Friday, May 29, 2009

Month-end Thoughts on Valuation

Hard to believe it's month-end already. Gee, time sure does fly when you're having fun. (Or.....B.) In any event, the lack of massive equity moves, such as we've observed for most of this year, should preclude the sort of month-end fixing/rebalancing jiggery-pokery that's been observed for the past six months. Perhaps the most interesting thing will be to observe what the asset allocators do. Bonds have cheapened nicely against equities this month and are entering a seasonal purple patch. Equities, however, will be in solid "go away" territory for the next five months.

Not that any of this will necessarily matter, of course. Seasonals are all well and good, but should arguably be swamped by the importance of the incoming dataflow. Yesterday's comments section contained some interesting debate about the valuation argument for equities, so Macro Man has delve a bit deeper.

One commenter posited that European equities looked attractive because of the dividend yield of certain companies. Now, Macro Man has neither the competence nor the mandate to trade individual stocks, so he is forced to look at things from a top-down, er, macro, index-level.

One of his favourite markets to trade is Eurostoxx, where not only are there listed options and futures on the index itself, but also listed options on the dividends paid out by the index consituents. Although payour ratios are not constant, these represents a decent proxy for market-implied earnings trends and, one could argue, economic growth.

It is a peculiarity of the Eurostoxx that most of the index dividends are paid or committed early in the year, meaning that they actually represent a good bit of the prior year's earnings. So for example, last year the Eurostoxx paid dividends equivalent to roughly 158 index points, a record high....representing earnings accrued primarily in 2007, before the worst of the financial crisis hit. 2009 dividend payments are expected at 112.6 on current pricing, and some 93 points of that has already been paid or committed. That decline represents the impaired earnings power of 2008. Next year, the market is forecasting divvy payments of 76.9 points, representing declining earnings this year.

Now, what's interesting is that the strip is pricing the nadir of dividend payments to occur in 2011, meaning that the bottom in Eurostoxx earnigns is likely to occur next year rather than this. Moreover, divvy payments are not expected to exceed 2010 levels until 2015, implying that 2009 earnigns will not be bested until 2014!!!

Call Macro Man crazy, but that hardly strikes him as an attractive proposition. If the dividend futures are correct, we can expect basically zero earnings growth for the next five years. Why the hell should we want to buy equities then? And if divvy futures are underestimating the likely trajectory of earnings, aren't they a better buy then equities (given that you don't have to worry about getting the mutliple right.)? By way of disclaimer, Macro Man has been long various segments of this strip for most of the year as abottom-of-the-drawer "eventual recovery" trade.

Put graphically, the implied dividend yield of the Eurostoxx index in future years (using a forward index level implied by swap yields) doesn't look like anything special...and that's before you consider things like volatility and uncertainty.

Frankly, for a no-brainer valuation trade at this juncture, Macro Man personally requires a much higher equity risk premium to be enthused about jumping in.

Failing that, all we have to fall back on is money-market cash levels. And while "everybody else is doing it, so why don't we" can on occasion be a persuasive argument, it's also paved the road to some of the most spectacular crashes of the past couple of decades. Put another way, just because some other doughnut decided that it'd be fun to buy GM stock (which traded in positive territory for most of the day) the day that they announced their imminent bankruptcy timetable doesn't mean that it's a good idea for you or Macro Man to do it.

Thursday, May 28, 2009



For all the talk of "green shoots", "second derivative improvements", "positive feedback loops", and "Chinese stimuli", perhaps the most important economic development of the year thus far as been sharp fall in credit costs to the US private sector (demonstrated by the Merrill Lynch indicator below.). Putting aside the issue of whether you can borrow your way back to prosperity (hint: you can't), this development (itself a product of the Fed's panoply of programs) has been a critical one. Frankly, Macro Man hasn't paid enough attention to the issue, which is why he has remained considerably more bearish than is good for his P/L.
Because unsurprisingly, there has been a strong correlation between private-sector credit costs and the SPX. Since Obama strode into the White House, even a simple chart overlay demonstrates that the trend in credit costs has been mirrored by the trend in equity matrkets.

So what, then, are we to make of recent price action? Yesterday's five-year auction didn't come off too badly, and indirect bidders once again stepped up to the plate. (We'll see if they have an appetite for today's seven-years.) Yet price action in bonds remains little short of execrable. 30 year swap rates have jumped 50 bps in a week, , and conforming 30 year mortgage yields are now litle more than 50 bps above the equivalent Treasury yields.
Sure, the bond sell-off could just be the usual cheapening ahead of supply, but the scale of these moves suggests something deeper (including convexity hedging.) Heck, even LIBOR has started to tick up.

So what does this imply for private sector borrowing costs? And what does that, in turn, suggest for the green shoots/second derivative/confidence boost and, more importantly, for the direction of equities?


Wednesday, May 27, 2009

Five-Minute Macro

Is it just Macro Man, or are we living in a world of five-minute macro?

It seems as if tradeable macro themes get as much traction these days as someone wearing ballet shoes on an ice rink. If you don't like the theme of the minute, hey! Just wait. Another one will be along shortly.

Such was the case yesterday, where the bother about Kim Jong-Il (was yesterday's Team America reference too subtle?) vanished as soon as you could say "higher consumer confidence." Yesterday's 54.9 reading on the Conference Board measure was clearly a positive surprise, so it's understandable that equities and risky stuff might rally. Yet the vast bulk of the improvement was down to the expectations component, which itself was probably driven by the recent run-up in equities. So we're buying equities on the basis of a number that was driven higher by the fact that we've bought equities over the past month. Uh, OK.Another "five minute macro" theme was the death of the dollar and the Chinese withdrawl from funding the deficit. Yesterday's two-year auction had indirect bidders (read: foreign central banks) take down more than half the print, the highest proportion in five years.

Before we consign the funding fear theme to the dustbin of history, however, let's see how the rest of the week's auctions go, and whether Uncle Sam and label the market with (yet more) duration.

Indeed, there is a rising drumbeat of what you might call the "Goldfinger" theme (loving gold and expecting Mr. Bond to die.) Price action in bunds, which have rolled over and broken their 200 day MA, has been mirrored in numerous other markets.

Of course, as linked above, Macro Man wrote a similar post about bonds little more than a year ago. A cursory glance at the charts therein will reveal that prices were a hell of a lot lower then, and that "key breaks" were not sustained.

So the world of five-minute macro is a hardly new, and simply represents a relatively noisy period of back-and-fill price action. Macro Man can only hope that the trend of five-minute macro steers well clear of economic datapoints like these.

Tuesday, May 26, 2009


Although it's only the last week in May, markets have taken on the distinct flavour of summertime. Perhaps it's because it's the half-term school holiday here in the UK. Perhaps it's because the Premiership football season ended yesterday, and we mentally associate "no football" with "summer." Or perhaps it's because, right on cue, the rains came on yesterday's bank holiday and have persisted into today (and, in all likelihood, the next ten weeks or so.)

Regardless, activity seems light and markets are reacting strongly to every last bit of news. The end of last week saw a lovely stop-loss run in fixed income, which surely took out all but the most deep-pocketed of longs in Treasuries and Bunds.

This week early focus has been on Korea. It's seems quite clear that nobody has realized quite how busy Kim Jong-Il has been, as North Korea has conducted a nuclear explosion and test-fired two short-range missiles over the last 48 hours.

Unsurprisingly, Korean asset markets (among the best performers in the green shoots upswing) have suffered, with the Kospi evidently breaking its uptrend line. Some caution is probably warranted, however, as plenty of other trendlines have broken over the past couple of months without producing a meaningful trend reversal.
Interestingly, however, the weakest of the EM carry currencies is also threatening to break its trendline this morning. USDTRY, which has underperformed its high-yielding brethren like BRL and ZAR, is looking a bit ropy this morning.

And that fact that the euro has sold off on this piece of scare-mongering on German banks is probably all the evidence you need that summer is here. While it is almost certainly true that German banks are carrying loads of dodgy assets at farcically inflated values, to date Macro Man has yet to identify the event that will force them to admit that the emperor's new clothes don't actually exist.

Any readers with a good idea of what would cause them to 'fess up should feel free to share. In the meantime, Macro Man is settling in for what's looking to be a long, wet, summery day.

Monday, May 25, 2009

Bank Holiday Poem: Ozymandias

With apologies to P.B. Shelley....

I met investors from a foreign shore
Who said: "Two trillion dollars we are long.
Until we can deploy them and earn four
Percent, without taking duration risk
'Twould be folly to purchase any more.
Yet when our new-world counterparts we meet,
Reclining for a chat under palm fronds,
Ere we take the slightest moment to greet
Our friends stand and declaim into the air
'My name is Ozymandias, buy my bonds:
Else we shall not import and all despair!'
The proud land's reputation's in decay
From that colossal wreck, boundless and bare
Our investment dollars shall stay away."

Friday, May 22, 2009

Sell American. I Am.

It's hard to believe that Warren Buffett's "Buy American" op-ed was more than seven months ago. How time flies!!

Macro Man wonders, however, if some foreign (Chinese, perhaps?) Buffett equivalent hasn't written a contra piece, entitled "Sell American. I am." For how else to explain yesterday's price action, in which the dollar, US equities, and US fixed income all received a good thrashing?

Well, one way to explain it would actually be noise; after all, yesterday barely registers on the scale of the chart above. Moreover, in thin holiday traffic (Europe on hols yesterday; the US and UK, on Monday), it doesn't take much to push things.

Still, markets are never afraid to let the facts get in the way of a good story, so it's worth keeping an eye on the "Sell American" theme...possibly coming to a Bloomberg screen near you!

Thursday, May 21, 2009

Quick Hits

Macro Man's a bit tied up this morning, so it's another edition of quick hits:

* Orgy of optimism? The latest BofA/ML Global Fund Manager Survey showed the highest degree of optimism over the economy and profit growth since 2004. The survey also showed a massive re-allocation into EM equities, which has taken positioning there from underweight to euphorically overweight in a matter of three months. It seems quite clear that managers are hitching their wagon to China, and are looking for more of a "check mark" recovery than a V. From Macro Man's perch, these guys are looking at green shoots and mistaking it for a redwood forest. Regular readers will know that he harbours a suspicion that this will end badly.

* Speaking of ending badly, no sooner does Macro Man pooh-pooh the market's renascent dollar bearishness than EUR/USD breaks through its recent highs around 1.3740 and accelerates above 1.38. The move was belatedly helped, of course, by the Fed, which was sufficiently worried about the economic outlook that it contemplated bumping up the size of QE three weeks ago.

* Proof that everything has its limits: The UK is linked arm-in-arm with the US, strolling down the yellow brick road of huge deficits and central bank monetization. You can almost hear Merv, Ben, Alistair, and Timmy singing "lions and tigers and bears! Oh my!" Sadly, they forgot to look out for ratings agencies, as S&P has downgraded the UK's outlook to negative. This really shouldn't come as a total shock, but the timing (an hour before a Gilt auction, and just after sterling had broken through ressitance against both the $ and the €) was unfortunate, to say the least. Is the US next? Inquiring minds want to know....

Wednesday, May 20, 2009

The Answers

And now, the answers. Yesterday's little quiz was a pretty fascinating exercise. Although a few commenters noted (some more politely than others) that in normal conditions, it is actually quite tricky to distinguish market price action from random walk, this ignores two factors.

First, most of the past eighteen months have not been normal conditions, with many markets exhibiting strong trending characteristics. Second, it is in fact possible to recognize a particular pattern as belonging to a particular market price, which of course renders the question of which charts are fabricated moot.

In any event, the real charts were A, B, and C. In the comments section Macro Man noted that no one had gotten the question right; this wasn't entirely true, as one chap had identified these three. But he then went on to try and name the underlying asset, and while he got the first two right, he whiffed on the third.

In any event, without further ado:

Chart A:

Chart B:

Chart C:

These are normally three pretty well-known charts to macro punters; indeed, more than a few readers correctly identified A and/or B. But the fact that no one correctly identified all three, and that only one guy (and a salesman to boot!) identified the 'real' markets is rather telling.

What's reasonably interesting is that the charts all capture various USD crosses in the two months after the Fed formally embraced QE. For all the talk of the dollar entering a death spiral, it's interesting to note that the buck only went down in one of the three charts posted above- and that against the currency with worse fundamentals than the dollar!

While Macro Man can certainly see the growing drumbeat of dollar bearishness in certain circles, he can't help but think that the bark is worse than the bite. Oh, sure, the press is making hay out of things like Brazil and China deciding to trade in...err...their own currencies, rather than somebody else's. But to Macro Man, that's little more than the economic equivalent of taking the training wheels off of one's bicycle.

He wonders what China's reaction would be if the US inquired about gaining the capability of purchasing RMB on the open market to settle their import bills in yuan. He suspects that that answer would rhyme strongly with "thanks, but no thanks." As such, he continues to have a hard time getting excited about the 'death of the dollar' theme so beloved in certain circles....

Tuesday, May 19, 2009

The Randomizer

Another day, another trip through the grist-mill of seemingly random (and certainly erratic) price action. In some ways, it doesn't seem to matter if you are bullish or bearish; if you're trading tactically, it's very, very easy to get caught out by the seeming randomness of it all.

So easy, in fact, that Macro Man wonders if it is even possible to tell the difference between current price action and a random number generator. So he's determined to find out.

There are six charts below. Three are actual financial market prices, and three are the product of the random number generator function in excel. Your mission, should you choose to accept it, is to determine which three are real....and which three are the figments of Bill Gates' imagination.

Good luck.

Monday, May 18, 2009

A Half-Assed Job

Astute readers may have discerned a small autobiographical element to Holmes' latest adventure. While Macro Man knew that doing a kitchen extension was a major project, he had little notion that the task would prove more arduous than the Labours of Hercules. Alas, this particular labour was completed imperfectly, and so the kitchen men are returning to Casa Macro once again today to properly finish what they started nearly three months ago.

Mrs. Macro will no doubt hope that it brings an end to what has been a tiresomely frequent refrain from your author, whose mantra throughout the project has vowed a refusal to "accept a half-assed job."

Sadly, the British tradesman does not have a monopoly on performing half-assed jobs. Macro Man finds himself encountering them with distressing frequency in his professional life as well.

His old friends the SNB are a prime example; after warning of their ability to sell "limitless" amounts of Swiss francs in the foreign exchange market, they somehow forgot to sell one franc in the market. At least until close of business on Friday, that it, when popular belief is that the SNB did a little drive-by at about quarter past five in the afternoon, local time.

Now, Macro Man cannot be entirely sure that this was in fact the SNB, but a number of reports suggest that it was. And if that's the, what a half-assed job. Really, if that's the best that they can do in a liquidity-constrained end-of-week intervention round, Macro Man cannot be terribly upbeat about the prognosis for EUR/CHF. Fortunately, he had the sense to leave the rotting carcass of that particular trade by the side of the road several weeks ago.

Another organization guilty of performing a half-assed job is the UK's Office for National Statistics. As the recession started to grip Britain last year, the ONS reported that May retail sales growth hit a 29-year high. Macro Man said at the time that the figure was "literally unbelievable". And so it proved to be. On Friday the ONS was forced into a red-faced admission that its retail sales figures have been utter rubbish.

Now, perhaps we'll never know whether the egregious over-statement of economic activity was down to some sort of Stalinist manipulation of the figures, or merely wretched incompetence. But it serves as a timely reminder that if you think data seems too good to be true, it might not just be you; it could be the product of a half-assed job.

Friday, May 15, 2009

Tough Times

Sigh. Just when you thought it was unsafe to get back in the water, it turns out that things are just swell, after all. Or so it feels after yesterday's little afternoon squeeze in equities. Italian GDP shrinks 2.4% (non-annualized) in Q1? No problem! German GDP collapses by 3.8% (non-annualized) in the same period? Who cares! It's all about the second derivative, baby!

While there are no doubt macro punters who have embraced the dark side and done well out of this, in aggregate it appears that Macro Man has plenty of company in his bewilderment. If anything, the negative correlation between the HFR macro hedge fund index and the SPX has intensified recently.
Macro Man is under strict orders to minimize his movement as much as possible, so he's missed out on the usual circuit of investor roundtables and after-work beverages where macro punters convene to exchange views and, on occasion, commiserations. On an exclusive basis, he is able to bring you a photo (thanks to reader Tiago) of one such gathering last week...

Tough times indeed...

Thursday, May 14, 2009

Is This It?

Presented without comment:

Tuesday, May 12, 2009

The Missing Billions (Part Two)

Part one is here.

The next morning dawned overcast and blustery: a typical spring day in the metropolis.

Holmes emerged from his bedchamber as I was finishing my breakfast; fortunately, it had not been so long since I'd shared my friend's adventures that I had forgotten his skill in disguising himself, else I would never have known him. He had acquired long, wispy hair and a ridiculous gray goatee beard, which seemed to have swallowed his chin entirely. He appeared to have gained forty pounds, which was stuffed into a large double-breasted blue blazer. His white shirt was crested with a multicoloured Ascot tie.

"Well, Holmes, I can only imagine who you are trying to be and what you hope to accomplish!"

"It is imperative, Watson, that we gain a firm grasp of how Mr. Broon and Mr. Darling have managed things over the past few years. To do this, I am going to need to gain access to the hidden secrets of the government. What better way to do this than to pose as a Labour Party donor?"

Holmes extracted a bundle of payment slips from his breast pocket. "If ministers get one whiff of this chequebook, we're likely to find a sympathetic audience for our enquiries!"

My friend suggested that he was likely to meet with the greatest success by working alone, and proposed that I remain at Baker Street to manage the workmen. "Besides, Watson, if you stay here then I'll know where to find you should I need your aid!"

The day passed largely uneventfully. I was treated to a firsthand exhibition of the productivity of the British tradesman....when it comes to consuming tea and custard creams. I was also able to observe his fabled intransigence, for it soon became clear to me that our team of experts was fitting the new kitchen sink some twelve inches to the right of its proper location. When I pointed this out to the foreman, he got what I believe is known as "the hump" and refused to start the work over, saying that the clearly misplaced sink is where the "guv'nor" wanted.

This pleasurable exercise in project management was interrupted by a series of cryptic telephone calls throughout the day. These were directed to a "Sir Simon Manley-Hopkins", whom I could only surmise was Holmes.

When told that "Sir Simon" was not in, the callers left a series of bewildering messages that I duly noted for my friend:

* "£703,000 per annum"

* "More than 25 percent"

* "Final-salary"

* "Twenty-four grand a year."

Just before tea-time the telephone rang again. This time it was Holmes, who was delighted when I relayed him the list of messages. Although I was reluctant to do so, I also mentioned my difficulties with the tradesmen.

Holmes was uncharacteristically angry over the problem with the kitchen sink. "You can never underestimate the productivity and utility of the British workman, Watson. They are scoundrels, the lot of them! Do NOT allow them to leave before I return, Watson! I want to give them a piece of my mind! Oh, and be prepared: I have asked Mr. Broon and Mr. Darling to stop by at half past five this afternoon."

"Brilliant, Holmes! Have you solved the case already, then? Have you located the money?"

"All in good time, Watson, all in good time." It was a peculiar habit of my friend to withhold his thoughts on a case until the last possible moment. While he often scoffed at my "sensational" treatments of his endeavours, I believe that he secretly enjoyed them and strove to maximize the dramatic impact of his efforts. "Just be ready at half past five!"

I spent the remainder of the afternoon contending with the pig-headed tradesmen, but alas made no progress in convincing them to either move the sink or abstain from PG Tips. At twenty-five past five, the front door slammed and Holmes strode in. Although I expected him to excoriate the foreman in a manner befitting his anger on the telephone, and perhaps even to provide an exhibition of the skills which had made him a champion boxer in his youth, he instead took the man aside for a quiet word out of my earshot.

Soon after, he had changed out of his "Manley-Hopkins" guise and was once again clad as Britain's foremost detective. At half-past, the bell rang, and Mrs. Hudson ushered our Scotsmen into the drawing room.

"Wail, Mr. Holmes? Have ye managed to find our foonds?" asked the white-haired Mr. Darling.

"I am more than satisfied with the results of my enquiries, gentlemen," said my friend.

"Och aye, that's wondairful!" cried Darling, as his companion smiled grotesquely.

"Watson, please call those men in from the kitchen," said Holmes, glancing at our clients from the corner of his eye.

"We got yer message that the culprits would be hair this evening, Mr. Holmes," said Darling. "I hope that they will be taken in to coostudy straight awee?"

"That is my sincere hope as well," said Holmes. The pair exchanged a few more comments as I disappeared to fetch the slovenly tradesmen, many of whom appeared to have a glint in their eye.

We filed back into the drawing room, and the kitchen-fitters queued up against the far wall by the door leading to the hallway.

"Pah! What a collection of scoundrels!" cried Darling. His companion glowered at them with his glassy stare. "Is thus the entire crew that has stolen the nation's wailth? Mr. Broon, can we take them all into coostody?" The other nodded grimly.

"Gentlemen, I told you that the men responsible for the missing billions would be here at half past five this afternoon, and so they are. My enquiries have uncovered a shocking and sordid tale of theft, misappropriation, and wicked malfeasance. Never in my long career have I uncovered such a web of deceit, nor met thieves so skilled at relieving the public of their funds. I had long thought that Professor Moriarty had no rivals atop London's pyramid of scoundrels, but I see that I was mistaken. Mr. Darling, Mr. Broon, the men responsible for the missing £175 billion are.....YOU!"

I was astounded to see Holmes leap out of his chair and, with fire in his eyes, point his finger directly at our clients!

Mr. Darling stood angrily. "Mr. Holmes, is thus some sort of jook? I can assure you, neither Mr. Broon nor I are laughing!"

"It is no joke, gentlemen, though I wish it were," said my friend, grimly. "Today I canvassed the the government and made a thorough investigation of sensitive documents..."

"You had nae right ta do that, man!" cried Darling.

"I posed as a Labour party donor..." said Holmes.

"Oh," said Darling, nodding in understanding.

"And what I found was a catalouge of waste unparalelled in the history of Britain," said Holmes. "In nearly a dozen years in office, you have created virtually no private sector jobs but increased the public sector workforce substantially. You have ensured that their wages have grown more quickly than the private sector's, and increased the country's future liabilities by guaranteeing final-salary pensions for the lot of 'em.

"You signed off on a £703,000 per year pension for the chief executive of a bank that you bought, then tried to renege when you found out that the public didn't like it.

"You, and you colleagues across the aisle, have allowed yourselves to claim £24,000 per year for second homes that you don't need, treating yourselves to swimming pools, gardeners, stereo equipment, and even pornography at the public's expense. For shame!" Holmes thundered. "If you wanted to watch people get screwed, you should just look at the effect you've had on Britain!"

Mr. Broon slowly rose to his feet, smiling grotesquely. He fixed my friend with a glassy stare, then began to speak, appearing to recite from memory, "Britain is well-placed to recover. No British saver at a British bank lost any money. This is a global recession caused by the American housing market..."

"Ha!" harrumphed Holmes. "You'd like us to think that, wouldn't you? You'd like us to believe that it is the Americans who have stolen your money. But I put in a call to Washington this afternoon, and found that they might be in even worse shape than you, if that's possible. They're missing $1.75 trillion, so I hardly think that they have taken the £175 billion that the pair of you have mislaid!

"No, the pair of you are responsible for the missing billions through your own ineptitude and a blatant attempt to bribe the electorate with jobs. Seize 'em, lads!"

With this, the tradesmen scrambled to apprehend Messrs. Broon and Darling. But despite being easy targets, they somehow managed to avoiding the grasping hands of the common men and scrambled out the door.

"Well, Watson," said Holmes with a shake of his head and a wry laugh, "we've let them get away. But unless I am very much mistaken, we'll be hearing more of the careers on Mr. Broon and Mr. Darling before long. Like a gambler, the criminal is never satisfied to keep his winnings and walk away. No, we'll be hearing more of those two, and soon, I'll warrant."

As usual, Holmes' intuition was correct. Unfortunately, much like the episode of The Valley of Fear, the case of the missing billions had a sinister postscript. One afternoon a few weeks later as Holmes and I were smoking and reading newspapers in the drawing room, my friend started coughing abruptly and nearly choked on his pipe.

"Good lord, Holmes!" I cried, springing to my feet and rushing to my friend's aid. "Whatever could be the matter?" Still sputtering, my friend pointed to the lead story in the Illustrated Evening Gazette:


Chancellor says detectives have been "sponging" on Britain's hard-working criminal class, must share in burden.

When I returned home from my practice the next afternoon, I found Holmes ushering a young man with greasy hair and a bad suit through our new kitchen. When I raised my eyebrows at my friend, he said "This young man is an estate agent, Watson. I've decided to put Baker Street up for sale.

"After reading the paper yesterday, I've decided to move to Monaco."

But never fear, readers! Holmes will return soon, in the Mystery of the Disappearing Government!

The Missing Billions (Part One)

It was in the spring of 2--- that, a few years after taking my own rooms off of Sloane Square, I rejoined Holmes at our old Baker Street address. Although my medical practice was flourishing, when it came time to roll my mortgage I found that my banker was unwilling to extend terms that I deemed acceptable. While I sold my rooms with heavy heart, I was also excited to renew my acquaintance with Holmes and share in his peculiar adventures.

Holmes' Baker Street rooms were a hive of activity upon my arrival. The apartment was filled with all manner of rough-looking fellows, which I naturally attributed to another of my friend's ingenious schemes to catch the London criminal unawares.

"Watson! You've arrived! Capital!" he exclaimed as I stepped through the doorway. He took my elbow, led me out of the way of the milling ruffians, and dropped his voice. "What do you think of my little project?"

"It's marvellous, I'm sure, Holmes, but I've no idea what it could be. Has Moriarty returned? Is this some gambit to infiltrate his gangs?"

Holmes laughed merrily, with a twinkle in his eye. "As observant as ever, Watson! It's good to know, my friend, that in an ever-changing world, I can always count on you...." My face reddened, flushed with pleasure. A compliment from Mr. Sherlock Holmes was a rare treat indeed. " fail to observe even the most obvious of facts."

My faced reddened further.

"Tell me Watson, these fellows. What are they drinking?"

"It looks like tea, Holmes."

"And how are they dressed?"

"Poorly, Holmes. I've never seen such an unkempt band of ruffians in my life."

"And do they look industrious to you?"

"Far from it Holmes! They look as if the lot of them has never done a full day's work in their lives."

"And yet you think this band of layabouts is employed by Professor James Moriarty, the most ruthless member of that predatory species known as criminalis Londinium? Is Moriarty's gang not known for its speed and efficiency? Moriarty would be a rare genius indeed to turn this mob into a well-oiled criminal enterprise!

"No Watson, I'm afraid that the answer is somewhat less attuned to my professional interests. That plumber that we rang in 19-- finally returnd my call last month, looking for work. So I'm finally getting the kitchen redone, just in time for your arrival back in Baker Street!"

"Splendid, Holmes!" Furnished with the answer, I could see that Holmes was right. A group of ruffians swilling tea and milling about, chatting, inside a domestic living space. What could they be but kitchen men?

Later that afternoon, after the kitchen men had departed to drink more tea at some other premises, I sat in the drawing room with Holmes as he regaled me with stories about his recent adventures. In the midst of recounting his involvement in the curious case of the fund manager's side pocket, we heard the muffled thud of footfalls on the stair outside, followed by a ringing of the bell.

"Splendid, Watson! Here's a chance for you to become re-acquainted with my methods, for unless I miss my guess we have a pair of clients about to offer us a case!"

Sure enough, Mrs. Hudson soon ushered in a rather odd-looking pair. One had a shock of white hair and what appeared to be tyre marks over his eyes, while his companion, a heavyset, jowly fellow, stared blankly at my friend with a vacant expression on his face.

Holmes rubbed his hands together and smiled. "Gentlemen! Welcome! What can I do for a pair of Scotsmen on a lovely spring evening in London?

The white-haired man gaped at Holmes. "Och aye, Mr. Holmes! How did ye ken we wair Scottish?"

"Tis a mere trifle, my dear sir! I can see from your wristwatch and manicured hands that you are a man of wealth and stature, unaccustomed to hard graft and manual labour. And yet your shoes are scuffed and worn, and your shirt collar frayed. Who else but a thrifty Scotsman would refuse to replace worn clothing, though he has ample funds to do so? Moreover, your colleague's signet ring is adorned with the cross of St. Andrew. I daresay even Watson here could identify a Scotsman by such a ring."

"Aye, when ye poot it like that, I kin see I've naught to be impressed aboot. 'Twas obvious!"

"Indeed," said Holmes icily. "Now how can I be of assistance?"

"My name is Mister Darling, and my colleague here is Mister Broon." The jowly man smiled grotesquely. "We have a wee problem that we hope you can solve for us. Mister Broon and I have been entrusted with the well-being of a great nation, to protect her wealth and safeguard her citizens.

"But the other week, something dreadful happened. Mister Broon and I were watching a film at our colleague Jacqui's third hoose when we got an anonymous phoon call. Some wretch has absconded with 175 billion poonds, and we cannae find it anywhere! Please, Mr. Holmes, we are begging you: find the money for us!"

"Hmmmm....." said Holmes after lighting his pipe and taking a thoughtful puff. "When was the last time you gentlemen actually saw this money?"

"Well," said Mr. Brown, smiling grotesquely, "we had it for a decade of careful economic stewardship. Our government successfully eliminated the boom/bust rollercoaster of the previous regime, and all was good. The last time I can really remember seeing the money was in September 2007. Since then it's all been a bit hazy, but I am sure I saw some Americans taking it recently. Yes, this is all the Americans' fault, and it has nothing to do with our government or our economic leadership."

"Och aye, it's the Yanks' fault!" chimed in Mr. Darling.

"Who were these Americans that took your money?" asked Holmes with a raised eyebrow.

"I dinna get a good look," said Mr. Darling, "but I'm sure it was their fault."

"Hmm," said Holmes, taking another puff on his pipe. "These are deep waters...very deep waters. I will take your case..."

"Oh, thank you, Mr. Holmes!" said Mr. Broon, smiling grotesquely.

"....but I cannot promise you anything than that I will do my best to locate the missing funds."

Mr. Broon's smile vanished but swifltly reappeared after what appeared to be an elbow in the ribs from Mr. Darling.

"That's wonderful, Mr. Holmes. Mr. Broon and I cannae thank you enough for taking our case. "

"Now, now, there's no need to thank me until we see what I come up with. Good evening gentlemen. I will be sure to wire you as soon as my enquiries bear fruit."

Smiling grotesquesly, Messrs. Broon and Darling rose, shook my friend's hand, and exited through the door.

As the sound of their footsteps receded, Holmes sat back and laughed. "Well, Watson? What do you make of our new case?"

"It seems serious, very serious indeed, Holmes! Who do you think these American thieves could be? The Black Hand? Maddoff, the swindler?"

"Now Watson, you know I never attempt to reach a conclusion without the benefit of facts, and right now the only fact that we possess is the identity of the oddest pair of clients that I have ever seen. I shall begin my line of enquiry tomorrow, and we shall see what we can land."

Will Holmes find the missing money?

Who is the mysterious thief?

What will Broon and Darling do if Holmes is unsuccessful?

Find out soon in Part Two.

Monday, May 11, 2009

Too Obvious?

Can a good technical set-up sometimes be too obvious to work?

While that might be the question of a man whose mojo continues to reside in the possession of Dr. Evil, it's nevertheless the one that's percolating in Macro Man's mind this morning.

Following on from Friday's rather blah employment data, which were probably a bit worse than expected when all was said and done, it nonetheless appeared as if the reflation trade was soooo on, baby.

Equities rocked and, perhaps just as importantly, the dollar got a kicking worthy of an 80's-era Doc Marten-wearing football hooligan. The technical damage was considerable, as EUR/USD roared through the 200 day moving average after the London market went home. This level, which topped out the December rally in the pair virtually to the high tick, has been a useful barometer in identifying technical trend reversals and acceleration points. Even the widely-hated kiwi dollar caught wing, bursting through the 200-day towards the end of last week and accelerating through the highs of the year.
What does it say about the dollar when even the kiwi is kicking its ass?

Such, at least, was the logic on Friday evening. Macro Man ended last week with a modest dollar short against high-beta, technically perky currencies, including the NZD. And while the NZD has indeed performed well so far today, price action elsewhere has left him wondering if all these 200-day breaks are....well....a little too obvious.

For one thing, he expected to awaken this morning to find that Asia had pushed EUR/USD a lot higher. It hadn't.

Moreoever, if the reflation/dollar going down forever trader were really in force, he wopuld expect some of the best price action to be in the commodity complex; after all, isn't that where the green shoots should be taking hold the most?

Early last week, copper broke through its 200 day moving average and appeared poised to break through its recent high and accelerate aggressively to the topside. Instead, the good doctor has meandered about, and at the time of writing has sagged back below the 200-day.
Macro Man finds this development to be somewhat worrisome, and not just because he has a small long in copper. One often finds such divergences at tops and bottoms, and so it's a lit disquieting to see one emerge just as the market is getting convinced that a nice bear run on the dollar is about to begin. Throw in equities approaching the resistance of their yearly highs and credit quietly rolling over this morning, and all of a sudden Macro Man finds himself having doubts about the "obvious" USD bear trade.

So while he clearly reserves the right to get back in, he's taken the money and run this morning. In a market wherre positioning seems to trump all, the dollar bear trade suddenly looks a lot more crowded than it used to.

Friday, May 08, 2009

Quick Hits

Macro Man is a bit pressed this morning, so he's reduced to offering up a few quick-hit bullet point thoughts:

* It's a trifle amusing, n'est-ce pas, that despite the well-publicized problems in the PIGS countries and Herr Steinbreuck's denial of a credit crisis in Germany, the ECB's contribution to credit easing (the purchase of up to €60 bio of covered bonds) appears to be singularly designed to support German banks while ignoring the "more vulnerable" parts of the Eurozone? !Viva el realpolitik!

* Surprise, surprise, the stress test results were leaked in advance, particularly the one bit of bad news i.e. Bank of America. The US really has turned into a banana republic, hasn't it?

* Government bonds suddenly look like they've got no friends, don't they? Treasuries barely budged on a strong ten year auction earlier in the week, and sagged markedly to fresh post-QE lows after yesterday's tepid 30-year auction. Gilts and bunds don't look much better. Remember when we all thought that the US government was targeting 4.5% 30 year mortgage rates? We're not far from that level on 30-year Treasury yields! Then again, a high-quality mortgage borrower is probably a better credit risk than Uncle Sam these days...

* Today's payroll data will be the usual put-luck crapshoot. The only question is whether Minitrue decides to print it at the consensus forecast or the level implied by the ADP. Regardless, it would be churlish not to observe that claims data has improved. The issue from here is whether it's a secular peak or merely a local one; with auto-sectort job losses likely in the pipeline, risks are still skewed to the latter, a la the beginning of the year.

Thursday, May 07, 2009

You Get What You Pay For

Another day, another rip higher in equities. Despite the dodgy leg, Macro Man is starting to harbour a desire to visit Pamplona this July. For someone with his relatively bearish disposition, that running of the bulls would appear to be considerably less dangerous than trading equities at the moment.

Fortunately for Macro Man, he by and large isn't trading equities. But given the extraordinarily high cross-asset correlations, it feels like just about everything boils down to getting the S&P 500 right.

To be sure, the weight of money trumps all; indeed, this is how bubbles form. So while the fundamentals may or may not be rubbish, if there are lots of marginal buyers and no marginal sellers, the price will rise until equilibrium is restored. Trying to sell the top-tick is a game for suckers.

That having been said, it is worth checking one's biases every so often. This is why Macro Man runs a medium term equity forecasting model that takes emotion out of the equation and attempts to provide an unbiased assessment of the factors that typically drive medium-term equity trends.

And in the latest run, the 12-month forecast has turned down again. This is partially a function of the recent rise in prices, but also an acknowledgement that earnings quality is pretty execrable, recent beats notwithstanding.

There is a lot of talk about how 'cheap' stocks are, but frankly, Macro Man just doesn't see it. Oh sure, it you look at operating earnings- particularly the operating earnings expected from bottom-up analysts- you can convince yourself that equities don't look too pricey. But this ignores the record divergence between operating and reported earnings, the latter of which contains the "one off", "extraordinary" write-downs (that seem to occur with quarterly regularity) known affectionately in this space as "turds."

Source: S&P

It is frankly ridiculous to look at earnings with the turds stripped out, not least because the continued presence of the turds is what has put the monetary framework in place that allows banks, etc to "earn" their way back to health.

And while there's no guarantee that equity analysts of any stripe are going to be right, Macro Man places a great deal more faith in the top-down folks (who forecast both operating and reported earnings) than the collective wisdom of the bottoms-up crowd, all of whom seem to live in Lake Wobegon.

Looking ahead to the end of next year, at current pricing the SPX is looking like a 20-25 P/E on 2010 earnings. That puts the earnings yield roughly in line with 30-year Treasuries, and well below yields offered bv investment grade credit.

Those markets appear to offer superior investment opportunities at current pricing. Macro Man understands the importance of money flow in driving short-term price action, which is why (despite his frequent bearish mutterings), he has largely refrained from trying to strap on the bear trade.

But those managers and allocators who are throwing in the towel and buying stocks should remember: at the end of the day, you get what you pay for.

Wednesday, May 06, 2009


Macro Man is struggling to come up with much desire to have an active investment stance, let alone layer fresh risk, ahead of a few days fraught with event risk. Given the run-up in equities, EM, etc., it would be entirely plausible for those markets to sustain a setback as longs take some profits....which, if he isn't careful, could lure a bear like Macro Man from his peaceful hibernation.

Regardless of the outcome of the next few days, a bit more two-way risk does seem likely. The stress-test pendulum seems to be swinging back the other way, with this morning's headlines focusing on BAC's need for an extra $34 billion, which probably constitutes a little more than they can dig up from under the cushions of John Thain's old sofa.

Tomorrow's ECB meeting could possibly be shaping for a disappointment; while 25 bps of easing is baked in the cake, it seems unlikely that the Bank's "unconventional" measures will be anything terribly sexy. And given the "green shoots" that are emerging even in Europe, no doubt the Weimar Republic's representatives on the council will be fighting tooth and nail for rate hikes before too long.

As for payrolls on Friday....well, it's all a crap shoot. The unemployment rate should tick up, but as for the headline number, who knows? On second thought, given that the out-turn has exactly matched the consensus for most of this year, thanks to government maniupulation of the data economists' new-found forecasting prowess, perhaps the consensus forecast of -610k is the best guess.

But hey, we always have China! PBOC has hit the wires this morning, promising to increase the yuan's exchange-rate flexibility while keeping it stable. Ohhhhhhhhh...kkkaaaaayyyyyy. If we're back to playing these sorts of games, you'll have to pardon Macro Man if he has little desire to play along.

Tuesday, May 05, 2009

Happy Days, Redux?

It's happy days again for the green shoots crowd, as the SPX finally completed its gut-wrenching round-trip to close up on the year yesterday. Man, those early January days of Macro Man loving risk seem like a long, long time ago.

In any case, yesterday's Fed Senior Loan Officer survey provided another arrow in the quiver of the recovery crew, suggesting that the worst of the credit tightening is behind us.
Throw in a solid Chinese PMI figure, and it's not hard to see how and why the reflationists are getting excited. USD/BRL is just one of many "risk asset" prices that appears to be sustaining a technical breakout.
At this point, readers may justifiably ask why Macro Man, a self-professed "data guy", has yet to exchange his bear claws for a shiny new set of bull horns. Well, it's a truism that we are all shaped by events from earlier in our careers. And Macro Man recalls the last recession very clearly, a time when he was serving as a buy-side economist as well as a portfolio manager.

And he vividly remembers looking at data such as that presented in the chart below and in February 2002 writing a big piece entitled "Happy Days" about the onset of a more vigoruous economic recovery.

Unfortunately for him, the chart above was punctuated by a very sharp downdraft in stock prices and a period of economic growth that was sufficiently tepid that the Greenspan Fed (including a certain B. Bernanke, esq.) was pooing its pants about potential deflation more than a year later.

So perhaps Happy Days really are here again. But you'll have to pardon Macro Man if he reaches for his hardhat whenever he hears the phrase; experience (and living in England) have taught him that the first sunny day doesn't mean that you can pack away your warm clothes until the next winter.

Monday, May 04, 2009

Bank Holiday Poem: The Miracle-Man

I took my children to the county fair,
To sample the delights of simple lives.
The sounds and smells of livestock filled the air,
And merry banter of husbands and wives.

Exhibits passed, munching apples we strolled,
Breathing in the burnt crisp October air,
Chanced upon a friend, who pointed and told
Of a miracle-man just over there.

A miracle-man! The children's eyes glowed.
I confess that mine began to glisten.
As we approached him, our quickstep it slowed
And ears unfurled and began to listen.

"Come one, come all! Gather round, gather round!
Let me make you richer than you can dream.
Hush now, hush now! Folks, please don't make a sound!
Allow me to tell you about my scheme.

"Something for nothing's the name of our game,
We use the latest financial magic.
Just give me the spark and I'll make the flame,
To miss out on this chance would be tragic.

"You lend us your livestock: cows, pigs and sheep.
We package them on to the street known as Wall.
They'll earn tidy interest for you as you sleep,
And always remain within easy recall.

The farmers applauded as their eyes brightened.
"We get paid for our herds and we don't have to feed 'em!"
Miracle-man smiled as my stomach tightened.
"You can always call back your swine when you need 'em!"

My friends and neighbours rushed to fetch their herds
And lead them to the miracle man's camp.
Too busily straining to exchange a few words
As they pushed their cows and swine up the ramp.

The speaker left, his trucks bulging with meat,
Each hoof and mouth checked for impurity.
The farmers were holding a bright pink receipt,
Left by the miracle-man for security.

The winter rolled in and hoar-frost descended,
Each day farmers strode past empty stable,
Felt a regret at the herds they had lended,
The winter is long with no meat on the table.

At last, spring's green shoots escaped winter's cold clutch
'Tis the time that the farmer loves the most.
This year, not least because of the crutch
Of good news from the miracle-man in the post.

When the envelope came, he snatched it with glee,
And called in his wife, two sons, and his daughter.
Then ripped it open, his jaw dropped to see
The miracle-man had sold his whole herd for the slaughter.

Friday, May 01, 2009

Good News On Public Health

With all the virtual ink spilt on the unfortunate situation in Mexico, Macro Man is pleased to be able to share some good news on public health with readers. It has been widely feared that nano-virus RU-a-WA-ke, otherwise known as "central bankers' flu", was reaching pandemic status.

It tragically claimed the entire executive board of the Swiss National Bank in mid-March, shortly after they embarked on a bold strategy of getting CHF into the system via the foreign exchange market.

And recently, it appeared that the Monetary Authority of Singapore had also been claimed by CB flu, prompting some discussion at IMF board level as to the propriety of declaring a global pandemic. Macro Man is therefore pleased to disclose this morning that the MAS is apparently not dead, and that the straight-line appreciation of the SGD after the MAS lowered the NEER basket parity does, apparently, have limits.

Or at least so we may gather by the price action pictured below, which is redolent of intervention by MAS through the usual local agent banks.
Macro Man trusts that readers will join him in wishing the MAS a speedy recovery. Now, about that "ursine flu" that seems to be ravaging the population of global bear colonies....