Wednesday, July 15, 2009

Helicopter Wen?

Sigh, redux. For all the sturm und drang surrrounding the GS earnings release yesterday, the banner report was met with a collective yawn. It looks as if the whisper number of nearly a fiver per share really was in the price, courtesy of Monday's squeeze-a-thon.

No, the real surprise came via the fact that every other company reporting yesterday, including heavyweights like J&J and Intel, beat expectations. Thus far, 10 of 13 firms have exceeded estimates, a slightly higher ration than usual (albeit in a tiny sample size.) Thus far, Macro Man's expectation of a disppointing non-bank earnings season has been wrrrooonnnggggggg.

Fortunately, his portfolio management style involves buying cheap hedges in the event that his base case falls through. (Years as a professional forecaster taught him how difficult it actually is.) So while he had his largest short equity delta of the year on Friday, he now finds himself modestly long. Bizarrre.

In any event, anyone who waited to sell the head and shoulders neckline breaks in just about any market going is now offside. This, combined with the earnings beats and looming option expiry on Friday, could potentially engineer a nasty squeeze into the end of the week. If not, Macro Man will have to decide what to do about his theta bill.

In anyevent, there was an interesting nugget in yesterday's business investories that Macro Man would like to throw open to discussion. A record level of inventory unwinding has finally put a cap on inventory/sales ratios, sneding them lower across the supply chain rom their early-year peak. An H2 inventory build is close to inevitable, though Macro Man contineus to believe that that is a pretty flimsy foundation for a sustainable recovery in an economy as consumer-dependent as the US.

In any event, if we break I/S ratios down, we find that the further up you go in the supply chain, the less of a correction there has been. Retail ratios, seen in the aquamarine line below, have corrected quite a bit and are now within hailing distance of their pre-crisis lows. Wholesale inventories have also nudged lower, yet remain close to their highs. And the manufacturing inventory/sales has barely budged. Might this mean that re-stocking entails less actual production than envisaged? Enquiring minds want to know...
In any event, other than the little post-Intel pop in Spoos, the last 24 hours have felt very summery indeed (at least market-wise; it's raining like the middle of November here in London.) Market lethargy is epitomized by EUR/USD, which, depending on which source you use, has traded on a 1.39 handle on 25 of the last 26 trading days. Ugh.....just ugh.
Among the culprits for EUR/USD's inability to move is reportedly your author's old chum Voldemort, who, after ramping EUR in May and June, is now content to trade (or, depending on your perspective, define) the range.

Sadly, these turkeys have once again become a fact of life in G10 FX after FX reserve accumulation started to tick up again. Indeed, Merrill's Steven Pearson reckons that Voldy and co. sold $28 billion against stuff that moves last month. Yowsah!

As you can see, Voldemort has not quit taking the piss: far from it. In fact, China's FX reserves rose by a record $80 billion in May, though that fell to "just" $40 billion last month. To be sure, some of that rise represents valuation efffects, but those pale in comparison to the extent of the actual USD/RMB purchases required to keep the yuan woefully undervalued.
And given the famous dificulties that the MOF and PBOC have had recently in flogging paper at uneconomic levels, you can be damned sure that a fair amount of this intervention has gone unsterilized. This, combined witth the "lend or else" diktat from on high, has helped spur China's M2 growth to 28.5% y/y, the highest in nearly 20 years (which ended...poorly.)
Unfortunately, in an act reminiscent of Gordon Brown Stalin, the early 90's data has been wiped from the historical record. A cynic might suggest that this is because China's leadership doesn't want to remind people that one upon a time, money growth was this high and it didn't end well. Judge for yourselves.

In any event, it's looking increasingly like the "miraculous" recovery in Chinese growth and equities is simply the result of cranking the ol' printing presses 24/7. While this seems highly likely to end in a banking crisis, hey- at least Voldy has plenty of FX reserves with which to recapitalize the banking system.

In the meantime, Macro Man is left pondering; given the complaints from the Chinese and others about economic management in the US and elsewhere, where are the moans about the true world champion of money-printing, Helicopter Wen?


Anonymous said...


Not directly related to the post so sorry for that, but I would be really interested in your views on trend following funds. On the one hand their volatility is high and people don't trust black box models etc... But on the other hand many of them have been operating for 30 years on end with consistent albeit volatile profitability. And their strategy, at least from a risk management perspective is sound in that losses are cut short, trends are followed (exploiting the non normal distribution of financial markets, black swans), they are NEVER short gamma, well diversified, risk is managed on a position, sector and portfolio basis.

Any views?

Professional Gringo said...

GS is staffed completely with fast Zombies. Slow zombies, as you all know, move at a steady pace which makes for an easy head shot. But the GS guys are all of the fast type AND they hunt in packs. You just can't head shoot that many - which means you're all screwed.

MM has admitted to dining with them so watch yourselves.

Have I mentioned how much I hate the Yen pairs lately?

Macro Man said...

I think trend-following funds are a useful part of an asset allocator's toolbox, as long as expecations are set properly.

As you say, trend-followers deliver a systematic long-option payout, whereas many, many popular strategies (arb, RV, equity quant) deliver short-option returns...clipping coupons every day with the occasional blowup.

In between crises, trend followrs/CTAs will tend to have pretty crappy return figures, simply because many of the markets they trade are more populated and less trendy than they were years ago- witness the EUR/USD comment in the main post!

SO naturally, human nature being performance-chasing, regardless of whatever marketing fluff you might hear, asset allocators will generally shift away from CTAs the longer that they underperform...usually just in time for the next crisis!

It's no coincidence that managed futures was the only non-bear focus strategy to make money last year in any of the major sector index returns.

So in sum, CTAs are useful to have as a portfolio diversification tool, even if their risk-adjusted returns over a given time horizon may look inferior to turd-buying/coupon-clipping strategies.

Nemo Incognito said...

Touche for getting the Chinese 87-89 data. Inflation = farmers rioting. Long China sovereign CDS to hedge all my equity exposure.

Anonymous said...

MacroMan - 10 of 13 beating earnings estimates is all well and good, but how many have beaten revenue expectations? (A question, I don't know.) Companies can easily move expenses around a few quarters and massage earnings for a time, but persistent revenue declines ultimately crimp earnings severely, and there's no sign yet in the advanced countries of revenue growth.

Another point is that early-reporting companies tend to have more positive reports than late-reporters.

The market is taking earnings very positively, but I doubt it lasts beyond this week's squeeze.

Macro Man said...

Anon, my take is this: if the market wasn't willing to look into a fairly transparent earnings fiddle from Alcoa, are they really going to delve into the income statements of the othr 499 comapnies? I suspect not. (As an aisde, I believe that INTC revs were actually a bit better than expected.)

So, for better or worse in the near term, markets will take their cues from earnings. Cost-cutting only gos so far, I concur that unless topline revenue recovers, this sucker's going down again.

Anonymous said...

Just looking at your I/S ratios and they don't seem to line up with the business inventory data released yesterday. I'm looking at the following bbg tickers: mgt2ma index (manuf), mgt2re index (retail), and mgt2wh index (wholesale). Looking at an HMS chart on one scale, the I/S picture seems more consistent with a convergence of I/S ratios where manufacturing backs up in line with retail. One rationale for this move could be that just-in-time inventory practices in manufacturing have broken down because of the lack of visibility on downstream demand.

It is also not clear that manufacturing I/S ratios will ever go back down to pre-crisis levels because of the potential bottlenecks/risks that super lean inventories can create.

Macro Man said...

Hmm...mine feed through via Datastream. Will have a butcher's..

Jeffrey D. Benson said...

Separate subject and just out of curiosity, did anyone see the 480 point jump in the dow front month future yesterday after close? What the &%$^ was that?

Joe Calhoun said...

I expect this recovery to be a lot like the one from the last recession when we saw corporate earnings rise to a record as % of GDP. Productivity has been rising through the entire recession (if you believe the gov't figures anyway) and with massive layoffs, that just falls to the bottom line in the form of higher margins. Intel did beat on the bottom line but margins also blew away estimates and will rise again next quarter. Layoffs are a bitch for the laid off, but for companies if they can cut costs faster than revenue drops, they can come out ahead. Of course, there would seem to be a limit to that game as we found out last time.

On inventories, it seems to me that the correction has more to run. I don't expect production to pick up until the I/S falls to 1.3 or even less. Last recession is again a guide.

Anonymous said...

that shows how thin the DJ YM futures are on reopen on a summer tuesday afternoon

all prints above 8440 were busted

Anonymous said...

S&P 500 kept publishing better than expected earnings, or nonstop Chinese printing machine...One just never runs out of the scapegoat for his ivestment mistake.

Macro Man said...

Hey, donut, did you miss the bit where I said I was wrong?

Anonymous said...

No offense. Sometime one just has to say he is excuse needed. I miss this same rally too, and I actually believe there is a bear somewhere down the road. Like in 2000-2002, there was a relative small bear market and big rally in 2001. The excuses do not make it sound pretty.

Professional Gringo said...

"Hey, donut, did you miss the bit where I said I was wrong?"

Such tension...and undeserved I might add. Clever blog, which is the reason you get so many comments and readers.

If there ever was a need for Macro-vision - it's now.

Besides, even with all the bitching that we're all doing, I'm hitting some of these pairs for very good results. And I still say that we're headed for a breakout soon....or Armageddon.

But the weather sure is nice here in Cali, my golf swing has never been better and I bought a great box of cigars this afternoon.

Anonymous said...

Professional Gringo, can you narrow it down a little? I'll take Armageddon myself.

The US unemployment numbers tomorrow morning will be interesting. I wouldn't be surprised at a 640-650k number (50k pushed from last week to this because of the July 4 holiday falling on a Friday, off a 610k mean). The last time we had such an orchestrated marketing campaign for the market was just before a series of bad economic reports. On the other hand, if it's under 600k again and the big banks have profits the market might have another big up day.

Also, MacroMan, best investment blog on the Web, pay no heed to whiners.

Nemo Incognito said...

The good things about trading in Asian time: CIT is going down and the minis have barely moved. Time to get involved....

Anonymous said...

GS et al didn't "earn" these profits: they gouged the US taxpayer and eat the dead meat of :Lehman and Bear Stearns. There will be blood: they say there will be blood. Politically...

What about an update on your tender knee MM?

Anonymous said...

re: unemployment numbers. Haven't 150,00 GM dealerships closed shop this month?