Monday, January 04, 2010

Marking 2009 To Market

Macro Man is back in the saddle after one of the most relaxing breaks he's had in some time. Although he had originally intended to keep a relatively close eye on things over the winter holidays, somehow the urge to turn on the Bloomberg or fiddle with the Blackberry proved surprisingly easy to resist. After what could only be called a "trying" 2009, Macro Man is now back at his desk with a blank p/l slate and a left knee in relatively fine fettle. All he needs to do now is shift the 5 lbs or so that he managed to put on over the last month and he'll be in peak condition.

Encouragingly, 2010 started in fine fashion. Macro Man won his annual New Year's Eve poker tournament (the only time each year that he plays) approximately 4 hours into the new year; while he's not a particularly strong proponent of the link between poker and trading, it was nevertheless a refreshing development from a karmic perspective.

Before turning his (somewhat chipped) crystal ball to financial markets in 2010, however, he feels compelled to gaze back at 2009. Regular readers will know that your author scuffled intellectually for most of the year, and P/L wise over the last couple of months in 2009. But how did his big-picture views from a year ago fare?

Macro Man does not do predicitions, which are sadly conventional; rather, he makes a series of non-predictions at the beginning of every year. 2009's can be found here and here. So how did he do?

1) 2008's lows in the S&P 500 will NOT hold. In 2008, the SPX got down to 741 before rallying to close the year at 903. The index crashed back through 741 by the end of February 2009, famously trading down to 666 in early March. This one is therefore scored a HIT, albeit a hollow one; Macro Man certainly wasn't expecting at 70% trough-to-peak rally in the SPX at any point in 2009...

2) 2009 GDP forecasts from the Fed, ECB, and the UK Treasury will NOT be achieved. The Fed forecast was -0.45% y/y; consensus for the final 2009 out-turn is now -2.5%. The UK Treasury forecast was for a decline of 1.1%; the consensus is now for a bum-clenching 4.6% decline in UK GDP for 2009. Finally, the ECB forecast 2009 growth at -0.5% y/y; given that Q3 growth was -4.1% y/y, that looks set to grossly underachieve as well, despite the surprising return to growth in Germany/France in Q2. HIT.

3) The "bond bubble" will NOT pop. The panicky collapse in yields during the last 6 weeks of 2008 was swiftly reversed, with US 10 year yields completing a round trip from 4% yields to 2%, then back again by mid-year. Despite record budget deficits in the US and UK and concerns of fiscal meltdown in Japan and peripheral Europe, bonds broadly range-traded in the second half of the year (courtesy of zillions' worth of QE buying, peut-etre?); certainly any efforts that Macro Man made to short fixed income yielded scant rewards. We'll call this one a PUSH.

4) Oil (defined as the second WTI contract) will NOT trade at either $25 or $100 in 2009. The low for the year in CL2 was $37.12, reached in mid-February; the high was $82.58, attained three weeks into October. While oil spent most of the year rallying, the dollars-and-cents magnitude of the move was dwarfed by 2008's roller-coaster. HIT.

5) VIX will post a higher average in 2009 than 2008 but will NOT reach 2008's peak. Macro Man was ready to declare victory on this one in March after the VIX failed to make a new high during the Q1 equity meltdown. Little did he know what was in store for him; a nine month, virtually straight-line equity rally that brought all manner of vol sellers out of the woodwork. Funnily enough, the 2009 average for VIX (31.47) was virtually indentical to that of 2008 (32.73.) Technically, however, it was lower....and more importantly, the 9 month bear market in vol was contrary to the spirit of this non-predicition. Both de jure and de facto, therefore, this one was a MISS.

6) EUR/GBP will NOT trade at par. This non-predicition was simultaneously brave and frustrating. After all, EUR/GBP rallied more than 20p during Q4 of 2008, and even on the last day of the year traded up to 0.9784. However, it fell swiftly in the first few trading days of 2009 and never seriously threatened par again. Sadly, the early-year dip happened without Macro Man, and he never made any money trading EUR/GBP throughout 2009. Frustrating, indeed. HIT

7) The DXY will NOT make a new low in 2009. While the dollar famously marched in lock-step with equities and other risky assets for much of 2009, it was the yen, rather than the euro, which bore much of the brunt of dollar weakness. To be sure, EUR/USD did manage to rally sharply off its March lows, but ran out of gas in early December (breaking its link with equities and providing macro punters with a bit of a widow-maker trade.) Given that the euro is some 57% of the DXY, the latter was never going to make a new low without the euro participating in the dollar move, and so it proved to be; the 2009 DXY low was some 5% higher than its early-2008 nadir. While the view was a solid HIT, it did little to help Macro Man's P/L, alas....
8) China will NOT stop taking the piss in currency markets.

9) High grade credit spreads will NOT reach their wides of 2008. Macro Man's reference point is the spread between Moody's AAA index and long bonds. And while more dubious credits such as the European crossover index reached new wides in Q1 of last year, neither Macro Man's reference index nor an index like EMBI global spreads reach new wides this year. Indeed, the remarkable performance of credit was one of the stories of 2009. HIT.
10) The approval rating of Gordon Brown and Barack Obama will NOT be as high as they are now at the end of 2009.

a) Gordon Brown is so desperate, he's trying to enroll Tony Blair (!) to help Labour's election campaign.

b) Obama's approval rating dipped below 50% by December and some polls in 2009 gave the Republicans a higher approval rating than the Democrats, less than a year after the 2008 electoral shellacking.


So there you go. Eight hits, one miss, and one push. Not a bad track record; actually, it was an improvement upon 2008's record of 7-2-1. Sadly, translating these views into profitable trades proved more difficult for Macro Man in 2009 than in the previous year, which just goes to show that pontificating and spouting opinions is not quite the same as working at the coal-face of markets, putting money behind one's views.

Funny enough, despite the stellar performance of last year's non-predictions, Macro Man has actually taken solace in the fact that he managed to ground out a modest return (and a not-too-shabby Sharpe ratio) despite feeling "wrong" for much of 2009.

He can only hope that his real-time feel for forecasting improves in 2010, though he will, as usual, lay a strategic foundation by revealing a set of non-predictions for the year later on this week.

Happy New Year to all readers, and allow Macro Man to wish you a healthy and prosperous 2010.

Good luck!


Anonymous said...

Good luck to you too and everyone on the blog - hope we all have an outstanding year and decade!


Anonymous said...

Happy New Year and welcome back.

Good record although on point 3, Fed, BOE, ECB GDP estimates are by in large inherently optimistic.

As for Obama and Brown in opinion polls - I'd say another easy call.

Brown is finished, Obama only has to worry about popularity going into 2012.

Welcome back

Donlast said...

Do get back into trim with langlauf and not the black piste.

But What do I Know? said...

Welcome back, MM--you didn't miss a thing. .

Our Man in NYC said...

Welcome back MM, and everyone else.
Good luck in the new year!

leftback said...

Good job with the predos for 2009, and can't wait to hear what's NOT going to happen in 2010.

Anonymous said...

Brown is (officially) finished this spring. Obama is finished next November. Both are lame ducks in the mean time

BTW -- a college buddy (US military) just shipped out on a new Iraq tour last week. he was told to expect at least a 15 month deployment

The "combat troops" are being re-labeled "advisors", which is not the same thing as bringing the troops home

tyaresun said...

Wishing you a happy and prosperous new year. Sorry about them Steelers.

Anonymous said...

Happy new year Macro Man,

Looking forward to your 2010 predictions

Anonymous said...

Happy new year MM and fellow commenters. Did you know it was a blue moon on NYE? Another good omen for '10 perhaps.
Are these the tens or the teens?

Stocks on Wall Street said...

Ya break didn't exactly last as long as I hoped.

arlequim said...

thanks for sharing the views and all the good for you MM and felow readers &commentators.


Steve said...

Welcome back MM et al!!

Byron Wein saying the shocka of '10 will be 5% growth. Dave Rosenberg says it's priced in. Uber bull meets uber bear, literally.

Whatever. 2010 looks a hell of a lot more interesting than '09, here's hoping this prediction pans out.

Nemo Incognito said...

Happy New Year MM. I am increasingly coming to the view that this year will be a lot more about rates, FX and the like rather than commodities and corporates (more my bag). "Obvious" equity trades are quite hard to find these days unless you're happy to reduce your return requirements in a big way or dial up the RV leverage.

And credit? Yawn.....