Wednesday, March 04, 2009

A Confession

Macro Man has a confession to make.

Regular readers of this space will know that he has been structurally bearish on stocks for more than a year, a view that paid handsome dividends last year with short positions in US and European indices. He came into 2009 with the view that the low was not in, and fully expected to be an enthusiastic participant in the equity short trade again this year. But Macro Man has a dirty little secret:

He's not been involved with the short trade at all in 2009.

Macro Man's investment style is to maintain a structural, long-term view that dictates most of his directional bias, and then use tactical analysis to time his entry points. The philosophy worked beautifully last year, when he enjoyed exquisite timing on entering shorts in May and September.

His problem this year has been twofold: his tape-reading has been poor, and the fundamentals are now something of a moving target. He entered 2009 expecting a bit of a bounce, and while he got one (for the first two trading days of the year), it vanished more quickly than he anticipated. He's never really been in sync with the market since, despite what in retrospect has been a fairly straight-line decline through key technical levels.

In fairness to himself, though, his fundamental analytical framework was telling him that it was not time to be aggressively short. His SPX forecast model, which had registered record negative readings for September and October, bounced smartly by year-end. (As a refresher, he is more interested in the relative output of this model than then absolute level of the forecast; like any linear model, it will understate extremes.) So really, he cannot beat himself up too badly on this one: his framework was not giving him the "full speed ahead" signal on the short trade, largely because the price decline had rendered stocks much less expensive than they were in mid-2008. In any event, he has managed to capture decent returns in other strategies where the confluence of his fundamental view and his tape-reading has been more harmonious.

What's troubling him now, however, is that despite the decline in stock prices, the forecast return is deteriorating again. There seems to be something of a negative feedback loop, wherein fundamental factors (like Macro Man's earnings momentum model) are being negatively impact by stock market declines. Such is the stuff of which Depressions are made.

And while macro punters seem to be be pretty clearly short stocks, it looks like the broader equity crowd, like Macro Man, may have missed the boat. Put/call ratios have remained remarkably sanguine this year, and anecdotally Macro Man has heard that real money funds keep buying dips. Similarly, the old blog traffic-o-meter has yet to show signs of visitor spikes that tend to accompany market bottoms. It's as if the the financial world is comign to an end...and no one can be bothered to give a damn.

What is curious is just how relentless the bear market has been. 12 of the past 15 trading days have been negative for the SPX. How unusual is that? Macro Man decided to check. Using rolling 3 week windows for the last 81 years, he pollted the number of positive days in each of them, shown below. Of the 20,366 rolling windows that he looked at, only 312 (1.5%) have had three or fewer up days.
So a bounce would not be a surprise...but then again, neither would an utter collapse. Gee, can you see why Macro Man has remained on the sidelines? While VIX has famously not kept up with equity market declines, from Macro Man's perch options certainly don't loook cheap. For fun he priced up June 500 puts in the SPX last night....they were offered at 14, nearly 3% of the index at strike! That just doesn't look particularly attractive; Macro Man thinks that his bearish global view continues to be more elegantly articulated via other strategies and markets.

And that's a state of affairs that he has no shame in confessing.


Anonymous said...


I love this post!

Though the runaway potential of this badly wounded animal became as good as non-existant, I cannot pinpoint a good entry.

And with the largest drop in history now (more than 52 %) we're clearly in the twilight zone. The minimal 50 % retracement (like in 1929) looks already unlikely.

Are the funds that buy, catching falling knifes?


Anonymous said...

Perhaps rates offer a better way of expressing bearishness. Going out to early 2010, short sterling, euribor and even eurodollars are pricing in rate hikes.

Chances are that this is premature and that the curve will flatten between 04Q09 and 01/02Q10

Welcome your thoughts

Anonymous said...


Thought you would enkoy this . . .

spagetti said...

you're not alone MM

last year i also felt that it was easy. s&p was hovering near 1400 only a year ago. it was clear that it will collapse, just a matter of time. rates were trickier thanks to Mr Trichet - but thats a story in itself

this year its all about short term swings and momentum..

no clarity at all.. literally as not clear what other skeletons fall out of the closet at citi or aig and then you have constant govt. meddling and a new president in the U.S.
its surely not getting easier

short term, i do expect the bounce that many been expecting since jan to start. why ? just based on sentiment, so wouldnt bet the ranch on it

Anonymous said...


I love your blog, and today, I am being forced to comment. Where do you get the CBOE Put/Call ratio historical data for S&P. I had been searcing for it for a long while. I look forward to your help!

Reader from India!

Macro Man said...

Anon @ 12.11, agreed. I have been playing some calendar spreads- June/June, etc, predicated on the thought that rates stay flat for a long time. Some of the juice already been squeezed on these, but will look to get back in on a widening.

Anon @ 12.20, it is Bloomberg ticker PCUSTOTL

wounded bull dragging his carcass away from the lions. said...

dr copper signalling a more positive outlook for the economy? noticeably not made a new low with dow, spx etc.

Anonymous said...

Hi MM..

Thanks a lot. I got them!

From India :-)

SwissBoy said...

Well, I've been wondering the same thing for a few days: the market should start to rebound by now. But it doesn't, except this morning. When I got stopped out (profitably) on my leveraged short DAX play early in the morning, I thought about reversing and going long, but I decided to ignore my thoughts and follow the tape. And the tape, at least to me, says go short. So I reentered the market with an even more leveraged short DAX position with a stop. Wait and see.

Forex Watcher said...

In the 27 trading days since Oman has been in office, Emini S&P have closed negative 19 times. A 70.3% bearish tilt with an average daily loss of 5.06 pts.

Great start I'd say

Anonymous said...

Careful on the short sterling/euribor/eurodollar trades LIBOR contracts, its not a clean way to play rates....and look what the basis has been doing recently.

Macro Man said...

No, of course there's the basis embedded. But the thing about doing a June/June or Sep/Sep is that you are betting that the financial system will be in a better state in 15-18 months (or, perhaps putting it better, interbank lending will be in a better state in 15-18 months) than it will be in 3-6. That seems like a reaosnable proposition, if for no other reason that it can't get much worse...and if it does, interbank lending will swiftly become intra-government lending via nationalizations!

Bob said...

The financial world might be coming to an end, but if so we don't want to hear about it.

Paulson said the sky was falling, therefor we must give him $700 billion no strings attached to save us. We seem to be out $700 billion, but the sky is still falling -- if anything faster

Bernanke assures us that the subprime contagion is well contained, but we had better drop interest rates to fight imaginary deflation that no one in the real world can see.

AIG has failed 99999 times. Lehman is failing, no, yes, no, yes, no, yes. Hedge funds failing. Bernie Madoff. Citi is failing, yes, no,yes,no. Wachovia is failing, yes, no, yes, no, yes. Merrill is failing, yes, no- now its part of BofA. BofA is failing, yes, no, yes, no, yes, no.

Every talking head on TV said the world was ending, and every insolvent financial "analyst" linearly interpolated the last few months and told us what we already knew.

Bernanke assures us that everything is OK, but now we will have a zero interest rate policy to insure that insolvent borrowers can refinance.

And then Obama became President. Change is coming to America! Well, sort of. TARP is not changing. We will now throw $800 billion into the wind. AIG is still failing, so is Citi, BofA, etc. About the only change we can see is that Goldman alumn Paulson was replaced by... Goldman alumn Geithner, who is a tax cheat

Two things are very obvious even to people who do not follow markets:

1) The experts have no idea what they are doing
2) In spite of this, the experts insist we throw unlimited amounts of money at a problem they cannot define, much less solve

So unless you have an actual solution, no one wants to hear another self proclaimed expert tell us the sky is falling

dblwyo said...

MM - thanks. Like others I've had identical problems. Part of is the fundamentals because we're in a non-normal regime where the appropriate models need to be changed (consider H2O dynamics where Ice = physics of elastic solids = frozen markets, broke economy; water = normal, hydrodynamics or business cycles work and gas phase where it's thermodynamics of hyper-inflation.) As Keynes himself pointed out different rules apply.
In this case I think we've evolved in the market looking for the new homeostasis and thought we'd found it for a while but it broke last week as fundamental realities tanked the bottom-seekers. Far be it from me to suggest thoughts, concept or tools but consider:
if you would for my best faith efforts at grasping the knives.

Macro Man said...


1) I never claimed to be an expert

2) If you don't like what I have to say, I think you'll find that one of those big arrow buttons on your browser will take you somewhere else.

Bob said...

MM - I think you missed my point (or equally likely I didnt make it very well)

I am just saying I am tired of reading yet another news story citing the "latest" / 4 month old GDP numbers followed by a "forecast" that, once again, the world is coming to an end.

Its been coming to an end now for at least two years, and we can only maintain the panic position for so long before we have to stand up and stretch...

The biggest issue with these End of the World predictions is that slimy, greedy, good for nothing politicians always seize on them as an excuse for "emergency stimulus" spending which is neither emergency nor stimulus.

Its the same tired nonsense they have been pedaling for years: more debt, more consumption, more debt, more consumption.

If Barney Franks -- who is personally responsible for destroying FNMA -- comes out and whines about regulatory failures one more time...

I think we need to have a moratorium on end of the world predictions. Not on your blog per se -- everywhere.

Macro Man said...

OK, understood. Funny thing is, I have exactly the opposite view: too many people are looking for silver linings, be they Baltic freight or Chinese PMIs.

(The second half of this post, which I didn't have the energy to write, was all about how a lot of people seem to be REAAALLLYYYY hoping China pulls the world out of this one.)

So while politicians may be saying it's the end of the world (actually, again, here in Europe, they're not- quite the contrary), in my experience not enough market people really seem to believe that things are that bad.

Put another way, it seems as if the house in which the Wall of Worry is located has been repossessed....

Anonymous said...

Gross out
This guy has the occasional solid analytical piece amongst the news flow...
Agreed with what you posit but am finding it profitable to play directionally with shorter horizon and think this type of action will dominate this year.
Cheers, JL

Bob said...

Well we are definitely having a recession -- arguably a bad one. I don't see how anyone could argue otherwise.

That said, the world is not ending. The people who loved you last year still love you this year (to paraphrase Louis Ruykeyser's YouTube video going around today)

There is going to be a reversion back to the long term historical mean -- even if the governments of the world waste tens of trillions of taxpayer money on nonsense.

Manufacturers (Europe, US and yes in China) have capacity to produce more "stuff" than the world can actually use, and WAY more stuff than the world can pay for.

No amount of gloom and doom is going to change that -- even if consumer confidence indexes are pushed to zero. No amount of government spending is going to change that -- even if governments bankrupt our great grandchildren

The situation is not unprecedented... reversion to the mean has been happening for centuries.

Bear and Lehman were not the first major firms to fail. See the 1970s. Heck, this wasn't even the first time Lehman failed (economically) -- it was the first time no one else wanted to bail them out. We ran out of Shearson / American Express / Travelers / etc.

Too many politicians are using the gloom and doom to promote anarchy. Long standing economic principals are being tossed out the window -- doesnt matter since we are all gonna die anyways!!

But on the off chance that the world does not end, maybe we should stop penalizing people who acted prudently, and stop rewarding people who acted foolishly

Anonymous said...

MM, take a look at a chart of Dow industrials back in 1938, looks strikingly similar to might say, we are setting up for a 600 to 1000 bounce up in stocks over the course of next 12 months (of course based purely off of a comparison of the charts, not my pref way of approaching trades, but similarity is striking)

Anonymous said...

I would say that everything depends on what gets passed in the budget.

Wall Street managed to vaporize $2.6T, according to Roubini's guess. Therefore, cet. par., the economy will contract by that much plus whatever economic damage is caused by fear. We have to somehow create that much money. The ideal way would be for some scientific genius to come up with a way to turn sand into magic carpets, or whatever. But since that's not going to happen in the short term, we can predict that the market will decline until the money is replaced.

Infrastructure spending is one of the best ways to drive the economy, at least to the extent that it actually improves productivity. Unfortunately, the Congress in its infinite wisdom, did not do very much of that. The budget creates the next opportunity. The turning point in the market will occur when the outlines of the budget and therefore the degree to which the $2.6T hole has been plugged, become clear.

--Charles of MercuryRising

Anonymous said...

Aren't Chinese Gov't fiscal inflows and new debt issuance wholey irrelevant in financing their stimulus package?

They can just sell international reserves. Why can't they do that?

Macro Man said...

Sell them for what? For RMB? Who would take the other side of that trade, other than the PBOC itself? What that would amount to would be the PBOC printing money and giving it to the government to spend willy-nilly. While that could perhaps occur at some point, even in China there are rules and procedures that would need to be followed first that would flag such money-printing well in advance.

Adrem said...

MM have you noted 10:10 poast on FT Alphaville ..Absolute Suicide?

Takes Niels C Jensen, one of eight leading lights at Absolute Return Partners. He reports a Telegraph story that seems to have been mangled in its first pars. Jensen says the real pars from an EC report are this:

“European Commission officials have estimated that “impaired assets” may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the ‘trading book’ total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.
In addition, so-called ‘available for sale instruments’ worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.”

Food for thought??

Macro Man said...

Yeah, John Maudlin sent it out earlier this week. Very interesting, for sure, though the Telegraph's impartiality when it comes to all things European must be called heavily into question, methinks