Wednesday, January 06, 2010

A Stuttering Start

While Macro Man intended to unveil the second half of his 2010 non-predictions today, nature has conspired against him. A dozen hours of solid snow has left half a foot on the ground, leaving him stuck at home amidst the Surrey hills. (In fairness, the trains last night were buggered before it started snowing; good to see public transport employees looking ahead for once.)

In any event, he left his notes on the second half of the list on his desk last night, and rather than try and hurriedly reconstruct the list this morning, he figured that his time would be better spent scribbling down a few ideas on early-year trading.

There seem to be two predominant themes so fur this year: "everything goes up", and "low volume." Looking at the charts, we've seen the SPX move to new post-Lehman highs this week, but with volumes that remain well below those prevailing even in the first two weeks of December. While the SPY, pictured below, possibly exaggerates the phenomenon, the general profile is broadly similar for major Western stock markets.
Similarly, bonds have put in a decent bounce so far this year after the late December kiboshing. While it's true that volumes are nowhere near normal, they are at least a bit higher than when TYH0 took a shellacking late last month.
And while crude is gushing higher (up nearly 20% over the last few weeks), observe once again that it's come on much lower volume than was observed during the prior downswing.
Now, what does this mean? It could be that someone has chosen relatively illiquid conditions to bully the market. It could represent a lack of natural sellers in some markets. Or perhaps it just means that conviction to strap on risk is low ahead of Friday's potentially critical payroll data (critical in the sense that it could well register the first positive reading in what seems like forever.)

Or perhaps relatively low volume is simply a reflection of the fact Western asset markets are paling in significance (or at least opportunity) in relation to their EM counterparts. Anecdotally, Macro Man has heard much more interest in EM, particularly Asia, than in most bread-and-butter G10 markets. The chart of USD/INR, for example, gives a bit of a flavour for what folks are looking at. Charts of stuff like KRW look broadly similar.
While Macro Man has started the year fairly quietly, what few trades he has done thus far have been predominantly EM in nature. While getting the Fed right is still of paramount importance (and there will be opportunity to make big money trading a Fed view, in his opinion), chasing low-volume moves in G10 markets looks like a sucker's proposition.

Macro Man suspects that patience will be one of the keys to profitability in 2010, and he is attempting to exercise some in the early going as markets get off to a somewhat stuttering start.


Crisis Management said...

Quite a flurry of geopolitical news over the New Year's weekend, especially General Petraeus making a surprise visit to Yemen. With a GDP per capita of $2400 we can surmise that he wasn't there on leisure.

Toss in the PM's Jan. 28 "Yemen summit," a tabloid rumor of a special SAS unit being flow into the country, and the closure of UK, US and French embassies and you've probably got some nervous shorts in the oil market.

A strange quote this morning from Shokri Ghanem, chairman of Libya's National Oil Co.: "As long as they (oil prices) are under $100 there is no need for action."

Why would oil prices be above $100 by the March 17th OPEC meeting he was referring to?

Anonymous said...

interesting you mention 'events' as the new driver in oil prices. We haven't seen that for a while now. In my view, that's not fully priced in yet. And calls are getting back in fashion! The put skew has pretty much gone in wti.
Vol at 35'sh % cheap perhaps?

Crisis Management said...

Re: crude vol, I guess so, does look like a volatile situation. Would be more enticing if the market weren't so saturated. Of course this has reached far beyond the virtual world of options with JPM, MS, et al getting physical as of late.

Borrowing near zero from the Fed to buy oil and store it in floating tankers, what could possibly go wrong? In fairness this does seem to be one of the more conservative schemes concocted by our favorite financial geniuses.

Donlast said...

Re: payroll data. Zero Hedge had an extremly interesting article on Jan 1 challenging the quality of the payroll data. Follow the money is a good dictum they said and went on to note that “ when we looked at the Daily Treasury Statement data we were very surprised because it indicates that the government could be underrepresenting employment data by up to 32%!”

The reference was not to the monthly change but to the total insured unemployed. It is based on the money actually paid out to the unemployed. Whereas in the past this tracked the published data fairly closely the amounts paid out have suddenly shot ahead since November. If it is true (and it is still early days in this revelation) that total unemployment is grossly understated what use is a trivial change in the monthly payroll and what use is a“10% unemployment ratio? Doubtless the market will make its typical knee-jerk reaction but it reminds one of the weekly money supply figures that used to be followed so religiously by Treasuries and which eventually became redundant as a market signal: a lot of noise signifying nothing. Also, if Fridays positive job data represents, as heretofore, new jobs in health care, education and the public sector in general, a fat lot of good that will be for growth.

Anonymous said...

the computers were turned off in December and probably wont come back on until next week.. that's the reason for the lack of volume.. i wonder if the 'machines' trade the INR and KRW (b/c I cant) and that is perhaps why real ppl want to trade them...

PPM said...

"It could be that someone has chosen relatively illiquid conditions to bully the market."

Indeed. I don't want to sound like a nut-bar (and fear that I will regardless), but what is the chance that there is US government or central bank intervention in the equity market? See this article:

Obviously, this is far fetched, but history is replete with far fetched scenarios that have come to pass, generally driven by desperation. Let's consider a few of these surprises: 1. Pearl Harbour; 2. JFK assasination; 3. Nixon bugging the Watergate hotel; 4. Arab oil embargo; 5. Sept 11 attack; 6. Enron fraud; 7. Lehman/Bear Stearns collapse; 8. Bernie Madoff fraud etc. etc.

All of these were unexpected. So, how unrealistic is it to expect government intervention in the equity markets?

Anonymous said...

CM - only because I love a good conspiracy theory, your comment really struck a chord: this morning I received an equities tech piece from NCB, highlighting that for the first time in years, the aerospace / defense sector is outperforming and breaking out across the board.
Also, they highlighted that "the commodity sector continues to move higher in the face of USD strength".
The piece was titled "Conspiracy Theory" and wondered whether the technical breakouts seen were "warning of impending military action".
I can't see it myself!

Nemo Incognito said...

Macro Man which EM countries do you like? Is it time to buy the nice trends (Indonesia, Turkey) or buy the underperformers?

Macro Man said...

I like Korea-who doesn't?- but am heartened at the relative outperformance of equities there over the past month or so.

I like India as a country that is amenable to FX appreciation and offers a bit of yield further out the curve.

I like Brazilian fixed income.

As for Turkey, I suppose a TRY long looks most compelling versus the euro from a pure valuation perspective. For choice, I think you have to pay rates there, or at least look at flatteners. But Turkey underperformed pretty badly throughout most of last year, so I'm a bit gun-shy.

wcw said...

Wow; it really is the case that every time someone refers or links to a Zerohedge article, it's idiotic. Sure, the headline unemployment rate is pretty useless; that's why they have U-6 and the employment-to-population ratio and initial freaking claims. Look at the latter. The worst is behind us. Look at U-6. Things in jobland are still completely punk.

The headline unemployment rate is just a distraction by comparison and fodder for lackwit conspiracy theorists like Zerohedge.

On Yemen, action there would be even stupider than continuing to pour money into Iraq and Afghanistan, but aside from his recent declassification executive order, Obama hasn't frightened me by doing super-smart things. That said, he hasn't been the super-stupid actor his predecessor was, but Afghanistan is a good indication he may be almost as dumb when you go offshore. I may be a loony leftist but I am starting to miss Eisenhower and Dulles: they may have been malevolent at times, but at least they were deeply competent about it.

Bob_in_MA said...

I was comparing the changes in volume to what occurred in 2002-2003. It is notable that volumes have fallen continually through the current rally, but isn't it also true that they were extraordinarily high last winter/spring?

If you compare today's volumes to 2007, aren't they fairly normal?

leftback said...

Low volume and also low volatility.

Neither trend will last forever. An awful lot of people are sitting on the sidelines waiting to see which way the jobs number points. Then we'll be inundated by rants, either with DGDF paranoia, or reflationary commodity bull and Treasury meltdown scenarios, according to the number.

But of course it's a process and one month doesn't end the double dip debate. I will make one prediction, however, $100 crude/$4 gasoline would definitely trigger a double dip in the US economy, and a rapid reversal in risk appetites.

Anonymous said...

"Obama hasn't frightened me by doing super-smart things. "

Some may view it very differently. First, the so called "closure" of Gitmo was in part a gimmick to transfer the prisoners to rogue nations such as Yemen where they are now under interrogation. The fact that tensions in Yemen are on the rise is no accident as the interrogations have raised the anger of radical extremists. Also, there is evidence that a considerable number of Gitmo prisoners are now back in jihad mode.

One may also point out the recent bombing of CIA's Khost HQ which claimed the life of a Jordanian spy working for the US. This provides clear evidence that the current administration is providing support to covert operations in Afghanistan and Pakistan. The fact that a Jordanian spy was involved will only serve to add fuel to the radical extremist fire and alienate other radical factions throughout the Middle East.

One would also argue that cutting support to the Iraq campaign or completely ignoring the situation in Yemen is equivalent to the same failed approach taken by the US after the expulsion of the Soviets from Afghanistan.

CM cleverly pointed out the escalating geopolitical situation in the first post and I believe that it only gets dicey from here.

leftback said...

Good luck with the snow on the wold, MM. I imagine you might be stuck at home for a day or two, given the well-known ability of British rail services to deal with cold weather. If you're in Surrey and your train goes into London Bridge, then you must be somewhere on that wacky Oxted line, around Woldingham, Limpsfield Chart or Hurst Green. I bet it doesn't take much for that to stop running. Lovely part of the world, though, and great golf.