Tuesday, April 06, 2010

Three Point Play

In honor of Gordon Hayward's nearly-the-greatest-shot-of-all-time, here are three points:

1) There have been rumblings of a Fed discount rate after yesterday's hastily announced Board of Governors meeting. Whether they do hike it or not, we are now at a relative extreme in Fed pricing; the OIS market is now pricing in rates of just over 1% at the eighth FOMC meeting. Levels not too far north of here have capped market pricing over thepast year; this, combined with a 10 year note flirting with a 4% yield, suggests that fixed income might be a scoop here. Unless something has materially changed, in which case it's a sale. Gee, maybe Macro Man has a future in research....

2) El Gordo has called the election for May 6, and sterling has promptly sat like a good dog and tumbled a percent. Perhaps this has something to do with a Guardian poll claiming that Labour could win the most seats in the election. Given that the Grauniad is selling "Step Outside, Posh Boy" T-shirts on its website, however, one could credibly question the partiality of the result, which bears a striking resemblance to a wishcast. A rather more impartial polling source gives the Tories a 10 point lead.

3) Macro Man is travelling for the next week, so updates will be sporadic at best. As always, regulars should feel free to use the comments section to chew the fat on markets.


TulsaGuy said...

Have a good trip

FX said...

Love ya work MM

No surprise really,cable taking a beating , surely traders are on standby for this week MPC speak,there record lately has been bearish relative to the cable, and then some.

A few here were asking for the PTJ doco...shhhh don't tell no one, someone may have a WOBBLY!


ps...Leftback,I was purusing a currency theme blog the other day, of good quality,indeed, but it did'nt have a feedburner and now I've forgotten the name of it, but I do remember you were a regular commentor, any chance of jogging my memory.

P2 said...

WTI testing some pretty heavy resistance here but once it breaks thru, 90 is the big number to watch.
Imp vols in wti very low and giving great opportunities to load up on cheap calls down the curve.

We could be out of that 75-85 range from here on.

Where is that OGDF crowd we had earlier this year?

Our Man in NYC said...

Have a safe trip MM!

It still seems like everything (well Equities, Oil and Gold) are just watching the $ and doing the opposite at the moment...

Leftback said...

Enjoy the trip. Spending the profits from that crafty pairs trade, no doubt. Covered my short of the long end this morning. Agree that a 4.00% 10y always brings out buyers. So far.

FX, sorry, wish I could recall. LB has trouble remembering his name most days.

deke said...

yep- love ya work and have a good trip MM!

XLF has a july 2008 low at 16.53 it's approaching, the banks liking the spread between the fed funds target and the 10 year treasury (370 bps at the moment)

crude oil has ye ole '5MA must be touched' trade setup as it hasn't been to that MA in awhile


forex-cat said...

Your article is always useful.

Leftback said...

MM, wherever you are, the Greek yield curve has gone linear at about 7% and repos are being pulled ... based on Argentina 2001, we are about to see:

Greek banks running short of physical currency.
Companies and towns not able to make payroll.
Population taking to the streets.
Capital flight out of Greece and asset liquidation.
Buying of gold, dollars, Bunds and US Treasuries.

Maybe even sterling? No, probably not.

Leftback said...

From Hoenig's speech today:

"There is no question that low interest rates stimulate the interest-sensitive sectors of the economy and can, if held there too long, distort the allocation of resources in the economy. Artificially low interest rates tend to promote consumer spending over saving .....

the expectation, as signaled by the FOMC, is that rats will remain so for an extended period. .... I have no doubt that many on Wall Street are looking at this as a rare opportunity... The unintended negative consequences of such actions are real and severe .... Low rates over time systematically contribute to the buildup of financial imbalances by leading banks and investors to search for yield... The search for yield involves investing less-liquid assets and using short-term sources of funds to invest in long-term assets, which are necessarily riskier.

Together, these forces lead banks and investors to take on additional risk, increase leverage, and in time bring in growing imbalances, perhaps a bubble and a financial collapse... .. I am convinced that the time is right to put the market on notice that it must again manage its risk, be accountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy."

Quite well put. But where's the beef?

Nic said...

Hoenig is a lone wolf now but I would not be surprised to see a 1% hike this summer. Defining "longer" is a bit like defining the word "is"

AEP & BIS do not love the pound: http://www.telegraph.co.uk/finance/economics/7565127/UK-needs-drastic-austerity-measures-to-prevent-debt-explosion.html

SFOT said...

hello MM, it's been a while but am finally back to share some humble thoughts on crude. I would presume you have ridden the upmove nicely with your long calls in the drawer?

Leftback said...

Simon Johnson on Greece parallels to Argentina default:
Johnson on Greece

Pascoe said...

NBP flexing their muscles today in EUR/PLN. See. They're not all just talk these CBs.....

Leftback said...

Greek bailout number 7 this weekend.
Got Drachmas?

Pascoe said...
This comment has been removed by the author.
Pascoe said...

@Leftback haha nope but I did find an IEP 10 note the other day and am off to the fair isle in the not too distant future. Who knows....

Might just take it with me.

mikepapa said...

Supposing that there is a well-defined, clear-cut mechanism for a Greek bailout, one can expect some calculus from the authorities. Its not clear that they will be any better off after 3 years.

Does anyone know whether Greek bonds have collective action clauses and what the nature of the terms would be? Is there a way to find out?

Right Field said...

Monday, April 12th

Pain Trade Risk Growing…Too Many Starting Today Negative

The SPX closed at a new high on Friday, to argue being technically short today on a perceived failure is a breach in fiduciary responsibility by your sales person. Professionals not only spent last week buying call options instead of deltas but they hedged with index puts highlighting their need for a defined risk profile and willingness for continued underperformance. Hence, it is easy to understand why so many post Greece are calling for a sell the news day or highlighting earnings correction analogies. Point being, the best outcome for professionals is an outright 10% correction due to underperformance vs. benchmark and real money.

Conversely, weekend event risk concluded in a positive manner providing real money with greater self-fulfillment in their positioning into earnings. Their focus remains on medium/long term upside potential which is predicated on the direction of EPS and not the rate of change. Wrong or right, there is a growing expectation that 2011 SPX EPS could exceed $100/shares and with history giving a 15x multiple when core inflation is 1-3%, their 12-18 month target is >1500.

Conclusion: Risk is a close above round numbers today -- Estoxx 3000 and SPX 1200 - increasing the likelihood of the pain trade. Downside is very manageable and a gift to many. Again, this is not about my opinion, bullish or bearish, this is about the structural difference between investors.

Leftback said...

RF, that's a very reasonable sort of analysis from the old days, but we are currently living in a sort of Alice in Wonderland universe here. So, clearly your scenario makes a certain kind of sense, but doesn't that apply only in a world of sustained growth that doesn't depend totally on central bank quantitative easing?

Short term, I think you are 100% correct, BTW.

Right Field said...

Left Back – This year is so far is a story about tail risks. Similarly to 2008-9 where every investor became an expert in short selling they have all now become an expert in tail risks. Hence, tail risk is now embedded in portfolio construction. The problem is that the majority of investors view tail risk as negative risk assets (Japan debt deflation, China Bubble, Oil/100, Double Dip Recession, etc.). Ironically, these same investors identified Low Volatility, mild consumer and economic recovery as tail risks at the beginning of 2010. What they cannot accept is that the ladder tail risks are risk asset positive. Mutual Funds have accepted that but Hedge Funds have not. Hence this is a classic structural disconnect between investor bases. The below Real Money thought process is NOT my view (not sure who published this) but here is what I am hearing:

This medium/long term bullish view is predicated on:

1. The Equity market is driven by the direction of EPS and not the rate of change
2. The direction of EPS is driven by economic growth
3. Economic growth is driven by the steepness of the Yield Curve, Income Growth and Credit Availability seen through spreads
4. Credit is driven by Fed policy
5. Fed policy is driven by core inflation

Important Highlights

1. Core inflation remains near the bottom end of the unofficial Fed range of 1-2%, with no evidence of a significant and sustainable increase above desired levels.
2. Low inflation allows the Fed to keep absolute and real rates historically low for an extended period.
3. The 2-10 US Treasury Yield Curve is at a historic high and other market driven spreads have narrowed dramatically. Unless the Fed intentionally inverts the curve, there is very little chance of a “double dip” recession given corporate credit is flowing very freely.

Conclusion: There is a growing expectation that 2011 SP500 Operating EPS could exceed $100/shares. History has show the minimum market multiple in a core inflation environment between 1-3% is 15x. That argues a 12-18 months target of >1500. Until the many macro indicators begin to act differently, real money will continue to work under the assumptions that it is not different this time and that a stronger than expected economy will lead to better than expected EPS and ultimately higher Equity prices.

Leftback said...

Right Field - yes, the arguments appear sound in many ways - it all sounds very reasonable, doesn't it? But mutual fund investors aren't exactly renowned for their understanding of the nuances of macroeconomics, and their risk control wasn't especially good in 2008.

How many million times in history has the Street promised eternal earnings growth, only to be "shocked and disappointed"? It's a matter of how many quarters can the show go on. Of the tail risks you list, Oil $100 is likely to be the straw that breaks the camel's back, as this is a fairly sick old camel this time around. Remember also that bank earnings are unknown and unknowable with mark-to-market accounting suspended. So in many ways, earnings can be whatever anyone wants them to be.

Richard said...

I'd be happier about the equities bull market if it wasn't obvious that it will collapse "some day" when governments' credit runs out and they can non longer prop up GDP artifically.

Of course we saw the same thing in 2003-2007 which ended when US consumers' credit ran out and they could no longer prop up GDP artificially.

Right Field said...

Counter-Trend Tuesday Call is Low Quality No Sellers --- The SPX is up three days in a row and overnight futures traded below yesterdays low, this technical set up argues a classic counter-trend Tuesday. The news flow and tone is supportive of this view for today, weakness in Crude Oil and the continued bid optically in Treasuries are additional examples. The two questions that need to be answered are: when was the last time professionals started the day looking for higher prices and after a new high again yesterday why would real money sell? If you can answer that then you are smarter than I am. In my experience, investors will push their views until they can no longer, only a material change in price is that catalyst and there is no basis yet for this discussion. Add in the fact that earnings unofficially began last night and no one is a seller until what they hear from the Technology and Financial sector first over this week and next. Risk remains the pain trade higher, downside remains manageable for all and a gift to professionals.

I-Man said...

I have the need... the need... for...


econobserver said...

The big financial and tech companies always dominate the earning season. So basically it comes down to this: you bet whether these big companies exceed the expectation and whether their earnings have been priced in already.

It is more about your luck than science/art.

Rossco said...


Your comments provide a welcome contrast to the more FICC related observations, please keep up the blogging.

As to what those FICC points of view may be at the moment..... ahh.. next

Nemo Incognito said...

Does anyone have any data on Singapore revaluation before CNY moves? I would not be surprised if the PBOC and MAS keep a pretty open dialogue.

Skippy said...

Nemo, that was my first thought on the MAS as well, but I did not have a chance to look today. It is probably a necessary, but not sufficient condition?

My sense, from discussions with a contact at the PBOC suggest that they think a move in the RMB makes sense. But they are probably not calling the shots.

Right Field said...

Backdrop Today is Very Supportive of Higher Prices

A game changing number for both the Financials sector and the forward looking 2011 earnings view for the SP500 would be 20 billion in Q1 US Financials sector profits. Point being, if bested, investors are likely to increase their weightings in banks. The 3.33 billion in net income from JPM today is 16.5% of that number and strengthens the view that the SP500 will generate $100 in 2011 earnings. Separately, China has leaked their GDP and CPI numbers. The GDP whisper is 11.9% vs. 11.2 expected and CPI 2.4% vs. 2.6%. Point being, this would change current rate hike perception, albeit short term, that there is growth without inflation. This would be a return to the 2009 view of Chinese leadership of growth with rates anchored. Finally, the US data this morning is strong and CSX/INTC is supportive of breadth (Transports-Tech-Financial). Again, Equities closed at new highs yesterday and one cannot argue real money profit taking today or that current levels are a technical short.

JPM: The other read through in JPM is corporate's can access money and the quality of the loans are sound. Conversely, consumer delinquency has peaked but the propensity to borrow is simply not there. Point being, 75% of earnings was IB related and that was high due to the reduction in compensation expenses. The question becomes will the market continue to believe in a corporate lead recovery or argue that the consumer component is not strong enough overtime as we hear from other companies during this earnings cycle.

Skippy said...

RF - The near term Chinese inflation numbers may be fine, but any economy that shovels 40% of GDP of new credit into its economy in one year is unlikely to see inflation topping out at 3%. China's output gap may be +8% and property prices have rebounded from an already high level. China is seriously overheated. It might take a few months but more aggressive policy tightening is probably on the way - look out below.

Nemo Incognito said...

I agree Skippy, though its only going to cause more cash to go into fixed income carry as opposed to equity asset carry. Long indo/malay/india bonds but probably not the equities given how stretched things are here.

k1 said...

I hate to play the permabear, but am very curious about the retail numbers. Anybody watching the Consumer Metrics Inst. numbers?


Interesting that they tell such a different story from the official numbers. Somebody's methodology is missing something.

Leftback said...

Yawn. The inventory rebuild is over but a large segment of US consumers is still broke and out of work and credit. Once China decelerates the commodity story is finished, the dollar will rally and this little bubble will pop.

"I'm Forever Blowing Bubbles
Pretty Bubbles in the Air...
They Fly so High, Up in the Sky
Then like my Dreams they Fade and Die..."

deke said...

new moon today which worked out so well for SPX tops last fall:

on the euro have to make the usual comment--->too many days without touching the 5MA

judyjl said...

an't wait for labour to trip , out of office that is. but that does leave the lib dem curiously in a position of power, which means, it's anyone's guess. the devil and the deep blue sea, wonder which is which?

looking at the markets, no one could possibly guess last year was a year of crisis.

which probably means the bubble theorists are busy "bubbling" or foaming at the mouth depending on which side of the fence you're on. betting on early 2011. btw, anyone knows what's up with michael pettis's site?

Rossco said...

Have the numbers in China become viewed as so cooked not to matter anymore ? Px action in SHCOMP nothing short of terrible for the longs

Skippy said...

Rossco, late in the afternoon in Asia the State Council announced more (administrative) tightening measures aimed at the property market, including 50% down payments on second homes.

The March CPI was 2.4%, lower than expected (as the 'whisper' suggested). However property price inflation has accelerated from a high level in March and Q1 property investment was 35.5% year-on-year.

The CPI is lower than the 2004 and 2007 tightening episodes, but the massive extension of credit in 2009 suggests that it is only a matter of time before inflation becomes a problem - perhaps it already has if you look at a broad definition (i.e. including asset prices).

If there is a correction in property prices, that would be problematic for commodity linked equities and currencies for two reasons. First, property is a large share of fixed asset investment. Second, property was used as collateral for local government infrastructure projects.

Of course, the government is petrified of inducing a 2008-style correction in the property market. But if they fail to act now, they may see an even harder landing later.

It is important to note that even in the 2004/05 'soft landing' the Shanghai Composite fell by 40% and mining equities fell about 30%.

Tyler said...

where oh where is monsieur Macro?

My information and insight is greatly diminished without his updates and the feedback from the Comments.

Writing a piece every day is very time consuming and i fear he may be enjoying the time a way a bit too much.

hope the holidays were good mate...and here is one other guy who was happy to see Duke pull it off.

Leftback said...

Hurry back, MM. Greece is so Last Week, we are already on to Portugal, and Fisher has joined the renegade Hoenig. Meanwhile, Spx is closing in on 1225 - the 61.8% retracement of The Fall.

Leftback said...

DB caught playing games in Clochemerle, while GS was confusing the good ole boys in Jefferson County:

St Etienne the Latest VIctim of Swaps

Waves of Default followed by Grapes of Wrath?

Right Field said...

Friday, April 16, 8:45 a.m. EST

Bias is Down Day…Degree of Weakness Unknown

Professionals are highly sensitive to pattern recognition, the trend where risk assets are weak pre-market and the majority of positive index contribution materializes post the European close is being questioned today. This is primarily due to the sell-off in US front end rates which us forcing US/JPY longs offside’s (carry trade unwind) and secondarily due to expiration and SPX being up 6-days in a row (+2.5%). Add in the fact that professionals are overweight Financials (GE/BAC +1.5%) and both Technology (GOOG -4.5%/AMD -4%) and Crude Oil are weak, it is easier to understand why the set up is down day.

In my opinion, the record single stock call buying skew yesterday was the most significant inflection point or meaningful metric identified in the last 2-weeks which argues caution and a potential change a market psychology. Point being, it is very clear that investors are less willing to buy cash positions now arguing a pause in higher prices. Given the room for error in Equities is small, risk assets are also rejecting top down revisions right now (GS US/EUR GDP u/g, CSFB China GDP u/g). If correct, the more pronounced weakness will be felt in Crude Oil, Small Cap Energy, Russia (RSX US), Small Caps (IWM) and Industrials (XLI). I am unsure as to the degree of weakness today, but that will be determined by professionals as opposed to real money which is a change in leadership.