Friday, January 15, 2010

A Head-Scratcher

Most mornings, Macro Man has a pretty good idea what he wants to write about, and tries to insert a theme underlying all of his comments and observations. Occasionally, however, he is somewhat bereft of inspiration....those days usually produce a "fun" post like 20 Questions or something. Sadly, Macro Man doesn't even have the inspiration to rustle up 20 vaguely interesting questions, so he is sitting here this morning, scratching his head about what to write.

Today is the first equity option expiry day of the year, of course, and usually that means fireworks. But for some reason, unbeknownst to your author, the slate of earnings releases has shifted back, so we have relatively little information to go on. Normally, you've had a healthy dose of earnings announcements by the time options roll off, and Citi, for example, has usually announced on the morning of expiry- an easy one to remember, given the fireworks associated with the once-mighty C's releases over the past couple of years.

Macro Man isn't sure what's's a bit of a head-scratcher. OK, Intel beat expectations last night, but come on: they've very 1990's. So if it seems like stuff has been relatively quiet, there is perhaps good reason: we're getting less info than usual this time of year. (In fairness, there's been a little bit more sizzle in Europe, but only just.)

To be sure, we do have one bank releasing before expiry today: the House of Morgan (and Chase, and Chemical, and Manny Hanny, etc. etc.) And while those numbers might be interesting, JP has of course been one of the rocks of the banking industry throughout the crisis, with less earnings vol than most of their competitors. And in any event, the real interst in the banking sector is now on earnings well forward, after Obama proposed a fee (not a tax, no sirreee, a fee, dammit!) on large banks' liabilities to pay the tab for the bailout.

One early-cut analysis that Macro Man saw suggested that it would cost the likes of C, JPM, BAC, and GS in excess of $1 bio per annum for the next decade. For sure, in his conversation yesterday with a mate at one of those shops, his interlocutor suggested that everyone took the proposal seriously and was pretty bummed out. In any event, after this (perhaps justified, but clearly populist) measure was announced, the BKX naturally surged. Another head-scratcher.

One somewhat puzzling development that has subsequently been cleared up (a bit) was the euro's painful decline in December. China released data suggesteing that FX reserves rose by "only" $11 bio in December. While the valuation adjustment from the euro's decline will artificially depresee that number, it nevetheless suggests less piss-taking than usual in December...and thus less reason to play with EUR/USD like killer whales play with baby seals.

While the euro has tried mightily to recover thus far in January, the results have been tepid at best. JCT offered little support yesterday, particularly vis-a-vis Greece, where he essentially said "you're on your own, sunshine" while downplaying the self-sustainability of the Eurozone recovery.

This morning, the EUR has been buffetted by the peculiar rumour that Angela Merkel will resign. There's no obvious source, rhyme, or reason to that story, so naturally Macro Man has been left scratching his head once more to figure out why it's out there to begin with.
You can observe from the chart that the 200 day moving average has provided good support for EUR/USD over the past month, much as the 55-day MA did for most of H2 2009. Should the 200 day mover break, it probably won't take much head-scratching to figure out what the market will do....


Anonymous said...

"Most mornings, Macro Man has a pretty good idea what he wants to right about"

Obviously, not proofreading. :)

Anonymous said...

Doh! Will proofread and amend when I get back in front of a PC. Guess I needed another coffee this morning.....

MM Bbry

Gregor Samsa said...

Don't we all want to be right about something...

Donlast said...

Maybe your lack of something to write about MM is a good tell on the US market's state - in limbo.

There has been a lot of US reports this week to remind one that "statistical" GDP prints do not a solid recovery make . These include a few million Alt-A mortgages massively under water; gloomy small business report; indifferent retail sales in December; falling sales tax recipes with no sign of uptick; very weak commercial real estate in all regions; unemployment insurance still clocking up daily big numbers. Have we a dead cat bounce in US econ data?

Anonymous said...

"b. The allowance for loan losses to end-of-period loans excludes purchased credit-impaired loans and loans from the Washington Mutual Master Trust, which were consolidated on the Firm’s balance sheet at fair value during the second quarter of 2009. Additionally, Consumer Lending net charge-off rates exclude the impact of purchased credit-impaired loans. The allowance for loan losses applicable to these loans was $1.6 billion at December 31, 2009. There was no allowance for loan losses recorded for these loans at December 31, 2008."

Nemo Incognito said...

Hmmm. Well looks like even those numbers couldn't even wow the minis. Equities appear to be way, way ahead themselves but if that's the case then rates stay low and the carry party probably continues.

Was doing some numbers on potential trade dust up scenarios and wondered what the good people of this board's thoughts were: if the US put tariffs on all Chinese imports to neutralize the CNY's 40% misvaluation and China retaliated in kind you'd only get about an 10% reduction in the deficit.

US China Imports $300,000
US China Exports $55,000
Under-Valuation of Yuan 40.00%
Easticity of Demand for exports and imports 0.5
Change in imports assuming full taxation of Yuan undervaluation -$60000
New imports $240000
Tax $336000

Change in Exports -11000
Reduction in M 60000
Incrase in G $96000
Decrease in $ Supply $145000

US Budget Deficit in 2011 930000
US Budget Deficit in 2011 after China FX tax $834000
Change 10.32%

However, 54% or thereabouts of the deficit is oil products so if you had a trade war it would be a lot less beneficial than highly aggressive CAFE fuel standard hikes over time. As a more micro idea, does it seem at all likely that aggressive fuel standard hikes are in the offing as soon as the Volt gets produced?

Yoke Ling said...

For data and graph geeks

There is also a macro presentation by the same guy the day before

Guess M. Macro is not the only one needing a coffee... proofreading would not have been a luxury but...

Anybody has heard of this fellow before?


Anonymous said...

any wisedom in these 27 slides?:

I think it pretty much is along yr lines of a bubble happening at some point in China.

Nemo Incognito said...

I can't say I agree on the CNY being overvalued - its horribly undervalued, its just that rates are the wrong price: as a result of of trying to keep hot money flows to a minimum to defend the peg China has to keep its rates low and as macroman notes its never been an object of policy. One of Eichengreen's books has a good article by Yu Yongding which summarizes Chinese monetary policy back in 2006 - almost nothing has changed since then. Were China to float it could move rates to a market clearing level, sadly that would also take down a good number of SOEs, real estate cos, real estate and implicitly many Chinese peoples' savings.

Our Man in NYC said...

Well at least it's livened up now...

JPM miss top-line, beat bottom on reduced tax burden (tax rate collapsing from c30-35%, to <15%)...low-quality!

Gary said...

Nemo -- in reference to your China trade tax post...

Hiking CAFE standards sounds great on paper, but the last time they were hiked (moderately aggressive hike), it actually **INCREASED** gasoline (petrol for Europe) usage.

Increasing auto efficiency (which is what hiking CAFE standards amounts to) lowers the marginal cost of driving a car. Hence, all else equal, lower cost = higher demand.

What Europeans don't grasp is that America is set up for cars. Outside of major cities, public transit is minimal and rather unreliable. Sitting around waiting for a bus that may or may not come makes no sense (time = money, even assuming the bus shows up).

At the same time, all our neighborhoods are centered around cul-de-sacs and the grocery store is well outside reasonable walking distance (or bicycle distance). US roads are also not motor scooter friendly (they are congested with cars that will hit you, and there is no place to park your scooter on arrival).

Reducing petroleum usage really requires LOWERING the cost of alternative transportation methods.

Raising the gasoline tax is stupid. For any moderate rise, gas powered cars are still cheaper when you factor in all costs including time. For a large tax rise, the effect on the economy would be devastating. And either way, our government (both parties) will spend 2x as much as the tax takes in on political pork projects.

Its a cultural issue that Europeans and Asians simply don't get. Centrally planned, one size fits all solutions almost always fail in the United States. That's one of our biggest strengths (diversity) and our biggest weakness (lack of cohesion).

Between Bush and Obama, more and more people are realizing our Federal government simply isn't capable of solving our society's biggest problems -- and they are looking for more local solutions.

This will work out great for maybe 45 states, but there are a few disaster states that can't make it on their own (they have too much debt / too few resources to make the transition -- eg California). These bankrupt states still have a lot of clout in Washington, and they will try to use that clout to force the other states to serve them.

If Obama is dumb enough to play along (and so far he is) -- it will actually make the federal government even less powerful, as the other states see California's ploy for what it is (theft).

And that is the other reason why raising CAFE would fail -- it would amount to bankrupt California forcing its economic woes on the other states (and Canada)

Any true solution is going to involve lowering the cost of other energy sources -- gasoline taxes and CAFE standards don't do that.

I think it will be interesting if China accepts this simple truth first and implements a real energy policy -- lowering their energy costs relative to the rest of the world.

Europe is too backward and has way too many entrenched interests that want to preserve the status quo -- even though it has (and will continue) to mean much slower economic growth

Anonymous said...

We are dealing with a centrally planned command economy. You should adjust your analytical tools, assumptions etc. accordingly. It does not make much sense to assume floating exch. rate regime etc..

Nemo Incognito said...

I'm well aware of the fact that we are dealing with centrally planned economy and that the politics / interest groups are lined up against floating and raising the cost of debt capital (learnt a few things living here for most of the last decade). The point is that floating would hurt a lot of people who hold a lot of sway, that being said, the longer this runs the more its going to hurt when the unwind comes.

Also Gary, very good point. That being said, if you moved everyone over to plug in hybrids (understand this would be a decade or more) then that demand for oil from afar gets turned into demand for West Virginia coal / Powder River Basin coal / gas / nuclear power that is all largely produced locally and would be very material for trade flows and FX markets.

l said...

Leftback remembers several days in March 2009 when the market stopped going down on bad news and started to go up on less bad news, which seemed a good sign that it was time to take on more risk. Now that the market has started to go down on good news, a little more introspection might be called for by equity bulls.

Gary said...

Nemo -- I for one would love a serious electric car option. But there are a few issues that I suspect will take longer than 10yrs (assuming we get started)

1) The power grid in many parts of the country simply won't take that spike in demand. Most utilities have only small amounts of surplus power generation capacity. Ironically, the biggest impediment to building new power plants is environmental constraints. After that, everyone likes more power, but don't even think of putting the power lines in my backyard

2)More coal powered plants, regardless of the economics, face the whole climate hoax / CO2 problem. Beyond that, they are stinky and dirty source of power

3) Nuclear might be a good option, but again you have a rather uneducated populace that doesn't understand Three Mile Island is not the same design as Chernobyl. Western nuclear plant designs are pretty safe. What to do with the spent rods afterwards? Not sure -- the central one sized fits all solution (bury it in a big salt dome in Yucca mountains of Nevada) didn't work even after tens of billions of dollars

4) Battery technology isn't really up to snuff yet. With some R&D effort, this problem could be solved -- but not within a single Presidential term. Politicians have no incentive to spend money that the next President will get all the PR benefit

leftback said...

Gary - good points. Of course in the end, nuclear supplemented with wind/soalr/hydroelectric will be the only option remaining, by which time we may have some better ideas about storage.

CV said...


Weren't we talking about the concept back in the HUNT FOR RED OCTOBER period that, since "October" failed to follow through with it's traditional "spook", the next best opportunity to do so could come when complacency was at its highest?

And that a convenient time to do so would the the January OPEX time , coupled with "earnings season" (which were the last chance for YOY cupcake comparisons)?

Yup SELL ON GOOD news... It's in the air my friend...


Our Man in NYC said...

PHEVs - if they're a meaningful part of car sales in 10yrs time, I'll eat my hat. Micro & Mild Hybrids, absolutely....they'll be all over the place (perhaps even the vast majority of cars).

But as for PHEVs (and especially powered by Li-Ion batteries), no chance...the maths doesn't work!

Anonymous said...

Maybe, but maybe this guy might have some answers? Might gas be the new oil, to mimic Private Eye.

Personally, I don't know, but a few "drilling" engineers I know here in Krakow, seem to know a bit and are keeping a low profile and quite quiet, too!!

I'm more than a little bit hopeful? Alot of people here are running on gas and of course, with the emergence of the new American gas supplies, problem might be solved?

Time to short gas maybe? Who knows? Everything seems smoke and mirrors nowadays.

How's the knee MM? I'm skiing for the first time next weekend following my knee "incident" several years back. Here's hoping!!

Best wishes