Thursday, April 30, 2009

Fighting Darth Vader

Macro Man feels like he's channelling Star Wars. Yesterday's action was drearily predictable, with the poor GDP figure met with risk-asset buying, and the Fed non-announcement met with more risk-asset buying. Oh, sure, the Fed said that they were gonna keep rates low for an extended (Is that longer than "considerable"? - Ed.) period. Of course, the eurodollar strip steepened, so its not exactly like that was taken at face value across markets.

In any event, a number of risk-asset charts are looking pretty compelling. Spoos are currently trading well above the congestion zone around 870-875, the dollar's broken down, and stuff like the Ozzie, after a recent period of congestion, has broken both its recent high and the3 200-day moving average (for the first time since last August.)
It all looks really quite bullish. So Macro Man finds himself feeling like Luke Skywalker...trying to maintain his fundamental convictions, but feeling tempted by the increasingly attractive delights of the Dark Side. While some market cheerleaders are more Jar Jar Binks than Darth Vader, a number of people whose opinion Macro Man respects are bullish.

At the same time, tomorrow brings a change of month, and with it a sharply deteriorating seasonal for equities. What's a punter to do? Is it worth embracing a Dark Side, even just a little, while planning to revert to type at the appropriate time? Hey, even Darth Vader came around in the end....

Wednesday, April 29, 2009

Sure Enough

Sure enough, GDP prints a horrible figure and tocks go down for a millisecond before trampolining back up to within a couple of ticks of the high of the day. In fairness, the -6.1% had a couple of mitigating factors- the inventory drawdown was huge and the deflator was actually quite big; nominal GDP shrank an unannualized 0.9% q/q, quite a bit better than Q4's -1.6% print.

Still, for all that the Green Shoots Posse is still fluffing their risk assets of choice, Macro Man cannot help but observe that many forecasters are still calling for current quarter GDP to be the worst (before the last two, of course) since the horrible '82 recession. So here's what's going on:

In late Q3 2008, the US and global economic trajectory morphed from a painful recession to a depression, courtesy of the Agencies/ Lehman, AIG, etc. Thanks to the plethora of programs and public support to the financial system, we are now morphing back into a recession- albeit a long and painful one.

While the trajectory of the weekly leading indicator has slowed from the freefall of late '08/early '09, it has yet to put in the sort of bounce that has preceded prior recvoeries- in both the economy and the stock market.
This transition back to recession from depression is what has made the current environment so tricky; there is no obvious point at which the pricing out of the depression is fully accomplished. From Macro Man's perch, it is already done and we're now overshooting, but it's entirely reasonable to think otherwise.

Still, the endgame does appear likely to end in overshoot (either here or higher up). At that point (and at the risk of sounding like a broken record playing a very grumpy old man), equities should represent a great selling opportunity.

Same (Stuff), Different Day.

Perhaps the real answer to yesterday's query about yen vols is that markets have run out of steam and that each day looks more or less like every other. EUR/equities/bond yields go down, and a flurry of explanations fly as to why the moves will continue. EUR/equities/bond yields go back up, and another flurry ensues, explaining why the first flurry was wrong and why this move will continue. At the end of the week, you find you've gone nowhere and that your P/L bears a strong negative correlation to the number of times you've traded. Lather, rinse, repeat.

Maybe today's US GDP and FOMC announcement will generate some signal, but at this point Macro Man is dubious. It feels like we're in one of those environments where a weak GDP figure will be waved aside as "old news", whereas a better-than-expected number will be taken as proof of sprouting "green shoots". Yawn. As for the Fed, having shot their wad whispering into the Illuminati's ear ahead of the last meeting, would now appear ot have little capacity to surprise. Unless, of course, the Fed decides to screen a live cage match between Ben Bernanke and Ken Lewis, with Jim Cramer commentating. Like recent price action, it wouldn't be pretty, but unlike this rubbish it would at least be a bit of fun to watch.

Tuesday, April 28, 2009

Dubai or Durent?

It looks like the answer is pretty clearly Durent. Dubai apartment prices fell 42% last quarter....and that's from Q4, not Q1 of last year. Ouch. Just about the only thing that Macro Man could find to match this performance was Icelandic equities. One wonder which is more liquid.
The full report from Collier's is here.....

What's Up With Yen Vols (Other Than Yen Vols)?

So now that even Mrs. Watanabe has decided that the road to prosperity is paved with yen shorts, USD/JPY and all its yen-cross buddies have duly turned around and headed south. This will no doubt alarm the equity bods, who tend to shiver when they see the yen strengthen. (Little do they recognize that the currency guys are watching stocks for clues to USD/JPY! It's like something oput of M.C. Escher.)

What's interesting is that despite the yen's strengthening, vols have barely budged- the remain at the bottom of the year's range.
Is this a sign of positioning (every man and his dog owns long-dated upside), a sign of complacency, or a sign (like just about everything else these days) that it ain't so bad and we should all buy stocks?

Inquiring minds want to know...

Monday, April 27, 2009

Back (Sort Of)

Macro Man is back, if in a slightly abbreviated form. While he intended to keep a reasonably close eye on things today, Dame Fortune had other plans for him, as he's been without power for most of the day. He's back online, albeit temporarily, which affords him a few moments to survey the investment landscape.

More generally, this space will take a slightly altered shape over the next couple of weeks. Rather than daily long form entries, Macro Man's intention is to deliver more quick-hit, almost stream-of-consciousness posts. This reflects not only his desire not to stay still for the 45 minutes to an hour that it usually takes to compose his morning missive, but also the indifferent nature of the current investment climate. It's been a bloody difficult couple of months for macro punters, and one can only say that so many times before running the risk of repetition.

First on the agenda is a quick question on the stress tests. This is perhaps a naive question, but it's one that your author has not seen clearly elucidated elsewhere. What, exactly, is the purpose of the stress tests?

It seems fairly obvious that they are not intended as a sober measure of how the banking system would fare under conditions of extreme economic stress. If they were, then the scenarios would offer a bit more choice than "Optimistic and Optimistic (Roubini version.)"

So what, then? Political cover to enable payback of the TARP and/or further injection of funds? To make everyone feel wonderful that the banking system is actually in pretty good shape? (Macro Man would normally scoff at this, but after the market action of the last few weeks, he's not so sure.) In a post-FASB, "say whatever you want" world, what possible purpose does this charade have? Macro Man is curious to hear your thoughts.

Thursday, April 23, 2009

Contest Results

Hearty congratulations go to reader DVP, the first to crack the secret identity of "Dick": AIG. Special mention must also go to reader EC, who twigged the exact formula behind Dick: AIG's share price squared, times 1000.
Now, it is said that a rising tide lifts all boats, but it is difficult to believe that the good ship AIG belongs anywhere but the bottom of the sea. Perpetrator of the worst corporate loss in the history of the known universe, AIG should count itself lucky to still have a publicly listed share price, let alone to see it soar (in percentage terms) as it has done.

That it has done so suggests to Macro Man that for all the talk of green shoots and cutting off the far left of the distribution, the recent equity rally has been pretty indiscriminate. Colour him unimpressed.

In any event, the pain in his knee is a welcome change from banging his head against the market every day. And hey, at least they prescribe potent painkillers for post-operative knees, which have left your author with a virtually non-stop desire to sleep. It's funny, when he dozed off yesterday, he could swear that he dreamt that Alistair Darling jacked up taxes even as Parliament voted to pay itself an extra £150 per member per day just to show up to work.

Man, this Codeine does some crazy things with your mind.....

Tuesday, April 21, 2009

Just When It Starts To Get Interesting.....

Just when things start to get interesting- the SPX puts in its worst day since March 2nd and FX carry gets up close and personal with Ms. Kubler-Ross- Macro Man has to up and leave the market for a bit.

At last, more than two months after his moment of hubris, he's getting his ACL reconstructed today....very possibly as you are reading this.

So you'll have to excuse him from posting for a couple of days, though he intends to return when he gets off the drugs and back onto the screens.

In the meantime, he's devised a small contest to amuse readers in his absence. After introducing you to Harry and Tom last week, here's their friend Dick, who provides as good a summary as anything for the nature of the recent rally.
Your mission, should you choose to accept it, is to name the underlying that is behind Dick. The winner, who will be the first to correctly unmask Dick in the comments section, will win a prize that is literally priceless: a year's subscription to this very site!

Bonne chance, both in the contest and the market generally, and Macro Man will be back before you can say "yours, five hundred spoos."

Monday, April 20, 2009

Short-covering And The Kubler-Ross Cycle

Macro Man enjoyed the weekend, and not just because the sun made one of its all-too-rare forays from behind the clouds over south-eastern England. Spending a couple of days away from the daily grind of the screens offers a chance for reflection and contemplation, which often pays dividends further down the road.

The drum-beat of short covering (or is that government buying?) continued its inexorable march last week, in the process unearthing the carcasses of yet more once-profitable trades. Over the weeend, it occurred to Macro Man that psychology might offer a useful signpost for determining how far along we are in this process. So he turned to the Kubler-Ross model for dealing with grief. See how far along you are with this process:

Stage 1: Denial. We've all been there: "This &%^&*%^ market is so stupid! This thing is gonna turn around any day now once these knucklesheads stop buying." Check. Macro Man was there in mid-March.

Stage 2: Anger. "Dammit, this is starting to cost me some serious dough. ENOUGH ALREADY!" For Macro Man, stage 2 follows swiftly on from stage 1. It felt like he spent about four weeks in this stage with his Singapore trade.

Stage 3: Bargaining. "If I can just get back to my entry level, I'll close this position out." How many times have you said/heard that one in your investing lifetime? And how many times has the individual who uttered it actually closed his risk if he's lucky enough to see his bad position get back to flat? Most often, emboldened by the eradication of a loss, the temptation is to add, so that you lose even more the next time around.

Stage 4: Depression. "I suck. I'm so cold right now, you have to measure my investment performance on the Kelvin scale." You don't have to be Sherlock Holmes to recognize that Macro Man (and, no doubt, numerous others) have been in this spot for a while.

Stage 5: Acceptance. "Well.....there is a lot of cash on the sidelines. I don't think we've seen the lows, but could we nudge up to 950? Yeah, sure we could." Macro Man knows a few people who think this way, but he's not sure if it's consensus yet. To be sure, the majority of readers are bearish equities, and a plurality are short/underweight. Personally, Macro Man reached this point when he started hangin' with Costanza; while that little foray was profitable, he's now well out of it and has a relatively blank slate.

One argument in favour of the market's being at this stage has been the downdraft in implied volatility across asset classes. VIX is at its lows of the year.... is currency vol...
...while fixed income vol is also near its lows.
As befitting someone who's been through the Kubler-Ross (or at least had a bit of a cold streak), Macro Man has dialled down the risk and is trying to clear his mind. His own medium-term biases remain intact, however, so he looks forward to the day when he can help the weak-handed equity longs and FX carry traders go through their own version of the cycle.

Friday, April 17, 2009

Harry and Tom

It is heartwarming, as a citizen of the world and a taxpayer of the United States, to see that another of our beleaguered financial institutions has apparently righted the ship after the recent travails of the industry. Having received access to government guaranteed funding, central bank asset purchases, and a capital top-up from the public purse, JP Morgan, like Goldman before them, beat consensus earnings expectations and declared its participation in the TARP to be a "scarlet letter" which it would be happy to be shot of.

We'll leave aside the issue that Q1's robust performance, if repeated for the next three quarters, would have JPM earning $1.60 this year- and thus trading on a P/E of more than 20, which hardly seems to be compelling value. No, the real question is how much would the Goldmans and the JPMs and the Wells Fargos be earning if they had to raise the money themselves, didn't have the Federales trying to polish their turds, etc. One can only hope that if the TARP funds are paid back, all of the special benefits these guys have enjoyed are also summarily withdrawn; access to the Fed programs, the FDIC guarantees, etc. Hey, there's nothing wrong with these guys wanting to stand on their own; but if they do, then they shouldn't expect to see dime one of help from John Q. Taxpayer.

One institution that seems, ahem, less likely to pay back the TARP funds is Citigroup, which reports earnings today. Unlike many others, the once-mighty C is not expected to announce a profit, though in fairness consensus looks for the smallest quarterly loss since Chuck Prince was ejected from the dance floor.

While Macro Man is trying very hard to check his biases at the door, markets do seem to be reaching a potential turning point. A lot of recent trends look to be reaching potential exhaustion points. Consider "Harry", below, which had a nice rally in mid-March, but has subsequently put in a sequence of lower highs and lower lows. It recently broke a little support line and is threatening the 55-day mocing average, a break of which would get the momentum crowd piling in to sell.

Harry is EUR/USD (times Macro Man's age.)

Or consider Tom. He's had an excellent 35% rally over the past six or seven weeks, breaking through a number of moving averages. Yet he's had quite a sharp pullback today and is now sitting bang on his uptrendline. Given the severity of that slope, should it break, there could be quite a bit of juice on the downside. Of course, he could be worth a cheeky purchase with a stop just below the trendline. But given that he's at the top of his Bollinger bands and his RSIs are rolling over, Macro Man is not tempted.

Tom is the Taiwan Stock Exchange Index (divided by e.)

His bearish worldview notwithstanding, Macro Man has actually made small money in equities over the last few weeks- his pain has come in other markets.

There does appear to be a slightly louder drumbeat of negativity from a number of sources- certainly the results from the recent sentiment poll were pretty skewed to the ursine. Now, that could man that the bearish money is now ready to return to the market....or it could mean that the shorts are already engaged and the pain trade remains to the upside.

So if readers will indulge him, Macro Man would like to follow up the sentiment poll with one on positioning. Those who responded to the prior poll (all 653 of you) are particularly requested to participate, to generate some kind of like-for-like comparison. Results are here.

Thursday, April 16, 2009

What Will It Take?

It's day two of the "Micro Man" investment regime, and Macro Man can only say that these "second derivative" guys are on to something. Why, he nearly broke even yesterday; coming after a seemingly endless skein of poor performance, Macro Man felt wonderful after registering such a small down day yesterday. Or......... b).

Regardless, he's plowing on while removing the detritus of the wreckage from a few thematic macro trades from his portfolio. Still, he is keeping more than one eye on macroeconomic developments, because that is, after all, his stock and trade.

He was intrigued by the results from the recent equity sentiment poll, which showed that 70% of you are bearish to one degree or another through the end of next month. He found that surprising, given that his own informal polling of market contacts suggests a much higher degree of optimism.

Anyhow, this got Macro Man to thinking: what will it take for him to become more structurally bullish on equities? Such a topic could be the subject of a dissertation, which he sadly doesn't have time for this morning.

The short answer, therefore, is a twofold one: profits at an attractive level for a bounce, and a cyclical economic recovery that is felt on the street.

The previous three economic downturns have seen profits as a percentage of GDP trough somewhere between six and seven percent of GDP. Given the distress of the consumer and the global nature of this downturn, Macro Man sees no reason why similar levels should not be reached in this cycle. However, the figure was at roughly 9% at the end of last year. While this is admittedly lagging data, the magnitude of the correction required remains very substantial; Macro Man estimates that it will require a profit drop of roughly 25% from the end of last year to reach a reasonable level. Naturally, in SPX terms, this would represent a rather disappointing out-turn from the consensus: hence, Macro Man's view that an ongoing bearish mantle is warranted.
As for a cyclical measure, Macro Man likes to use jobless claims. They are high-frequency and represent the sort of second derivative, rate-of-change datapoint that the market seems to love. As the chart below (kind of) demonstrates, jobless claims have peaked at roughly the same time as a number of previous mmarket bottoms. Sometimes claims peak first, and sometimes the market bottoms first, but ion aggregate they are pretty close to contemporaneous.

As for the "green shoots" of yesterday's Empire survey? Well, a record low capacity utilization figure is hardly reason for optimism. But even if you're willing to consign that figure to the dustbin of history ("March data is soooooo last quarter, dahling"), it's worth bearing this little historical nugget in mind: the SPX reached its last cyclical low in mid-July 2002. Where was the ISM that month? 50.2, having been as high as 53.6 a month previously and first breaching 50 five months earlier.

Indeed, the trough in ISM came a full nine months before the trough in equities. There is of course no guarantee that the same outcome will occur this time around, but if it did, that would put the low in the seasonally weak September/October period.

But hey, that's enough of my yakkin'. Back to the charts....

Wednesday, April 15, 2009

Tom, Dick, and Harry

And the drumbeat goes on. Following on from yesterday's tepid price action in equities, markets opened on the back foot this morning but have subsequently snapped back smartly. Far from basking in the glow of the brave new world, spurred on by (yawn) another rumoured Chinese stimulus package, Macro Man feels as if he's being incinerated in the red hot crucible of a Panglossian risk orgy.

Yesterday's US retail sales data is a classic case in point of why the current environment is so treacherous. While the month-on-month decline was certainly disappointing, the 3 month rate of change turned sharply upwards. This is an example of the fabled "second derivative", i.e. an improvement in the rate of change in the data. Obviously, extrapolated further, this potential "green shoot" could blossom into the flower of recovery.

Yet in the scramble to ride the wave of of recovery, it's easy to lose sight of the fact that the green shoot may, in fact, be a dandelion. Certainly the chart of actual retail sales paints a less compelling picture than the rate of change chart above. Indeed, if retail sales were a financial asset, you'd call the early-year pop little more than a dead-cat bounce.
Yet it is the very fact that there is ambiguity in interpreting the data is what has made things a bit tricky. It is difficult enough to project the trajectory of economic variables; figuring out which interpretation the market will pursue adds an additional layer of complexity that, for a trader like Macro Man, considerably reduces the chance of success.

So he has decided to pursue a somewhat different tack and focus on the charts. Price, as they say, trumps all; in the current environment it certainly offers the clearest signal as to how the market chooses to interpret various datapoints.

The problem, of course, is that it is difficult to check one's inherent biases at the door. It would be far better if Bloomberg had an application that could change asset price tickers from EUR, CL1 and ESM9 to Tom, Dick, and Harry. (Perhaps there's a business opportunity there!)

In the absence of such a tool, Macro Man is steeling himself as best he can and trying to keep his eyes as open as possible in the hunt for "sexy" charts. Like Austin Powers, he's trying to recaputre his mojo; if any readers know a Tom, Dick, or Harry (or prehaps a Felicity Shagwell?) that could help him in his quest, he'd love to meet them.

Tuesday, April 14, 2009

Wistful, Slightly Bitter, and More Than A Little Jealous

Sigh. If only Macro Man had been able to hire Costanza over the weekend.

For if he had, then ol' George would have told him that the clear response to a country reporting a -19.7% saar GDP figure in Q1 and adjusting its exchange rate peg lower would be to buy as much of that currency as you could get your hands on.

In all the years that Macro Man's been in the market, he can't ever remember a GDP print as low as -19.7. That's the economic equivalent of getting hit with one of those Hollywood movie asteroids, the eruption of Krakatoa, a 9 Richter-scale earthquake, and the Great Fire of the same time!

And so it's happened in Singapore. As a reaction to the shock hitting the economy, the MAS re-centered the SGD band at the level prevailing last night: a modest step lower in the SGD. However, they didn't widen the band, and perhaps more importantly warned about "undue" weakness in the SGD.
Now, from Macro Man's perspective, when you're hangin' a minus twenty on GDP (-11.5% y/y), the only "undue" weakness in your currency is if it dispensed in lieu of Charmin in public lavatories. Anything short of that falls within the bounds of reason. Still, with the market rather short of SGD, we were treated to another Costnaza-like reaction of the SGD screaming higher on a shocking growth figure and a SGD band re-centering.

Meanwhile, back in the US, Goldman recorded super earnings in the first part of the current fiscal year, announcing Q1 earnings of $3.39 per share, well above the consensus expectation of $1.64. Except that they didn't. Buried in the small print, it appears that as the Easter Bunny was delivering candy and eggs to children all over the world, he also desposited a small turd in the GS income statement. In December, which magically falls outside the aegis of any reporting period (falling through the cracks, as it were, in the transition from investment bank to bank holding company) , the firm lost $2.15 per share. Add that to the Q1 earnings figure, and you get a result that is comfortably lower than consensus.

More telling was the GS announcement of their intention to sell shares to the public. While Macro Man occasionally takes Goldman to task, he will happily concede that, individually and collectively, they are some of the smartest guys on the street. And when a smart guy offers to sell you something in an industry that has more than doubled in value over the past month....well, judge for yourself what the appropriate response is.
All of this has left Macro Man wistful, slightly bitter, and more than a little jealous. His carefully-laid plan to reach a P/L summit this month has ended with his portfolio nursing a broken leg back in base camp. Adding insult to injury, he doesn't work for an institution where he has the option of valuing his book using a model derived from those titans of modern finance, Andersen, Grimm and Grimm.

Perhaps its the accumulated fatigue of the last month's trading, or perhaps its the literal tiredness from getting Costanza'ed in the wee hours of the night by the market and the MAS. But your humble scribe is suffering from a deficit of both conviction and performance, and could use a few more data points.

He's curious how a broader (but still informed) audience views the world, so has created another SPX poll. Simply click on your answer below as to where the index will be at the end of next month. In the meantime, it's back to the drawing board for Macro Man. He really needs to find a market where they've never heard of Seinfeld.

Results are here.

Monday, April 13, 2009

Easter Monday Poem: It's Raining Yen

"Inspired" by a four-day Easter weekend in which the sun has not appeared once, here's the first bank holiday poem of the year:

Spot has started rising,
Downside interest's getting low
According to our sources
There's panic in Tokyo

Cause in Q4 for the first time
GDP was worse than minus ten
For the first time in two years
It's gonna start raining yen

It's raining yen
It's raining yen

I'm gonna go out
I'm gonna let myself get
Absolutely soaking wet

It's raining yen
It's raining yen
Every specimen

Oz, rand, the B-R-L
Even Turkey too- wow, bloody hell!

God bless mother nature
With some help from the Kampo, too
She took a call from the MOF
And did what she had to do

She taught the market who's the boss
And put a bid under every yen cross

It's raining yen
It's raining yen

Thursday, April 09, 2009

George Costanza, Hedge Fund Manager?

So this is what it's come to.

Macro Man is considering finding and hiring George Costanza, the hapless buffoon from Seinfeld, to sit at his side as an advisor and general trading guru. For nowhere, in all the books that he's read and all the discussions that he's had over a sixteen year career, has Macro Man encountered a more perfect strategy for trading these markets than that enumerated in the clip below:

Just imagine how George would have traded some of the flamingos that have assailed the market recently-heck, he could even call on the assistance of Clarence Beeks, who makes a cameo appearance at the end of the clip.

* EUR/CHF: "So the SNB has intervened and the equity market is going up 14% in a month? I'd bet my mother's mortgage that we'll be at 1.57 by Easter. So this baby's going down, Jerry! It's going DOWN!!!" EUR/CHF is half a percent lower since the New York close on the day of the intervention, but the intellectual and emotional cost has been more considerable.

* Gold: "So let me get this straight. If equities head lower, gold goes up as a safe haven bet. If reflation works, gold soars because of inflation. No matter what happens, I win? Jerry, this is better than being an architect! Sell 500 June gold!"

* South African Rand: "Wait. You're telling me I can actually trade the currency of a country with an incredibly corrupt leader AND which correlates well to gold? Where do I sign up? 50 million USD/ZAR yours!"
* Hungarian bonds: "Fitch has downgraded the Baltics? You think it's the tip of the iceberg, Jerry? I'll give you a tip, baby: Blue Whale likes yields on a ten handle!"
* Treasuries: "Jerry, Jerry, Jerry. Why do you bore me with details? Yes, I know the Fed is buying Treasuries. Yes, I know the employment situation is dire. And yes, I know there is a wall of supply out there. Of course Treasuries should motor around. Sell 2000 May 122-125 strangles."
While you may fault the logic, the results speak for themselves. Why, just yesterday, Macro Man took a little informal poll of brokers and punters of his acquaintance. Risk asset bulls outnumbered those expecting the rally to top out 15-3. Normally that would ring some pretty severe alarm bells.

Yet had George Constanza been in Macro Man's seat, he would have purchased some Spoos, and been up 2% already for his effort.

Ay caramba! What's the world coming to? When George Costanza is the best macro punter out there, it's usually a sign that markets (or at least Macro Man) need a break. So it's rather fortunate, therefore, that Easter is rapidly approaching. As always, Macro Man will be keeping an eye on things and may even conjure a poem if he has the energy, but it will be refreshing to do something other than watch screens all day and wish that he were George.

Wednesday, April 08, 2009

Time For Some Signal

Enough of the noise, it's time for some signal.

Earnings season kicked off last night, and the results were less than compelling for the "risk on" crowd. Sure, Bed Bath and Beyond beat the consensus, but you can only go so far on a recovery fronted by smelly candles and Epsom salts. More tangently for global activity, Alcoa disappointed...sending Spoos lower overnight.

This came a day after equities were sent lower by a Morgan Stanley report going underweight European equities. Macro Man despairs that markets continue to adjust prices on the basis of research reports, but there you go. In any event, the fact that the MS report had a reasonable impact on stocks certainly begs the question of whether the bull run has had its day, at least for the time being.

To be sure, economic recovery bulls are still highlighting the "green shoots" with a magnifying glass: yesterday's story du jour was a rumour that Chinese loan growth in March would reach Dr. Evil-esque proportions.

Of course, many of the China bulls were trumpteting the Baltic Index a month or two ago, yet have fallen strangely silent. Perhaps thats's because the index has once again turned around and is heading lower?
In fairness, Macro Man pooh-poohed the significance of the BDIY on the way up, and to be honest he's not particularly enthused about the significance of the relapse. But one thing he is fairly sure of, however, is that he trusts the data of people who sell to China more than he trusts Chinese data itself. And in that regard, the news is slightly less rosy.

Korea recently released trade data for March, wherein exports to China fell to a new low after a modest post-New Year's bounce in February. If Chinese growth really is gearing up, it must be very selective indeed.
And so Macro Man is not particularly surprised to see some of the recent corrections in Asia turn tail. USD/MYR, after falling sharply last week, has bounced equally sharply and has broken a resistance line.
So, too, has USD/TWD; the CBC must be so proud, given that they blithely ignored the G20 and have continued to buy USD to curtail TWD strength.
If only they'd have a word with the SNB, perhaps one of Macro Man's most painful flamingos would take flight....

Tuesday, April 07, 2009

The Joys Of Spring

Ah, the joys of spring.

Daffodils are in full bloom, the grass has started growing again, and Macro Man is awakened every morning by the dulcet tones of birdsong through his bedroom window.

Spring is also the time for Easter, and the Macro Boys are more than pleased to have a couple of weeks off school. Naturally, they also await the impending arrival of the Easter Bunny with bated breath.

And perhaps, just perhaps, in a small neighbourhood on the outskirts of Pittsburgh, a pink plastic flamingo is still being passed from house to house.

Macro Man introduced the investment concept of the pink flamingo nearly a year ago, during a previous period of treacherous trading conditions. A pink flamingo is, simply put, a widely-held position in the macro trading community that turns as ugly as one of those garish plastic birds. And like the pink flamingos of Macro Man's distant youth, pink-flamingo status gets passed from market to market as more and more trades get sucked into the "fun."

While Macro Man has found himself scuffling over the past few weeks, he's clearly not alone. The HFR Macro hedge fund index has performed a bit of a swan dive since early March. While it's scant comfort to know that Macro Man isn't alone in his pain, it's nevertheless useful information to know that pink flamingos are dotted around the investment landscape. On current form, financial markets are a virtual aviary.
Regular readers will recognize a few pink flamingo in Macro Man's book from his recent grumbling, among them EUR/CHF and Schatz. But wait! There are oh so many more fundamentally sound trades that have gone wrong because of positioning.

Consider AUD/NZD. This has been a darling of macro and currency punters for a number of years. New Zealand's macroeconomic fundamentals would rate poorly for an emerging market; as a developed market, it's bottom of the heap. And while Australia has clearly not been immune to the global economic downdraft, it's long-term fundamentals (excluding housing) look very solid indeed.

And yet AUD/NZD has been on a one-way train south since mid-March, which looks to have been largely a position liquidation. Ironically, the cross bounced overnight despite a somewhat surprising rate cut from the RBA; perhaps a wretched business survey out of New Zealand has re-focused attention on the fundamentals?
Gold is another consensus trade gone badly wrong. There seemed to be so many reasons to own it; it's a safe haven if equities go down, and an inflation/fiat currency hedge if global central banks break out the printing prsses en masse. The yellow metal peaked a bit before AUD/NZD, and sicne then has proved to be mighty disappointing to longs. Macro Man's inbox is stuffed to the rafters with analysis suggesting that IMF gold sales should not affect the price; be that as it may, the market still trades very long and very wrong.
And of course, equities. The inverse correlation between the SPX and the HFR index isn't quite as strong as it was a few weeks ago, but the market still appears to be leaning short equities...or at least short stuff that is correlated with equities (if, indeed, one can trust any correlations to hold.)
These pink flamingo episodes usually seem to last a month to six weeks, taking even the most sacred of cows to the abattoir. Given that we abear to be halfway to 2/3 of the way through the usual duration of a pink flamingo episode, the question then turns to where the remaining pink flamingos reside.

Readers are invited to submit their suggestions: enquiring minds want to know!

Monday, April 06, 2009

Make A New World

For the second month in a row, the US nonfarm payroll figure came out bang in line with expectations, missing the consensus forecast by just 3k (after missing by 1k the previous month and 1k in January.) Macro Man isn't naturally prone to wearing tin-foil hats; if he were, he could only conclude that the Street's newfound forecasting prowess is the result of government manipulation of the numbers.

In any event, the data brought to mind a comment from last summer, when the US government first announced a support package for the Agencies. "When I picked up my newspaper yesterday, I thought I woke up in France,'' quipped Jim Bunning last July, before excoriating the Federales in a Senate hearing.

Well, Senator, many Americans would gladly wake up in France these days. The US unemployment rate is now above France's for the first time since the early stages of the Reagan revolution, despite (or is that because?) US workers toiling for a Gallic 33.2 hours per week. At least the French get good health care, decent grub and an unshaken faith in their own superiority. No wonder Sarko would shout the death of Anglo-Saxon capitalism from a soapbox, if only he could climb up that high.
It seems clear that we are living and trading in historic times, an epoch that will be seen by future generations much as our own regards the Great Depression. Putting on his long-term forecasting hat, Macro Man can see a scenario where regulation and government control of various aspects of economic activity endure for a decade or two, until eventually a backlash emerges and a new Reagan or Thatcher emerge fifty or sixty years after the originals.

Regardless, the people in power today have the opportunity (or, depending on your perspective, excuse) and the will to make a new world. Now, the thing about modern media (both mainstream and alternative) is that are ten guys offering criticism and lobbing barbs from the cheap seats for every guy offering a prescriptive suggestion. It is, after all, easier to tear down than to build up, and regular readers will know that Macro Man has not been averse to hurling shells from the peanut gallery.

Today, however, he wishes to offer a few small suggestions as to how he would make a new financial world. The list is by no means meant to be comprehensive. nor indeed is every item on the list replete with detail. Still, you gotta start somewhere:

* Change the regulation and/or incentive structure of the ratings agencies. One of the fundamental flaws in the current (or is that prior) economic system is that the ratings agencies were paid by the sellers, rather than the buyers, of bonds and structured credit. They were therefore incentivized to help those sellers game the models to win the most favourable ratings. If, however, they were compensated by the buyers of bonds and structured credit, they should be incentivized to, you know, get things right.

* Migrate the CDS market to exchanges with position limits and heavy margining. This has obviously been suggested elsewhere, but bears repeating. In its worst form, the CDS market has a) added untold leverage into the system, and b) represented little more than Mr. Smith buying fire insurance on the houses of Mr. Jones and Mr. Wesson. If a fire (whether natural or via arson) consumes the entire street, the neighbourhood as a whole loses out, but Mr. Smith is quids in. What sort of incentive structure does this give Smith, and what is the impact on society at large?

* Grant loans and mortgages held on balance sheet more favourable tax treatment than those sold off to a secruity factory. One of the primary problems behind the subprime fiasco is that mortgage lenders had little to no incentive to critically assess the quality of borrowers, since they had no intention of holding the loans themselves. If, however, more loans were held on balance sheet, rather than nested in the A tranche of some steaming turd of a CDO-squared, lenders would exercise a bit more responsibility in the allocation of credit moving forwards. And if there's one thing that the new world could use, it's a little more responsibility.

* Re-institute some sort of Glass-Steagall split between commercial and investment banking. In the modern era of Goldman Sachs, bank holding company, the pendulum has obviously swung pretty far in the other direction. And in all honesty, Macro Man hasn't been through the fine detail of what this would entail with enough rigour to provide a checklist of costs and benefits. What he does know, however, is that the creation of financial leviathans that make both loans and securities hasn't done much other than create firms that are too big big to live and too big to die. Rather a sticky situation, that. In any event, splitting investment banks off feeds through into the next suggestion:

* Create tax incentives for investment banks to function as partnerships rather than as publicly listed companies. One could argue that this is all John Gutfreund's fault. Back in the days when investment banks were run as partnerships, the amount of leverage that they could take was constrained by the amount of capital in the firm. Moreover, because partnerships risk their own money, rather than that of some anonymous shareholder, they have every incentive to act within the bounds of reason; if they don't make money, they don't get paid without reducing the capital of the firm. By taking Salomon public in the 80's, Gutfreund helped usher in the era of the firm-wide "Acapulco trade": swing for the fences on Friday and jet out to Acapulco. If the trade works, come back on Monday and collect the plaudits and start mentally spending your bonus. If it doesn't, stay in Mexico and let someone else clean up the mess.

If there is one tenet that Macro Man would like to see introduced into the financial system, it is that more actors should be incentivized to act as if they are in partnerships managing their own capital.

* Scrap the dollar if you want, but get ready to pay. China and Russia have been particularly vocal about the desirability (if not the need) for an alternative to the US dollar as a global reserve currency. Evidently they are tired of paying the toll for the "exorbitant privilige", which in practice has kept the US dollar artificially strong and led to a cessation of some monetary policy sovereignty (the bond conundrum.)

Reserve currencies are, of course, a matter of choice. No one is forcing China and Russia to hold as many dollars as they are, both in terms of gross levels of reserves and in terms of currency allocation within their reserve holdings. If they want to IMF to create and maintain a new "store of value" unit based on the SDR, fine. Run with it. But a store of value unit is an incredibly, er, valuable resource, which should not come free. Currently, China, Russia, and other reserve managers are paying the cost of low US nominal yields and a burgeoning supply of bonds for using the dollar as their primary store of value. Perhaps a new system could have a transaction tax on SDR purchases above a given threshold to discourage over-accumulation of FX reserves. At the very least, a new system should include a heavy does of oversight of the reserve accumulation policies of large current account surplus nations, with both carrots and sticks included in the policy arsenal.

So there's a starting point for discussion. Readers are encouraged to submit their own suggestions and/or critiques in the comments section.

Friday, April 03, 2009

Is It May Yet?

Well, the latest edition of policy "shock and awe" was released yesterday, with FASB adjusting the mark to market rules and the G20 promising a Dr. Evil-esque "one triiilllliiioonnnn dollars!" for the world economy. Markets were so excited that they barely noticed the disappointment from the ECB.

Well, that's not entirely true. The euro rallied sharply against the dollar (because in a 16 vol currency pair, an extra 25 bps makes the carry sooooooo much more attractive), and the front end of Europe got butchered. While euribor fell quite a bit, the real carnage was in Schatz. Macro Man stands by the view that German two year bonds are a much more attractive proposition than short-term lending; sadly, the market doesn't agree with him. Perhaps he can employ new FASB guidelines, as his model suggests that Schatz yields should be 1% rather than 1.5%?
While Macro Man will leave a full dissection of the G20 announcement to others, he is left waiting for Messrs. Brown and Sarkozy to move swiftly on the tax haven issue that has troubled them so much. He is looking forward to seeing a clampdown on noted tax avoidance centers like the Isle of Man, Channel Islands, British Virgin Islands, and Monaco. Or will Gordo continue to turn a (literal) blind eye to his island stashes while Sarko is unable to see over Les Alpes-Maritimes, even with platform shoes? Inquiring minds want to know.

Speaking of dodgy tax havens, the SNB received the green light, from the data at least, to make another foray into fighting deflation. Swiss CPI fell 0.4% y/y in March, lower than the expected -0.1% and the most intense deflation (or is that "extreme disinflation"?) since 1959. Given the reaction to Hildebrand's comments yesterday, the SNB may decide that for the time being, words are more powerful than trading tickets. But the marginal impact of jawboning will ebb swiftly; the only words that the market will want to hear is "One fifty five bid, your amount."
And of course, today sees the release of the US non-farm payroll data. Macro Man omitted mention of it over the past couple of days because it feels as if the market just doesn't care. The market feels like it's in the modd to shrug off a horrible number; hey, it's a lagging indicator, China's recovering, Dr. Evil has saved the world, etc. etc. etc. A "mere" 500k job loss figure, on the other hand, could be met with cries that the "worst is over". Or so the theory goes.

In any event, Macro Man expects another wretched figure as his little model suggests that the unemployment rate will tick up to 8.6% - 8.7%.
At this point, Macro Man is looking forward to the weekend. He might pay away a bit of option decay, but at least he knows where that is coming from. It feels like he's been scuffling for about three weeks now; while the P/L damage has been fairly modest, the intellectual hit has been more considerable. It's all part of the business, of course, but he's looking forward to a couple of days where he's not saying "WTF?"

Thursday, April 02, 2009

On Your Marks, Get Set, Go

Yesterday's protests were nowhere near as bad as feared, though we should probably reserve judgement until the return leg is played today at the G20 meeting.

Regardless, after a day spent watching the news yesterday it feels as if the London market is in its starting blocks, looking to sprint out of the gate into Q2. It appears to be a race to see which "risk on" trade can go furthest the fastest; while Macro Man noted yesterday that he thought that there might be some short-term upside in equities, for example, he has been bemused and bewildered by the enthusiasm for stocks and risky currencies today.

Regardless, today should prove to be eventful, with two key announcements. The ECB kicks things off at 12.45 London time, when they are widely expected to cut rates by 0.50%. The real key, however, will be any announcement at 12.45 (or hint from the 1.30 press conference) of unconventional easing measures.

To be sure, the short end has rallied quite a bit, spurred on by huge upside option flows in June and September euribor. From Macro Man's perch, Schatz offers more attractive upside for those that don't need billions of euros worth of liquidity; the current gap between German 2 year yields and the second Euribor contract is the lowest its been since the crisis started. Meanwhile, in the US, FASB announces its decision on whether to suspend mark-to-market accounting today. It seems likely that some of yesterday's rally was anticipating a suspension today (though the tick up in the macro data surely helped.) How much of the recent equity rally has been predicated on the potential, ahem, "flexibility" that would accrude from MTM suspension? It's hard to know for sure.

But as the chart below illustrates, the sort of illiquid turds that banks still carry on their balance sheets contin ue to plumb new depths (the price below is for the first 2006 vintage AAA-rated ABX index.) The watchword over the past year or two has been "where credit goes, equities follow." Suspension of MTM may break that link, if only temporarily. Then again, if MTM is not suspended, stocks could snap back lower with a resounding thud. Macro Man has no view on the outcome, and hence no position in stocks.
If only he were on the distribution list for "the memo" that tips certain punters off in advance! Sadly, his application to join the list in the United States has been rejected. But let's bear in mind that the US is hardly the only, or indeed the worst, bastion of crony capitalism out there.

A particularly egregious example has taken place in Switzerland, where today SNB governor Philipp Hildebrand made some comments supporting the prospect of further SNB intervention. In mid-afternoon yesterday, EUR/CHF had no friends and was sinking fast. Then magically, as if out of nowhere, huge bids appeared for overnight 1.52 call options when spot was trading 1,5130. Sure enough, Hildebrand has made his remarks today and we're at 1.5234.

While this has helped Macro Man's portfolio, it still doesn't make it any more right. Macro Man has filed an application to join the so-called "Swiss mafia" of insiders....he's even promised to grow a moustache and wear shiny green suits and white socks to work every day. Sadly, he's had no reply so far.

Anyhow, while today might set the tone for Q2 it by no means will guarantee wherre we are in a month or two. Markets are, after all, a marathon, not a sprint, and the first one out of the blocks doesn't always win the race.

Wednesday, April 01, 2009

Looking Forward

Well, at long last, March is over. As frustrating as it was, and as difficult as trading was, it was actually Macro Man's best March in at least five years. Talk about damning with faint praise...

In any event, after yesterday's polemical fireworks and, potentially, today's literal ones, it's now time to look forward to April and jump-starting Q2. What are the things that Macro Man is looking at? Some of the things on his radar include the following:

* Equity noise. This year, Macro Man's forecasting success in equities has been best described as "Antarctic", he's been so cold. He's not expecting April to get much easier. At this point, the two event risks that he's keying on are bank earnings in the middle of the month and the US stress test results in late April. For choice, he expects banks to try and massage good figures for Q1 in line with their recent boasts. Implicit in that, perhaps, is a delay in further writedowns in the hopes that the value of their turd-holdings increases in Q2. He is therefore leery of a further squeeze higher in stocks over the next couple of weeks. However, last weekend's Geithner comments are perhaps a foreshadowing that some institution will fail the stress tests, either as a sacrificial lamb or otherwise. It's hard to see that not rebounding negatively on stocks.

Moreover, it's not as if the fundamentals are improving at a dramatic rate either. Macro Man's return forecasting model took another leg lower last month, and is now essentially forecasting zero returns for US equities over the next year. It's a scant comepensation for 40% plus volatility! So while Macro Man reckons there may be some good tactical trading opportunities in stocks, he has difficulty buying into "hold-able" view
* QE: Put up or shut up? OK, that's a bit extreme. But certainly the follow-through from March's policy initiatives still looks "shock and awful". Particularly galling is the SNB; who knew that Rip Van Winkle was on the bank's board? For after the three hour flurry last month, the bank has been notably absent, and EUR/CHF has now retraced 50% of the move since the SNB stepped in. CHF 814k per year for 3 hours' work? Perhaps today's protesters will spare a bit of vitriol for Roth, Jordan, and co.

* Whither the ECB? A rate cut tomorrow is the worst-kept secret in finance. The real issue for markets is if (or is it when?) the ECB introduces a more complete suite of nontraditional policy measures. While the euro has retraced much of its post-QE strength against the dollar and sterling, it's still well off its lows of the year. A more aggressive response from Trichet and co. could send the single currency careening back down.

Meanwhile, the front end of Europe has rallied strongly in recent days, helped by large flows from a well-known (and well-connected) London hedge fund. June and Sep euribor are now implying cash yields only slightly lower than German 2 year govvy yields. For choice, Macro Man sees more upside value in Schatz than euribor, therefore.

* Will they or won't they? Macro Man has pushed the theme of Asia's exposure to global trade for some time, as well as the requirement for global monetary easing. Those two views have coalesced around a position in Singapore, the only economy that Macro Man can think of not to ease monetary policy during the crisis.

Well, the MAS makes one of its biannual policy announcements this month, so to some degree it's now or never for the view. The past behaviour of Singapore's policy mix suggests that the authorities use fiscal policy to address growth shocks and monetary policy to counter price shocks. Well, the run-rate of Singaporean CPI (measured by annualized quarterly change) is now at its most deflationary in more than 20 years.
So if the MAS doesn't adjust policy now, there's really not much point in having the regime, is there? Regardless, there is almost certainly an exciting (and possibly sleepless) night in store for Macro Man in a few weeks.

Finally, and most personally, Macro Man is looking forward to getting his knee properly sorted out some time this month. He can't say he's looking forward to the surgery or the early-stage rehab, but he's certainly looking forward to getting a fully-functioning knee again, whenever that may be.