Friday, December 25, 2009

Merry Christmas

Merry Christmas to all readers around the globe. Here's hoping Santa brought you what you wished for (cough, healthy knee and an easier market in 2010, cough). Happy holidays!

Friday, December 18, 2009

Market Christmas Carols

At long last, it's come: Macro Man's last day in the office of 2009. It's been an eventful year, both personally and professionally, and your author is looking forward to turning the page and getting stuck into 2010. Before that happens, of course, he would be remiss in not maintaining a tradition and sharing a couple of market-themed Christmas carols:

God rest ye merry, gentlemen
Let nothing you dismay
For quantitative easing
Is here to light the way
To save us from last year’s mistakes
When we were gone astray
O tidings of comfort and joy
Comfort and joy
O tidings of comfort and joy

From Washington to London
Beijing and Zurich too
The printing presses cranked right up
And they did it all for you
With S&P’s at 6-6-6
‘Twas the only thing to do
O tidings of comfort and joy
Comfort and joy
O tidings of comfort and joy

“Fear not then,” said Bernanke,
“Let nothing you affright
We’ll buy some bonds and MBS
And put this sucker right
And make sure AIG pays out
At par without a fight!”
O tidings of comfort and joy
Comfort and joy
O tidings of comfort and joy

The punters at those tidings
Rejoiced much in mind,
And threw away their sell tickets
Then told their broker “mine!”
They bought up every piece of junk
That they managed to find
O tidings of comfort and joy
Comfort and joy
O tidings of comfort and joy

Now let us all sing praises
To those who saved the day
And kept bleating about green shoots
‘Til bears all ran away
No need to worry ‘bout next year
And who is going to pay
O tidings of comfort and joy
Comfort and joy
O tidings of comfort and joy!

You better watch out
And give a big cry
When the market’s a rout
I’m telling you why
Santa Claus is coming to town
He’s making a list
A second, a third
To bail out those who own a few turds
Santa Claus is coming to town
He sees you when you’re losing
He knows when you’ve been bold
He’ll give you an interest-free loan
To go out and by some gold!
Oh! You better watch out!
And give a big cry
When your P&L’s red
I’m telling you why
Santa Claus is coming to town
Santa Claus is coming to town

Although daily service will be interrupted ovr the next couple of weeks, Macro Man will still be keping an eye on things and may well scribble down a few thoughts from time to time. Happy Holidays to all readers and good luck in 2010.

Thursday, December 17, 2009

Hidden Truths

Macro Man isn't sure that we learned much from the FOMC last night, but that doesn't mean that markets have receded into a pre-Christmas stupor. It's hard to know what the DGDF crowd was looking for...but whatever it was, they certainly didn't get it. Cue the by-now predictable battery of stop losses from dollar shorts and, dare we speculate, initiation/expansion of dollar longs by the CTA community.

In any event, one could argue that there was a significant development last night, via S&P's downgrade of Greece and maintenance of a negative watch. Greece will soon be knocking on the door of the lower threshold of eligible ECB collateral; one doesn't need a terribly vivid imagination to conjure an idea of what might happen should that occur. 15-month Greek paper is currently trading north of 3.5%.

In a possibly related development, it's interesting to observe that the ECB now wants to lift the hood on the collateral that it's holding and find out how bad the turds are. Macro Man wonders if they won't find that they've been the victim of the old "flaming bag of poo" prank. Perhaps that could be the catalyst for untangling the web of deceit that surround the global banking sector.

Even when there's no malfeasance and information is publicly available, it's surprising how easy it is to misunderstand the current state of play. Gallows humour has been a staple of trading desks everywhere for the past couple of years, and Macro Man isn't immune to the odd jibe here and there. When he talks to mates at Citi, he sometimes muses that perhaps he should buy a few C shares p.a. at the current knock-down price, since "I can leave my stop only three and a half bucks away."

As you can see below, the once-mighty C has seen its share price is down some 48% from the 2008 close, so it's badly underperformed the braod market. Or has it?
Sure, if you've been long since last year, you're rather out of pocket on your investment. But for the insitution as a whole, it's been something of an annus mirabilis; thanks to its capital raising/share issuance, etc., C's market cap has nearly tripled this year. The company's now worth nearly $100 billion!
Betcha didn't know that. Even more remarkable is fact that Wells Fargo's market cap is now at all time highs (at least at the close of the year.) Yes, this is the same institution that has both hands thrust deep in the stinking morass that is the Califoria real estate market and that has employed every trick in the book to avoid fessing up.
Readers are invited to judge for themselves what, if anything, this remarkable recovery in bank market caps means for 2010. It certainly suggests that something should be changing, and it doesn't take Sherlock Holmes to deduce where Macro Man's bias lies.....

Wednesday, December 16, 2009

See No Evil, Hear No Evil

So Japanese banks rose 7% last night in the face of a huge impending share offering by Mitsubish/UFJ. What gives? Well, the Nikkei reported that the BIS will smooth the path towards implementing Basel II by phasing in the stricter requirements over a 10-20 year horizon.

Ten to twenty years? Are you effing kidding me? What's the point of implementing new rules if they won't bite before another two or three crises have erupted and the Macro Boys (current ages: seven and six) will be old enough to have their bonuses garnisheed by bankrupt governments?

Sweet Lord almighty, it's enough to make one weep. Macro Man is sitting here, thinking about investment themes for next year (he has a roundtable lunch today) , and he feels like he's embroiled in some weird fairy-tale cross between Pinnochio and the Emperor's new clothes.

From suspension of marking-to-market to extend-and-pretend to setting LIBOR rates at levels no bank can borrow at to now, evidently, relaxing capital requirements because it might crimp somebody's style, Macro Man feels like he's embroiled in a world where the consensus has agreed to try and bluff their way out of crisis.

Going all-in whilst holding a pair of twos might occasionally work at the poker table, and indeed it has worked pretty well for the last few quarters. But ultimately it's a weak hand that is pretty likely to fail if the holder is forced to show his cards.

The people who called this mess correctly- your Meredith Whitneys, your Laurie Goodmans- are still bearish, though who the hell knows what it will take for reality to bite (though Macro Man cannot help but notice that the BKX is sagging a bit...perhaps heralding wider bank credit premia next year!?!?!?)
Perhaps the trigger will be a raft of lawsuits from angry investors- maybe Abu Dhabi is trying to get Citi to foot the bill for the Dubai slush fund? Or maybe it will be a withdrawal of liquidity
from major central banks. Today sees the last ECB LTRO- given the indexation announced the other week, takeup is expected to be modest. And of course this evening, the Fed will announce its policy decision to change nothing.

Heaven forbid that anyone rock the boat! Macro Man does think that you'll see a few more jitters next year than you have for the last nine months, even though global policymakers (pictured, left) do their best to prevent it.....

Tuesday, December 15, 2009

EUR A Disappointment

Although Christmas markets are in full swing, with the concomitant reduced risk profiles, low volumes, and general lack of interest (at least judging by the paucity of comments in recent posts), that doesn't mean that there's nothing happening. The DGDF crowd are being taken for a visit behind the woodshed, as EUR/USD hsa traded to its lowest level since October 2 so far this morning.

Perhaps it's the news that Austria's banking sector may be imploding, though if that's the case Macro Man is left to wonder why Eurostoxx futures are up on the day. Or perhaps it's the latest Krishna Guha article in the FT, suggesting that the Fed may address liquidity policy before monetary policy- a move that could entail a discount rate hike. One wonders how likely that really is, however, before both the end-of-year turn and, perhaps more importantly, Bernanke's confirmation for a second go-round as Fed chairman.

No, the rationale would appear to revolve around a large pink bird that's fond of standing on one leg. It seems quite clear that DGDF has been a popular theme and trade, and that given Voldemort's predilection for buying euros positioning has been rather heavy in EUR/USD. Overlaying the (admittedly flawed) HFR macro fund index with the euro-centric DXY reveals a pretty high degree of correlation.
So what's with the euro fetish? Well, those who trade currencies for a living have become accustomed to seeing the euro rock and roll into the end of the year. Indeed, looking at the returns in November/December for the last ten years, it's not hard to see why punters may have loaded up on long euro positions.

Macro Man, for example, ran a long euro delta until last week on the rather cynical view that every other punter would drive hi position into profit. Needless to say, that was a disappointment, and once again provides proof that a "greater fool" investment strategy is not the road to fame and fortune.

What's made the euro's recent weakness particularly galling, however, has been its underperformance of equity markets. While it's become cliched that "it's all one trade", Macro Man can confirm from bitter experience that trying to hedge a long euro exposure with equity puts results in nothing but a one-way ticket to the Pain Cave.
While Macro Man is coasting into the end of the year, as he starts preparing his mental strategies for 2010, he is trying to draw a few lessons from his disappointing EUR/USD experience in Q4:

* Avoid Greater Fool trades
* Keep a closer eye on flamingos
* If he wants to buy a hedge, he should go to a garden center (cheers, RK)

Monday, December 14, 2009

The Problem With Political Correctness

While the problems with political correctness are manifold, among the most egregious is that attempting to remain PC can sometimes prevent one from accomplishing a vital task. Such as a meeting with the president to receive a bollocking.

So Macro Man had to laugh at the sweet, sweet irony that Lloyd Blankfein, John Mack, and a Vikram Pandit impersonator have missed a bankers' meeting because they flew commercial rather than in the private jets that we know they all normally use (and that the auto execs got roasted for using earlier in the year.)

USeless Airways really does what it says on the tin. The Administration's considered response was offered by chief of staff Rahm Emmanuel, below.

Christmas Comes Early

Ho ho ho!

Christmas has come early (OK, not this early) today, courtesy of that well-known proponent of Yuletide cheer....Abu Dhabi! The emirate has lent a cheeky $10 billion to Dubai, which has funnelled the dough to Dubai World, enabling them to redeem the infamous 12/09 Nakheel bond (which was trading in the mid-50's on Friday) at 115.52. Even the 2011's, pictured below, have nearly doubled.
Ho ho ho! Macro Man can only wonder if the Emir of Abu Dhabi was secretly long a bunch of villas here and figured lending 10 yards was a cheaper solution than looking for the bid....

So it's happy days, right? Spoos are flirting with their highs of the year, Eurostoxx are up a percent, and hell, even Japan's Tankan was better than expected. Hmmm....not so fast, my friend. The risk rebound has been selective, to say the least. EUR/USD has barely budged and FX carry is actually lower on the day (AUD/JPY is down 0.75%.)

And while gold has at least tried to rally, poking its head back above $1120/oz, oil couldn't even be bothered to put in the effort; at the time of writing, prompt crude is down 40 cents on the day.
Perhaps this is because of the Abu Dhabi loan; on an exclusive basis, Macro Man can provide a short video of the Emir's conversation with the head of ADNOC over the weekend:

Perhaps Christmas really has come early for those tired of the naive "risk on/risk off" regime. A bit of quality differentiation would be a welcome Christmas present indeed.

Friday, December 11, 2009

The Hangover

Today's post will be mercifully short, as last night was Macro Man's office Christmas party. Overconsumption of adult beverages has left him nursing a startlingly powerful hangover, and he really hasn't got the energy to do more than point at pictures.

Thankfully, China released a veritable library of data last night that makes for interesting viewing. The latest M2 data confirm that Beijing has been throwing a pretty serious party of its own, with plenty of liquid(ity) provided....
The bill hasn't come yet, so everyone still seems to be having a good time. Even the normally grumpy "foreign devil" guests can't complain too much; hey, just look at that import growth!
Ah, but some early arrivals who drank deeply do indeed to be in the early stages of the same "pounding head, dry mouth, dodgy guts" ordeal that your author is currently enduring. Copper imports have started collapsing back towards trend:
as have iron ore imports:
Strangely, the one commodity sector that seems to be the most resilient is the one with the soggiest price of late, crude:
Of course, China has a relatively lower profile in the oil market than they do in, say, copper. But still, the relative divergence in price fortunes is striking. In any event, it seems as if even China cannot party indefinitely without getting a hangover. Sure, a hair of the dog approach can postpone the pain....but the more that that remedy is pursued, the more painful the hangover will be when it finally comes time to sober up.

Thursday, December 10, 2009



Normally, at this juncture of the electoral cycle, one could confidently expect a "giveaway" pre-budget report from the Chancellor of Exchequer. Not so yesterday from Alistair Darling, who has quite clearly "run out of our money", to quote MEP Daniel Hannan. But hey, look on the bright side: deficit reduction starts next year, as the public sector borrowing requirement is forecast to collapse to £176 billion from the current year £178 billion.

Although Mr. Darling spent most of his time waffling on about woolly job-training schemes and business advice bureaus, the centerpiece of his PBR was, of course, the attack on bankers' bonuses. Similar to the story reported by Robert Peston yesterday, the Chancellor announced a one-off supertax, payable by banks/building societies and affiliated companies, of 50% on all bonus payments above £25,000.

How significant are City bonus payments to the UK? Let's put it this way: the sharp-eyed reader should have little difficulty in spotting the seasonal pattern on the chart below.
The bulk of those new year spikes are indeed represented by bonuses from the City. Now admittedly, not all City bonuses were affected by Mr. Darling's measures: brokers and hedge funds, for example, fall out of the web, since they were not backstopped by the government.

Yet the attack on the financial bonus culture is one that highlights a real fragility of the UK economy and public finances. For the twelve months ended in September, the average weekly private sector income was £443, according to the ONS. For the public sector, that number is higher, at £449. If we were to strip bonuses out of the equation altogether, the disparity becomes even starker, as public sector basic salaries are, on average, 7.5% higher than their private sector equivalents. Moreover, observe how that disparity has widened sharply this year.
Now, it's true that public sector workers include valuable memebers of society like doctors and teachers. But it also includes armies of civil service jobsworths and talentless morons like Elmer Fudd Jonathan Ross, who's on several million quid a year. And what sacrifice are these legions of leeches being asked to make? Guaranteed pay rises of "just" 1% per year.

Anyhow, there are a number of questions which arise from yesterday's debacle. Among them include the following:

a) Are banks really going to pay this supertax on bonuses? It's hard to say. Darling waggled his finger and promised to extend the tax if banks try to avoid it, but c'mon....he'll be out on his ass come May. Strangely, however, the Treasury only forecast a revenue generation of £550 million from the supertax, which wouldn't cover the charge from the Goldman London bonus pool alone, let alone all the banks in the City. Now, that could mean that a) Darling expects most banks to slip through the cracks, perhaps by issuing stock through an approved scheme? b) the increased tax burden from bonus payments can be offset by tax losses carried forward, in which case the ultimate result of this scheme will be to significantly reduce the tax-loss "asset" carried on bank balance sheets, or c) Darling is a moron and is bad at math.

b) OK, let's assume my bank is going to pay the tax. What is the impact on my bonus if the bank wants to leave the cost to itself unchanged? Here's where it gets a bit tricky. Banks have always been able to offset bonus compensation costs against company tax (which is set at 28%), so the "true" cost of bonus payments has only been 72% of the face amount. That hasn't changed.

But they now are further liable for 50% of the difference between the bonus face amount and £25k, which changes the marginal cost to the insitution quite dramatically. The graphic below derives the equation to determine the bonus that a bank employee will get in the new regime that would equal the cost to his/her employer of a given bonus before yesterday.
Ouch indeed. Someone who was slated to receive a £100,000 bonus will now get £69,000. £300k will become £187k. And that massive £1 million bonus will shrink to £600k. And of course, you'll still have to pay 40% income tax on this reduced amount!

c) How does Alistair expect to jump-start the economy in the new year when he's just taken a huge chunk out of private-sector cash earnings? Your guess is as good as Macro Man's. Anecdotally, he knows that a lot of bank employees were counting on a cash injection to finance big-ticket purchases. One could reasonably conclude that without the injection, the purchase will not happen.

d) If the supertax was to encourage banks to act more like utilities (i.e., making loans for the public good rather than trying to make as much money as possible), why doesn't the Government regulate actual utilities? No idea. Electricite de France is Macro Man's electricity supplier. EDF is constrained in their home market from charging more than a statuatory limit for electricity. Sans limits in the UK, the periodic arrival of the electricity bill is so painful that he's tempted to hook up electrodes to his sensitive bits to take his mind off the pain. Indeed, he's dissuaded from doing so only by the knowledge that the act would increase the charges on the next bill. Rather than cutting the public's fuel bills with the swift stroke of a pen ("But Monsieur Sarko, we are simply adopting the Continental model as you've been asking!"), Mr. Darling instead chose to offer a £400 tax credit to replace old boilers.

e) If the supertax is to dissuade the gambling culture in banks, why did Darling cut the tax on actual gambling, namely bingo payouts? For that matter, why are lottery winnings and payoffs from the bookies tax-free? Oh, that's's not about actual policy, it's about Darling being a vote-scrounging cretin.

f) Will employees of Vauxhall and Ford fall under this scheme? After all, US automakers filed to become bank holding companies last year to get some of that sweet TARP lovin'. Macro Man doesn't know the answer to this, but wonders if there are some sweating auto execs out there.

g) Is this is the start of a new global land-grab on financial companies' earnings? Perhaps, perhaps not. Macro Man is comforted by two things. First, despite their best efforts to gerrymander their way into another term in office, Labour has been so execrable that the best they can hope for is a hung parliament. The current cast of clowns is on their way out. Second, it was only eighteen months ago that the Chancellor was publicly mulling a windfall tax on energy companies at the height of the oil bubble. How times change. Yesterday, he offered to credits to encourage the drilling of new fields. To quote the old aphorism, "this, too, shall pass"....eventually.

h) And if it doesn't? Back of the queue for flights to Geneva, mate.

Wednesday, December 09, 2009

The Party's Over

OK, now the party's over. For Macro Man, that means the pity party. OK, he's had a bad run, and he's moaned about more than a bit. But no one likes a whinger, and Macro Man feels like he's close to wallowing in self-pity. So while he might still examine his performance to distill lessons for the future, the moaning stops here. Anyone who sees/hears him whingeing any more should feel free to give him a slap.

In any event, it looks like there are plenty of other pity parties being held around the world. Dubai is turning into an annoying smell that you can't get rid of. As uncertainty continues to swirl around Dubai World, the Dubai stock markt continues to collapse; there's been a nearly uninterrupted string of limit-down days since the debt restructuring concers first surfaced.

These concerns over the peripherals just won't go away. Greece has unsurprisingly come under the cosh over the last couple of weeks, with selling going through both the cash bond and CDS markets (which is pictured below.) Now, one can wonder about the utility of predatory buying of protection on Greece for speculative purposes; it's hard to argue that such activities serve a useful purpose to anyone but the investors of the fund(s) in question. But the selling of cash bonds (if anyone can find someone to bid) is something else; it's pretty telling that Greek 15 month bonds now yield more than 2.6%, particularly on a day when the ECB is offering 3- and 6-month fixed rate tenders at 1%. Those Greek yields are up more than 100 bps since the day before Thanksgiving; that is why you are seeing the Greek finance minister in the headlines. It's hard to see this ending in any solution that doesn't involve the letters "i" and "m" and "f". How soveriegn buyers of euros would view such a development remaisn to be seen.
And then we come to the UK, where Alistair Darling will lower the boom at 12.30 local time today. The BBC reports that there will bea punitive tax rate on all bank bonuses above £20,000; the story is unclear whether the measure would be on the tax treatment of bonus compensation on banks' income, or whether it would be a punitive measure levied at the individual level. Intellectually, the former is far preferable to the latter; address the insitution that received the benefits of government largesse, rather than arbitrarily targeting individuals.

Anyhow, if the tax is geared towards the insittutions, one could credibly wonder what the hell the FTSE is doing within a hair's breadth of the year's high when financials represent the highest sector weight of the index.
Alistair and Gordon are desperate men, and look set to take desperate measures.
As noted yesterday, it's not hard to envisage the biggest pity party in the world taking place in the City at about 12.31 today.

Tuesday, December 08, 2009

Remember That Thou Art Mortal

In the days of the Roman Republic, the imperator of a particularly successful or important military campaign was occasionally awarded a triumph. This festive ceremony featured a parade of captured bounty and prisoners, interspersed with Roman soldiers signing bawdy songs about their commander, who would wave to the cheering crowds from the back of a chariot. And behind the chariot would walk a slave, whose sole job was to whisper in the ear of the conquering hero "Remember that thou art mortal."

At the risk of beating a dead horse, 2009 has, in aggregate, played the role of the slave in Macro Man's investment career. As if he needed further proof, a couple of the trades that he cut yesterday have come roaring back today. It's a slap in the face, but not altogether unexpected, and Macro Man has to laugh (if only so he won't cry.) In any event, those trades are done with, and there's no utility to be gained from crying over spilt milk.

Anyhow, while Macro Man is in wind-down mode for the year, he is still keeping a watchful eye on things. One little item that has caught his notice is the relative outperformance of Korea in the aftermath of the initial Dubai flare-up. For the two months after late Sepember, the Kospi couldn't buy a friend, and badly underperformed the rest of global equities. Since "Dubai", it has surged, even breaking out of its downchannel resistance. Does it mean anything? Macro Man isn't sure...but it is interesting.
Also of interest is the swirling talk around sovereign risk. Te Nakheel bond maturity is rapidly approaching, and while there have been some mumbles about ad hoc support from the government, there's been nothing concrete announced. Similarly, Greece continues to get pummeled, with 5 year CDS widening out beyond 200 bps this morning.

The Big Kahuna(s) of soverign risk, however, are G4 countries. While Japan is its own special case, the US and UK have come under renewed scrutiny, and not simply because it's the time of year whn banks roll out their "year ahead" research products. Today's WSJ carries a story noting that Moody's has changed its language on the US and UK, possibly opening the door to a downgrade by 2013.

While that's still an unlikely outcome (doom-mongering to the contrary), it does highlight the risks posed by the fiscal situation in both countries. Macro Man had to laugh at a recent story that the Obama adminsitration would use some of the TARP money to pay down the deficit. It really highlights the absurdities of US government budget accounting, because it seems to be common sense that the best way to "use" the TARP to reduce the deficit would be by...err....not using it! In any event, US CDS has started to tick higher again, though it remains well below the panicked levels of last year. Still, it's worth keeping an eye, particularly in the context of shaky performance by the peripherals.
In the UK, meanwhile, we get the Government's "go for broke" mini-budget that is widely seen as a last-ditch effort to revive Labour's sagging electoral fortunes. The other day, Macro Man wondered to himself what Mr. Darling would propose if he were actually interested in a goal other than saving his own political skin, then chuckled at the absurdity of the notion. In any event, expect some focus on windfall taxation of banking bonuses, which will no doubt raise howls of protest from the Square Mile and satisfied taunts of "Unluggy!" from the other 94,525 square miles of the United Kingdom.
In any event, UK sovereign risk is likely to remain in focus for some time, given the forthcoming election next year and the potential for a hung Parliament. Macro Man doesn't know how it will play out and is happy to remain on the sidelines. Trying to guess how this will play out would likely provide him with aanother slave-like reminder.....

Monday, December 07, 2009

Wait Til Next Year!

Well, that payroll figure put the cat amongst the pigeons, n'est-ce pas? A headline figure close to zero, the best household figure since late '07, and an unemployment rate that knocked on the door of single digits: what wasn't there to love?

The short answer, of course, was the impact on your author's P/L, where his wretched run sadly continued. He is one one of those miserable stretches where he feels like he cannot buy a win; even formerly reliable strategies seem to have turned against him, knives drawn.

And so it came about last night that Macro Man wearily set himself down on the couch in front of the TV, hoping for a little escapism by watching some NFL with his father-in-law.
Now, just before Thanksgiving, he wrote a little piece that compared to sports to that that case, the undeniable existence of "too big to fail."

Sadly, last night brought about fresh revelations about the linkage between sports and finance, as his favourite team, the Pittsburgh Steelers, dropped another excruciating game to extend their losing streak to four.

The ephinay, as it were, centered not on the last month or so, but rather how Macro Man's peformance seems to have tracked that of the Steelers for the past several years. In 2005, Macro Man had his best year at his previous shop. The Steelers won the Super Bowl. In 2006, Macro Man had his worst year at his previous shop; the Steelers slumped to a 0.500 record and missed the playoffs. In 2007, Macro Man rebounded with a good but not great year; the Steelers made the playoffs but fell in their first game. And last year, Macro Man had a very good year at his new shop, and the Steelers once again claimed the Lombardi Trophy as Super Bowl Champs.

Now, the hallmark of Macro Man's 2009 has been the knee injury that he suffered in February. Strangely, one of the Steelers' (and indeed the NFL's) best performers, Troy Polamlu, has also been sidelined for most of this season with a knee injury.

And so, when the Steelers' once-vaunted defense when into their patented "Swiss Cheese" formation against the execrable Oakland Raiders, Macro Man had a foreboding of doom for whatever flamingos rremained in his portfolio. Sure enough, EUR/USD has confirmed the break of both the trendline and the 55 day moving average that bulls have keyed on for the last several weeks.

Now, Macro Man isn't fatuous enough to suggest that there is actually some sort of Vulcan mind-meld going on between himself and 53 rather large gentlemen in the city of his birth. But their twin struggles of late provide confirmation that in trading, like sports, the margin between victory and defeat can be very thin....well, at least if you are playing a fair game.

And so, it looks like the Steelers' season is, for all intents and purposes, over. With just over three weeks left in the year, Macro Man's is too, more or less; there's not enough time to regain the heady heights of his high water mark, at least not without gambling recklessly.

You still have to play the games, of course...but at this point in the season, both Macro Man and the Steelers should be doing so with one eye on next year.

Friday, December 04, 2009

The Haircut

Macro Man had a haircut yesterday.

Now normally, that's the sort of trivial everyday event that wouldn't come close to an airing in a financial blog, even one as ropy as this space. But this one is different. You see, Macro Man is a big believer in managing his psychology, putting in place a number of little buttresses to help him maintain an optimum mindset to to his job and live his life.

Part of that includes a fairly heavy emphasis on physical fitness: you know, healthy body generates a healthy mind, that sort of stuff. So it was quite jarring when your author injured his knee in February. Not only did it rob him of the ability to maintain his exercise regimen, but it also provided an unwelcome reminder of his own mortality and fallibility. Perhaps coincidentally, portfolio performance trajectory tailed off soon thereafter.

In any event, Macro Man decided to give himself a little psychological crutch to help him through the rehabilitation process after his ACL was reconstructed in April. The day that the surgeon gave him the thumbs up for the surgery and booked an appointment for five days later, he got a "#3 all over" haircut. He then vowed not to get another, not even a trim, until he was cleared by the surgeon to ski again.

Well, it's been seven and a half months of hard graft in the gym, during which time his barnet went from this to this. Well, he saw the surgeon yesterday, and the good doctor was very pleased indeed with his knee, and gave him clearance to hit both the slopes and the golf course come February. And that is the reason for the haircut, and why it was rather significant for your author.

Unfortunately, as noted above, there was a bizarre sort of Ricardian Equivalence at work. While noggin avoided a haircut for seven and a half months, his confidence and his investment performance did not avoid the barber's scissors. Macro Man noted his poor hit ratio this year in yesterday's post. During his time between haircuts, he managed to put together a Sharpe ratio just above 1...but in the context of struggling to generate any portfolio volatility, this generated a fairly negligible investment return. Meanwhile, the SPX rallied 30.3%. Ugh.
Now perhaps it is a coincidence that the SPX sold off a percent soon after Macro Man emerged, newly-shorn, from the barber's. Then again, perhaps not. Time will tell....

Today sees the release of payrolls in the US. While it's tempting to say "ooh, this is an important number", on the form of the last few weeks it will be a non-event. Macro Man has been wrong on a number of things recently, but perhaps chief among them has been his long-vol view for Q4. Simply put, it's been very wrong (Dubai notwithstanding) and very painful. Payrolls perhaps offer a last shot at redemption for the view....maybe it'll put "the haircut indicator" to the test?

Or perhaps Macro Man has already sounded the death knell. To offset some of his long-vol decay bill, your author recently increased in risk in what had previously been a pretty profitable space for him: namely, curve trades at the short end.

Now, yesterday's ECB announcement was perhaps slightly hawkish, insofar as the last LTRO will be indexed rather than fixed-rate. But Trichet went out of his way to emphasize that there was no signal intended and that the move has no implications for EONIA. That hasn't stopped the market from trying to pick the time that rates will normalize; thus far, Q3 on next year looks to be the "winner."

The chart below shows the changes in the contracts on the Euribor strip since Wednesday's close. While the absolute value of the changes in any individual contract are not particularly large, the change in the shape of the strip has been more substantial and, to Macro Man's eye, somewhat odd.
It's just one more item for the bulging drawer marked "Things I Don'T Understand." Anyhow, Macro Man can only hope that he is the "anti-Samson", and that his haircut provides him with increased strength of perception. In any event, Mrs. Macro was well chuffed with the new 'do, saying it makes Macro Man look ten years younger. It's just as well, actually....because managing his book since his previous haircut has made him feel ten years older.

Thursday, December 03, 2009

My, How Times Have Changed

OK, let's get this over with. No, Macro Man cannot confirm that the reason the USD fell so hard overnight is because Elin Woods asked for a bid in $500 million USD/SEK before she went to bed last night.
Seriously, what does it say about financial markets when equities surge after the close, apparently on the story that BAC will pay back $45 billion of TARP funds, when the news came out during yesterday's New York session? Peculiar, to say the least. In any event, every man and his dog has SPX 1121 on his radar, which is the 50% retracement from the crack-smoking subprime 2007 peak to the cyanide-swallowing 666 lows in March of this year.
Note the negative divergence of the last few months (as the index makes new highs, momentum does not.) Actually, on second thought, don't look at it at will probably cost you money. Macro Man did a little portfolio review last night, and was surprised- but not very much- to discover that his hit ratio this year by strategy has been a paltry 33%. Fortunately, a lot of the losers were swiftly ejected from the book, but wonder it's been such a frustrating year for him.

Anyhow, today could be quite momentous, as two of the most important men in finance take the stage....for very different reasons. While the ECB will not change rates today, Jean-Claude Trichet is expected to provide at least some guidance as to the ECB exit strategy...if only by clarifying whether the forthcoming one-year LTRO will be at a fixed 1%, indexed to the refi rate, or with a penalty fee. Really, the choice is between the first two...and assuming the ECB doesn't move rates for another 6-9 months it should be largeyl irrelevant for currencies.

Not necessarily so for fixed income, where the market will look for guidance on the normalization of EONIA (and thus, euribor.) There seems to be a school of thought that this is likely to happen in Q2; ERM0 is pricing in euribor of 1.2% currently, which would represent a "normal" spread to policy rates.

Somewhat strangely, the market is then pricing in a sequentially smaller quarterly rise in rates each quarter for the next two years. In other words, it seems to be pricing in more rate rises in H2 of next year than in H1 of 2011. From Macro Man's perch, the reverse would appear more likely. Similarly, there's nothing to stop the ECB from nudging EONIA higher at the beginning of next year, so the less than 15 bps priced into March looks a bit too low.
In Washington, meanwhile, Ben Bernanke will testify at his re-confirmation hearing in the Senate today. In the Greenspan years, this process represented nothing so much as a papal audience, but times have changed.

Krishna Guha notes in the FT that Bernie Sanders has raised the bar for Bernanke's confirmation through a procedural measure that now requires him to attain 60 votes. Macro Man was in college when Sanders was first elected to Congress, and remembers how anomalous it was to see a Socialist- a Socialist!- elected to the House of Representatives. My, how times have changed indeed.

Anyhow, given the fact that while Wall Street has the money, Main Street has the votes, BB looks set to come under the cosh from all directions today. "Record Goldman Bonuses" and "Record U6 unemployment" make uncomfortable bedfellows, a fact that the likes of Chris Dodd are likely to press home with vigor.

While Bernanke's public speaking has improved during his tenure, it's still not great, so he's likely to come across as pretty defensive. Whether this derails the risk asset orgy remains to be seen, of course. On the basis of what Macro Man has seen this year, he gives it a one in three chance.....

Wednesday, December 02, 2009

What Goes Around Comes Around

Macro Man recently had an unfortunate experience with one of his brokers. Dialling a 24-hour line, he left an order at about 8 pm London time with the New York desk to execute a couple of trades in the Asian time zone. Waking up the next day, Macro Man searched his Bloomberg messages for the confos....but alas, none were forthcoming. When he got to the office, he rang the broker, and found to his horror that the orders (buying some Asian equities on a day when they rallied strongly) were never executed.

After a flurry of discussion, it was agreed that the broker would execute the orders at current pricing (or, in one case, when the market re-opened), calculate Macro Man's opportunity cost, and compensate him for the loss. Fortunately, the trades weren't very big at all, so the opportunity cost was not particularly large for him. However, in a "fill 'em and bill 'em" industry, that money can only be replaced by volume...something like 140,000 lots. Given that the broker was prepared to make him good on the whole amount, Macro Man decided to split the difference on the "opportunity cost"....the cost to him was neglibible, and the broker sounded very relieved indeed.

This little story illustrates an interesting principle: namely, what goes around comes around. While Macro Man likes to joke and take the piss out of his brokers with some regularity, he believes in treating his counterparts fairly. This, in his view, is generally the best way to ensure that he gets treated fairly and looked after in the long run. If, on the other hand, you beat people up every day, it has a funny way of catching up with you in the end.

In any event, this maxim- what comes around goes around- seems particularly apt in light of a couple of recent market phenomena. While Dubai has fallen away as a "prime mover" of financial markets, it is still burbling away in the background, with no resolution yet in sight.

Macro Man wonders if the Dubai sovereign (and Abu Dhabi behind them) would have been quite so prepared to cast Dubai World adrift (credit wise, that is) if one of its subsidiaries owned a crown jewel in a major Western economy. Say, like, what if Dubai Ports owned the operating rights to six major seaports in the US? We'll never know, of course, but Macro Man cannot help but wonder if DW would have been cut adrift so easily if Congress hadn't blocked the Dubai Ports deal in 2006.

Similarly, Japan's Financial Services Minister, the maverick Shizuka Kamei, has been on the tapes this morning callign for joint intervention to weaken the yen. OK fine...but from whom? The Europeans are moaning about a strong euro already, so they're hardly going to be first in line to intervene for someone else's benefit. And what about the US? Let's see: U6 at 17.5%, GM in bankruptcy, and the Democrats' approval ratings are sliding fast. Where's the attraction for helping out the Japanese?

Of course, Japan would have a much easier time persuading other G7 nations to take the other side of the trend and weaken the yen had they themselves been willing to step in over the summer of 2007 and take the other side of the yen carry trade. But they didn't, as then-MOF currency surpremo Watanabe thought it inappropriate to stand in the way of private sector capital flow. (little did we know that it was his wife pushing the buttons!)

Well, Japanese repatriation has been the primary driver of yen strength recently. And while the governments are different on both sides of the Pacific, it would be hard to justify stepping in now, at 87, when the MOF failed to "take profits" by selling USD/JPY >120 in 2007. What goes around comes around.
In any case, there is (as Macro Man has ovserved before) no divine right to a trade surplus. And despite the yen's strength over the past couple of years, Japan's trade surplus is starting to widen again...even as the American deficit also widens.
Now, Macro Man has some sympathy for the view that the yen will weaken moving forwards, and confidently expects short JPY to feature prominently in the GS Top 10 trades today. But he's not holding his breath waiting to get bailed out by the G7...he suspects that he'll have to make his money the old-fashioned way on this one.

Tuesday, December 01, 2009

Ice, Ice Baby

Macro Man was chagrined to find, upon emerging from his house this morning, that his windshield had iced over for the first time this autumn/winter. Fortunately, because his regular train is still AWOL, he's getting a later service, which afforded him the time to retrieve a scraper and do the business.

Little did he know, however, that the ice on his windshield had come straight from the veins of the marketplace. Dubai is yesterday's news, evidently....he's had no Nakheel price updates from FX monkeys at all this morning, and while the Dubai equity index has cratered again today, developed market stock futures are back threatening their highs of the year.

The dollar's also thoughtfully taking a beating, stirring the fire in the loins of the risk-orgy crowd. It now seems to be a popular proposition that the pain trade into year end is once again the melt-up; if positioning really is that sparse, Macro Man wonders, why did the market absolutely crap itself when the Dubai news hit the tape?

In any event, the lust for gold, both literal and metaphorical, is back in play today, and the barabarous relic has posted a fresh all time high this morning, tickling but not breaching the $1200/oz level.
Meanwhile, the FX carry crowd is once again swaggering about, perhaps at least partially because of policy divergence in the Asian time zone. The RBA hiked rates again overnight, in line with leaks yesterday but contrary to some speculation at the height of the Dubai panic. The BOJ, meanwhile, called an emergency meeting and announced a 3 month tender facility at 0.10%. Not exactly earth shattering, and hardly the thing to break the back of the deflationary spiral. But with 3 month TIBOR just under 0.30% and the yen near 14 year highs, it was enough to rally the strip and generate a small bounce in USD/JPY. How sustainable those are remain to be seen.

So here we sit, with ISM, the BOE/ECB announcements (will the last LTRO be fixed or indexed?), and payrolls yet to come this week....and Spoos are within spitting distance of their yearly highs. The last few months have seen a strong equity rally on the third or fourth trading day of the month; this time around, markts don't want to seem to wait.

Maybe they really do have ice in their veins.....or maybe they have ADD. Is a warm jumper or Ritalin the solution? We'll know more in a few days.