Repeat After Me....

Wednesday, March 11, 2009

Repeat after me: six percent rallies don't happen in bull markets, six percent rallies don't happen in bull markets....

A six percent rally did happen yesterday, however, which tells you everything you need to know about what kind of market we're in. It was possibly (probably?) overdue, and now that it's come, it's time to survey the landscape and say "what now?"

Macro Man is struggling to get too excited, he must confess. 750 on the SPX, which more or less marked daily lows for a solid week before giving way, should provide some decent resistance on the way back up. That's only 30 points from yesterday's close; given that spoos have already rallied 50 points from the lows, the implication could be that the correction is already more than half done. Ouch. March is often a month when crowded positions get shaken out. If the equity rally were to get more legs, one possible casulaty would be the front end of Europe. German two years yield just 30 bps more than their US counterparts, despite the obviously larger spread in policy rates. True, the US has a bit of a supply issue, but still; given the scope of the rally in Schatz, euribor, et al, would a 30 bp backup in yields really be that surprising?
Speaking of yields, today sees the onset of QE in the UK. While the Treasury is auctioning Gilts as fast as they can print 'em up, the Bank will start reverse auctioning them out of the public domain. Somewhere in Westminister, Gordon and Alistair will share a quite high five, no doubt.

Finally, back to China. First, the good news. Fixed-asset investment rose 26.5% y-t-d in February, better than the expected 21%. Hurrah, the stimulus package is working! Looking at the details, however, Macro Man was less enthused. Despite dealing with a real estate bubble of tis own, Chinese property investment has yet to decline y/y, and in the first two months of the year represented more than 23% of all fixed investment. That's a higher percentage than was recorded for all of 2008. Not exactly what Dr. Keynes ordered when there's already a 14 year excess of office space in Beijing, is it?

Meanwhile, the trade figures were a literal shocker, as the surplus collapsed to just $4.8 mio, much less than both the January surplus of $39 bio and the expected $28 bio. Interestingly, the narrowing was all on the export side; imports actually rose in February (while still collapsing y/y on Macro Man's preferred 3 month moving average measure, of course.)
It will be interesting to see the breakdown by region when that data is released next month. China has recently swung into surplus with Asia, might today's figures suggest a reversal into deep deficit, which could buoy growth in the rest of the region?

Perhaps, but the anecdotes aren't supportive. The price of Australian thermal coal, used to provide electricity in manufacturing powerhouses like Japan, Korea, and Taiwan, is falling sharply due to collapsing demand.

Repeat after me: we're not out of this yet.....

Posted by Macro Man at 8:36 AM  


What probability, if any, do you assign to the Fed following the BoE with widescale purchases of USTs?

Anonymous said...
11:00 AM  

I suspect that there's a better than even chance that they get there, eventually. There's a WSJ story to that effect today as well.

Macro Man said...
11:04 AM  

if we go into reverse globalization, with current account (and or fiscal surpluses) being depleted whose gonna buy them bonds? yes, the greenspan bond 'conundrum' goes into reverse and the probability of FED QE increases (though they would rather not go down that route). reverse globalization also means stronger US dollar (current account moving towards balanced slowly) so QE also helps getting the currency down. one way or another, conditions are tightening as we get horrific data, so they gotta do something ... and soon. just my 2 pesos.

Anonymous said...
11:06 AM  

The three obvious candidates to buy bonds are a) the Fed, per QE b) banks, in lieu of making loans or buying, I dunno, CDO-squareds, and c) private sector savers, who finally have some spare cash and are looking for an alternative to a plummeting equity market!

And yes, financial conditions are tightening despite the dizzying array of Fed programs, which is why I suspect that they'll eventually step in an put a nail in long end yields.

Macro Man said...
11:10 AM  

re the front end of europe, i submit two competing theories as to why it's held up so well relative to USD and GBP...
1) the ECB has done a better job than Fed or BoE at taming the money markets (and/or the euro money market is not as seriously broken as the USD/GBP), and
2) a disproportionately large hedgie is still long and until he flips his position no one will defy him.

any thoughts?


Anonymous said...
11:14 AM  

I think you're probably right. Then again, the same fund was long short sterling and European steepeners this time last year.....and when he tried to take some off, absolute carnage ensued. I guess I am saying I would be very concerned if these guys ever started selling...

Macro Man said...
11:20 AM  

should I make a guess on that disproportionately large hedgie?

ı also wonder who China's export machine would fare compared to other exporting EMs as the latter lost more of their cumulative value compared to RMB.


Anonymous said...
11:29 AM  

should read 'how China's export...'



Anonymous said...
11:30 AM  

large daily upswings do happen at the end of bear markets/start of new bull markets. Im not claiming we're there but the maxim breaks down

Anonymous said...
12:11 PM  

If the simulus works in China, you are looking at the more railroads (a good thing), not more offices. Declining export in China is not news, we all expect this, don't we?

Anonymous said...
12:26 PM  

So far this year, railway investment has been 34 bio yuan, and real estate investment has been 240 billion. True, railway investment has doubled y/y....but it is still small potatoes ion the big picture.

Macro Man said...
12:31 PM  

these days it seems best if your view is in stocks to put the pos on in stocks--i run an fx only fund and guy yesterday was bullish stocks so thinking about selling usd em--told him just buy spx cause correlations stink at moment--would say same to you forget bonds based on stocks and trade stocks---china numbers all the commentary is about how bad they are but as you title you chart global recession starts to bite--didn't we know that--is it a supprise that the world is buying less of china's exports--and heck they are importing --wouldn't a rise of china's middle class consumption be a real econ positive--not to mention i think you could change the title of your chart to global imbalances adjusting down--a positive i think

1:05 PM  

If the S&P 500 can end the day above 712.87 (last Wednesday's close), then it would be the first time in 27 years (1982) that the index closed at a new low one day, then rallied enough the following day to close above its five prior closes. The 1982 instance marked the end of that bear market... and after we made the low over the next 3 months we rallied 40%

2:13 PM  

any gut feeling on gbpbrl?

Anonymous said...
6:39 PM  


Macro Man said...
8:58 PM  

MM, re: QE in the US...what is the point in buying USTs? Shouldn't they be backing up the truck to buy corporates, mortgages, and even equities (not saying the are not already on the quiet)? Just because the Fed buys USTs drving the yield down isn't going to make me touch risk assets.

Anonymous said...
9:23 PM  

I don't think they care whether you, me, or anyone else touches risk assets, per se. What they do care about is, I think, getting long-term mortgage rates down to 4-4.5%. While it is true that buying UST is not the perfect way to do this, higher Treasury yields, should they occur, would make the goal even more difficult to achieve. The first port of call would therefore be to get UST yields back down...which could well involve the purchase of Treasuries.

Macro Man said...
9:51 PM  

hi MM,
doesn't the chinese trade surplus drop every feb for LNY?
eg in 2008 it went from 19.5b to 8.5b
granted, the drop this time was more substantial, but a rebound back (and hence back to surplus vis the rest of asia) is likely.

Anonymous said...
10:23 PM  

Macro Man, what's the basis for the conventional wisdom that 6% rallies don't happen in bull markets? Or at least at the start of bull markets? I looked at all daily gains on the S&P500 of at least 4% from 1960 to the start of the last bull market in October 2002. Of the 20 4%+ rallies, 12 occured in bull markets (if you count three days in the week following the 87 crash, but which preceeded the 87 final low) and 8 occurred in bear markets. Of the 8 5%+ days, 5 occurred in bull markets (including 2 in October 87 following the crash) and 3 in bear markets. What's more, all 3 of the 5%+ bear market rallies and 6 of the 8 4%+ bear market rallies occurred in the 2000-2002 bear market. Finally, it's worth noting that there was (i) a 5%+ gain on the day following the May 1970 low; (ii)two 4%+ gains in the week following the October 74 low; (iii) a 4.75% gain three days after the August 82 low; (iv) a 5% gain on the day following the October 97 low and (v) another 5% gain five days after the September 98 low. So if we exclude the 2000-02 bear market, it appears that large percentage gains typically happen at or soon after market bottoms. In most cases, there was some retracement, but the fact remains that large gains are not necessarily indicative of an ongoing bear market.

Rajat said...
12:51 PM  

If you look closely at this issue, you'll see that I am almost certainly correct. Since 1900, there have been 35 days in which the Dow has registered a 6% or greater arithmetic return. There are basically six different types within this population:

1901: One day, admittedly within a bull market, but following a 2-day, 10% decline

1907: One day, in the year of a famous Panic when the Dow fell 38%

1929-1930's: 27 days

1987: One day, the week of the crash. The market closed lower that month and at year-end.

2002: One day, and the market was lower three months later

2008-09: Four days and counting, the only period other that the Depression to have this many huge updays.

Widening the window to 5% or more rallies admits a further 31 trading days; 2/3 of them are from 1929 and the 1930's.

Given that the Depression is the only period over the past century with as many huge updays as the current environment, it is natural, I think, to conclude that the underlying market dynamic is similar- particular;y give the analogous economics.

Macro Man said...
10:35 AM  

Well, I guess it depends on how you define bull and bear markets. In the 1929-early 30s period, there were 13 6%+ rallies on the Dow before the final low of 41.22 on 8 July 1932 and 11 6%+ rallies after that final low was reached. In 1987, while the Dow did retrace after the 10% rally on the 21st of October, it never closed again below the closing low reached on the day of the crash itself (1738) and it never broke the intra-day low seen on the day after the crash (1616). In other words, the 10% rally occurred after the lowest closing and intra-day lows of the cycle. I think in the current enironment, what people want to know is "have we seen the lows?", not so much whether the Dow now goes back below, say, 7000 for a period of time.

Rajat said...
8:05 PM  

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