Tuesday, April 07, 2009

The Joys Of Spring

Ah, the joys of spring.

Daffodils are in full bloom, the grass has started growing again, and Macro Man is awakened every morning by the dulcet tones of birdsong through his bedroom window.

Spring is also the time for Easter, and the Macro Boys are more than pleased to have a couple of weeks off school. Naturally, they also await the impending arrival of the Easter Bunny with bated breath.

And perhaps, just perhaps, in a small neighbourhood on the outskirts of Pittsburgh, a pink plastic flamingo is still being passed from house to house.

Macro Man introduced the investment concept of the pink flamingo nearly a year ago, during a previous period of treacherous trading conditions. A pink flamingo is, simply put, a widely-held position in the macro trading community that turns as ugly as one of those garish plastic birds. And like the pink flamingos of Macro Man's distant youth, pink-flamingo status gets passed from market to market as more and more trades get sucked into the "fun."

While Macro Man has found himself scuffling over the past few weeks, he's clearly not alone. The HFR Macro hedge fund index has performed a bit of a swan dive since early March. While it's scant comfort to know that Macro Man isn't alone in his pain, it's nevertheless useful information to know that pink flamingos are dotted around the investment landscape. On current form, financial markets are a virtual aviary.
Regular readers will recognize a few pink flamingo in Macro Man's book from his recent grumbling, among them EUR/CHF and Schatz. But wait! There are oh so many more fundamentally sound trades that have gone wrong because of positioning.

Consider AUD/NZD. This has been a darling of macro and currency punters for a number of years. New Zealand's macroeconomic fundamentals would rate poorly for an emerging market; as a developed market, it's bottom of the heap. And while Australia has clearly not been immune to the global economic downdraft, it's long-term fundamentals (excluding housing) look very solid indeed.

And yet AUD/NZD has been on a one-way train south since mid-March, which looks to have been largely a position liquidation. Ironically, the cross bounced overnight despite a somewhat surprising rate cut from the RBA; perhaps a wretched business survey out of New Zealand has re-focused attention on the fundamentals?
Gold is another consensus trade gone badly wrong. There seemed to be so many reasons to own it; it's a safe haven if equities go down, and an inflation/fiat currency hedge if global central banks break out the printing prsses en masse. The yellow metal peaked a bit before AUD/NZD, and sicne then has proved to be mighty disappointing to longs. Macro Man's inbox is stuffed to the rafters with analysis suggesting that IMF gold sales should not affect the price; be that as it may, the market still trades very long and very wrong.
And of course, equities. The inverse correlation between the SPX and the HFR index isn't quite as strong as it was a few weeks ago, but the market still appears to be leaning short equities...or at least short stuff that is correlated with equities (if, indeed, one can trust any correlations to hold.)
These pink flamingo episodes usually seem to last a month to six weeks, taking even the most sacred of cows to the abattoir. Given that we abear to be halfway to 2/3 of the way through the usual duration of a pink flamingo episode, the question then turns to where the remaining pink flamingos reside.

Readers are invited to submit their suggestions: enquiring minds want to know!


Anonymous said...

A few candidates

Long fixed income
Lower rates for longer trades

cfarley said...

Credit spread: long high grade corporate bonds, short the calls for premium. Not working like it should.

Anonymous said...

Long NOK against whatever...

Anonymous said...

long copper
citi pref "arb"
long tech

SFOT said...

Hi MM,
I am in agreement to AUD, Gold and equities but it seems we are in the pain trade environment now. A few more views coincidentally to share in my blog. Are you still happy to own some deferred crude?


Trader Joe said...

Speaking of Kiwi, how about the position liquidation in Kiwi rates after the 1-way train for most of 2008? Greens at nearly 6% with 3m cash at 3.3% seem to me pretty good if you haven't been runover by the train. As to the next pink flamingo, the longs in Treasuries to position for Fed buying seems to be a potential sh-tshow; TY sure trades heavy the last few sessions given the weakness in equities.

Anonymous said...

Long FI especially Europe - rm still hasn't cut positions sufficiently.
The reds - prob last weeks pain trade

THE pink flamingo is short jpy. Also think people are still a touch too long AUD. Receiving Brl Jan 10s also pretty heavy.

personally think Macro has been short copper & think Nok positioning a lot cleaner.


Anonymous said...

I hate to gripe about the technical aspects of the blog (I guess I have no complaints about the content :) ), but as a bandwidth challenged reader, I want to know how come the full size images in your post (that you get to by clicking to on the preview) each take up 32 kbytes, while the preview images (allegedly shrunken to make them smaller) each take up more than 100 kbytes. That seems sort of bass-ackwards to me.

Anonymous said...

MM or anyone.....any thoughts on short sterling flatteners?

hopefully anon said...

short sterling anywhere above 1.4 is good for 1000 pips at least.

Miko said...

For the making of a New World: Clear all securities and derivatives in one single place. Ctrl bks could buy Eurex as it could do the trick already. Savings for better collateral management would be huge, not to mention the increased awareness of risk concentrations. Would Woldemort and Nikita allow this agency to see all deals their citizens and institutions are doing and all their positions ?

Anonymous said...

Sorry hopefully anon, was talking about the short sterling strip...interest rate futures, not ccy. on fx though i don't see GBP being such an obvious whipping boy anymore, least of all vs the dollar.

MW said...

Long NOK
Long USD/Asia (not what you want to hear?!)

Cornelius said...

Citi pref arb and long copper don't strike me as particularly "pink flamingo" (we've actually specifically covered both topics).

Pink flamingo: I've actually been surprised at the recent upsurge in real estate (disclosure: long SRS). Seems a little early, especially with the many predictions of the collapse of commercial real estate.

Macro Man said...

I would concur that that long the reds is probably quite consensus. I have actually got a small steepener on in one of the big markets; funny enough, it's one of the few things that have worked for me over the past week or so.

So re: the sterling strip, I would think that while a flattener might eventually make sense, risk is that the strip sttepens first, both on positioning and the tail risk that Merv swerves.

SFOT: Out of futures, but have a derisory position in slightly-in-the-money midcurve calls that are nestled safely in the bottom of my pedestal drawer.

SD said...

DC @ 11:48, who's rm?
Apparently, I'm the only one out of the loop on "that big HF" that moves the short end of the EUR curve... anyone want to spill the beans?

Treasury curve steepeners anyone?
Long EEM short Spoos/Europe?

Macro Man said...

SD, rm = real money

As to the big HF, check out t next month's Bloomberg magazine

SD said...

Did read that article, recommend it too. Thanks MM!

Dimitry said...

Yep, short sterling greens, 2y 2y fwd GBP or 2s5s10s GBP, choose your poison, it's all the same trade that looks really good. Like MM, I would be cautious, though.

Anonymous said...

can someone point me to the HF article on bloomberg.com?

Macro Man said...

Try this

Anonymous said...

Anyone care to suggest a couple of ideas they like that aren't single stock/ripe for being flamingoed - have to admit am struggling for inspiration so looking to engage in intellectual theft.

Have same concerns on UK curve mentioned by MM and Dimitry but think that June/June @ 95 is decent risk reward.


Cornelius said...

USD/JPY just did a bounce of 100... flamingo may be over pretty soon for that trade, especially if the limit buys kick it in with force.

ry said...

thanks for the link macro