Tom, Dick, and Harry

Wednesday, April 15, 2009

And the drumbeat goes on. Following on from yesterday's tepid price action in equities, markets opened on the back foot this morning but have subsequently snapped back smartly. Far from basking in the glow of the brave new world, spurred on by (yawn) another rumoured Chinese stimulus package, Macro Man feels as if he's being incinerated in the red hot crucible of a Panglossian risk orgy.

Yesterday's US retail sales data is a classic case in point of why the current environment is so treacherous. While the month-on-month decline was certainly disappointing, the 3 month rate of change turned sharply upwards. This is an example of the fabled "second derivative", i.e. an improvement in the rate of change in the data. Obviously, extrapolated further, this potential "green shoot" could blossom into the flower of recovery.

Yet in the scramble to ride the wave of of recovery, it's easy to lose sight of the fact that the green shoot may, in fact, be a dandelion. Certainly the chart of actual retail sales paints a less compelling picture than the rate of change chart above. Indeed, if retail sales were a financial asset, you'd call the early-year pop little more than a dead-cat bounce.
Yet it is the very fact that there is ambiguity in interpreting the data is what has made things a bit tricky. It is difficult enough to project the trajectory of economic variables; figuring out which interpretation the market will pursue adds an additional layer of complexity that, for a trader like Macro Man, considerably reduces the chance of success.

So he has decided to pursue a somewhat different tack and focus on the charts. Price, as they say, trumps all; in the current environment it certainly offers the clearest signal as to how the market chooses to interpret various datapoints.

The problem, of course, is that it is difficult to check one's inherent biases at the door. It would be far better if Bloomberg had an application that could change asset price tickers from EUR, CL1 and ESM9 to Tom, Dick, and Harry. (Perhaps there's a business opportunity there!)

In the absence of such a tool, Macro Man is steeling himself as best he can and trying to keep his eyes as open as possible in the hunt for "sexy" charts. Like Austin Powers, he's trying to recaputre his mojo; if any readers know a Tom, Dick, or Harry (or prehaps a Felicity Shagwell?) that could help him in his quest, he'd love to meet them.

Posted by Macro Man at 9:04 AM  


How about short aud/cad? Or for that matter any aud cross....

MissionaryMan said...
11:50 AM  

MM - good points all and worse than you say in some ways. The 3rd level of filtration is what did the data really say and then how was it represented.
In this case, rather like the "green shoots" euphorias of the preceding data series Retail Sales is actually quite bad. Look at it on a YoY% basis. -8% vs -9.4% or x-Autos -4% vs -6% ! Almost as bad as Dec. and as bad as it was before and after the hols. The rate of decline HAS slowed but the level is abysmal.

dblwyo said...
12:04 PM  

Why not create a CIX for each and name them whatever you want!

As for the markets, I've learned the hard way that, given an opportunity, most market participants will cling to ANY positive tidbit they can - especially after the horrific last 12-18 months. One has to assume that, if there's a way, no matter how thin the thesis, people will want to see the bright side - no matter how absurd the premise.

Anonymous said...
1:11 PM  

...and don't forget, frugality is in vogue. Whether due to environmentalism, or just cold hard lack of cash flow, the culture of consumerism is in decline. It will take a long time for that to run its course. Not to mention, the level of indebtedness relative to incomes has not corrected by any significant measure, therefore the brunt of debt deflation remains before us and will keep a lid on the "green chutes" for years to come...

Anonymous said...
1:14 PM  

Agree with anon 1:11. The social mood is changing and this is a multi year phenomenon. The anecodotal evidence of this is overwhelming.

Just yesterday I saw some journo waxing on about how many months of wages one should set aside in case of loss of a job.

Before this wouldn't even be discussed now it is an item of interest to the viewing public.

At my sons private school kids are being pulled out every week. Others are making do without music lessons, karate lessons and so forth.

I hear the same from my friends stateside. Any thematic investing has to keep these trends in full view.

Manc Trader said...
1:29 PM  

I meant anon 1:14

Manc Trader said...
1:30 PM  

Case in point re: optimism - a small up-tick in Empire mfg survey and spoos clamor higher - laughable really - the uptick is from historically unthinkable catastrophic lows, yet everyone is so convinced that, "the market begins to recover 6-months before the economy does" - so they are scared to death of missing their last chance to get long equities...

Ultimately, this tells me we are nowhere near the bottom. At the bottom, CNBCs ratings will be zero. The "Million Dollar Portfolio Challenge" will have zero entrants and nobody will care about the market reacting 6-months before nonsense...EVERYONE will have sold and THAT will mark the bottom!

Anonymous said...
1:46 PM  

What I find rustrating is that, if anything, markets ARE pricing things to get worse, viz the sharp inverssion of the Eurostoxx divvy strip from 2010-2012, which has really accelerated as stocks have rallied. It's also worth going back to the last cycle...ISM was actually above 50 the month BEFORE the ultimate low (July 2002.)

While I concede that tail risk has, to some degree , been reduced via all the wonderful initiatives promulgated over the past few months, Manc trader's point is one that I have been focusing on for some time. Savings ratios are going to rise and real and nominal GDP growth will be smaller than we've been accusotmed to. My reading is that the earnings recovery is still quite some ways off, and when it comes it'll be a damp squib.

Macro Man said...
1:58 PM  

how about P&F charts in times like these?

thaiboxer said...
2:08 PM  

Missionary Man, yeah been looking at that. Trying to decide between AUDCAD and NZDCAD...

Macro Man said...
2:15 PM  

Been hearing more and more about the AUD recently... get the feeling its getting crowded and could suffer from a correction alongside a down-leg in the spoos (which I expect). Personally like the the AUDEUR, looking for a buyable dip since I missed the first train(break) out. Any thoughts MM, everyone?

SD said...
2:27 PM  

SD, MM, etc.

I am actually looking at EURGBP, looking like full blown liquidation sell off here, looking to grab some at 86-85.
A few numbers have been coming a bit better than expected in uk, inflation numbers running a tad higher still, while eur inflation #'s are deteriorating quickly, ip/ gdp numbers are in fast decline, unemp on the way to come...
BUT, that begs the question, Isn't the worst of the disinflationary impact- (or deflationary) impact in UK still to come?
GBP also trades well as a proxy for risk / and positively moves with financials in general.

any thoughts?

Tom said...
5:06 PM  

One possible trade could be EURJPY. Although Japan is going down the tubes, I think that is priced in with a level of 100 (for now...). On the other side, I cannot find much justification for the level of the TWI EUR, and the chart looks to be near an inflection point.

MM, I'm finding Demark indicators handy for reudcing baises from getting in the way of objective TA. Have you found them to be useful in the past? Also, out of curiosity, how long are you holding (winning) positions for these days?

ec said...
5:19 PM  


re the Div Swaps, I think movement is pretty technically driven as people moving steepeners from 10-14 to 11-14. It is thin n crispy and low beta to indexes until people get a bit more clarity. I spoke to 1 of my deriv guys and he is seeing structurally short instos coming in to hedge that risk at attractive levels. There is decent risk/reward here but it is a slow-burner.

Full disclosure: long in size Dec 14s.

Alas my request for interesting ideas in the commentary section last week fell on deaf ears - people just don't want to share the wealth.

Am sure you saw the long pln/czk bandwagon increase its nos. but has moved some way since my guy at MS was recommending having a look.

Your process is sound so don't let the current low batting average get you down too much!


Anonymous said...
6:19 PM  

SD, I agree that AUD could correct lower (though I also like AUDNZD higher) and had a go at selling AUDUSD this morning on what looked like a nice little chart break. It's now a percent and a half higher.

ec, I agree that AUD could correct lower (though I am still long a bit of USD/JPY delta) and had a go at selling EUR/JPY this morning on what looked like a nice little chart break. That one was stopped out within three hours. (As an aside, I don't use Demark because I cannot understand the methodology and flat out refuse to use something which, on Bloomberg, magically erases the bad signals, FASB-style.)

Tom, have a lot of sympathy with EUR/GBP (long a zero delta downside option) and per the above dipped my toe in GBP/NZD today which, unlike the above-mentioned turkeys, is up more than a percent.

DC, I am also long DEDZ4 in reasonable (though not max) size. It baffles me, however, why anyone would roll steepeners from 2010 to 2011. The 10/11 spread (which I have in social size) is now -7, whereas 10/14 is close to flat. THAT looks like a better trade (4 years CAGR of close to zero is priced) than the 11/14 (3 year CAGR of 3%.)

The last time I suffered like this was August of last year; that was punctuated by two superb months in Sep and Oct, so I can only hope for a similar resolution this time around.

And ec, as to my average holding period for winners...well, when I get one I'll let you know! ;)

Seriously, it is safe to say that my time horizon has shortened, at least for delta one strategies. Post QE, took six bucks out of Dec 9 crude in about a week and a half, then exited. More recently, did a Costanza trade and bought a derisory amount of spoos in the middle of last week; sold them yesterday for a 4% profit. I've found that this market is like ancient Egypt; the guys who build pyramids end up buried underneath them. SO I am trying to keep it simple, keep it short-term, and build my confidence back up.

Macro Man said...
6:37 PM  

Doh! The first portion of the comment to EC referred to EURJPY.

Macro Man said...
6:37 PM  

The "frugal future" hypothesis is one that Rosenberg has been pushing for a while (so read his pieces if you want detail/examples). What will we do when he leaves for the buyside?

Anonymous said...
6:38 PM  

MM, I find that long AUDNZD is very prone to risk aversion moves (much like long PLNCZK)... fundamentally, I have to agree though. Also, worth considering the BRL as an alternate, though exoticism might scare some, trades roughly the same (except when all hell breaks loose) with better carry.

Tom, interesting thoughts on EURGPB... I have to agree!

SD said...
8:25 PM  

i can't read "green shoots" without thinking of chauncey gardener [chance, the gardener], the empty headed character played by peter sellers in "being there." his simple-minded recounting of the seasons was mistaken for profundity. "after the winter, spring will come to the garden," as evidenced by green shoots, no doubt.

Anonymous said...
11:18 PM  

Still a bit perplexed by the financial system. True, cash spreads have come down a bit but they're still horrifically high. Of course the credit market's broken, but all that means is that risk trades go into a small number of markets, thus leading everyone to conclude that the world looking a lot brighter. Doesn't really look like it - and profits are getting crushed and saving can't do anything but go up - for both companies and households. Thoughts?

Anonymous said...
3:07 PM  

That's been more or less my view since the second week of the year. Sadly, it's not paid any dividends since March 10, so I am keeping it on the backburner until the price tells me that it's game on again.

Macro Man said...
3:11 PM  

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