Friday, October 16, 2009

Flamingo, Fright, or Friday?

Although Macro Man didn't ouch on it yesterday, his "no frills" earnings model for Goldman Sachs once again proved its worth, as the "consensus plus a buck" methodology proved to bve deadly accurate. Why pay analysts a couple million bucks a year when the no frills model does so well?

In any event, given that someone had whispered $6/share yesterday, and that Citi's reportwere less than stellar, stocks generally traded on the back foot. Nothing that IBM and Google couldn't rememdy afte the close, of course, and SPX futures have made a new high for the year in this morning's trade.

The real story, however, is in oil, which has finally broken out of four or five months of consolidation. Yesterday's bullish inventory data was met with a bullish response, which probably means that the trend is...err....bullish. $85 forecasts are now a dime a dozen; while another 10%-15% on the oil price may seem a bit too obvious, the set-up is not unlike the SPX price action in July.
Perhaps spurred by the oil price, some of the widely-populated front-end rate contracts have come under a bit of pressure, as indeed have some of the oil-importing Asian currencies. Indeed, despite the spike in crude, the dollar has felt decidedly squeezy for the last 24 hours; remarkable comments like Trichet's "the euro wasn't intended as a reserve currency" just added to the "fun".

So Macro Man is left wondering whether these jitters are merely the occupational hazard of the occasional market fright, a to-be-expected round of Friday profit taking after remunerative week, or a warnings sign that flamingo hunting season has started.

In truth, there's probably an element of all three. Macro Man has already pointed out the emergence of a distrubution phase in the Kospi, which is certainly consistent with profit-taking. For markets to climb a wall of worry (or tumble down the elevator shaft of complacency) necessarily entails the odd bout of nerves.

But without a doubt, there is the odd flamingo or two that have been passed. Exhibit A is GBP/JPY, which reversed sharply after a seemingly inexorable decline over the past couple of months. The timing seems odd from a fundamental perspective, given that this week saw one of the few CPI prints of the year that didn't surprise to the upside.
Ah, but when it's flamingo season, positioning is the only thing that matters! And positioning in GBP/JPY has been...ahem...extreme. The CTA model community, as proxied by IMM positioning, has its largest short GBP/JPY position ever. (The chart below only goes back to 2004, but would look the same if taken back to 1992.)
Anecdotal surveys on real money and discretionary hedge fund positioning appear to confirm that this was a big 'un.

The risk, of course, is that if the damage exacted by this cross proves sufficiently large, it could start to encourage profit-taking in other widely-held positions...the classic passing of the pink flamingo.

At this juncture, however, it might be a little premature that that will necessarily ensue. But Macro Man planss to keep and eye on whether this development is just a Friday jitter, an orthodox market right, or a prelude to flamingo season.

24 comments:

Nemo Incognito said...

Price action in NOK the last two days does look very Flamingo like, though the AUD is stopping for no one. What do you make of the RMB noise? More of the same or more the drums of war?

Nemo Incognito said...

Note, NOK action looks particularly profit taking like in the context of what oil has done.

Macro Man said...

GBP/NOK could prove to be GBPJPY on steroids, particulalry when you liquidity-adjust the NOK leg. RMB focus has been people piling in after the relatively rosy data of earlier this week and looking at the "relatively low" one year premia...low by the standards of 1H2008, that is. I don;t think China moves for some time.

Anonymous said...

One of the comments on the pink flamingo, Friday, May 09, 2008:

Never say never...but I think we will never see $40 oil again.

We saw it before the end of the year :D

Nemo Incognito said...

And it lasted all of 20 minutes....

Richie Rich said...

fully agree re the NOK comments, was about to post the same before I saw you had all beaten me to it. The other twist with any NOK unwind is the effect it would have on NZD. In a general unwind environment you'd expect NZD to get slapped too but Long NOK/NZD has been a favorite of the street and a NOK sell off will see NZD supported. - which would lead you to once again see aud/nzd lower and yet again see everyonee cry "I dont belieeeeve it" .. I m sure it was MM who once paraphrased Benjamin Franklin.. once
"fish, visitors and short NZD smell after 3 days"

Macro Man said...

Anon @ 11.03, proof positive that I am nothing if not fallible! If only I'd said $30, I'd be lookin' like a genius....

SFOT said...

Oil indeed had a breakout, but i do not think the data yesterday was very bullish. Days cover are still horrendous and the only reason why it is up here is due to stops, CTA entry and the SPX. Perhaps 85 is reachable soon, but any puke will be hard if the CTAs were to get out. Also, check out Brent in EUR. Hardly anything impressive to speak about, though also at the high of its range the past few months. Perhaps a breakout of that chart will then take USD WTI to 85.

Steve said...

The metals are looking a bit flamingoish.

Great site MM, you have become a regular stop on my daily information tour. Finding the time must not come easy.

But What do I Know? said...

About a week ago, MM, I mentioned my sure-fire investment strategy--to do the stupidest thing I could think of --and the stupidest thing I could think of would be to buy the pound. Of course it worked, and of course I didn't do it :>)

Hope you did.

Macro Man said...

SFOT: the analysis I've read suggests a relatively bullish slant; regardless, relative to expectations, the result yesterday was pretty unambiguous IMHO.

Steve, cheers. Doing this site is a bit like exercise: it's much, much easier once it gets into a routine. It's also a psychological crutch: it actually does make a difference to how you feel when you're bleeding money to have somebody compliment you on something you've written. Plus, one of my best trades of the year came out of something that somebody posted in January, so there's been a material incentive to do it as well.

BWDIK? Sadly, your excellent idea went unheeded (by me at least) until yesterday morning, after much of the damage had been done.

Robot In Disguise said...

The next flamingo is Chinese A shares going up. Premier Wen.

Steve said...

I'm glad you get back, it really is a great forum. You seem to have generated some organic buzz, a lot of people in the industry who I chat with have known about your site for some time.

A bit off topic, but has anyone else noticed that the high-flying early reporters (AA, JNJ, INTC, SCHW) had given back their post-earnings gains by yesterday's close even while the averages kept rising?

Jerk Off said...

the next flamingo could actually be all the existing trends continuing. a lot of people want the stock market down.

Skippy said...

Retail investors have finally started to pile into emerging equities according to the latest data - we must be near the distribution phase? Some investors in Asia are expecting bubble-like valuations in regional equities (arguably some markets are already there) based on the usual liquidity arguments - and that it will keep going until the Fed raises rates. I guess it is possible - a la 1993/94.

My sister also asked me yesterday if she should buy gold stocks? She never shows any interest in the markets.

Love your work as always MM...

Karen said...

@What do I know 12:13, I read your post the other day with great amusement as I had been watching FXB myself.. thanks for the followup post.. This morning has been good for a lot of laughs so far..

But What do I Know? said...

@Karen

I'd start a new investment strategy called the "Stupidest thing I can think of" except for the way that client's eyes get a deer-in-the-headlights look the few times I've mentioned it.

Maybe I need to hire Don Draper to come up with a name for it. . .

Anonymous said...

BWDIK, I don't work for Sterling Cooper, but I do work for a Brit, so try this for size:

When you "stupidly" buy a dog, implement a :

Correlation Offset/Short Term Asset Near Zero Approaching algorithm.

When you "stupidly" sell a rock star, implement the reverse algorithm. It's got the same name, except you substitute "zenith" for "zero."

-MM (via blackberry)

Macro Man said...

Here is that model in action six months ago. As you can see, some of the trades have been stunningly successful.

But What do I Know? said...

@MM

Thanks for the ideas and the reminder--I knew I had read about this somewhere before!

I suppose the theoretical basis might be that the markets these days are the province of really smart thoughtful people (I mean that sincerely) or their algorithmic avatars--evolution has driven (many of) the dumb ones out over the last ten years. Therefore, the only way to take the other side is to do something "stupid."

Brian said...

Is that Bloomberg screen of the IMM positioning for GPY/JPY basically just a blend of their respective COT reports?

Macro Man said...

Yeah, it's a real rough and ready indicator based on the non commercial CFTC reports.

The Astigmatic Oracle said...

Does anyone else see this market topping once the health care bill has enough votes to pass the Senate? I played the Feb-Mar decline based on the same logic with the stimulus bill (which was officially passed Feb. 15).

Judy said...

George Costanza as fund manager may well be the best emblem of the markets these days. But there's always hope for some rationality ...maybe? Frankly, the situation reminds me of a poker round where everyone has just bought in to the last round knowing full well that they don't have a winning hand but hope by some dink of momentum to win by waiting out the nervous and the rational . It's clear everyone's in the markets for a quick harvest - how fast it all turns to dust - depends on who's willing to quit the see no reality, hear no reality model.