Treat....or Trick?

Friday, October 30, 2009

This equity price action is becoming almost Biblical: "and on the fifth day, the market rose again...." Macro Man was somewhat bemused by the enthusiastic reception to yesterday's GDP number, by the economics profession at least as much as the marketplace.

After a four-day slide, that an above-consensus real GDP print encouraged a bounce was hardly shocking, particularly in light of the history of the last seven months. Yet the reaction from sell-side economists: "A very strong report! We're upgrading our forecasts!" bordered on the nonsensiscal.

For one thing, the margin of the consensus "beat" was razor-thin: 0.3% anuualized is less than 0.1% q/q. That this is the advance number that will be revised twice in the next month or two provides even less reason to go overboard with the enthusiasm.

More viscerally, however, to Macro Man's mind the report was actually worse than expected. Years of poring through Japanese national accounts data have taught him that in deflationary/bubble-bursting/highly distressed economies, nominal GDP is what matters. And on that score, the resultant figure- + 4.3% q/q, SAAR - undershot the 4.6% consensus by the same margin that the real figure beat it by.

Moreover, as the chart above illustrates, the quarterly nimonal growth was well below "trend", even as the real figure exceeded trend. Colour Macro Man unimpressed. Of course, there were some positive aspects to the report: residential construction rose for the first time since 4Q05. Of course, whether that can continue with plenty of untapped housing supply from foreclosure sales remains to be seen. Similarly, the surge in auto sales and the decline in the savings rate last quarter suggests that it will be difficult to maintain a 2.36% contribution to growth from household spending.
Meanwhile, the latest interesting twist out of Korea occured last night. Industrial production surged 5.4% in September, taking the y/y growth rate to 11% and the underlying production index to an all time high. This, combined with the smart bounce in the US, surely gave a tasty boost to the Kospi, right?

Nuh-unh. After a half-hearted gap higher on the open, the index sagged badly into the close, falling to its lowest level since August 20th. The divergence vetween the Kospi and IP is curious, not least because the Kospi peaked more than a month ago, leading other markets by several weeks.
At the risk of beating a dead horse, Macro Man finds it very interesting and very troublesome that a cyclical market like Korea with apparently rock-solid macro fundamentals is trading so poorly. By way of comparison, the SPX was at 1007 the last time that the Kospi closed as low as it did today.

It's the season for tricks and treats (hint: here comes the obligatory Halloween tie-in); somewhat worryingly, it's becoming a tad tricky to tell the difference between them. The evidence is increasingly mounting that the naked liquidity trade is coming to an end, and that markets will soon have to float or sink on their own merits. Judge for yourselves what that implies for the goodies that have stuffed many high-beta portfolios over the past couple of quarters.

Posted by Macro Man at 9:47 AM  


China is starting up state VC funds.

China's can be found here, its not listed but at this rate it can't be long.

It is amazing that this country seems hell bent on having a property, industrial capacity, and tech bubble all at once.

Nemo Incognito said...
10:44 AM  

and the chinese housewives are still on the loose...

Flying start for ChiNext board debutants raises concerns

worth reading some of the comments too!!

Anonymous said...
10:47 AM  

Hi MM,
This is starting to look a little like Sep-Oct 2007 where volatility in equities started moving higher and the new high was reached before the inevitable leg downward began. Everyone seemed to think we'd dodged the bullet, until...

Do you think Short-term TED spreads will start moving higher soon?



Anonymous said...
10:50 AM  

Jesus H Christ. Somehow this slipped by me today. I lost interest because there was f-all QFII to go around.

I am hoping "This Time is Different" is soon translated into Mandarin and sent to everyone at the National People's Congress. As much as I like a bubble for trading I'd rather not have my in-laws ferried out Saigon style when it all goes to hell.

Nemo Incognito said...
10:51 AM  

Thanks for that info on the nominal GDP, MM. Yesterday I felt lonely as a cloud because I was sitting at my desk wondering why no one else cared about nominal--in view of the budget problem that seems most important. Now I know I am not alone.

Personally, I'm having a hard time reconciling continued 5-10% Y-O-Y drops in US tax withholding and GDP growth. I know there were some changes to the tax code made earlier this year but I don't think that accounts for all of it. They used to say "cash flow doesn't lie."

But What do I Know? said...
11:19 AM  

This a floyd mayweather market - lots of noise, hard to connect with, annoying.

Keith Richards said...
11:24 AM  

me thinks and concurs with the CS boys that global IP has just if not about to peak. Treasury buy backs over, and ECB will probably do last 1Y LTRO in December so liquidity being pulled back.

if we get no further stimulous packages and more forms of soft tightening (bank capital hed in govt bonds), stocks and inflation hedges asset prices should reflect that.

funny how most f the big revenue misses have been in europe ... US stocks should soon reflect the notion that sales aren't going up and their is only so much margin improvemnt you can have or DGDF.

time to scale into deflation trades.

Anonymous said...
11:36 AM  

The money quote from Bloomberg News...

"U.S. Stocks, Oil Rally as GDP Signals ’Waterloo of the Bears’"

Vandalsstolemyhandle said...
11:51 AM  

Thanks for the blog MM - I use it not only as a way of developing a 'view' but also as an educational tool (for myself). A question, if I may (from the perspective of a learner) - why is it, as you have said today, more important at this time to be focused on the nominal GDP? Thank-you.

Tea time said...
12:05 PM  

Dear Marcoman, I am a macro girl too and I agree with you about everything from a macro economic point of view, but this year I was intelligent enough to abandon a macro vision of the world and use simple technical analysis and I got back into the market in april. Has it ever crossed your mind that really buying selected good stocks of companies who grow even in recession is better than buying G10 country treasurys (these countries have no possibility of paying back debt with exploding health costs, low productivity rate and so many pensioners), or better than buying gold which is useless, or better than buying real estate ? the only place where i see value is in selected stocks, they protect you from deflation, inflation, whatever. of course, buying indexes would be silly now. let's say the winners will do the opposite of the efficient portfolio theory and all that other bullshit!

ida pagnottella said...
1:00 PM  

as you see I use my real name, I really don't see why we must hide ourselves, we're just sharing opinions....

ida pagnottella said...
1:05 PM  

LOL! The ChiNext was hilarious. I was watching it last night (EST) and it was completely absurd. The gambling spirit of the Chinese was fit to be tied, and the market is nothing but a casino. They should put blackjack tables in there just to make everyone feel right.


Anonymous said...
1:16 PM  

What a joy to read a clear-sighted view of the GDP print: recession over be-damned. Very, very few picked up the point that a oartial boost to the real GDP metric came from a drop in the deflator. Much gratitude on the nominal GDP point MM.

The US trade component didn't help much either: imports still pulling out domestic demand -Thank you China.

Now let's see if weekly C&I loans are still falling, and monthly household debt and credit still deleveraging. That will tell us where we are.

The Euro is hardly off to the races today; and the 10yr yield seems to have a job staying up.

Micro girl has a good point about the merit of quality dividend stocks, but unfortunately these quality stocks do not an equity market make. A tanking market carries all before it.

Donlast said...
1:21 PM  

Ahh, the bearish crowd is back...
You dont buy risky assets when the sun is shining.

Fully invested said...
1:23 PM  
This comment has been removed by the author.
1:35 PM  

Sometimes people really seems to ignore the reasons behind a data different than estimates, Donlast explanation is correct, it's all due to deflator.
Today, again, the mood seems different..

@ida pagnottelli: maybe also macro man and other guys are, at least, enough intelligent!!!!

1:38 PM  

We don't use our real names because many of us work in places that are run by people who have million dollar mortgages, tons of debt and whose myopia and greed got us into this highly leveraged mess in the first place. LB calls it the Tyranny of the Incompetent.

leftback said...
1:51 PM  

Re: everything. Stocks are for my p.a.. I don't have the professional remitto trade individual stocks, and my expretise is not in security selection. In terms of 'risk assets', I have been long selected risk assets since February and March, and unsurprisingly they are among my best performers this year.

But I don't write this blog to publicize how smart or wonderful I am or to discuss well-prforming trades ad nauseum. I know these are good trades, and I don't find it particularly interesting to discuss them. I much prefer to write about things I am unsure of, have low conviction on, find genuinely interesting, or just plain don't understand.

As for anonymity, I address that in the FAQs, but suffice to say that when I started this blog it was advantageous to be anonymous, and since I have no intreest in being a "personality" or getting masses of Bloombergs from people reacting to something I've written.

Macro Man said...
2:19 PM  

this blog is refreshingly honest and mm writes with humility, spirit and humour (albeit a bit english hehe!), keep it up - i for one read you daily, it has pushed me to learn more of the bond market and i'm grateful for that and the insight/thoughts you offer

Anonymous said...
2:59 PM  

Speaking of the bond market, LB thinks the steepener is going to be on again, at least early next week, as B-Ds look forward to more favorable pricing at the 10y and 30y auctions the following week. So that might potentially favour risk assets, commodities etc. The ADP/NFP reports Nov 4/6 loom as the usual wild card.

LB is done for the week after a punt on the short side today and is back to thinking about footy.

leftback said...
3:17 PM  

I dunno LB, if the market remains weak today there's a potential change in trend/risk here after the given bull trade - 3-4 days down then up to new highs fails to materialise.

Anonymous said...
3:45 PM  

dax is very weak today, and has just breached yesterday low, risk maybe off for a bit

Anonymous said...
3:48 PM  

Bit shy to say, but sometimes (on daily basis) I feel I am losing the last morsels of my knowledge of sth. and am doubtful if there was any at all. Maybe Soros was right with that reflexivity idea and coupled with postmodern narratives we are getting back to Proust and the tankard's brim.

Anonymous said...
3:49 PM  

LB, ¡quĂ© quilombo! as they say. Steepener seems questionable at this point whilst risk aversion takes hold. I like your long tsys/short HY FTQ idea much better.

Crisis Management said...
3:56 PM  

may the force be with u mate.

yesterdays looking like a one day wonder for the bulls, hang about shouldn't that have been bears....!?

somethings changed

Anonymous said...
3:57 PM  

RELAX, Crisis Man, the underlying thesis is intact. LB is simply pondering a short-term hedge against a large position in 5-yr IGs and Tsys. While FTQ remains a heavily favored scenario once risk-off becomes the dominant theme, one has to consider the "Flight to Quantity" - as more than one wag has termed it - as supply expands, this is most relevant at the long end.

leftback said...
4:03 PM  

See the spike in the EUR? No big sell-off today.....

leftback said...
4:17 PM  

Couldn't escape if I wanted to...

Vandalsstolemyhandle said...
4:29 PM  

Gold > SPX soon (again!)

Gregor Samsa said...
4:36 PM  

speaking about GDP deflator, if you really want to see how to work with this variable properly look at Lithuania's recent GDP data$file/FlashComment_Lithuania_271009_edited.pdf

Anonymous said...
5:03 PM  


Know anything about this HF pow-wow in Washington yday evening? Sell-off too aggressive to be just month-end rebalancing.

Anonymous said...
5:05 PM  

LB 2/10 is at the top of its range, as they say in political circles, "I question the timing."

Not sure where 2s can go from here, they have stayed in a tight range. Think you're better off just shorting some bonds--but if we get a meltdown it won't be pretty.

I'm a small long for choice, my thinking is that we will now enter the Great Unwind into year end, risk OFF, and bonds (which have been sorta grinding lower) will benefit.

Steve said...
5:07 PM  

I am actually starting to agree with leftback more than I disagree ... that's got to be a bad omen

Red skies at night, sailors delight. Red skies in morning (or agreeing with LB) -- get the risk off the books

Gary said...
5:14 PM  

HF Powwow ? I have heard nothing...what have you heard?

L/S Equity Guy said...
5:16 PM  

leftback said...
See the spike in the EUR? No big sell-off today.....

Where can I look at the volume of EUR/USD? Rookie here. Thanks

Anonymous said...
5:37 PM  

Gary: very amusing. Thanks for playing.

Today's action is probably about CIT being BK and several people no doubt knowing ahead of time.

Re; Steepener, Just putting the idea out there, and thinking ahead a week or so, as one likes to do.

This might be quite significant. Financial inter-connectedness here we go again... this isn't LEH but there will be consequences.

HY not looking very clever today. No doubt certain firms will expect 100% payout on their CDS, perhaps via the government sponsored AIG FP. How long can this go on for?

leftback said...
5:38 PM  

Sell-side event with current/ex-officials and a load of Hedgies.

Don't know who went, what was discussed, if it was a complete waste of time etc but one of my brokers mentioned it yday.

Apols for the gossip-mongering.

Anonymous said...
5:39 PM  

Interesting. We are primarily hearing rumors about Citigroup - need to take big write down (out of CLSA), need to raise capital (various).

L/S Equity Guy said...
5:52 PM  

VIX at 31 or so. Game on, Macro Man?

leftback said...
6:03 PM  

vix is up 25pct, demand for options must be high!

Anonymous said...
6:13 PM  

didn't the 1929 selling start on athur/fri...just a scary thought, prolly time to buy!!

Anonymous said...
6:15 PM  

With your permission, MM, a musical interlude....

Summer Heights

Summer rally had me a blast -
Summer rally, happened so fast
I bought some Fannie, GS and C
Some REITs and trash, like CIT 

Summer days driftin' away,
to uh-oh those summer heights

Tell me more, tell me more, did you ride the QE?

Tell me more, tell me more, like, did you buy AIG?

The Fed got friendly, holdin' my hand –
Got gold and silver, and Krugerrands

Stocks were sweet, P/E thirteen
GE was cheap, you know what I 

Summer heat, bulls and stocks meet,
but uh-oh those summer heights

Tell me more, tell me more,
Was the rally for real?
Tell me more, tell me more,
Was the bonus a steal?

It turned colder, that's where it ends -
So I told her I’d prefer bonds
Then we made our P and L vow
Wonder what she's doin' now?

Summer dreams ripped at the seams, but oh,
those summer…. heights....

leftback said...
7:01 PM  

LB, when are you going to get your John Stewart type segment on CNBC?

Nemo Incognito said...
9:25 AM  

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