Crucial

Thursday, October 29, 2009

"Life all comes down to a few moments. This is one of them."
-Bud Fox, Wall Street

Looking back on his sixteen year career in finance, it's been Macro Man's experience that each year is often defined by a handful of critical days or events. While Bud Fox had the benefit of knowing how important his visit to Gordon Gekko's office would be, it's often not quite as obvious in real time how important an event will be.

When Ralph Cioffi's Bear Stearns hedge funds blwe up in July 2007, for example, it was viewed as in interesting development that might result in an orthodox phase of risk aversion; little did we know that it would usher in a global financial meltdown the likes of which none of us had ever seen. Similarly, when Macro Man took to the slopes on Friday, February 13 this year, he had no clue that it would become the defining day of the year for him (which happened when he blew out his knee in waist-deep powder.)

Today, on the other hand, has all the hallmarks of a potentially defining day for the rest of the year. Yesterday saw the SPX close below its uptrend line from the March lows; while prior trendlines have been violated more often than traffic laws by your average London cyclist, this time may be different. Even as the index was making new highs, the RSI was making lower highs- a classic momentum divergence that signals trend exhaustion and possible reversal.
Moreover, the market has gone down four days in a row. According to Macro Man's mate "Nick the Greek" at Citi NY, this has happened three previous times since the March 9 low: the average return on day 5 has been 1.66%. Adding spice to the chili is the release of Q3 advance GDP; with a forecast range of 2% to 4.8% around a median of 3.2%, the potential for someone to be surprised is rather large. Anyhow, the point is that if (and aat this juncture, it remains a very big if) equities put in another poor day's performance today, it may be a signal that something has changed.

Obviously, next week will also prove critical, with ISM, payrolls, and the Fed. There appears to be something of a divergence in pricing across markets. On the face of it, the dollar and equities look to be pricing in the removal of the "extended period" language, which acccording to the recent Guha article would imply that the Fed could (rather than will) raise rates within six months. But then looking at the strip, where December 2010 eurodollars are more or less at their highs of the entire cucle, it seems likely that such an outcome is not fully priced into fixed income.
As usual, reality is more complicated than it seems at first appearances. The dollar has evidently been buoyed not only by all the mumbling about the Fed, but also by the more prosaic (and powerful) fact that US corporates have been aggressively buying dollars. That positive earnings outcomes have been skewed towards those firms with large international sales is probably not a coincidence; still, the apparent vehemence off the flow is notable.

One other little development has caught Macro Man's eye. It may be nothing but an attractive p.a. investing opportunity, but it may be more, and to Macro Man's mind raises question about LIBORs. NS&I, which administers the UK version of savings bonds, recently icnreased their one year fixed rate interest on offer to 3.95%. To put this rate into contrast, one year Gilts offer a yield of 0.46%, one year swap yields are 0.93%, and the entire LIBOR complex is well, well below that level.
Now, if you are a depositor with excess cash who is willing to forego liquidity for a year, why would you ever leave the money on deposit with the bank, where savings rates are miniscule? Surely these rates are going to vulture deposits away from the banking sector? And if the banking sector loses desposits, shouldn't LIBOR move higher?

There is a hell of a lot of complacency in global front-end trades which, to Macro Man's eye, look close to fully-priced. The risk is surely skewed towards LIBOR-OIS widening, rather than narrowing? And if that happens, it could well be a crucial development for financial markets.

Posted by Macro Man at 8:56 AM  

31 comments:

Or this could all be a monstrous head fake. Libor-OIS widening? But isn't most of the risk really sitting at the fed now? Or is this just premised upon the lizard-brained / amygdala driven markets doing the same old 2008 moves when they get scared?

Nemo Incognito said...
10:38 AM  

GDP won't disappoint, whatever the actual number will be. I'm expecting a bounce today.

Gregor Samsa said...
10:39 AM  

I can't see why so many seem to put their faith in a linear recovery. If the GDP figures deviates it should impact markets, but does it say much about coming quarters or the state of the economy? I don't think so.

On another note: This crisis and subsequent "recovery" has failed to produce the only thing we really needed; deleveraging. With that flaw, and it is a major one, we will see (and need) another bonecrushing market compression with proper asset deflation to trigger significant shrinkage of balance sheets, both private and corporate.

Cortex said...
11:04 AM  

Cortex with all the equity and rights issues I've seen in the corporate space I'm not so sure about corporates needing the delever.

Consumers are another story entirely, however.

Nemo Incognito said...
11:09 AM  

Will be a bounce alright today, but the overall mess is much bigger than we could ascertain. And the CB heads are not talented enough to deal with it. Especially, HeliBen and Timmy are mediocre, unable to think outside the box. Just waiting for Godot.

Anonymous said...
11:40 AM  

as a London pedestrian, i can say that the average london cyclist is AT BEST a d-bag when it comes to traffic laws

Anonymous said...
11:51 AM  

everybody expects a bounce. longs hope to get their 'get out of jail card' and bears who are no longer short coz stopped out, are now determined to short when it bounces

so, will it bounce.. ?

spagetti said...
12:22 PM  

This whole business looks increasingly headfakey to me. My bearish determination to short after this bounce is wavering, and it's not so bad in jail after all.

Gregor Samsa said...
12:53 PM  

Broken clocks litter the street...

Anonymous said...
2:03 PM  

Annualised numbers give me the bracen-bits. It was not much of a 'surprise' if you divide by 4.

As spagetti said - everyone wanted a bounce - let's see if it holds into the close...

Skippy said...
2:03 PM  

Its a BS trading market and I'm treating it as such. GDP is a lagging number, lets wait until a few more leading numbers suck eggs or until the trade war kicks off in earnest.

Nemo Incognito said...
2:55 PM  

It would be interesting to see how a prime tyson fared vs. a young lennox lewis.

Kevin Rooney said...
3:36 PM  

"Note that the US is off the line in this chart. We believe the Fed will be much more patient than its counterparts in Europe. In part, this reflects the fact that the US is the epicenter of the capital markets crisis, but in part it reflects a different mindset. The ECB worries more about inflation, particularly in the context of aggressively easy monetary policy."


http://ftalphaville.ft.com/blog/2009/09/28/74346/deflation-dead-and-deader-federal-reserve-style/

Anonymous said...
3:54 PM  

LB took an unusual punt on the long side at the close yesterday, partly on technicals and partly because the Vampire Squid called a suspiciously low GDP number, and LB assumed this was part of their plan to Screw The Shorts. Anyway, we did some EWZ, GDX and COP and it's turned out nicely.

This thing has a little more squeeze potential as recent shorts experience a little COLD STEEL to the nether regions. After that it's back to business as usual, expecting a resumption of the dollar rally and waiting for the BIG ONE.

leftback said...
3:58 PM  

They will go on screwing the shorts until no one dares to sell anything anymore.

Welcome to Utopia, where asset prices never fall, and mankind lives in peace and harmony forever.

Gregor Samsa said...
4:17 PM  

LB would be interested in thoughts on the Treasury market here. LB assumes the 7s will be sold OK this afternoon, but then LB expects that they will start selling the long end ahead of the big auction of 10s and 30s coming up in two weeks. So that would mean that the steepener is likely to be on again quite soon. Anyone?

leftback said...
4:36 PM  

Isn't there still $0.3 trillion of MBS buybacks outstanding?

Would you be willing to bet that QE2/3 is not going to happen?

Gregor Samsa said...
4:48 PM  

weren't the unemployent figures today still bad, a little hidden behind gdp, i think the equity rally will fade in the last 1-2 hours of trade

Anonymous said...
4:59 PM  

QE2/3 will happen, but not until equity plunges 2/3.
Unemployment is shocking and the November NFP will be a horror show on Friday 6th.

A week after that it will be Friday 13th.... then options expiration on Nov 20. Black Monday, November 23rd? Just a thought.

leftback said...
5:06 PM  

The NS&I enigma is discussed here:
http://www.nuclearphynance.com/Show%20Post.aspx?PostIDKey=135448

Funnily enough, FRA/SONIA has been widening in the past few days. Anecdotal evidence suggests it's a UK clearer that's been on the bid, somewhat aggressively and in size.

There's all sorts of conspiracy theories swirling, but it all still makes very little sense.

Dimitry said...
5:25 PM  

I like your thinking LB personally i'm thinking a black day will happen early december, so 23rd Nov seem feasible

Anonymous said...
5:30 PM  

LB on bonds you could be right. The thing is that now that there are auctions every 5 minutes it gets hard to play the pre-sell, post-buy game.

If you take a look at the 30-yr yield chart you can see that we have a nice down-trend line, nice and clear, with tests of the line on Mon and Tues of this week. We're currently about 3bp below it now.

Steve said...
6:00 PM  

Great day to not be short....!

leftback said...
6:45 PM  

http://globaleconomicanalysis.blogspot.com/

Cheering Over Ugly Report

Today the market is cheering over what is actually an ugly report.

A misguided Cash-for-Clunkers added a one-time contribution of 1.66 percentage points to GDP. Auto sales have since collapsed so all the program did is move some demand forward.

Government spending increased at 7.9 percent in the third quarter which is certainly nothing to cheer about.

Personal income decreased $15.5 billion (0.5 percent), while real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent last quarter. Those are horrible numbers.

The savings rate is down, which no doubt has misguided economists cheering, but people spending more than they make is one of the things that got us into trouble.

The only bright spot I can find is exports. However, even there we must not get too excited as imports rose much more.

Anonymous said...
7:43 PM  

Tomorrow's personal expenditure numbers will probably show us the other side of the coin. So if Q3 GDP was +3.5% thanks to USG spending, then (3.5% - 7.9%) means private spending decreased ~4.4%.

Hard to see how this can be sustained into 2010 or even into the Q4 GDP. The recoveryless recovery may be over before it even started. Even as the recession ended, it is beginning again.

leftback said...
8:13 PM  

Tudor Jones just went publicly bullish on Gold. Not that he is infallible but interesting nonetheless, especially in context of other prominent managers agreeing eg Greenlight and Paulson.

Anonymous said...
9:36 PM  

If the Euro goes to 1.60, gold will go higher. If it turns around here below 1.50, then it will retreat - for now. There is only one trade here. Currency volatility has increased and that usually indicates a trend change. But in this market, who the f*** knows?

leftback said...
9:50 PM  

Some Asian markets, KOSPI in particular, have been quite weak into the close...hmmmm

Skippy said...
7:27 AM  

You're right skippy - CLSA notes its got the worst technicals along with STI (and that's illiquid as all hell anyway). High yield not getting much life either, A/D indices looking pretty crap across the board. Time to reload the shotgun and bring the pain to zombie risk assets?

Nemo Incognito said...
7:32 AM  

LB
on bonds, anecdotally i hear of a lot of shorts. probably yday, people added to them. i think equities will have a few bad days going forward and there will be a squeeze in bonds despite the auction supply. i think if equities tank and USD rallies, the supply is not going to be such an issue. its an issue only in a weak market

spagetti said...
7:52 AM  

NZD looking weak also. Less convincing than most of the regional equity markets... but...

Skippy said...
9:02 AM  

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