Tuesday, November 03, 2009
Yesterday was instructive, n'est-ce pas? The ISM was substantially stronger than exepected (OK, new orders dipped slightly, but employment rose sharply to exceed 50), equities popped sharply higher.....and then spent most the rest of the session melting away. Sometimes it's possible to over-intellectualize things: at the moment, stocks trade like they got 'em but they don't want 'em.
When Macro Man hears phrases like that, there's only one thing that pops into his head: hunting season. Flamingo hunting season. To be sure, flamingo-hunting has been in play for stuff like EUR/USD, ADXY, and broad indices for a couple of weeks. But now it looks like the hunters, having bagged their quota of big-game flamingos, have started poaching out-of-hours.
Macro Man wrote about Sunday night's ZAR/JPY carnage yesterday; last night saw the poachers go 2/2, as EUR/HUF was the victim of what is known in the trade as a "drive-by" stop loss run, which is an occupational hazard when you leave stops in illiquid pairs with NY spot desks.
More generally, taking a step back and observing the performance of the "naive" G10 carry basket (long the 3 high yielders, short the 3 low yielders), we can see that (unbelievably!), it has recouped nearly all of its "end of the world as we know it" losses. If you were fortunate enough to put this thing on close to the lows, you no doubt are feeling fine. But the very vehemence of the rebound would suggest that G10 carry is heavily posittioned. Add in the fact that AUD and NOK are especially beloved of reflationistas, and the potential downside for those currencies on a continued flamingo run would seem considerable.
And what of intra-equity market price action? Here, too, we observe an interesting dynamic. The chart below represents the relative performance of a basket of turds (some of whom don't currently exist [though their stocks are still listed], and the rest of whom wouldn't exist without government largesse) against the SPX. As you can see, there have been quite a few peaks and valleys over the year, with the relative outperformance in March and July/August looking like short-covering rallies in the turds.
Anecdotally, however, people have gone long these turds on the flimsiest of rationales, and now it appears to be going wrong. Indeed, the roll-over closely resembles that of June/early-July, a period which happened to coincide with quite a sharp downdraft in stocks.
It's hunting season, all right. How long the season lasts may depend on Chief Gamekeeper Bernanke tomorrow night- that is, assuming that the poachers follow the guidance laid down by the Fed. With so many flamingos turning into turkeys, however, there's probably no guarantees even after tomorrow night.