday range of 11.6% in the SPX......
...was very nearly as much as the entire yearly range in 2005!!!!!!
While it might appear tempting to conclude that the worst is over- the SPX has once again resoundingly rejected the 800 level- Macro Man prefers to keep his options open. Yesterday's price action was rather similar to that observed on September 18, when the SPX made a new and then surged higher to close at its highs. This was the day that Paulson announced what has become the TARP. Yeah, that worked out well.
2) On a lighter note, it looks as if global central bank liquidity programs are beginning to loosen up the market for poorly-performing, illiquid assets. How else to explain the advert below?

Thursday, November 13, 2008

I'm Sorry, I Haven't a Clue

There is a long and glorious history of transatlantic cross-fertilization when it comes to television programs and other forms of entertainment. Staples of the US television landscape such as Sanford and Son (Steptoe and Son), American Idol (Pop Idol), and The Office (The Office) all started life on the British airwaves.

It appears as if US policymakers have seized on the idea, re-incarnating the popular UK radio show I'm Sorry, I Haven't a Clue.

How else are we to interpret Hank Paulson's admission that the TARP will not be used to purchase dodgy mortgage assets, the rationale for its passage way back in....last month?

Macro Man couldn't see any way to interpret this other than as an admission that they're making this up as they go along- not exactly a reassuring methodology for policymaking.

Meanwhile, it looks like we're about to embark on the unedifying spectacle of a land-grab for the remainder of the TARP cash. OK, the Treasury will spend some of the money on asset-backed turds (as opposed to mortgage-backed turds)....but yesterday's post looks to be sadly accurate.

Strangely absent from the photo above is the president-elect and his new Treasury Secretary....the latter, of course, because he does not currently exist. Mr. Obama seems content to allow the current administration to bury itself until he takes office on January 20. Politically astute, of course, but not exactly an act of leadership. Obama will be conspicuous by his absence from the weekend G20 meeting, which is ostensibly set to discuss a coordinated response to the crisis and the framework for a new global financial architecture. Again, politically expedient.....but it sort of renders any near-term attempts at a policy prescription irrelevant.

Macro Man's moles in the media industry suggest that the BBC is in negotiations to license I'm Sorry... elsewhere in Europe as well. In Germany, for example...where the ECB is located. This morning it was confirmed that Germany has entered the popular definition of a recession, as Q3 GDP growth came in at -0.5% q/q, considerably worse than expected.

The ECB, of course, hiked rates at the start of Q3, despite a severe downturn in leading indicators, evidence of significant financial distress, and a complete absence of domestically-generated inflation pressures in Europe. (Those commenters who spring to Trichet's defense and/or claim that interest rates are irrelevant should consider their views as already noted for the record.)

The BBC may also wish to create a celebrity version of I'm Sorry..., featuring the Bank of England. This is a trifle unfair, given that the BOE has (belatedly) realized that the circumstances have changed, and radically adjusted their policy orientation as a result.

Where they can come in for some criticism, however, is their failure to anticipate the requirement for substantially easier policy earlier. Mervyn King was pretty eloquent in the Bank's defense yesterday, basically saying that "no one could have forecast this."

But this ignores the fact that a member of the MPC itself, David Blanchflower, did indeed forecast it. Mr. Blanchflower has been arguing for a number of months that the situation was dire, underlying inflation pressures were likely to recede, and that the Bank was grossly underestimating the likely pace of the slowdown. He voted for rate cuts in every single meeting this year. But one MPC member (the future star of the show), Tim Besley, voted for rate hikes as recently as August.

Is it any wonder that sterling has been pummeled, taking the pound to (gasp!) the cheap side of fair value against both the euro and the dollar, according to Macro Man's metrics? Yesterday saw the single largest rise in EUR/GBP since the advent of the single currency (helped on by Merv the Swerve's "blue horseshoe hates sterling" comment) , which necessitates dusting off the old GBP/DEM charts to get a flavour for how far things can go.
Technically, there isn't really anything between current levels and the old lows in GBP/DEM, equivalent to roughly 0.9000 in EUR/GBP. This winter's ski trip is shaping up as being eye-wateringly expensive.

Will sterling trade all the way to 0.90 against the euro, thus rendering the pound bum-clenchingly cheap? Having whiffed on sterling this year (short when it went nowhere, flat when it collapsed), Macro Man can only say "I'm sorry, I haven't a clue."

Wednesday, November 12, 2008

Back of the queue!

While the newsflow continues unabated, market engagement remains tepid at best; as noted, many punters (and banks) seem content to limp into year-end.

The latest development from the US is, unsurprisingly, a broadening of the firms angling for a piece of the bailout pie. Yesterday AMEX filed to become a bank (and thus receive some sweet, sweet TARP lovin'), while Nancy Pelosi wants to divert a chunk of funding to prop up the US automakers.

Jeremy Clarkson's love for the new 'vette notwithstanding, it's not difficult to come to the conclusion that most of Detroit's offerings are uncompetitive in the global marketplace in terms of quality...and that's before you factor in the pricing disadvantage that comes from the Big 3's defined benefit liabilities.

Macro Man understands the political realities that make the bailout of Detroit an inevitability...but it does make him wonder where the line is drawn. Banking, insurance, real estate, financial services, autos....which industry is next in the queue for government handouts?

McDonald's (to ensure a ready supply of cheap, if unhealthy food, for the nation)? Televangelists (to ensure a ready supply of prayers on behalf of the nation)? Major League Baseball (MLB has a long and proud history of gorging at the public trough to pay for stadia)?

Macro Man doesn't know which industry is next in line, but he does know that the list of extended hands is growing by the day. As an exclusive to MM readers, he has managed to secure a photo of the queue to receive public funding through the TARP. Should you wish to apply, he's afraid you'll have to go the back....

But hey, enough of pickin' on the old homeland. While it's easy to blame the state of the economy and consumer confidence on the government and greedy Wall Street does that explain the collapse of confidence elsewhere? Take Japan, for example....where some leading indicators are actually pointing up, the government is, well, flaccid, and finance a go-go hasn't been seen in nearly two decades. Yet consumer confidence has collapsed there as well.
And the goings-on in Russia seem to have re-directed the market's attention to the fact that when the shit well and truly hits the fan, you really need to hold the world's reserve currency. After yesterday's "band widening" of the Russian basket, CBR reportedly burned through at least $8 billion of reserves yesterday.

Meanwhile, the DXY has broken through the top end of a wedge formation, suggesting further impulsive near-term gains for the buck. Clearly it's happening against some of the weaker currencies out there; USD/TRY, for example, has rallied 11.5% since last Tuesday.
With EM looking wobbly and stories circulating of yet another round of hedge fund redemptions in the pipeline, the market certainly feels as if it is short of liquid USD assets. Macro Man has added some tactical risk in some of his favourite EM short plays as a result.

The lack of flow information notwithstanding, this dollar does feel as if it may be poised to make a step-adjustment higher. It's almost as if embedded dollar shorts ask their banks how they can buy some and, by way of reply, are told to "get in the back of the queue."

Tuesday, November 11, 2008

4 charts

Well, the joy of the Chinese stimulus package lasted....err......about 12 hours. By the end of the day yesterday, stocks finished solidly in the red and oil had reached a new cyclical low, with front-month WTI trading down onto a 50 (!) handle since Q1 2007.

The fun has continued this morning, with everyone's favourite kleptocrats adjusting the top end of the rouble basket, allowing for a 1% deval from 30.40 to 30.70. Anecdotals suggest plenty more trapped positions.
Another pegged currency that Macro Man is watching is the Hong Kong dollar. Hong Kong faces a) recession brought on by declining trade, b) the popping of a domestic property bubble, and c) the prospect of deflation in 2009. While betting on a HKD revaluation has been a sporadically popular trade for the last few years, the underlying pressure is actually shifting towards Hong Kong requiring a weaker currency. And yet the spot rate is hugging the bottom of the band (you can actually buy USD forward below the 7.75 lower bound.) Therre was a similar episode this time last year, which culminated in a fairly sharp rally back towards the upper half of the 7.75-7.85 band. It looks like a pretty decent risk/reward trade to bet on a similar outcome now.
LIBORs keep tumbling (3 month USD could fix below 2.20% today), but swap spreads remain relatively elevated. The 2 year dollar swap spread, shown in the chart below, seems to have reached a reasonable support level at 100. Lower LIBOR should help pressure these spreads lower; if they cannot break 100, that's probably as good a sign as any that there remains considerable underlying stress in the financial system.
Finally, (and this one is directed towards non-expert users of Bloomberg, most of whom have probably seen this chart before), we can probably all be happy that the rule of law in South America seems to have remained resilient throughout the current financial crisis. At least, that's the most obvious interpretation of the chart below, which shows that monthly kidnappings for the purpose of extortion in Colombia remain on their lows.
So at least that's one reason for optimism....

UPDATE: As a colleague points out, the data in the chart above ends in December . So perhaps the rule of law hasn't been as stable as first hoped......

Monday, November 10, 2008

What Does 4 Trillion Yuan Buy?

Friday was a milestone in the evolution of the ongoing financial crisis. No, not the employment data, which was execrable (and prompted Goldman to raise their unemployment rate forecast to an eye-watering 8.5%.) In fact, Friday was notable because it was the first time in quite a while that Macro Man can recall being bored at the office.

It seems as if markets have mentally shut down and are content to limp into the end of the year. Liquidity has certainly dried up amongst many of the products that Macro Man trades, and declining volumes in a number of exchange-traded assets also bear testament to a lack of engagement. Moreover, the ever-reliable blog traffic indicator has shown a reasonable decline in eyeballs from the panicky markets of a month ago. As always, that is perhaps explainable by the dearth of quality of the commentary in this space...but nevertheless it would appear to indicate a waning interest in the day-to-day saga of the financial meltdown.

So it was with much elation that Macro Man and other punters greeted Sunday's announcement of a 4 trillion yuan Chinese stimulus package. Hurrah! A return to working on the weekends and wondering where Wellington will open FX rates on Sunday evening (London time.)

The rationale for the package is fairly obvious. Both anecdotal evidence and official data appear to indicate that the Chinese economy has hit something of a brick wall. Smoothed industrial production growth, for example, has hit six-and-a-half year lows. The property sector has also come under the cosh, and the Shanghai composite index is down 65% on the year following a 7% overnight rally.
Strangely, there appears to be quite a difference in opinion of how significant the package actually is. A number of the measures had been previously announced; still others represent the allocation funds that would have been spent anyways. Moreover, only a minority of the funds are coming from the central government, so the source of the remainder of the money is a trifle opaque.

The ultimate impact is also somewhat nebulous. One shop that Macro Man likes on China has left its 2009 growth forecast unchanged at a below-consensus 7.5%. Another has suggested annual stimulus along the lines of 1.5% per annum.

Predictably, markets have seized on the headline figure (which equates to roughly $586 billion) and rallied risk assets without bothering to consider the substance of the program. Given that much of the stimulus appears to be focused on rural housing and infrastructure (which, again, was going to see plenty of investment anyways), it's not immediately clear to Macro Man why the announcement merits a 2% rally in S&P futures, for example, other than a knee-jerk "buy first, ask questions later" reaction.

Of course, the size of the announcement demands that we ask the question: what exactly does 4 trillion yuan buy?

Lets consider some of the options:

1) 9.25 billion barrels of oil, using the front contract WTI futures price. Of course, there might be a little bit of slippage if China tried to print that particular ticket.

2) Real Madrid, Barcelona, Man United, Chelsea, AC Milan, Bayern Munich, Inter Milan, Arsenal, Juventus, Liverpool, Lyon, Roma, Schalke, Ajax, Rangers, Valencia, Benfica, Celtic, Stuttgart, Werder Bremen, Porto, PSV Eindhoven, Sevilla, Villareal, and Lille......39 times over.

3) Per July's modest proposal, Alaska, Idaho, Kansas, Montana, North and South Dakota, and Nebraska. They'd raise $560 billion, based on the Macro Man's calculations. And hey, they're all "red states"....just don't tell China that "red" means "Republican", and perhaps the new administration could get them to pay a premium!

4) HSBC, JP Morgan, Wells Fargo, B of A, Citigroup, and Deutsche Bank. It's not immediately obvious why China would want to buy these institutions, however; perhaps they'd be buying expertise in how to account away losses?

5) US fourth quarter Treasury issuance. Old habits die hard....

6) Ford and Boeing, 3M, Google, and Exxon. It would be ironic if the US government nationalized the US automakers and flogged them off to a foreign buyer just after some American cars received the first non-scathing reviews in the history of Top Gear.

7) The entire market cap of Russia, Mexico, Hungary, and Ireland. They might have trouble taking possession in one of those places, however.

8) Mars. If China waits long enough, the fiscal straits of industrialized country budgets are likely to become so dire that they will happily sell off all future mineral and mining rights to the Martian landscape. And given that China has now put a man in space, perhaps they'll take delivery sooner than you think!

9) 83.71% of 1 TARP program. Puts it in perspective, doesn't it?

Friday, November 07, 2008

Hats Off


Macro Man tips his hat to Merv the Swerve and the Bank of England's Monetary Policy Committee. Your author has been critical of Mr. King in the past, but is pleased to see that Merv has belatedly seen the light; namely, that policy easing is required to prevent depression, not recession.

Despite the fact that Macro Man's indicator suggested that the BOE should ease dramatically, he was skeptical; so much so that he had put on some small bets on disappointment, per yesterday's post. Still, it's a case of better late than never when it comes to grasping reality, and it seems as if Merv and co. have finally realized that there is no demand-driven inflation pressure in the UK economy.
On the other hand, the smuggest man in finance saw no need for extraordinary measures; unsurprising, really, given that a) he doesn't believe that there is any sort of credit crisis in Europe, and b) he still appears to inhabit a bubble where 320 million people think he's a diamond geezer. Most punters that Macro Man knows would disagree on both counts.

In any event, UK base rates are now below Bundesbank rates for the first time since 1993- your author's first year in financial markets. Perhaps it's a coincidence that UK growth was double that of Germany over the ensuing five years....then again, perhaps it isn't.
Speaking of growth (or lack thereof), today is the latest iteration of the statistical folly that is the US employment report. After a skein of truly putrid employment indicators, including Wednesday's ADP report, the street is probably expecting a decline of 200k or more in payrolls, well under the supposed consensus of a 65k loss.

As always, Macro Man is focusing on the less noisy unemployment rate; his favourite "tell" on that is suggesting that the rate will soon be knocking on the door off 7%, well below the latest reading of 6.1%.
None of this is good news for risk assets, of course. Macro Man was frankly bemused to see Eurostoxx futures down some 8.5% on the day by yesterday's NY close. At this juncture Macro Man has tilted his book very slightly towards a "risk off" regime, though he could easily tilt back towards "risk on" should circumstances warrant.

Perhaps more importantly, he continues to run a relatively low risk profile- only 20% of max. Given the Brownian motion of most asset market prices this week, he is content to run mostly slow-burn, medium-term macro trades; trying to trade the noise will only result in him getting his hat, let alone his face, ripped off.

Thursday, November 06, 2008


Oh dear. The expected feel-good rally ran into a juddering halt, and instead morphed into a "sell the fact" on the Obama victory. Of course, pundits being what they are, they could obviously claim that yesterday's sell-off was "always" going to happen. The market rallies? An obvious result of the Obama feel-good factor! The market tanks? Having bought the rumour of an Obama victory (and its presumed beneficent impact on consumer confidence), markets were always going to sell the fact once he was elected.

Of course, such Harry Hindsight analysis is utterly useless, particularly when you're running risk. Your P/L tells you whether you had the right call. From Macro Man's perspective, he has completely disengaged from positioning in equities. For choice, he would have expected the feel-good rally to continue, so being flat was the right choice.

In any event, it seems like the grim reality of the global recession is swiftly intruding into the recent rally. The notion of "value" is a movable feast, and overnight news suggests that the earnings target is moving swiftly.....lower.

After last night's close Cisco guided down forward revenue expectations to levels well below prior expectation. Perhaps even more significantly, Toyota slashed its profit forecasts after japan's close this morning; the e-coupling dream seems a long time ago, doesn't it? While analysts are forecasting relatively little earnings growth in Japan over the next year, it nevertheless seems likely that earnings will fall quite a bit more than currently expected. Sound familiar?
Of course, central banks globally are trying to address the dramatic economic slowdown. Of course, trying to do something and actually doing it are two different things, and it is now probably time to exhume a word last heard in 2003: "traction." Specifically, the ability (or lack thereof) of policymakers' actions to gain traction, to have an impact.

So far, the Fed's policy actions have had mixed results. Bernanke and co. made a big deal about paying interest on reserves, as it would theoretically allow them to quantitatively ease while maintaining a nonzero funds rate. So far, that effort appears to be failing, despite repeated announcements from the Fed raising the level of interest (aka, the "floor" on the effective funds rate) that they will pay institutions depositing reserves at the central bank.

So far, it's not working. For the last few days, the effective funds rate has traded well through the floor, at 0.23% (versus a floor of 0.65%.) There are a couple of esoteric technical factors driving this (relating to insurance and the exclusion of the GSEs), but it confirms that the devil with saving the world is in the details.
Today in Europe is, of course, central bank day, with both the Old Lady and the ECB poised to trim rates. While markets are demanding 100 and 50, respectively, Macro Man can't shake a sneaky belief that the BOE will do a compromise 75 bps, which would disappoint both markets and mortgage holders.

A number of UK institutions have already announced that they will not pass through all of the cuts and/or pre-emptively raised their base-rate tracker spreads on new business. So unfortunately for Macro Man, it will take a 50 bp cut just to get him levels for his new mortgage that he could have achieved last week! Alas, the margin between joy and pain is often very thin indeed.

More broadly, he is bemused by the aggressive pricing in short sterling. December 2008 is currently pricing 3 month LIBOR at 4.10%, more than 1.50% above yesterday's fix. Macro Man would rankly be rather surprised if the BOE cuts more than 1.5% this month and next. And given that we've already heard from mortgage lenders that not all of the base rate cuts will be passed on, why is the market expecting all of them to be passed on in the unsecured interbank lending market? Oh, and let's nor quarter/year end, banks tend to hoard cash. Observe how 3 month sterling LIBOR has ticked up at each of the quarter ends this year.

Surely it's not unreasonable to expect the same to happen at year end?
So even if Macro Man is wrong and the Bank does ease rates very aggressively in November and December....he still reckons the market is overoptimistic that the Old Lady gets traction.