Ursus Minor

Friday, September 25, 2009

Is it time for the bears to come out from the woods? Apparently so, judging by the last 48 hours' price action and the general tone of comments in this space.

To be sure, yesterday's price action was pretty dreadful. Equities and other risk assets tried to rally, and had a modcium of an excuse to do so in the claims and house price data, but fell back to earth with a resounding thud.

What's interesting is that Macro Man's proprietary measure of risk appetite, while well below the highs reached earlier this year, remains at levels consistent with, dare we say, irrational exuberance by the standards of the pre-crisis era.

As for the whys and wherefores of the sell-off, there are two plausible explanations for yesterday's price action. The first, more prosaic, rationale was the disappointing existing home sales data, which fits the sort of brown-shoots scenario described yesterday. The alternative, sexier explanation was the Fed's announcement that it is reducing the size of the TALF/TAF programs, and the simulataneous releases from the ECB/BOE/SNB that they will be winding down some of their special USD repo facilities.

Now, all of these programs have been under-utilized in recent months, so their withdrawal should not have a particularly pernicious effect, especially as the authorities have retained flexibility to re-establish them. But one might reasonably posit that winding down unused facilities is a necessary (if not sufficient) precursor to implementing an exit strategy; while their elimination does not suggest an exodus is imminent, while they were in place one could reasonably discount the chances of a policy tightening for the tradeable future. Now, who knows, especially as the timing of the announcement in the run-up to G20 is probably not a coincidence.

That, at least, appears to have been the reaction of equity and currency markets. Today's WSJ op-ed from Kevin Warsh underscores that markets will need to contemplate the timeline of policy tightening before too long.

Interestingly, fixed income markets didn't take the same message....if anything, quite the opposite. The eurodollar curve flattened reasonably yesterday, continuing the trend of the past couple of months (proxied below by the March/Sep 2010 spread.) A eurodollar flattening implies "lower for longer"....not exactly what you'd expect from a market worried about having to contemplate tightening!
Alas, logical consistency appears to be too much to ask from this market, as currency punters know all too well. Consider the table below, which lists four countries and some relevant macro variables, and then four six-month currency moves. See if you can match which currency move goes with which country...and no cheating!
While Macro Man retains considerable sympathy for the bear case, and has enacted trades to that effect this week, he finds it difficult to fully commit to any thematic view when so many markets exhibit logical inconsistency.

So while it's tempting to have a real go from the short side and shoot for the stars, Macro Man will need to see more than two days of price action to convince him that this is the "big 'un." For now, therefore, he's happy to just aim for Ursus Minor.

Posted by Macro Man at 9:48 AM  


Word from my dude in Shanghai was that Voldemort was on the bid again for copper. I've been picking stuff up today in anticipation from some decidedly stimulatory action next week, look at the end of day ramp in 2823. I am not the only guy positioning for this.

Nemo Incognito said...
10:32 AM  

Perhaps the wiser and more experienced traders can help me understand this phillosophy; but why is a trade no longer profitable when everyone is on the same side of it?


The young and the reckless said...
10:48 AM  

Any insight on today's breathless charge in the ASX 200 from its intraday lows? The 4 banks went bananas!

Anonymous said...
11:04 AM  

"why is a trade no longer profitable when everyone is on the same side of it?"

To oversimplify, prices move as more people put on positions. If everyone already HAS positions, there is no new money to move the price further (in the favorable direction), and much more potential for prices to move the other way (as people leave the trade for any number of reasons).

MM, for your currency quiz, what are those changes relative to? The U.S. dollar?

Anonymous said...
11:06 AM  

Anon, yes, the 4 changes are relative to the $. As for the surge in ASX and other APAC indices...maybe the MNS Chinese PMI mumble had something to do with it....

Macro Man said...
11:14 AM  

I dunno, MM. One and a half down days and the Madrid bottom fishers are out with a vengeance.

Charles Butler said...
12:42 PM  

B&D NZD and AUD No idea A&C

Anonymous said...
12:50 PM  

must be regionals

Anonymous said...
12:51 PM  

ASX insanity - it just seemed like lack of selling interest after the initial gap down was met with remorseless "bargin" hunting and short covering. One of the strongest intraday moves for weeks and it seems so strange to be back near the highs when commodities have been selling off.

Anonymous said...
1:31 PM  

At the moment stock price action is eerily similar to the topping process observed in June when the market became overbought and then proceeded hold through options expiry and only then went down into a correction and what most people thought would be a summer drought.
That coincided with the USD taking some strength after a very long fall and that sideways move has whipped a lot of people to death on the currencies since.
In this case though it might be might now be the USD just gone through a barrier out of that sideways range into a new low now doing what markets do and going back to pressure people who took that breakout. if that is what we are seeing then stocks are likely to correct wouldn't you say given that the dollar trade has underpinned a lot of the action we have seen in stocks and it's leading groups.

Anonymous said...
1:35 PM  

A one day surge in anything has limited value especially aftera strong prior move when you almost always know you are gong to get some blowback when the trend has been strongly up ..it's Pavlovs approach to the market ,you know when it's worked before buying the dip what do they keep on trying to do ?.

Anonymous said...
1:38 PM  

Gold getting smacked some more, copper holding up better. Nice.

Nemo Incognito said...
1:45 PM  

Umm quickly I would say Yen, ZAR, USD, KIWI

inegoveritas said...
2:10 PM  

I don't know if celebrations by bears are in order, yet. This reminds me of 2007 where despite everything, the markets kept moving up. And on every little fall, it was felt that the turn had come. But still, the exact timing left more than a few people seriously injured (including me). My guess is this is going to be a minor correction and the craziness will resume soon. But, who knows. Am still sitting out, wishing I was short rather than actually shorting and wishing soon that I was out.

Anonymous said...
2:15 PM  

I like your risk indicator, have one myself.

I wonder, how do you interpret it? Is it showing on ongoing risk appetite since it is at higher levels overall (a la diffusion), or is it a coincident indicator, namely that it has risen with spoos?

If so, you could make the case that it is diverging, with spoos making new highs (until yesterday), while the indicator rolled over some time ago.

That's what mine does. After indicating higher spoo prices for all spring and summer, it peaked in early August and made a lower high last week.

As an aside, take a look at the Hang Seng, not only did it just complete a classic island reversal, but also the resulting gap is exactly at the 50% retracement.

Steve said...
2:18 PM  

MM noted the chimerical character of the Iran "geopolitical" risk a few days ago. Certainly there has been a lot of confusion and a number of false starts on this story over the years.

That said, this time it really does look different. I try to draw up scenarios of how markets would react if we woke up one morning to find that a war had started.

Oil doubled in a very short space of time during the Gulf War. We had that 11% move on Iran rumors last year during the mania. Food for thought.

Crisis Management said...
3:01 PM  

IF one was short Ag and £ one would have had a STERLING performance this week, Macro Man.

Agreed for now about Ursus Minor, a trip down to the 50 DMA on the Spoos would bring in a lot of buyers. But remember that when you see a little bear cub on the edge of the woods, Momma Bear is never far away.

leftback said...
3:19 PM  

Wow, Looks like MGA really nailed the Fed. Warsh's comments bang in line with their actual report (as opposed to the broker blast version).

Anonymous said...
3:36 PM  

Well, I guess we at least know who's been speaking to them.

Macro Man said...
3:38 PM  

One of my trash spec names is up nearly 200% over the last two trading sessions. A solitary datum, true, but that sort of thing would not be happening much at the onset of any this-is-the-end bear move.

FD: flat beta, wishing I'd been long beta but short RIMM. Alas.

wcw said...
4:08 PM  

WCW I'm not surprised, there's a feeding frenzy in junk at the moment.

Talking my book (of course) but it feels like a blowoff to me. Steady buying over the past few months, then parabolic up.

Steve said...
4:16 PM  

USD/JPY really moving now, looks like the new government is going for FX hari kari.

Crisis Management said...
4:23 PM  

Bears growing horns, commentator volatility (J Grant, M Faber just did a 180), last week's extreme dollar bearish sentiment and high volume trade in worthless securities of bankrupt companies likely indicate we are close to the top. The hawkish tone from some parts of Warshington may indicate a change in the weather for carry traders.

leftback said...
4:25 PM  

Agree leftback, Fed making noise about draining, that would boost buck and came out of left field. And for all the talk about US weak dollar policy, are the Europeans happy at 1.47? Is Japan happy at 89? (That is a mini-crisis in itself.)

Steve said...
5:12 PM  

Steve, not quite out of left field, in view of Tiny Tim's comments on withdrawing some support a week on his CNBC game show "Taxes With Tim" a week earlier.

leftback said...
5:26 PM  

Were the durable goods figures leaked? "Risk" was hit about half an hour before the publication time.....

Anonymous said...
5:55 PM  

More copper range trading - there is no fighting Voldemort's range on CL and HG.

Nemo Incognito said...
5:56 PM  

Anon at 5:55 - obviously. Some of us are learning to get the f out when price action gets choppy before the news. It helps to be out in EM where this stuff happens all the time.

Nemo Incognito said...
6:00 PM  

Nemo, thanks. I am clearly too naiive for this world, otherwise I would suspect the homes sales figures yesterday were leaked too....

Anonymous said...
6:15 PM  

Nemo: what is Voldemort's range in CL and HG if you may share?

Anonymous said...
6:18 PM  

I'll call foul on that one. Spoos had already rallied well off the day's lows (and yesterday's close) before drifting off a bit before the figures. Ditto Eurotstoxx, which rallied a percent off the lows before coming off slightly ahead of the data. Trust me, I had my finger on the 'sell' button on my futures toy into the data, ready to press in the event of a bad number...and it didn't look suspicious to me...

Macro Man said...
6:21 PM  

Hey all, first timer poster here. Have been reading for a couple weeks, enjoy the dialogue immensely. But please share, if you may... Who is Voldemort?

bergs said...
6:40 PM  

Bergs, every few weeks someone comes on here asking that question. Google it, takes about 10 seconds to get the answer.

Crisis Management said...
6:44 PM  

CM, got it. Thanks for the tip.

bergs said...
6:51 PM  

Here's an oppotunity to hear some input from the ones that advocated following the prevailing market trend just a few days ago. In a prior post, someone raised the point that one should follow the overall market trend until the final reversal independent of fundamental factors. The reasoning was that as long as technicals looked "good" one should stay with the market. I raised the point that macro managers trying to steer a large portfolio would be unable or "less than timely" before steering the ship in the right direction. So in the spirit of erudite and enlightening discussion, what say you mates? Technicals still looking good? Is this the top and what a large macro fund manager should do at this point? I'm particularly interested to hear from the advocates of "forget fundamentals and follow the tape" as to how steer the large ship at this point? Let's keep it civilized.

Anonymous said...
6:58 PM  

A couple of points: bergs, as you may have found, Voldemort is China (the State Administration for Foreign Exchange, specifically.) I really ought to add it to the FAQs.

Anon @ 6.58...I think that's what options are for. It is relatively simple to print a fairly big option ticket; while it may have an impact on the underlying delta (per the late session swoon a few days ago), buying puts turns your position into a synthetic call. Should the downdraft continue, you can sell your futs/stocks, and be left with a shiny new short position. That's how I do it, anyways...and while I don't run billions of dollars of AUM, the strategy is certainly scalable to that sort of size.

ANd this indeed is what I've been doing....my pro-risk book was first hedged with puts, and yesterday I sold some futures....still awaiting the technical signals to close out my longs.

Macro Man said...
7:33 PM  

I'm operating from the viewpoint that it has b/c official policy to inflate asset prices until they drag the fundamentals along with them. Outside of Warsh this morning (whose hawkishness I find absurd) rates can be expected to stay floored as far as the eye can see and any substantial widening in spreads or weakness in asset prices will be met with a quick reversal of all the talk of exit strategies. Rather, they may be expanded. The $8k home credit may expire only to be reinstated in short order but bumped to $15k, and this thing along with 5% 30yr money is moving product,. The only question is if we are all yet sufficiently trained to understand this. Does anyone really think policy makers are just going to sit on their hands if equities get clipped 10-20% and spreads have a mini blowout? Also, outside of equities other asset prices are being cut in sufficient size to entice real money to bite b/c 0% interest is very, very painful. Fundamentals may say the price should be lower, but enough has been done to raise the floor, so we get some things washing through the system and avoid going Japan. Speculative fervor is too strong in the States to go that way. So isn't the big macro call risk on until we see any signs that the bond market may start erupting?

Anonymous said...
7:42 PM  

Anon @ 6:58

While I certainly do not fall into the “forget fundamentals” brigade (and have a general disdain for esoteric TA if I’m honest), I do see value in following the tape and general structure of the market – it’s not all noise, and if you can sniff out the signal then it’s a useful addition to your skillset / PnL. I consider the recent reactions to data points “signal” rather than “noise” – Given the opportunity to rally on good data points (e.g. Initial claims) the market didn’t break short term resistance– yet sold off at a disappointing Durable Goods report. This is a potential paradigm change from a few weeks ago – a market that would ignore all bearish data and shoot for the sky given any excuse.

Of course this is not to say it’s straight to SPX 800 from here; but the wind will change before new weather arrives, and sticking your finger in the air is good a barometer as any.

Olly said...
8:21 PM  

Feeding frenzy in junk is right. I took my money and ran, only to watch the whole group of junk names that even *sound* like they could get a 123-battery pop run up in the last hour. It's kooky out there. And that's without mentioning the Fannie preferred I owned for a while, AIG bonds, or the zombie equities like Frannie, AIG, rump-GM and family. Who's trading these things eludes me.

wcw said...
8:34 PM  

Oh, and FD: my spec name was in a completely different arena. As with short RIMM, long-anything-123-like is an idea I wish I had had, not did have.

wcw said...
8:35 PM  

"Of course this is not to say it’s straight to SPX 800 from here"

Yup. Agreed, but fading the FOMC was a good trade and it was a very good week. Short the long end of the curve into the weekend, expecting some selling early next week after the rally in 10s and 30s. Modest equity bounce Monday on a no news day, anyone?

leftback said...
9:15 PM  

Viz Voldemort Copper just does not close much below 2.70 and can't get much above 2.95, which is where its been since chinese concentrate imports peaked in July. Similarly crude just doesn't get much above 75 and probably won't go below 60.

I wonder if Voldemort & friends are not only trying to revive SDRs, but perhaps Bancor too?


Viz the front running on the numbers, seemed most obvious in Gold to me (what I was watching at the time).

Nemo Incognito said...
4:47 AM  

LB, I would not be surprised if we saw that bounce - National Day in China and viz factional politics it looks like the stimulati are here to stay. Any good news out of there could really move the HSI, as pointed out elsewhere its sitting on a 50% retracement level.

Oh, and for those of you who have witnessed CCTV (中国中央 not closed circuit) check out River Elegy here:

its remarkable how close that country came to liberalizing politically.

On an entirely unrelated note, when do we see a turn in JPY? This week would have been great save for this POS.

Nemo Incognito said...
6:32 AM  


Didn't you mean exponential rather than "parabolic"?

I've seen Some linear (constant amount of growth) and lots of exponential (constant percentage growth), but no parabolic fits of prices (or revenue, etc.).

tas said...
5:38 PM  

3 I assume is HKD, as the only major currencies that haven't moved at all over the last six months are HKD and CNY, and money supply growth in China is waaaaay higher than any of the macro data you've posted.

sharpe_mind said...
3:47 AM  

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