Monday, March 29, 2010

A Quarter Of The Way Through

It's hard to believe that we're almost a quarter of the way through the year already, yet Wednesday marks the close of the third month of the year. It many ways feels as if the year has barely gotten started, intellectually; judging by the performance of many macro funds thus far this year, Macro Man suspects that he is not alone in his sentiments. Q2 isn't likely to start off much easier; how the hell is one supposed to play the first positive payroll figure of the cycle on a day when stock, bond, and futures markets (at least the pits) are all closed?

Of course, like Macro Man's alma mater, there are still a few days of March madness to navigate first (or is that winter madness)? European banks are back in the news this morning on reports that Vladimir O'Lennon will essentially nationalize the Irish banking system.

Unlike Greece, however, this is being taken as an isolated incident, at least judging by the performance of pan-European banks. Speaking of Greece, they've announced plans to sneak another bond issue into this little window of opportunity. Step right up, ladeeeez and gentlemen, and get yer bonds right here!

In any event, for all the talk of differentiation this year- and to be sure, there has been some divergence in the performance of, say, the SPX (+4.05% YTD) and the Eurostoxx (-0.36% YTD, -6.3% in $ terms)- that European banks chart looks verrry familiar. Where has Macro Man seen it before?

Oh yes, that's right. It's the copper chart.
OK, it's not one for one, but the V shapes bottoming in early February do bear a noticeable resemblance, don'tcha think? Of course, one one hears the word "copper" these days, one cannot help but think of the word "China." Given the V-shaped bounce in the good Dr. Cu and Chinese high fives over its impending, conveniently-timed trade deficit, one wonder if the old pig farmers have been up to their old shenanigans and buying copper like it's going out of style (which it eventually will!)

And while it's tempting to sit back and play for the "big one" in copper, equities, and most other things, the more profitable strategy has been to play "small ball": to trade in and out rather than trying to hit home runs. Whether that continues as March Madness gives way to Opening Day remains to be seen...


Nemo Incognito said...

I don't know MM, holding a boatload of IAT has made me feel a lot better about some decidedly crappy calls in commods (short Nickel, ouch). The steeper that curve gets the better it gets for your average bank. Additionally, with the aggressive provisioning done any semblance of improvement should make those recoveries better.

Rossco said...

Well, with a torpedoed Korean boat, a bomb in Greece, 2 bombs in Russia, a country nationalising it's banking sector and the Greek fudge the spoos are handily up.

Standing in the way of the qtr end ramp up would seem foolish.

Right Field said...

Set Up for Quarter End is a Pain Trade

Many who are bearish have now conceded that an Equity correction will materialize through a function of time rather than price. When looking at key indicators that would signal risk reduction into quarter end they are not providing the signals. Copper (HGA) is breaking out to the upside, China +2% overnight and both CAD and AUD are signaling equity risk is back on. Crude Oil breaking the technical flag above 81.50 would provide further confirmation. The latter is important because Energy as a sector has been a significant laggard and any contribution by this sector would help explain a quarter end rally. A surprise short cover in natural gas along with higher crude would be a signal. Factually, professional performance on aggregate is underperforming benchmark arguing net long exposure increases into quarter end if prices continue to rise.

Pain Trade: After 12-months, the liquidity effect of Quantitative Easing and other alphabet programs will end on Wed. Interesting, the Equity market is closed on Friday but employment data will still be released. Point being, if the quarter ends with risk assets at new highs the question becomes how much of a positive NFP report has been traded with the entire month of March calling for +225k. Clearly the risk is a disappointing number and with the end of QE, the Sunday night trade would start off the 2Q painfully. An inline consensus whisper number makes all of this mute.

Conclusion: After a very tight range in equities last week, today should have a trend type style profile. To be clear this means no new day low after the first hour and the upside should be just above last week's closing high (SPX 1175).

Fixed Income: Simply using the 10-year Future and making the assumption the risk view is correct, I would be looking for quite a bit more downside in 10's. A trade above 116-03 would be a concern as my view is the downside should be pretty immediate with low risk.

Leftback said...

EoQ performance chasing, followed by the NFP number on a day when bond markets are open, but not the equity markets. Kind of makes you want to sit on your hands and watch everyone else flail around for a few days, doesn't it?

My guess is that traders will use the ADP as a proxy for the NFP... of course we know how well that has panned out in the past. Don't trade the news, trade the reaction to the news....

Leftback said...

MM's alma mater?

Michigan State, Butler, West Virginia...?
You're not a Dookie... surely?

elway said...

Right Field
The least you can do when posting my comments is give attribution. This is getting old.