Thursday, February 26, 2009

The Back Of My Mind

So suddenly, here we are closing in on the end of the month again. And yes, here we are contemplating the passive rebalancing flows that are likely to occur on the heels of yet another month of execrable equity market performance. Early readings would suggest buying USD (again) to adjust MSCI EAFE passive hedges, and to buy equities/sell bonds from the pension crowd.

Macro Man just cannot shake the nagging feeling that equities want to rally here. Not only should month-end flows provide some sort of support, but the newsflow can be construed as at least marginally positive. Here in the UK, RBS earnings were slightly less awful than expected, and the asset insurance program from the government more generous than the martket had thought.

Meanwhile, some tiny details are emerging of the US Treasury plans, mainly around bank stress-testing. (Macro Man can only imagine the thousands of people thinking to themselves "Stress test? You wanna stress test? Try having 90% of your net worth in a stock now worth $2! That's a stress test.) Hell, even UBS has appointed a credible chief executive!

In any event, markets never move in a straight line forever, and having plummeted (in the case of Eurostoxx futures below, nearly 20%) in the last couple of weeks, and least some sort of correction seems likely to be on the cards. Not that Macro Man can really bring himself to be long....he's more comfortable taking positions in longer-term dividend flows than in short term technical bounces. And in the back of his mind, he feels compelled to remind himself just how awful the fundamentals are. (Not that he needs too much reminding- the macro data flow is just TERRIBLE. Q4 GDP was revised down in Singpore to -16/4% q/q saar, and January exports in Hong Kong posted their lowest y/y reading since 1958.)

Macro Man uses a proprietary indicator of earnings momentum to help him model forward equity returns. The chart below shows his indicator (on the left hand axis) along with the subsequent 12 month price change in the S&P 500. As you can see, it's not a perfect fit, but it ain't bad for a one-factor model (Macro Man naturally uses other factors as well!) As you can see, through the onset of the crisis in July 2007, the indicator suggested earnigns were likely to remain resilient.
The chart below updates the indicator with the latest available data. The scales are left consistent to provide an apples-to-apples sense of magnitude. As if you didn't know, the earnings headwinds faced by companies are unlike anything that they or their chief exeuctives have likely faced before.
Literally off the charts! So while we may indeed get a bounce, perhaps even a "tradeable" one, it should only prove to be a temporary respite. To paraphrase Winston Churchill, this crisis cum depression may be at the end of the beginning, but it ain't close to the beginning of the end. This is a bear market, and the burden of proof will remain on the fundamentals to improve to change that fact. And that's something that's never far from the front of Macro Man's mind.


Fred_the_shred said...

RBS: GBP24 billion loss, PLUS another GBP300 billion in bad assets pushed off on the tax payer...

And that is not so bad? If that's a "win", I would hate to hear what RBS would have to lose to be a disappointment

Here in the colonies, GM lost "only" USD10 billion (GBP 7.5 billion-ish?)

Fred Goodwin will be collecting 600K for life, plus 200K for a security detail, plus other benefits... all for being a first class screw up

thousands of former RBS employees who did not screw up got 6 weeks severance

This is not the sort of setup that inspires confidence going forward.

Given that RBS has effectively gone bankrupt, it seems inexcusable that certain debts -- like those to Goodwin -- should be expunged.

Macro Man said...

£28-29 billion loss was the consensus, so yeah, I'd say it wasn't quite as bad as feared. But the APS looks like a kitchen sink the government took a bigger equity stake in RBS, which now has, if my sources are correct, the highest Tier 1 ratio in Europe.

You are correct, though, that the Shred's payoff is nothing short of criminal and should be forfeited forthwith.

Fred_the_shred said...

GBP24 billion was the headline loss, but it obviously is not correct -- since the next line in the story is the 300 billion in garbage that is being pushed off on the taxpayer

If those assets were any good, then why is RBS getting rid of them?

The probable (almost certain) losses on those assets have to be added back into to the headline loss -- so the actual loss (after adjusting for accounting shenanigans) was pretty much in line with consensus

But no matter how you cut it, one of the 5 largest banks in the world went from a stodgy reliable Scottish bank to a government basket case

No matter what spin anyone tries to put on it, that is a galactic failure

The first thing they tell you at any rehab clinic is that you have to admit you have a problem-- you can't start a recovery until you accept you have a problem first.

The government and the political elite that control it (both in the UK and the US) are still trying to pretend that the economic situation was an act of God or something outside of their control -- any scenario in which they don't have to take responsibility

God did not lever RBS up 50-1. God did not lever Citi or Lehman up 50-1. God did not lower interest rates (Fed / BoE) to absurdly low levels.

Unless and until we label the powers that caused this economic crisis for what they are -- FAILURES -- we cannot begin an economic recovery.

Fred_the_shred said...

The guy who ran the NY Fed and was supposed to regulate Bear and Lehman is now US Treasury Secretary (lets not mention he is also a tax cheat).

The guy who was the British equivalent of Treasury Secretary, who obviously did a bang up job regulating RBS, is now Prime Minister

Sandy Weill (Citi) has been collecting benefits for years after leaving Citi. Stanley O'Neil (Merrill) played golf while his firm collapse -- but he gets a pension. John Thain bought a $35K toilet, finished Merrill off for good, but he got a bonus anyways. Bear and Lehman CEOs are still worth hundreds of millions, while their former employees are being evicted from their homes. Bob Rubin was paid $15 million per year to provide "strategic advice" to Citi. We already mentioned Fred Goodwin collecting GBP600K (plus another 600K at least in benefits), and that is on top of tens of millions of pounds he was paid for "earnings" that were nothing more than accounting slight of hand... and the list goes on

In another time, these people would have been in prison if they were lucky, and quite probably lynched by a mob.

Its great that we act more civilized in modern times -- but how does it make any sense for these idiots to be REWARDED for FAILURE?!?!

I only ask because I would like to see the markets recover during my lifetime, and I know it won't happen unless we purge this nonsense from the system

Anonymous said...

somehow markets have it in their head that higher taxes and government meddling inefficiency is good for long term prospects ... go with it for time being. sell gold. taxes will prop up financial sector and speculators (and rich folk) will have less money to plough into the yellow stuff.

Cortex said...

In my heart I agree with all of the above.

The problem is that this is a very bad time to start abandoning the principles of pacta sunt servanda, in any field of law. Therefore I would prefer that all of the formerly solid banks (and their present and future elected owners)would honour their agreements wild all the aforementioned clowns. We can all secretely hope that they will all succumb to an epidemic botulic foie gras plague while the rest of us enjoy the relative comforts of a functional legal system that proved reliable even under significant populistic stress.

One eyed man said...

MM, re RBS ,It appear we all got a little ahead of ourselves in the Bank "pit" today , reliably informed that the Tax assets are a give back to treasury, this deal was not as cheap as advertised... implies NAV around 30p.. Only flag as I think that takes some steam out of the financials into the w/e...

Struck by the price action in DXY, and USDSGD, to ur point USD (given the JPY trend reversal) looks like DXY the only trade that doesnt want to take profits?--

SPX? I am a cash man, we are very excited by IBM restating that they still see 2009 @$9.20, Given Macro Hedge Index is up does this imply Macro funds have been on the SPX short ? Therefore shorts to cover....?

Looks like VIX also making for lower end of trading channel

Hasnt been MUCH of a test of the Low however suggesting a rally to short....

Enjoying yur discourse...good luck with teh knee.

Macro Man said...

I think Cortex hits it...Goodwin, Fuld, O'Neill, et al may be scoundrels...but breaking contracts because of a baying mob is not the greatest idea. Not that there is no public recourse, of course....Goodwin should have the "Sir" removed from the front of his name pretty quickly. But as for more visceral measures...well, as Cortex suggests, you could always root for gout.

One-eyed...I am far from an expert on the plumbing of this deal, so am forced to take my views from those better qualified to judge. I was/am not aware of the tax issue that you raised, but to be honest I am not sure if that level of detail will have a meaningful impact on my view...which is that the APS is a kitchen sink public sector effort.

Re your other points: it does seem as if USD/JPY is now doing the heavy lifting for the DXY, which remains at a critical juncture. What's interesting is that the euro is stalling at its usual support level (1.25 or so), but that the SGD appears to be de-coupling, if you will, and trading very poorly indeed. Music to my ears, as you can imagine....though I have rolled strikes up to extract some cold hard cash from the trade while retaining a high degree of optionality.

Equities, macro is definitely short, as the correlation with HFR indicates. Not that macro is necessarily the prime mover of equities- usually it is not- but does suggest that fast money will be forced to cover on a deeper correction higher.

I feel like I have missed a beat, not so much on gold but on silver, which broke a beautiful uptrend the other day and has been splattered. That's where I should have been directly my "metals reversal" attention, rather than moaning about gold put spreads costing too much!

Anonymous said...

OK its a rant day, my 2c: "unlike anything that they or their chief executives have likely faced before"
Agreed, so why the lack of CHANGE? We need systematic paradigm shifting game plans, but instead get the same empty rhetoric and blame.
Bring on the bottom and the vol.

Anonymous said...

Cortex -- why do we have to honour obligations to inept executives, but we don't have to honour obligations to the rest of the staff?

Law and order are supposed to benefit everyone, not just the politically powerful

I worked 14 years for a bank that RBS acquired and wrecked (not ABN). I resigned because I thought Goodwin and his gang of clowns would do, well exactly what they did. My colleagues who stayed ended up losing thousands because RBS gave them restricted stock in lieu of their deferred comp. That stock is obviously worthless now

If you want to honour debts owed to a bafoon who ruined the bank, you also have to go back and honour all the other debts

Macro Man said...

Anon, my understanding that a large portion of Merrill's popularly-derided multi-billion bonus pool represented guaranteed payouts to stockbrokers all over the US (and perhaps abroad.) I.e., honouring the contracts to the troops. And it was widely and popularly derided.

Not that there's any excuse for Fred's pension land-grab, or Thain wedging up his buddies. But frankly, in a world of "discretionary" bonuses, for staff of a loss-making firm to receive anything at year-end is a result.

The incompetent executives should get what they are legally entitled to and not a penny more. That some have managed to to negotiate handsome golden parachutes is, I will readily agree, a disgrace.

Anonymous said...

...but breaking contracts because of a baying mob is not the greatest idea.

Too bad their worthless banks are being propped up – no bank, no benefits and all that. You guys somehow don’t grasp that their millions going forward are the millions you could have made going forward. I wonder - were Goodwin and Co in the same situation as you, would they worry about contracts and all. They left you a royal mess to dabble in.

Mr Risk said...

Equities do "want" to rally here. But maybe the better phrase is: equities "need" to rally here.

Another 30% blow in the stock markets, near 0% interest rates, a continuing slide in property prices and just terrible business conditions... that would put many formerly happy Baby Boomers and their babies out on the Obama bread lines.

So, let's just use *need* instead of *want*

CG said...

Lest you forget or are oblivious: Goldies aided and abetted the RBS fiasco. The fees paid by RBS's shareholders seem to me to be a fraudulent conveyance. Are they subject to recapture? I think they've long been spent on Ferraris and lakefront Canadian property.

Joshua said...

As usual, a post that is worth reading 2 weeks later: what does that one factor imply for the level of S&P? My naive interpretation is that it looks like down another 80% from end Feb levels, which would put it at 150!