Tuesday, November 10, 2009


"I'm so tired, I haven't slept a wink.
I'm so tired, my mind is on the blink.
I wonder should I get up and fix myself a drink."

I'm So Tired, The Beatles

Macro Man can sympathize with John Lennon's 1968 lament. Not only is he weary of these treacherous markets in the "existentialist ennui" sense, but he struggled to get any sleep at all last night. Wondering the same thing as Mr. Lennon, he eventually decided in the affirmative and hauled himself out of bed for a bit of coffee and Special K.

There wasn't any particular concern keeping him awake last night; it's more of a general disgust at getting sucked into silly trades. One of his general trading maxims is to "know your market"- i.e., whether it's a market that forgives mis-timed trades or punishes them brutally. He's pretty sure that he's not alone if feeling that the current market is among the latter.

It's hard to believe that Spoos are now barely a percent off of last month's highs. Man, that didn't take long, did it? If yesterday's price action is anything to go by, a break of the ~1100 cash top could generate the dreaded melt-up scenario.

There are some who posit that the fate of the market is tied up with the health care bill. Macro Man's strong sense is that there is a real disparity in views over how important the bill is, depending on where one lives. Non-US residents seem to viw the bill from a purely academic perspective, in terms of its impact on govenrment and private sector finances, s well as on a company-specific level. It feels as if the issue is a much more emotive one for US residents, with the bill representing "the end of the American way of life" or "a badly overdue helping hand to the uninsured underclass", depnding on your viewpoint.

Your author will stay out of that fray, but finds the chart below to be of intense interest. Courtesy of Pareto Securities, it suggests that the famously profligate US consumer isn't quite as profligate as we thought....he's just trying to pay his health care bills. (edit: note that the labels on the chart are reversed.)
Elsewhere, Fitch has made some menacing rumbles about the UK's AAA rating, which has put sterling under a pit of pressure this morning. Gordon Brown's Peso has had quite a strong run over the last few weeks, as short the pound was, in retospect, one of the bigger flamingos out there.
These would, on the face of it, appear to be good levels to get back in. But this is a market that rallied sterling last week after the BOE was alone in doing more QE; just another slip of paper for the "things I don't understand" drawer. One thing that Macro Man does understand is that he's tired of getting whipped around; it's time to raise the bar for trade entry.


Skippy said...

I can sympathise MM, I was up at 4am this morning myself. I have been taken out behind the tool-shed over the past week.

I have no useful ideas at the moment but sometimes a cold beer helps.

Tom said...

Chin-up - keep trading as you always have, changing too much after a bad run usually leads to the cold streak lasting longer.

Anonymous said...

the old adage of money flows from the stupid to the smart doesnt seem to work in these markets or I have grown very stupid recently and just not realised it..good luck everyone.

Anonymous said...

Is the legend the wrong way around on that Pareto Securities chart?

Macro Man said...

Doh! Yes it is....serves me right for cribbing someone else's chart!

Denovich said...

Well if you weren't sleeping last night, at least you had a chance to watch the Steeler's game. 01:30GMT kick-offs really test my devotion, thankfully my sleep sacrifice was rewarded with a win.

Anonymous said...

It's kind of clear from the posts today that there are a lot of people berating themselves over their recent trading performance and that MM's suggestion of raising the trade entry bar is prob a good one.
However, smart a strategy as "disengagement" may be at the moment if bubble markets are back courtesy of major CBs, we might need to sit on our hands for a mighty long time before reality prevails.
I for one am struggling to reconcile my "low rates forever" view with my "risk assets are overvalued" view. If anyone has the answer.......???

Gregor Samsa said...

I'm sitting on increasing amounts of cash, with no idea where to put it. I still hope that something will happen soon to make things clearer. I'm not quite out of the "the equity rally has ended for good" camp yet.

Anonymous said...

I guess you have to be patient and wait for what looks good....equity melt up would be a shocker!!!

What i really dont get is the divergences now...

The utilities index
The nasdaq comp
The transports
The iboxx corp etf LQD

Macro Man said...

Denovich, I try not to watch those late games (SB excepted), because then I definitely can't sleep! Didn't stop me from followinging the last quarter online though. MNF is made for Sky+.

Anon@11.13, re your last point....it's easy! "Low rates for ever" is what's making "risk assets overvalued."

Anonymous said...

There is a simple tool to implement when one's trading performance deteriorates. That is "Stop trading!"

Anonymous said...

MM, trouble with "low rates forever" is that "risk assets" therefore become not that risky....so either my rates forecast is wrong or my asset value assessment is wrong. Prob is I don't know which.....

PJ said...

I'm with Gregor, LB, and others ... Even if equity indices make new highs, the market has broken down. Financials won't make new highs, they've topped and are headed down, and they're the key to the market's destiny. There's limited time left for risk assets.

The stimulus pot is tapped out, further big stimulus will draw upon resources that are crucial for the private sector. Recurring stimulus will prevent a Great Depression type collapse, but it won't give us positive GDP growth in 2010 and beyond. We are entering a Japan 1990s market, only a bit worse GDP performance, and with higher interest rates.

Can't say I've done well playing this view so far, except for gains shorting the financials in recent weeks, and a too small hedge in long gold. But I expect to do better once the broad market turns.

My fear is that the future stimulus programs will all be structured so as to stimulate the financial markets and frustrate my "risk-off" trades, even as the broad economy sinks. But I suspect popular ill will toward the bankers will prevent such a scenario.

Gregor Samsa said...

Ahm..., its not only the risk assets which are overvalued, but also the currencies used for pricing them. How to measure value?

Anonymous said...

A few thoughts/talking of book:

UK: Think it is <10d that depo rate cuts actually occur such that targting 93 strike in March makes sense.

Euribor: trickier beast, have legacy positions on but nothing looks great to add aside from maybe steepeners from M0/M1 onwards. Will leave it to the boys from Baker St....

Long Krw & Inr vs Usd & Jpy.
Short Gbp/Cad
Short Eur/Pln above 4.25
Long Try/Zar @ 5

Trying to find intelligent way to be long aud/nzd as missed the most recent boat again so receiving NZD 1y/1y instead.

See the argument for renting stocks til y/e but would rather wait to short in the 1150 region or Jan 1 whichever occurs 1st.

Good luck all.


PJ said...

I do agree that low rates is the heart of the bull case ... Just dumbly buying risk when short term rates are zero has a great historical track record ... EXCEPT in debt deleveraging scenarios like Japan or the Great Depression, when one must be more selective.

Historically buying long Treasuries has done well in the deleveraging environments, as LB has argued, but I wonder if this time they have taken Richard Koo's prescription to heart and will stimulate the heck out of this market, issuing so much government debt and so many government guarantees of private debt that even government debt is too risky to hold.

The one thing I am sure of is that this economy is going to take years to play out. There will be plenty of ups and downs along the way. And with governments intervening relentlessly, traditional trading methods will probably not work. The tough trading environment of recent months is probably going to be a multi-year phenomenon.

PJ said...

Gregor - How to measure value of currencies? Great question. I am not sure if people have not gone overboard on the currency depreciation idea.

They are not wrong, just early. While China has followed an inflationary policy, to date the US stimulus has not been traditional monetary ease, but rather a leveraging up -- the Fed turning itself into a levered hedge fund, replacing the hedge funds that liquidated and restoring the securitization engine that made the 2007 boom. I don't see why this should lead to either inflation or a rapid currency depreciation. And it is hard to say when inflationary monetary policies will be adopted in the major economies.

In my mind this raises the risk of a countertrend dollar rally. I'm not predicting that; I still think dollar weakness is odds on. Just saying the DGDF trade is not a sure thing.

As for risk assets denominated in dollars/euros, if that's what you meant, well, one can go long gold and make one's other trades on risk assets denominated in gold.

Steve said...

MM, Skippy, PJ, bears,

I can't see what business we have up here either but I keep telling myself "it can go higher, it can go higher..." It doesn't keep me from losing money but it keeps me from losing MORE money.

Every time we have a slight spu dip of 2-5% the VIX and sentiment indicators go screaming into "buy" territory and the S&P just flies up. We're in the 5th iteration since mid-year. I don't know what the hell that means other than "stay small." Is smart money really buying?

I understand the zero rate argument and think the effect on P/E is underestimated by Rosenberg and others (he keeps talking about historical low-multiple bottoms but rates were high single digits back then), but (1) shouldn't we be discounting at the BBB rate, and (2) if so why isn't the Nikkei back at 40k?

I can't come up with a value for the S&P of over 1000. Can we go to 20% overvalued from 9% overvalued? Yep. Should I have my feet on the desk? Yep. Are they? Nope.

Anonymous said...

PJ: don't take this the wrong way but your posts are way too long, which is a shame because they're quite interesting.

The scenario you describe (policies aimed at hyperstimulating financial markets) are exactly what's coming if risk trades badly again. The public is pissed at bankers of course but it's easy enough to persuade them that these policies are in everyone's interest. Much pain to come in shorting risk I'm afraid, even if it is a moral imperative to do so ;)


Steve said...

BTW I stared at that chart so long it started to make sense. I definitely need a higher bar.

Funny, since I have seen some social phenomenon stuff posted here: I just bought the White Album, the remixed version. (Love it.) Is the remix what inspired the reference?

And was Sir Walter Raleigh really such a stupid git?

Steve said...

...and shouldn't it be the "White CD?"

leftback said...

Look at Munch's The Silent Scream when you feel like this, and you'll see that someone is having a worse day than you, MM. It's probably LB.

Nemo Incognito said...

Long China consumer stuff into a RMB revaluation. Easiest way to stop a trade dust up.

Skippy said...

Sincerely, thank you for all the posts tonight. Very helpful as always (the red I am having from Margaret River is also helping).

I am not a permanently bearish, but I find it difficult to take a position against my big picture view (which happens to be bearish risk at the moment). It is difficult to argue with the liquidity trade. After all if narrow money supply growth is not going into the real economy it is probably supporting asset prices.

The big picture problem, of course, is that broad money and private sector credit is contracting. This suggests that final demand is still weak and the production cycle will (may already be) roll over again.

It should start to cause problems for growth assets soon. Perhaps some of the divergences (mentioned by someone above) suggests that it already is. Light volume on the up days and the break down of cyclical markets like the KOSPI, small caps and NASDAQ give me some comfort that it may already be underway.

But I concede that 'risk on' may carry on for a while yet. The near-by levels on the S&P and DXY are obviously quite important.

Nemo Incognito said...

This month has rocked. This is getting towards the end, hence having feet up on desk and occasionally taking an existential punt with a good technical stop while going to the gym seems to be working for me.

Anonymous said...

Instead of tired, the song 'I am a loser' (Revolver, the Beatles) suits better to my situation. And i'm just afraid it may show up on my forehead...

dblwyo said...

Let me testfly some hypothesis for this relatively intelligent and very concerned audience. Most of us here seem to be in the top-downish macro camp complemented by technicals. That's all well and good when the implicit models don't change and the parameters driving them aren't too volatile. Right now I think we're in a highly volatile market where the underlying models might be questionable. Broadly speaking there's turbulence and chaos - it's turbulent when the relationships are in flux and chaos when there are none. Since we all look for the patterns to bet on yet are in a world where policy decisions are causing deep structural factors to fluctuate as if they were high-frequency technical indicators this is "challenging". The other major problem is real data (for which one needs a theory, i.e. model of course) vs. distortions caused by ideologies. The classics being deficits out of control, crowding out and hyper-inflation. In a slow-growth world private demands for funds will be reduced while public demands are vital to keeping the wheels turning. MM is entirely right when he says liquidity means carry trade means RiskOn - right now a temporary paradigm and a meme that's spreading far and wide. It also means that assets are bubbly but CAN keep running. When rates and liquidity start diverging being markets the ripples might lead to the US having low inflation while China, et.al. experience high inflation.
In this turbulent and volatile environment a trading strategy is appropriate not an investing strategy and this should be a golden age for hedgies. Investors are going to be more challenged.
It may take a decade to play out which means we'll have plenty of time to test and experience these things if they're accurate.

I-Man said...


If I may, just casually throw in some input.

I read you cats every morning, and rarely post because frankly, many of you are out of my league... with the exception of that Leftback guy, who I could take I think...


I think you are getting tired and weary when you should be getting confident, energetic, and aggressive.

Macro Man said...

Steve, the song reference came from waking up for good at 2.30 am this morning, sadly, rather than the altogether more pleasureable experience of listening to the Beatles.

I-Man, two and a half weeks go, I was confident, energetic, and brimming with optimism. While the scale of my subsequent smackdown has not been enjoyable, the real damage has been psychological; my RV trades have performed poorly at the same time that I've traded directionally like a chump. That naturally (and sensibly) requires remedial action, which in my case has been to stick with the trades I believe in, and to try and increase the quality of the thought process of nw trades, rather than sitting there slack-jawed, pissing money away by clicking on the toy all day.

I-Man said...

@ MM:

Yeah, I suppose there is a fine line between exhaustion and runners high.

I must be high.

Nonetheless, I can feel the breaking of the SPX, and have confident solace in my March UUP calls and SDS.

Anonymous said...

I'm not as experienced as most people on this chat, but after only 6 years macro trading, I have today officially taken myself out of this market (before circumstances forced my hand) for an indefinite period. The last year has been a struggle (to put it lightly) and while it is comforting to know that there are many far wiser hands who are struggling as much as me, I unfortunately agree with PJ that this situation may continue for the forseeable future. I will continue reading this post and the comments daily as I pursue a new career that doesn't foce me to check the SPX ten times a day. Good luck to the rest of you and may the markets trade more logically soon.

Professional Gringo said...

Here you go MM, best comment from yesterday:

"My name is Goldman Sachs. I am a taxpayer-sponsored survivor living in New York City. I am blasting on all Bloomberg frequencies. I will be at 85 Broad everyday at mid-day, when the sun is highest in the sky. If you are out there... if anyone is out there... I can provide SPY bids, I can provide SPY offers, I can provide securities and just a little liquidity. If there's anybody out there... anybody... please. You are [not] alone."

Macro Man said...

PG, you're a legend! ;) I guess "Main Street" are the zombie-like creatures in that film?

Anon @ 3.56, sorry to hear that...good luck.

Steve said...

Anon 3:56

I'm sorry to hear that. This was a rotten year, it's the only market comment I'm confident in making.

Good luck.

I-Man said...

Re: Exhaustion

Someone sent me this awhile back, and I find it every bit as prescient now as I did in September.

Hope you dont mind me linking, MM... not sure of your Rules of the Road, per se.


leftback said...

This reminds me of February, when LB was buying, and seeing signs of a turnaround in some small cap materials and energy stocks, but the market just kept going down. Remember the exhausted bulls last March? Bear capitulation will certainly be a feature of the next turnaround, whenever it comes.

Not much you can do except choose logical points to set up trades, prepare an exit strategy and then execute and wait and see what happens. Having a zen philosophy and looking back at your longer term results may help. Sure, LB hasn't exactly excelled for a month or two but the 1 yr and 5 yr results make happy reading.

leftback said...

As we head into the 10y auctions, a presumably reputable source is available below to support LB's contention that domestic demand will stabilize the US Treasury market in a manner similar to Japanese demand for JGBs in the 1990s. [Readers may recall that this concept has been rubbished in this space by several informed and intelligent commentators].

The data suggest that banks are indeed increasing their holdings of Treasuries and agencies in lieu of adding to their loan books. In other words, the banks are gradually "de-risking" and becoming a stable source of domestic demand for Treasuries.


PJ said...

LB - Either Treasuries or gold will be the best performing asset class over the next year ... hard to say which one though!

But I wouldn't mind being in leveraged 3-5 yr Treasuries for a 4-6 month trade. Might be the best place to be.

Vandalsstolemyhandle said...

While I empathise with all of the value players who've been wrongfooted by this rally, counting myself amongst this fine band of brothers, I don't like to hear that the market is 'illogical' / 'irrational' / whatever, which seems to be a recurring theme in the comments.

Firstly, this usually just means that the market didn't conform to one's own views / prejudices, and secondly, if it was all IF...THEN...ELSE, trading (a) wouldn't be any fun and (b) wouldn't command the big bucks...

Our Man in NYC said...

LB: I track that data weekly (given my view, secular reduction in debt, it along with consumer credit are the most important nos i follow). The pace of the decline in Bank C&I lending is stunning (down 16.5% from peak, 53 weeks ago, and MoM/QoQ rates are faster...though last week was the 1st positive week in an age) compared to the previous contractions (both 01-04 and 75-76 were at a 6% ann. rate, with 91-93 at half that).

It's also very similar to what happened in Japan during the 90's, along with a shift to bonds from those approaching retirement. It's why i think they bond bears are wrong in the short-medium term -- the US may be about to experience the decoupling of the yield/equity correlations.

Our Man in NYC said...

I'm thinking of ditching my Gold holding; getting very crowded (to the extend the cab driver wanted to discuss it yesterday!)...and I fear that removes the quality of it being a place to hide in any correction.

That said, I'm also exceptionally long it, which adds to my concerns.

friz said...

I'm fascinated that so many couldn't sleep, when I, too, gave up and got up at 3am. I thought it was just because I'd been dumped, but maybe there's some unconscious intelligence inside after all.

leftback said...

LB thinks "Nowhere Man" is an appropriate lament for the confused investor, as everyone gobbles up risk.

"Doesn't have a point of view,
knows not where he's going to,
Isn't he a bit like you and me?"

Patrick said...

NYC: I'm with you on gold but the first few quarters of '10 might be a repeat of late 2008 in the sense of "best performing" being "down less", but I still wouldn't be surprised if it does perform better than everything else. This is what Put Options were invented for. Pare down your positions above $1000 or even $900 if you like, but don't lose it, you'll likely regret it.

Nic said...

MM if you have an i-phone here is a great new game application that is about killing bankers (not joking):

PS - Veterans day tomorrow and Churchill said: "In Defeat, Defiance"

fedhamou said...

Nic: Cool. Are Central Bankers and prominent SW CT hedge fund titans who are NOT INVOLVED IN INSIDER TRADING also featured?

I bet funds were getting long AAPL, BIDU, GOOG and AMZN again today. Can't beat the old Four Horsemen beta trade for widows and orphans, eh?

[I will probably get a yellow card for this one ... but it's very late in the day so maybe the ref won't notice]

OK, back to macro posts tomorrow. Really....

Skippy said...

China's data today is mostly (and probably not surprisingly) quite close to consensus, however the new RMB loans was "only" 253bn (consensus 370bn).

Казбек Садыков said...

Hello MacroMan!
This year market is for speculation not investments. I've been kicked all this week trying to catch the bottom in USD/CAD.
Do you have any thoughts about rationality of this market? I have just spotted that AAPL is growing like a rocket and violated the high of Dec2007 (202.96)but financials and steel producers drift down.
Day-by-day i'm coming to conclusion that we are in bubble terrytory created by FED and followers and it gonna drop like a brick.

Jeffrey D. Benson said...

I'm still bullish on a equities melt up. Things are still so far below the 2006 / 07 euphoria. I don't think we are heading there, but I think they are strong psychological anchors in the market.

Skippy said...

The important big picture point about China's loan growth, of course, is that while it slowed to 253bn in October, cummulative new loans over the past 12 months are still running at around 10.3 trillion. To put that into perspective, it is around one third of China's GDP. The obvious point is that it is clearly not sustainable and risks creating an asset price bubble (if there isn't one already). However the leadership in China is clearly comforted by the fact that the CPI is still negative year-on-year. Until that rises, giddie up!!