Wednesday, October 21, 2009

Macro Man has previously observed that blog traffic can sometimes say a lot about the significance of market events or interest in a particular theme. If this is the case, then it appears that concern about the weakness of the dollar is very real, as yesterday's post generated a near-record level of traffic. This was largely due to the fact that a few high profile sites very kindly linked to Tuesday's post, but still....someone has to be interested enough in the subject to click through. For the first time in a couple of years, Macro Man finds the subject of external imbalances to be of paramount interest, and since Brad Setser moved on to bigger things, there is perhaps a dearth of commentary on the subject.
Regardless, the drumbeat of dollar weakness rolls on, as the buck is back close to its lows of the year against the euro. Exotic barriers around 1.50 have, by all acccounts, helped put a lid on spot for now, but one would have to believe that it's only a matter of time before the level breaks. Hell, even sterling has continued last week's bid tone; if the BOE minutes don't hint at an appetite for more QE in December, one might reasonably conclude that the Queen's head could enjoy another dies mirabilis.

Although equities had a bit of a setback yesterday, the pro-risk drumbeat marches on (despite the swirling winds of financial and economic protectionism.) While the Bank of Canada intimated yesterday that loonie strength would stay their hand on rates for another couple of quarters, another strong currency phobic CB, the RBNZ, changed its tune by suggesting that the strength of the kiwi would not preclude rate hikes.

And in the London morning, China leaked its September industrial production figure, due to be released tomorrow, at a better than expected 14.1%. You could almost literally hear the risk longs shouting "hip hip hooray!"
Regular readers will know that Macro Man has been (incorrectly) fairly sceptical of the green shoots phenomenon and has fought the equity rally (if not position-wise, at least intellectually) for much of the way up. One factor that he almost certainly underestimated, or missed altogether, is that of margins. As a top-down macro guy, he doesn't really gt his hands dirty with company- or sector-specific margin analysis; he has neither the data nor the expertise to do so.

But as a top-down macro guy with a penchant for crafting little indicators, he does have a proxy that he was watched for the last few years to give him a rough idea of what margins are like. Simply put, he looks at the y/y change in US CPI ( a proxy for corporate selling prices) against the y/y change in finished goods PPI ( a proxy for corporate costs.)

To be sure, the proxy isn't perfect, nor is it intended to be. But it ain't half bad as a rough-and-ready indicator, as you'll observe that prior "negative margin" readings have typically coincided with recessions/bear markets/ticking timebombs.
As you can observe, after plunging to record negative territory in H2 of last year (a period that coincided with near-record negative equity performance!), the margin proxy screamed higher earlier this year. Macro Man ignored this signal to his detriment. Today, the margin proxy is stabilizing at relatively high levels which, much as Macro Man may hate to admit it, could suggest upside profit surprises (such as those observed thus far for Q3) if maintained.

Rest assured that he will pay this little indicator a bit more attention in the future; it won't just be with currencies that Macro Man gets back to his roots.

Posted by Macro Man at 8:57 AM  


was the china i.p. data actually leaked ?...or just a rumour ?...

Anonymous said...
9:40 AM  

Funny thing is when you and many others have been raging against the dollar risk play I was plugging it on a why 'fight it'.
But, right now when you appear to have changed your mind I am looking at this thinking the signs are ripe for a really good squeeze.

Earnings have been good ,but revenues still show it's a case of selling less and trying to make more from that. And this is now less of a surprise on earnings than it was in the summer and at much higher prices.

I have to note that despite the so called good releases price on days up is on lower volume and volume increases on down days.

I call this distribution and it's happening while the USD is pinned in support at .75.

The action up has centred on Tech and Energy and even some of that has not maintained reporting gains.Although Energy doesn't really come into the fray until next week.

This is all beginning to look like a struggle and I think I see some increase in short interest now in the banks again so reminds me of topping to the broad index in 2007/8 when only Energy/comms held it all up.

Anonymous said...
9:44 AM  

Anon # 1, I saw a specific comment from a CB guy, so I'd call it a leak!

Anon #2, while I have certainly fought the reflation trend in equitiy indices all year, I do tend to run a balanced book so have caught it elsewhere. While I concur that it appears to be running out of steam in some circles, the big question is whether it can keep it up through the end of the year or gives up the ghost before. And the answer to that question depends not on the fundamentals, but on the ratio of profit-taking to window drssing that we see over the next 10 weeks.

Macro Man said...
9:51 AM  

i am not a trader, just a retail consumer with a 403b I'm trying to keep solvent.

MM, with regard to your answer to anon #2 at 9:51 I am interested in your (or anyone's) opinion about whether or not a dreadful US xmas season is already baked into the numbers or if the market will be shocked when it happens and that will be the tipping point leading to an early "giving up the ghost", rather than having this rally grind into the new year?

triozyg said...
10:09 AM  

That certainly could be the case, though one thing to bear in mind is that y/y comps will be very easy as sales fell off a cliff in Q4 last year as the world "came to an end."

Macro Man said...
10:14 AM  

Hi, just on the CPI vs. PPI thing, I can see the logic here but just to warn you a little bit on the pitfalls, one thing to consider is technology cycles which will offset somewhat any compression in the spread between PPI and CPI. Couple of strategists seem to think particularly since the late 90's this has had an impact on reliability of CPI minus PPI but I actually think it is most observable in the decline in the average working week from say the 60's to the 80's.

On the subject of margins though, one thing I think people don't talk about nearly enough is the shallowness of the recovery forecasted by consensus vis-a-vis what we have seen historically. I think this is the chart to look at on this topic:

Obviously I wouldn't want to totally extrapolate the trend from history to now as the imbalances are somewhat more severe now, but if the recovery is anything like the magnitude implied by history, top down guys are way off on GDP. If this is the case, bottom up stock analysts are probably basing their top line forecatss off their strategists and economists. In which Case their top line numbers may be a ew percent too low. Factor in operating leverage and earnings growth could be way above the 20-odd percent consensus expects for next year.

That would be the bull case anyway...

Great blog MM, read it every day, forst post today, cheers

darth trader said...
10:59 AM  

Would agree with the "wall of worry" issue in equities - check out EDU US. Ridiculous growth, stable margins despite H1N1 issues, ladida BUT it dropped 11% at one point yesterday. From where I am sitting that's a good reason to buy dips, at least in Asian consumer names which should be beneficiaries of any resolution in global imbalances.

Nemo Incognito said...
12:32 PM  

Also Darth, pasting links always screws up in blogger. Which article?

Nemo Incognito said...
12:48 PM  

China's Q3 economic data story. The leak was on China Securities Journal.

..From India!

Anonymous said...
1:21 PM  

It is a post on the federal bank of Atlanta's blog from 6th of August. Compares peak to trough GDP falls over last six recessions with subsequent four quarter rebounds in GDP.

The implication is that by historical standards at least, the consensus forecasts for the next four quarters I see on my terminal of around +2.5% might be a bit low.

darth trader said...
3:02 PM  


Nemo Incognito said...
3:25 PM  

Dave Rosenberg makes the point today that the recent PPI print, declining 0.6% MOM, could be a sign that margins are actually being squeezed, given recent -$ and +commod moves. PPI ex food and energy was weak too.

Another economic boutique argues for a continued rally in SPUs due to increasing margins, the reason being a 2% drop in labor costs. I question the reasoning though, seems they are "econometrically" holding all else equal, and a 2% drop in labor costs could be a harbinger of nasty effects elsewhere.

Steve said...
4:15 PM  

Agriculture. WTF. Again.

Nemo Incognito said...
4:56 PM  

Chinese industrial production doncha know, Nemo. It's up, so the Wangs eat more, so they import more of Indiana's finest, so corn and wheat are up 3%, overnight. All very logical.

Anonymous said...
5:27 PM  

Not complaining because I'm in it, but those EM high inflation prints could be coming sooner rather than later (and i should probs be taking some risk off as per MM's post today on the equity side). Is is just me or did cycle get compressed?

Nemo Incognito said...
5:55 PM  

MM, any thoughts on short JGB/JPY trades? There is a noticeable momentum in the last 3 weeks that has built up (in terms of "smart money" betting on this). Do you think that the market is at a point where it just "accepts" that Japan is in perma-deflation and 10yr JGBs yield 1.5% or wherever they are atm, without noticing how bad the government fiscal position is now and how quickly it will get worse?

My own personal thought is that apart from keeping an eye on the salient charts and long dated vols you could wait a while for the "recognition point" when the P&L starts ringing. But, having been wrong on most things for several months....I best keep those opinions to myself

Anonymous said...
6:33 PM  

This new government in Tokyo could find itself the spark that lights the fuse for the next crisis. How do you say: "bond vigilante" in Japanese?

leftback said...
7:14 PM  

Here's another newbie question for the blog:

When a market strategist says the S&P500 (or whatever index) is priced to assume 4% growth next year...

How is that 4% (or whatever rate) calculated? Why does 1000 S&P imply the market is pricing in any particular rate of growth?

Anonymous said...
8:19 PM  

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JanuskieZ said...
8:30 PM  

darth trader: No idea if I'm right or not, but it's that widespread belief (that the downside was so bad, that the upside will be so good) that's giving me comfort in holding the opposite view.

I think the previous drops were business cycle recessions, which have a natural end (which was generally aided by some debt and auto/home buying) to help produce the charge out of those recessions. If this one's a result of credit issues (as opposed to a normal business cycle), then I'm not sure using the previous recessions is a good guide.

Our Man in NYC said...
8:33 PM  

It's begun. Pay limits. Merv the Swerve talking about bank break-ups. SELL 'EM LLOYD....

leftback said...
8:39 PM  

OOOH, Macro Man, they are throwing ALL the toys out of the pram here in New York this afternoon.

This might call for a song later...

leftback said...
8:53 PM  

WTF? Seriously, I eat my dinner and the spooz drop 17 points. What gives?

Macro Man said...
9:00 PM  

Pay limits at TARP recipients spoiling Xmas plans on Park Avenue. Dick Bove downgrades WFC. NY State is broke. Or the old SPX 1100 EUR 1.50 technical levels.

Take yer pick, me old China.

leftback said...
9:12 PM  

On the S&P drop, weak dollar / bonds may be hitting critical mass. Also I think you can link consumer confidence to crude, which is up $10 MoM.

Steve said...
9:16 PM  

Check out that last hour volume, ursine dudes...

leftback said...
9:21 PM  


As I said in post 2 on the thread the volumes over the last week suck of distribution.
The weak dollar play is very heavily concentrated in the comms and will not necessarily support broad stocks at this point when that very action is going to result in higher input costs for alot of sectors and in an economy which is struggling to find any pass through on those costs.
I'd say seasonlity this year is going to be stood on it's head once again.

Anonymous said...
11:55 PM  

Nasty close on the S&P.

The reaction to China's Q3 data may be interesting out here in Asia today (no doubt the cheerleading types will celebrate the remarkable recovery). It is rumoured to be 9.1% year-on-year and that's probably what it will be. Of course, there is no breakdown on the expenditure side, so we have no real idea what the underlying trends in the economy are.

Is there any private sector investment?

Skippy said...
12:25 AM  

Skippy, unfortunately the cheerleading types include Glenn Stevens and Ken Henry. If only they read some Michael Pettis occasionally.

carbonsink said...
1:18 AM  


Carbonsink. Completely agree, it is disturbing that the RBA and the Treasury believe so strongly in regional growth diverence. If Michael Pettis is even half right they may be in for a rude wake-up day.

Skippy said...
3:38 AM  

Looking at the FAI number in China it is pretty darn clear where this growth is coming from (SOEs, government). I'm already hearing pretty retarded stories viz a viz RE lending in Beijing: 55% LTV (LTV is nuts to start with) on the asset, another 25% at the single asset corporate holdco. Last time I saw this kind of stuff I was in Kazakhstan in early 2007.

Nemo Incognito said...
6:21 AM  

Good point Nemo, I guess it is pretty obvious that China's growth is driven by FAI, construction and exports. But it is (from memory) the only country in the world apart from LAOS that doesn't publish expenditure-breakdown of GDP. And where the consensus is always within 0.1% of the actual outcome. I am surprised that Goldman missed the forecast by 0.6%

I guess the important point (for equity and commodity markets) is if or when China's property market might correct? Or if the policymakers choose to tighten loan growth? Or if the SOE's property and infrastructure investments are going to implode into bad loans?

Skippy said...
10:12 AM  

I've seen a couple of crappy real estate cycles now and the games not over until 1) Banks can't raise capital (Kazakhstan 07) and thus can't continue pyramiding up 2) Assets can't service interest payments (Japan early 90s) or 3) Some external shock in banks balance sheets (exporters getting seriously hit in a trade war?) causes flow on effects. I don't think we're at 1 by any means, 2 seems to be skinny but ok for now and 3 hasn't happened yet. I think the most important thing is to just know what to look for as the margin of safety gets thinner and thinner.

Nemo Incognito said...
10:22 AM  

Thanks Nemo,

I guess no.2 is the most likely way that it may unfold? Is China like Japan in the 1980s? hmmm...

Skippy said...
10:32 AM  

"And in the London morning, China leaked its September industrial production figure, due to be released tomorrow, at a better than expected 14.1%. You could almost literally hear the risk longs shouting "hip hip hooray!"
Regular readers will know that Macro Man has been (incorrectly) fairly sceptical of the green shoots phenomenon and has fought the equity rally (if not position-wise, at least intellectually) for much of the way up. " - Macroman, at least you admit when you're wrong. I'll give you credit for that. And to anticipate the vitriol that I received last time - yes I did buy Chinese equities on Oct 08 and sold June 09 on PA (for better or worse my professional mandate is not macro). Money was squarely where my mouth was.

Anonymous said...
11:20 AM  

What can I say but "Nice trade"!

Macro Man said...
1:07 PM  

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