Monday, July 13, 2009

Monday, Monday

Perhaps its the after effects of an unusually deep Sunday night sleep, or maybe it's the knowledge that it's going to be a big week (what with option expiry and everything), but Macro Man's brain still feels slightly groggy so far this morning.

In a way, he feels like Odysseus, tempted by the siren song of a weak opening in stocks. While his brain is screaming "sell! sell! sell!" like Randolph and Mortimer Duke, thus far Macro Man has lashed himself to the mast-head of responsible risk management, trading the noise until the opening price action resolves itself into signal.

To be sure, the newsflow has been broadly bearish thus far. CIT looks to be on the brink of imminent demise- well, they would be if we didn't live in a world where anyone larger than an eight-year-old's lemonade stand wasn't deemed "too big to fail."

Meanwhile, the big banks have confirmed that they won't accept Arnie bucks any more, leaving some in California scrambling. Hmmm....will Vegas do an over/under on when the Federales ride to the rescue and guarantee all of California's debts?

Anyhow, more viscerally, it looks like Lloyds will be writing down another mountain of turds this quarter. Man, that's sooooo 2008! That commerical property has led the losses is particularly telling, given that US bank earnings kick off tomorrow with the mighty GS. One of the reasons for ongoing bearishness and scepticism over US financials has been the elephant in the room that is looming commerical property losses.

Of course, that's more of an issue for later in the year and into 2010. Of more immediate concern for the "all is well" crowd may be the renewed decline in that old chestnut, the Baltic Dry Index. While Macro Man pooh-poohed the significane of the rise earlier in the year, subsequent evidence clearly confirms that it foreshadowed a rally in equities and commodities. So we should perhaps pay some attention to the fact that it's tailed off again recently, particularly in light of the "commodity stock-piling is over for now" stories coming out of Beijing.
In that vein, it's intersting to observe that some heretofore resilient EM equity markets are reaching interesting technical junctures. Ship-building titan Korea, for example, made its highs of the year last Thursday. But it fell sharply today; much lower, and the KOSPI show could face cancellation.
More broadly, Macro Man was struck by a Bloomberg story today suggesting that EM stocks are now at their most expensive levels since October 2007. EM overweights have been a popular position, both according to record-high flows and anecdotal surveys from the likes of ML and CS.

Interestingly, the MSCI emerging markets index, proxied by the EEM ETF, has traced out a virtually identical head and shoulders pattern to those seen in more developed, "un-de-coupled" markets.
The difference, of course, is that the EEM has yet to break its neckline. If it were to do so, prompting an outflow of profit-taking, Macro Man can't help but wonder if that could be the much-discussed missing catalyst to send global stocks sharply lower.

(Yes, Macro Man's talking his book here.....but if you'd been long EM stocks for 30% and then saw them start to head lower in a haurry, wouldn't you wanna ring the register?)


Keith said...

"...can't trust that day..."
did you also hear the sucking sound of $450b and $240+b coming out of the emerging markets these days? (bloomberg)
As you say, it's monday, but maybe the crash is more imminent than suits your groggy first cup of coffee...

Anonymous said...

Did you not see this in Bloomberg Exclusive news. Mind you they put it well down the list:
"The U.S. economy will expand faster than previously forecast in the second half of this year and in 2010 as a revival in consumer spending signals an end to the recession, a Bloomberg News survey showed.

Growth will average 1.5 percent in the July-to-December period, compared with last month’s 1.2 percent projection, according to the median of 57 forecasts in the survey taken from July 2 to July 8. The jobless rate will exceed 10 percent early next year and average 9.8 percent for 2010...."

One can only stand bemusd. There is a raft of resets coming up in H2. Denninger points out that the story last year was "Subprime." This year's will be "ALT-A", "Option ARMs" and so-called "Prime".... "The amount of debt involved in these "bad deals" is vastly higher than that in the "subprime" space and if they fail to contain it (a near certainty) Round #2 of severe bank instability gets served up on us in the second half of 2009..." so saith Denninger.

Keith said...

and it appears that money is paying bills come due, not landing on wall street.
Where oh where to go for safety?

Anonymous said...

Ditto that Keith, where to go for safety???

EMs are dead for near short term (<1 month). ı'd load up on short term treasuries.

how about you, Macro?


pej said...

MacroMan, it's not just the EM, the US markets are far more expensive...

... The PER on the S&P 500 is at the highest since 1936 (since inception!) and has been hovering above the incredible figures of the peak of the tech bubble.
Historical PER record value on the S&P 500

Macro Man said...

Pej, oh yes. In fact, we are in with a chance of putting in the first 4 quarters of aggregate losses in SPX history.

Of course, that's only if you include bank writedowns and other "one offs" that somehow escape from reported earnings. Couldn't possibly happen again, so we can safely ignore 'em. Right? Right?

pej said...


Indeed, I think after the INDU and the RUSSELL 2000, it should just be normal to get a yearly loss on the SPX. The problem with the banks though, is that they are allowed to mark to fantasy so not sure if there will be more write downs.

Also, Citi has Government guaranties, and I've seen a piece of news where BofA was stating that they won't refund the government. I didn't quite understood the reasons, but it had something to do with a deal around Merrill Lynch...

For these reasons, I am thinking SKF is not the best place to be. But bank losses or not, the S&P should sink and Russell 2000 won't get any support from the US Gov as they don't have any CEO friends at these small/micro caps... errr... sorry, I ment, these small/micro caps can't possibly be to big to fail? Right???

Nemo Incognito said...

Got to say that viz a viz EM I like the technicals, HSI broke the 17500 handle and as far as I'm concerned its zero resistance down to 16700 or thereabouts. All the politics/policy coming out of China gets worse and worse whereas everything I see in Indo and Malaysia gets better and better. The SE Asia long / China short is looking better and better each day.

Nemo Incognito said...

FYI, EEM needs a push. Group effort please.

k1 said...

Hi MM, first time caller here. On the topic of bank writedowns, does anyone know the size of the reserves the banks *are* taking? Clearly they're not aggressively writing down those bad debts, but from the huge reported profits it would seem they are not setting aside anything for future losses either.

It would be interesting to see a chart of loss provisions within the big financials, illustrating how much(little) they are actually prepared for their future. Although it might make me want to follow Jim Rogers and convert my USD to SGD while there's still a chance.

Bob said...

MM ... I know "everyone" considers it a forgone conclusion that Uncle Obama will rescue California, if for no other reason than to stop Pelosi from hitting him with her broom stick.

But "everyone" said Lehman would never be allowed to fail either. And Bear. And Countrywide. FNMA, FHLMC, Wachovia, and Merril effectively failed, even if they didnt formally file bankruptcy papers.

AIG continues to suck more and more money -- the taxpayers have saved that thing how many times so far?

No one outside CA believes the problems are temporary (and many people inside CA don't either). If Obama finds an extra $30 billion somewhere -- that will only postpone the problem, it won't fix anything

California has lots of electoral votes -- but not enough that Obama can alienate the other 49 states. He can't bail out just one state unless he wants to get impeached; he can't bail out 50 states because he doesn't really have the money to bail out even one

After AIG, the banks and GM ... popular support for bailing out losers may not be the foregone conclusion that Wall Street wishes it was

At some point, CA politics be damned ... Obama is going to have to think about self preservation (both his political fate and maybe the federal govt)

I would argue that a good model would be New York City circa early 1970s. The Feds eventually (with much foot dragging) helped NYC out, but only with the condition that expenses get slashed. NYC effectively lost its "sovereignty" at the same time; now NY state has to approve NYC's budgets. And incidentally, NYC defaulted on bonds owned by banks (no votes).

If California gets bailed out, its still going to be very painful. I don't know how many registered voters own CA munis (as opposed to "evil" hedge funds), but there are lots of other debts to choose from (IOUs, pensions, etc) -- somewhere, some debt will get defaulted on, even if they call it something else.

The other side is that the bloated state government will get downsized -- because it doesn't take 10 bureaucrats to do essentially nothing. Other states manage to do the same nothing with only 5 bureaucrats.

Greg said...

Any 2nd stimulus or CA bailout will fall under one of two scenarios:

(1) Too small to make a real difference

(2) Too big to leave the US Federal government solvent

Moody's and S&P don't matter, they are always the last ones to recognize a problem. What matters is the millions of Chinese citizens (and OPEC citizens) that already question whether the US will pay its debts in real terms.

Beijing may very soon be forced to choose between abandoning "Bretton Woods II" or staying in power

Monday 13th said...

MM -- why don't risk managers allow traders to get massively short gamma?

I only ask because going into this economic mess, the "Greenspan put" had the Fed massively short gamma

wcw said...

On-topic: indexes ramped 200+ bps off the lows today, so be glad you didn't sell, sell, sell. My zero-beta stance is looking pretty punk as a result, but it's a lot better than being short, lemme tellya. Give me some more rallyage in the stupid names before I go net short, please.

Off-topic: a native, I normally am the first person to badmouth California budget politics going back to Prop 13, but some of you kids are pretty divorced from reality. CA spends a very sustainable proportion of gross production on government, in the 6% of Gross State Product range. There is no problem paying for bureaucrats, much as I would like to see a real administrator go all Neutron Jack on them (or as Neutron Jack as you can get in civil service). There is a huge problem insofar as the entire budgetary apparatus back to the aforementioned trainwreck of a proposition needs to be dynamited an replaced.

California, in short, does not need a bailout. The day that it does, we will all quit trading, cash out, and put all our liquid assets into firearms, ammunition, and sewing needles.

Greg said...

wcw - you and Krugman are peas in a pod. We the people don't want to pay infinite taxes, and we voted accordingly.

Its pretty arrogant for elitist "intellectuals" to sit there and tell us we don't know what we want, and we should be paying higher taxes because the elite intellectuals know better than us.

The proposition wasn't done in secret -- the inept bureaucrats knew all about it but kept spending money they didn't have and voters didn't want to pay

If you don't want to obey the voters wishes, you don't belong in government. Krugman lives in a pretend world where tuition rates increase faster than CPI and GDP decade after decade... he has never had to operate in the real world

Anonymous said...

I thought the problem with CA was that they derived too much tax revenue from property and income, which is obviously very pro-cyclical (and much like the UK's tax base?).

Greg said...

anon - the problem with CA is their spending has grown much faster than their state GDP for decades. State GDP measures the whole economy (not just income or property) -- in the long run, spending cannot grow faster without the state going bankrupt.

Voters put a cap on how much taxes could increase, but they didn't put a legal cap on how much inept politicians could spend

Politicians all think instant gratification. Spend now, buy votes, let some other idiot worry about how to pay for it tomorrow. They have been doing this for decades

The problem in CA is that it is tomorrow

Neil said...

Macro Man, love your column, but there's no way this market falls apart ahead of the GS earnings. GS, aka Government Securities = Giant Squeeze !!

Let's take another look at the ensuing technical picture on Wednesday before the real turd traders report on Friday (GE, BAC, C).

Bob said...

Somewhat off topic note on Government Sachs ... lots of IT/programmer types have located the German website where Sergey ??? supposedly downloaded all the double top secret GS trading code.

What they found was slightly modified open source code (already publicly available) that interfaced with various exchanges.

Once again, GS cries wolf that the markets will all collapse, even civilization as we know it ... if only the government doesn't do what Goldman wants

wcw said...

Anon, the cyclical nature of CA's tax base is a problem. It isn't property at all, which would be less cyclical, but income and especially Silly Valley options that are the issue.

Greg, as Friedman said, to spend is to tax. California spent, and it will tax, full stop. Off-topic, our host asked us to behave once already. Please avoid personal attacks. Or post your trades -- either works for me.

Bob, are you sure the code got out? Do you have a link? The way I remember it, our intrepid hero uploaded it to a 'public' svn (based in the UK, hosted in Germany, so more British than German to my mind). I hadn't read that he had left anonymous SVN access enabled, or that anyone had gone public with the code. Links?

Bob said...

I have read several different sources all saying the same thing -- that doesn't prove truth, but...

The word is that the stuff Sergey ??? posted was Erlang API code -- open source code used to interface with exchange servers.

The trick to high frequency trading is to get your trade to the exchange first -- hence the most critical part is efficient communication / trade transmitting.

Many firms also position their servers at the exchange (or "nearby" in a telecom sense)

The algorythms to actually make markets obviously have differences, but they have an awful lot in common. Market making is not exactly an unknown science. Even if you develop a better mouse trap, it does you no good if the lesser mouse trap enters / executes its trade first

It was also mentioned (again, I am parroting the other blogs, so caveat emptor) ... the lawyers looking at this stuff are mostly securities lawyers, with some IP lawyers thrown in. There are no programmers in the compliance department. The lawyers have no idea what they are looking at; they just see "software" that (allegedly) got copied.

Just because Goldman's compliance department ordered their system administrator to put "Copyright Government Sachs" in the compiler defaults does not mean that Goldman actually has a copyright -- especially if the code is already copyrighted by the open source community.

It is not obvious that Goldman's compliance department has the technical expertise to understand what was copied

Bob said...

I should mention that there are many megabytes of code, and most people say they haven't read through every line... its possible that some Goldman code might actually be buried somewhere in the mess, and maybe it has some proprietary algorythm contained therein. The bulk seems to be open source communication software

Bob said...

From Goldman legal department's angle, it doesn't matter whether Sergey ??? stole proprietary algorythms or not. And I would certainly echo the question of whether a bunch of lawyers would know if the code was trading software or the source to Donkey Kong

I think Goldman is just abusing its position with government to delay competitors from entering the market. The more confusing this case gets, the longer it stays in legal limbo -- the longer it will be before a well funded ex-Citadel trader can create (materially) the same thing Goldman has and take market share

Its unlikely Goldman's servers can get "closer" to the exchange (in a telecom sense). They probably don't have any true competitive edge -- one that can't be recreated easily by someone with sufficient capital

The only way for GS to keep the competition out is to (ab)use the power of the state to bully competitors. Wouldn't be the first time....

So maybe this topic isn't so unrelated to MM's post after all...

wcw said...

A found the link. ZeroHedge links to a Google Code site. This is not, as far as I can tell, the xp-svn dump. These are LGPL'd Erlang libraries Sergey is hacking in his spare time.

I fear this one goes under the subject "sometimes blogs get it wrong." I am pretty sure Goldman knows the difference between the Google Summer of Code and its trading algorithms.

Bob said...

WCW - those are not "the" links I looked at. Zerohedge is a financial blog, not a programmer blog

I seriously doubt the lawyers at Goldman are significantly different from those at other banks -- meaning they have no idea what the code does. Lawyers are not omniscient no matter how big a God complex they develop.

There is a good chance that Goldman hired Sergey ??? two years ago because of all that GPL google code that he developed before joining Goldman. That just adds credence to the suggestion that much of the code Goldman lawyers think is proprietary is not

One might ask why Goldman would entrust a short term, junior employee with business secrets that are supposedly so critical to their business. And a guy known to produce and publish GPL code no less.

If I go work for Pepsi/ Coke for two years, will they give me their secret formula? If I join the military, will they give me the nuclear launch codes after two years? Not that I would want it if they gave it to me, but would Kentucky Fried Chicken give me the colonel's secret blend of spices if I work there for two years?

Either Goldman is gallacticly stupid, or they know this code isn't that hard to re-create

Tangling their competition up in endless legal nonsense has much more value than the software

Anonymous said... is 3.20am in Taiwan and Taipei has just had a tremor. The Hotel is still moving after 1 hour(which is a little disconcerting). Perhaps it was a minor Tremor that also shook Taiwan equities on Monday and the "Greater China" convergence theme? Excellent post again MM..

wcw said...

Where are the 'real' links? I posted what I found in two seconds of googling. It's my experience that by the time something like this hits the hacker community, it's available.

As for GS and a junior programmer, you need access to source in order to work on it. Perhaps GS made the mistake of allowing all developers above a certain level read-only access to the entire project on which they worked. It's certainly the best way to collaborate. When I have had SVN access, I have never been shut out of any portion of a project, despite not being much of a developer myself. Those were small companies, though. I have no clue where to gain insight into GS's code security.

Greg said...

I agree with Bob ... higher ranking executives with access to marketing plans or development plans, or research scientists with access to drug development pipelines always get paid a lot more, and they have non-compete clauses that force them to sit unemployed (with pay) for several months

Either Goldman's legal team screwed up big time ... or else Sergey who ever didn't really have access to anything critical

Anonymous said...

You gotta love Ms. Whitney. Of course, if we had read the REAL 24 page report instead of just the news blurb about how GS is a buy and the stock price adjustment is $186, we might not feel so rosy inside. But why spoil the punchbowl? Green shoots!!


Jeffrey D. Benson said...

Its interesting to watch how this financial crisis has occurred and how its changed so many perspectives. I remember 2 years ago when the economy was so white hot any talk of apocalypses was conspiracy theory. Now, fast forward to present, and a large portion of the financial community is negative on emerging markets, commodities, and commodity currencies. I'm bullish. My logic.... is that $2 Trillion of stimulus has been pushed in to the global economy. That $2T replaces a lot of American consumer spending (the origin of the crisis). Also, does anyone really know what the outcome of Quantitative Easing is? Could it be the cause for financial warfare? Is it possible that there is a run on the dollar if (for example) China found that Russia is diversifying its reserve out of the dollar. No body really knows. The financial crisis, proved some unusual thinkers correct. Most notably Nassim Taleb. I like some of Taleb's investment advice. One of his practices is a barbell strategy where, in the event of an outside event, you are positioned to profit. I think Greenback bulls are stuck in old modes of thinking. I have similar perspectives about Emerging Market bears.

Anonymous said...

Bob - thanks for your explanations, they're the clearest I've heard so far (there's a lot of hysteria about this code "theft").

Anonymous said...

What is there to be bullish on?