By The Time You Read This...

Monday, February 22, 2010

...Macro Man will be making his first appearance on the ski slopes since the defining moment of his 2009. It's been ten months since his ACL reconstruction, and over that period he's put in more hours than he can count in stretching, lifting, jumping, and other forms of rehabilitation.

While some might think it foolhardy to return to the slopes a year after his injury, from Macro Man's perspective he had but two options: with his 40's rapidly approaching, to slide gracefully into middle age and alter his lifestyle....or to work his tail off and get back on the horse ASAP. Obviously, he chose the latter.

To be sure, he's going to dial down the intensity from his usual standard, not least because he suspects it will take some time to get used to the carbon fibre knee brace he'll be wearing. However, much like in trading, psychological factors will impact his performance, especially during the first few runs and/or mogul fields.

Anyhow, bonne chance to all readers and normal service will (fingers crossed) resume in a week's time.

Posted by Macro Man at 9:00 AM 33 comments Links to this post  

It Don't Mean A Thing.....?!?!?!?!

Friday, February 19, 2010

Well, well, well. Yesterday's fixed-income polls proved to be very well-timed indeed; Macro Man cannot help but wonder whether we would once again see 55% of the respondents vote for "no FF hike this year" if the same question were put to them again this morning. Somehow, he thinks not.

The Fed has tried very hard to downplay the significance of last night's discount rate hike. Ex-ante, the minutes of the January FOMC meeting noted that a discount rate hike did not carry on specific implications for monetary policy. In real time, the accompanying statement said the same thing. And ex-post, Messrs. Bullard and Lockhart also downplayed the policy implications of the move.

This is all well and good, of course, but from Macro Man's perch to suggest that the move is utterly devoid of meaning is patent nonsense. First, and most prosaically, if the move had absolutely no meaning then there would be no point in doing it. Even if it was just intended to phase into an ECB-style "corridor" mechanism for Federal Reserve lending and deposit facilities, the widening of the spread between funds and the penalty borrowing rate will have some impact.

After all, it's notas if the Fed discount window is like the ECB marginal lending facility- used for a couple of days around MRO maturities, and then lapsing into disuse. Discount window borrowing, while well off the peaks of the crisis, is still pretty considerable- nearly $90 billion last week. That little 25bp hike has just added nearly $220 million to the annualized borrowing costs of those institutions paying a visit to the discount window.

Finally, it's worth recalling that the Fed's initial policy gambit in the entire crisis was a discount rate cut on August 17. They also cut the discount rate on Sunday, March 16, during "Bear Stearns weekend" before trimming both the disco rate and the Fed funds rate two days later. So it's perhaps a bit disingenuous to suggest that raising the discount has no meaning when they certainly intended it to have meaning when they were cutting it! Moreover, there's nothing to suggest that "extremely accommodative" policy necessarily means FF at 0 - 0.25%. After all, consensus calls for a steady stream of positive growth quarters this calendar year; if that forecast is realzied (and yes, it's a big if), one could credibly argue that rates 100 bps higher than current levels would still be "extremely accommodative."

Now, to be clear, Macro Man does not expect a FF hike this year. He does, however, look for reserves to be drained and believes that there's a decent risk that LIBORs tick up as a result (we're already seeing that in the UK, for example.) And so from a market perspective, he has little interest in owning the front end at current levels. If we look at EDZ0 and compare it with ED4 over the past few contract cycles, we can see that it looks pretty rich (though less so than a few weeks ago, in fairness.)


ED6, meanwhile, is in the middle of the pack. Of course, none of those prior contracts traded in to the context of a discount rate hike and possible draining of liquidity. And there was still a bum-clenching decline in the second and third quarters of last year- declines that occurred with much less open interest in ED6 than the current iteration of the contract has.
So while the Fed and much of the sell side are claiming that the discount rate hike "don't mean a thing", given current market pricing Macro Man ain't biting. If the labour market improves and CPI starts registering UK-style upside surprises, would you really be surprised if there was another 40-50bp bum clencher in ED 4-8? In many ways, it would be a surprise if there weren't one. So Macro Man is content to remain on the sidelines for the time being; far better to wade in when the blood is flowing than trying to ford the river at high tide.

Posted by Macro Man at 9:09 AM 32 comments Links to this post  

Central Tendencies

Thursday, February 18, 2010

The last 24 hours have been replete with news from central banks, with minutes from the BOE/ Fed and a policy announcement from the BOJ. The first and the last were relatively uneventful; the BOJ was utterly unchanged while it seems as if Merv the Swerve's colleagues are beginning to wonder if marginal changes to the QE program are really worth the bother.

The Fed minutes seemed to provoke a bit more interest, however, given that it seems as if some FOMC voters would like to start flogging some of their veritable Everest of securities in relatively short order. This put the cat amongst the pigeons slightly, causing both Treasury and LIBOR yield curves to steepen, and opens the prospect of ongoing interest and volatility surrounding future Fed meetings, given that no decision was reached on security sales in January (but one might well be taken by mid-year.)

Given the focus in this space (and in the comments) on fixed-income recently, a commenter suggested that Macro Man open up the polls to query reader views on a variety of bond-y matters. Today, he's happy to oblige. Readers are encouraged to answer the following few questions- hopefully the formatting won't be screwy this time.



(On this one, note that the "less than 200 bps") answer has gone AWOL...if that's your view, please note in the comments.)






Posted by Macro Man at 8:49 AM 26 comments Links to this post  

TIC-ed Off

Wednesday, February 17, 2010

Another day, another bout of troubling news on Greece- the German business lobby is now calling for Greece to lose all EU voting priviliges until they sort themselves out, and Martin Feldstein is calling for a cheeky tactical exit and 30% currency realignment. Dr. Feldstein is almost certainly displaying a bit of naivete in his apparent belief that both the market and the rest of the EU would allow Greece back into the monetary union after a simple step reval.

Really, it's hard not to have sympathy with the belligerent stance of taxpayers in EMU anchor nations; Greece has pretty clearly abrogated the "social contract" of EMU membership with its cavalier tax collection and lush transfer payment policies; regardless of how this specific episode plays out, the lack of an enforcement mechanism on the fiscal behaviours of member nations represents a significant flaw in the project of monetary union.

Fortunately for the Greeks, at least some of the focus on "sovereign risk" has been diverted to bigger fish, courtesy of yesterday's TIC data in the US. This data is dangerously opaque and limited at the best of times, capturing as it does only a partial snapshot of capital flows; in a Setser-less world, it has become increasingly difficult to "follow the money."

Yesterday's TIC data was a case in point. China's holdings of US Treasury securities fell sharply, prompting reports that Voldy and the Death Eaters were dumping US bonds (perhaps as a geopolitical warning shot?) and the usual hand wringing press reports. You can see the decline in China's UST holdings below. Uh-oh, right?

Not so fast, my friend. That decline in China's US Treasury holdings wasn't a sale at all; it was simply the maturation of a slew of bills, many of which were no doubt purchased in the huge run-up of China's holdings a year earlier. The proceeds from the maturing bills would have been left on deposit, which isn't captured in the TIC data; as such, that bill roll-off simply represents a change in the assets captured in the data. Looking at the performance of Treasury bills since late November, it certainly doesn't seem as if the US Treasury has had much trouble flogging paper since China's "earth-shattering" decision.

Amusingly, despite the provocative headlines, China was actually a modest net buyer of Treasuries in December...and they had plenty of company. Net foreign purchases of Treasury bonds and notes totalled nearly $70 billion, down: down, in fairness, from November's $117.88 bio, but still the fourth highest month for foreign Treasury buying on record. Perhaps the financial press should hire Frank Drebben to report on the TIC.
Not that this means that either Treasuries or the dollar are bullet-proof, of course; Macro Man continues to like being short the "QE withdrawal" bonds markets against those that won't have to experience the dubious pleasures of cold turkey this year.

The dollar, meanwhile, has at least temporarily re-asserted its link with equities, as the DXY followed yesterday's strong "synthetic Monday" showing by breaking its one month trendline.
Insofar as we might reasonably expect a moratorium on real news out of Greece for a bit, it would not be unreasonable to expect a bit more of a bounce in the euro and other "risky" currencies. Until the EU decides what to do about its unrepentant black sheep, however, it would seem that short-covering rallies in the euro might represent little more than a selling opportunity.

Posted by Macro Man at 8:49 AM 23 comments Links to this post  

Downhill

Tuesday, February 16, 2010

Congratulations to Didier Defago, new Olympic downhill champion, for conquereing the Dave Murray course yesterday in Whistler. The run is the second longest in Alpine skiing (behind Wengen in, perhaps uncoincidentally, Defago's home country of Switzerland), and as such requires a substantial degree of stamina. It was this endurance angle that made yesterday's competition so compelling, as the fastest skier on the top half of the course (Bode Miller) plainly ran out of gas further down the mountain; it proved to be impossible to determine who the ultimate winner would be on the basis of the splits throughout the race.

It seems as if risk-asset bears will require a bit of stamina as well, as the downhill trajectory of global markets is proving to be as treacherous and bumpy as the Dave Murray. Stellar headline results from Barclays have given stocks an early-session fillip, and no doubt punters are wondering if "Magic Monday" will transmogrify into "Terrific Tuesday" courtesy of yesterday's US holiday.

Yet beneath the surface, tensions still bubble along. The Greek situation remains unresolved, and Ecofin president Juncker rubbished the notion this morning that the IMF could be of any assistance whatsoever. OK, fine, but what are the alternative solutions? A European bailout seems like a pretty unpalatable solution for obvious reasons; in addition to the questonable legality of such an outcome, it's not exactly a vote-winner in the core of EMU to subsidize a country where the national sport is tax avoidance.

So what are the options for Greece? The country is threatened by both liquidity issues (its ability to roll over debt) and solvency concerns (its ability to pay off principal and fund its ongoing outlays.) Fiscal reform is unlikely to bear immediate fruits of such richness that these problems will vanish. So what can they do?

It's impossible to formally deval within the Eurozone, though they can effect a de facto "financial devaluation" on both the liability side (via bondholders' haircuts) and the asset side (via a substantial wealth tax.) Neither of these will prove sufficient to permanently solve Greece's problems, however, especially given that they do nothing for Greece's competitiveness on the trade front.

The most likely option at this juncture appears to be what might be called the "Thriller" approach, i.e. muddling through, fighting fires on a case-by-case basis, and slowly turning into a zombie.

In any event, just because the course of markts has flattened out a bit for the time being doesn't mean that there aren't dangerous dips in store for the intrepid skier of financial markets. Over the past couple of days the ECB has seen decent demand (~€4 bio/day) for funds at its marginal rate of 1.75%; one wonders what sort of institution that has eligible collateral to borrow with this facility couldn't find cheaper funds elsewhere (such as, er, EONIA.)

In the context of yesterday's comment on the fictional nature of benchmark short rates, this demand for funds is interesting, to say the least.

Elsewhere, curves ontinue to steepen to relatively extreme levels; the US 2-10 swap curve is now basically at its steepest level of the past two decades (and that's with 10y swap spreads at an egregiously low level!) Sadly for the punter wishing to take the other side, the negative of the flattener is close to prohibitive; the 2-10 curve one year forward is nearly 90 bps below spot.
Still, at some point the flattener will start to appeal. In the last two US monetary policy cycles (really, the only two of the "swaps era"), the curve started flattening well before the Fed started putting rates up: more than a year, on average. Given the negative carry, now might not be the time to think about this trade, but should the carry become less onerous it will starg to look migty attractive. Moreover, the front end of the swap curve could come under pressure if the outlook for the financial system (jnspired by a Greek haircut/default, perhaps?) starts going downhill....

Posted by Macro Man at 8:45 AM 25 comments Links to this post  

Shift Work

Monday, February 15, 2010

Man, it seems like finance has been reduced to shift work these days, doesn't it? After being snowed in for a few days in greater NY last week, Macro Man finally made in front of his screens today....only to find much of Asia, the US, and even those pesky Greeks off for public holidays today.

Your author's sequesterment in a hotel room with little accompaniment (he only packed enough for an overnight trip) offered him a new perspective on the spending habits of the fabled American consumer, as he watched a few hours of television. Perhaps it hasn't really changed that much since Macro Man was resident in the US, but man oh man: at every (frequent) commercial break, the viewer was exhorted to spend his cash on a dizzying array of items that could be best described as "crap." Perhaps a four-piece "diamond" jewelry set from JC Penney for $49.99 really does say "I love you"....though if Macro Man were to present Mrs. M with such a gift, he suspects an altogether different message would be conveyed.

Equally jarring were the drug ads; given the ongoing debate about health care reform, Macro Man wonders how much of the prohibitive cost of prescription drugs goes to feed the pharmaceutical firms' advertising budgets. (Sure, he knows it's not large, but the contrast to the rest of the world, where drug advertising is not permitted, nevertheless jars the senses.) In any event, having watched more American advertising over the past few days than he had over the past decade or so, it really struck your author where America's relative manufacturing advantage lies. While US business isn't that great at manufacturing goods, they are second to none at manufacturing demand.

Anyhow, normal service has resumed today, albeit in the context of reduced participation. Another day, another sovereign-y debt worry, with rumours swirling about Dubai World debt holders receiving a "#1 all over" haircut on their holdings. While it seemed last night that this would submarine markets today, Macro Man has been surprised by the relative lethargy displayed on his screens.

One development that bears watching is the trend at the short end of the curve. While your author remains firmly planted in the "Fed doesn't hike in 2010" camp, Bernanke's comments on the discount rate have muddied the waters a bit. Moreover, it is curious to observe that sterling LIBOR has begun ticking higher again after the BOE did nowt this month.

At some point, playing the short end is going to get very, very tricky, for the simple reason that LIBORs are, for all intents and purposes, a complete fiction, a political construct. How much three month money do you think is being lent in the dollar market at 0.25%? Macro Man's guess is that the answer rhymes with "zero." Ditto sterling.

So if LIBORs don't really reflect underlying supply and demand conditions, how can you tell when they are going to move, and how far they will go? Will supply and demand return as a driver first? Will we need to see reserves drained to effect that transition? What, if any, impact will a discount rate hike have, both literally and as a signalling mechanism?

These are the questions that Macro Man is trying to wrap his head around. In the meantime, looking at 2y yields provides a handy guidepost to the relative richness/cheapness of short ends. To be sure, they are impacted buy things like the sovereign wobbles at the periphery, but still; they give a decent flavour for where the risks lie.

And to Macro Man's reading, the risks lie skewed to somewhat higher short-end yields, particularly if and as the Greek situation fades from prominence. Such a shift need not be seismic, nor indeed particularly painful. Still, if Macro Man were long the front end (which, alas, he is not), he'd be inclined to book some profits relatively soon.

Posted by Macro Man at 9:02 AM 39 comments Links to this post  

Normal Service....

Thursday, February 11, 2010

...will, alas, not resume this week after all, as Macro Man is snowbound in what seems like the third or fourth "Storm of the Century" this year.

It seems as if normal service has at least returned to policymaking circles, where Europe seems to have decided on a "September 2008" response to the Greek crisis: announce a rescue plan before you've decided on any of the details. The limp response this far from the euro is telling, though in fairness Bunds have reacted a smidge more. Still, market reaction is underwhelming, to say the least. "Normal service", indeed.....

Posted by Macro Man at 1:23 PM 63 comments Links to this post  

On The Road

Tuesday, February 09, 2010

Macro Man's travelling for the next few days, so will be unable to offer any updates. Readers should feel free to use the comments section for the usual market repartee, but please: play nicely.

Posted by Macro Man at 8:09 AM 69 comments Links to this post  

Returns

Monday, February 08, 2010

Yesterday proved to be a bit of a milestone for your author. For the first time since his knee injury a year ago, Macro Man held a golf club in his hand, as he made it down to the driving range to hit a hundred balls. The good news: there was no noticeable change in his swing due to the layoff. The bad news: there was no noticeable change in his swing due to the layoff, as he sprayed an astonishing assortment of slices, scuffs, and duck hooks over the range at a series of increasingly improbable angles.

Still, it was good to get back out there, and Macro Man looks forward to returning to the course (after all, someone has gotta keep greenskeepers in a job.) Friday, meanwhile, may have seen another return after a lengthy absence. After taking a few quarters off during the furious stock rally from last March, Team 1250 (now rechristened Team 1050?) appears to have emerged from hibernation.

It didn't take much- a selloff of less than 10%- to (evidently) hit the panic button in Washington; why else would the SEC announce that they are mulling new restrictions on short-selling? After an initial flurry, the market seemed happy to shrug off the news, taking the SPX down to fresh lows for the year....only for futures to ramp hard in the last hour of trade. Whether it's Team 1250, the PPT, or simply an assortment of tin-foil hats, Friday's newsflow and price action probably represented the (unwelcome) return of conspiracy theorists to the investment equation.

'Twas interesting to note, meanwhile, that the late-session US rally (whatever its cause) proved insufficient to offer much comfort to Asian equities: y'know, the ones most sensitive to growth and liquidity. The Hang Seng failed to put any dent whatsoever in Friday's gap, and indeed closed near the lows of the last six months. There's a raft of Chinese data this week, followed by Lunar New Year next week, so the next few sessions could prove to be critical for Asian stocks.
Wednesday, meanwhile, sees the return of a certain B. Bernanke, esq. to Capitol Hill to perform the latter-day Humphrey-Hawkins testimony. The subject has been prespecified as a discussion of the Fed's exit strategies, so it could prove critical for markets of every stripe. BB's predecessor, of course, would have tried very hard indeed to say absolutely nothing of substance; Macro Man would be very surprised indeed if BB didn't at least try to do the same thing-or at least keep all of his options open. Pre-committing to a given policy or timetable could potentially throw a serious wobble into markets; as we saw on Friday, that's apparently been deemed unacceptable in certain quarters.

Finally, today has seen an unwelcome return of another sort: it is once again snowing here in SE England. It's just flurries for now, though heavier stuff is expected later in the week; Macro Man (and indeed everyone outside of England's schoolchildren) can only hope that we avoid Snowmageddon:

Posted by Macro Man at 8:48 AM 15 comments Links to this post  

Horror Show

Friday, February 05, 2010

It's suddenly turned into a bit of a horror show, hasn't it? It seems as if the combined weight of Greek contagion, Chinese tightening, political risk, and so/so economic data has finally managed to break the camel's back, and Macro Man's Bloomberg screens are a sea of red this morning. Still, the market environment is quite tame by the standards of the past couple of years, so it's hard to envisage anyone outside of last summer's graduate trainee intake (if there was one) panicking too badly.

Indeed, there is still quite a bit of differentiation out there amongst popular trades and 2009's stellar performers. The "horror show" analogy can be extended, as it struck Macro Man this morning that we can probably classify trades along the lines of the US film rating rubric. Consider:

Rated G:

Good clean fun for the whole family! How else can one describe front end carry trades, the 2009 gift that keeps on giving. Sure, there's been a little bit of drama in the Euribor curve, but hey: even Bambi and Nemo's mothers got whacked. When you consider that EDZ0 is at its highs and that something like Jan '11 DIs in Brazil are stable (and offering 0.64 bps of carry per day for the time being), it's pretty clear that these types of strategies deserve (for the time being at least!) the most lenient rating.

Rated PG:

Fairly safe, but with a slight edge. That describes the last few months of trading in EUR/CEE3, which has remained surprisingly stable despite the intense pressure on the periphery of the Eurozone. Hungary is usually a prime whipping-boy when sovereign or credit risks begin to materialize, but thus far has been relatively tranquil.
The stability in EUR/HUF has generally been mirrored in the decent-quality credit space as well. Macro Man has observed before that 10 year swap spreads in the US look too low; while they are off their tights of a few weeks ago, they're still exceptionally narrow by the standards of history, let alone the crisis conditions of this time last year. What's particularly bemusing is the report of heavy buying...the price hasn't really moved.
Still, as with PG action movies, there is a faint hint of malice beneath the surface; the director could easily escalate the level of violence, and in so doing change the film rating dramatically.

PG-13:

Mature yougsters can handle it, but young 'uns should stay away: that's not a bad description of price action in financials. In Europe, for example, the banks index has fallen more than 18% peak-to-trough over the last month, which is both fairly painful in absolute terms and fairly modest by the standards of previous volatility.
Rated R:

Adults only, please. What else to call price action in copper which, after defying gravity for longer than Macro Man thought possible, has plummeted to earth with all the grace of a lead (or is that copper?) zeppelin.
The magnitude of the moves in EUR/CHF, meanwhile, pale in comparison. But with a central bank as erratic as the SNB pulling the levers, trading EUR/CHF is a bit like swimming with Jaws. First they defend 1.51 for 9 months....before pulling the bid and seeing the cross trade down below 1.47. While they've hit the market a few times since, their behaviour this morning was not suitable for young viewers. In a market trading 1.47, they put a 1.4905 bid into EBS; panic predictably ensued, stops were run....and here we are trading back below 1.4700 again. Someone in Zurich must love the smell of napalm in the morning....

NC-17:

The most explicit rating these days, and thus aptly applied to EUR/JPY, which- unlike just about every other "pro risk" asset price- is much closer to its 2009 lows than its highs. The cross has confounded the comfortable consensus on both legs, with Greek contagion submarining the euro leg and stop losses driving the yen. While other yen crosses like AUD/JPY and NZD/JPY have been relatively well behaved thus far, one doesn't have to search too hard for recent episodes where they, too, have merited the dreaded NC-17 rating.
Rated X:

Macro Man didn't realize until writing this article that the X rating was discontinued nearly 20 years ago. Still, he feels compelled to revive it this morning; while Portugal and Greece may look like PG, the price action is strictly rated X.

Portugal is the first real example of the Greek contagion phenomenon; 2 year yields were below their 200 day moving average as recently as last Tuesday; since then, they've erupted by 120 bps. With the situation deteriorating rapidly, might we see a replay of the Greek crisis (albeit without the same rollover pressure)?
And then there's the Greeks themselves, who, instead of taking one for the team, have walked out on strike rather than make concessions to the country's fiscal plight. JCT said yesterday that the Greeks are on their own, and really- with this sort of behaviour, is it hard to blame him?
Today, of course, sees the release of US payroll data, which is usually good for some Harry Potter-calibre fantasy. While the January data will be interesting, particularly in light of the recent deterioraton in claims data, focus may well be on the benchmark revisions, where the BLS is widely expected to wave their wands and intone "Opus abolesco!"

Funnily enough, despite the relative "cheapness" of the euro these days, Voldemort has been strangely absent.....

Posted by Macro Man at 8:27 AM 28 comments Links to this post  

Vegas-by-Thames?

Thursday, February 04, 2010

Readers will be happy to hear that after a lengthy, tedious ordeal, Macro Man managed to secure the requisite stamp in his passport yesterday. How bad was it? The level of bureaucracy was stunning: Macro Man had to pass twelve different interaction points before he was admitted to consult with the officer considering his case. And after that meeting, he was convinced that they had granted him de facto indefinite leave to remain....by virtue of forcing him to remain in the waiting area indefinitely. He could have sworn that he saw Godot walk by at least half a dozen times.

In many ways, it was like being in Vegas: there were no windows and no clocks, and time lost all meaning while Macro Man was there. There are important differences, of course; instead of piping in pure oxygen, the Lunar House ventilation system appears to emit methane. And at £1020 for the pleasure, it was certainly a costlier endeavour than your author's solitary visit to a Sin City casino.

Still, mustn't grumble, as the Brits say; the appalling bureaucratic waste at least has the benefit (viewed from the perspective of Whitehall) of keeping scores of people off the unemployment rolls. Despite this chilling example of "Soviet Britain" in action, however, Macro Man's labour market indicator for BOE policy still suggests an optimal nominal base rate that is negative- even with the recent improvement in the data.
It is partially for this reason that today's BOE meeting carrries some interest. Normally, one might posit that a central bank confronted with a return to real growth (however tenuous) and an inflation rate nearly high enough to merit an apologetic letter would be considering its exit strategy. Not so the for the Bank, however, as tepid M4 growth and the labour market slack could tempt Merv to take out a final piece of "recovery insurance" before he eventually swerves. If the BOE does anything (either expanding QE or cutting the deposit rate), this will be the month, as the quarterly inflation report will be released next week.

A further easing of policy would of course be a gamble for the Bank, given the likely trajectory of reported nominal GDP growth. If Merv does decide to roll the dice and ease policy, 'twould be a gamble worthy of a high rollers' table in Vegas or Mente Carlo. Hmmmm...perhaps Mr. King is angling to lead a renewed push to roll out supercasinos in the UK? Vegas-by-Thames, anyone?

Posted by Macro Man at 8:39 AM 27 comments Links to this post  

Follow Up

Wednesday, February 03, 2010

Long-time readers may recall the all time great rant in the history of this space, which took the form of an open letter to Gordon Brown on UK immigration policy. Alas, the stamp that Macro Man acquired in his passport during that episode expires on Monday, and he is therefore compelled to journey to the armpit of the universe, Lunar House in Croydon, to acquire another.

Not that this episode was without drama, of course; when Macro Man rang the immigration people on Monday to get an appointment, he was told that the first one was in March...thereby resulting in a whole host of complications. After a rather stressful conversation in which the public "servant" refused to explain his options to him, your author hung up fearing the worst. Funnily enough, however, when Mrs. Macro's dulcet Lancashire tones rang a few minutes later, a spot opened up on Wednesday, i.e. today. "When would you like?" the chap asked. "We can fit you in at 2 pm, 10 am, or whenever...."

Ugh. That's the sort of wonderful results that the soon-to-be 50% top rate of tax has achieved. Lest readers think that Macro Man single-handedly alienated the immigration people with his high-falutin' hedge fund ways, let's just say that these people are no more pleasant (or indeed helpful) to those less well off than your author.

In any event, while Macro Man is in Lunar House (motto: Gitmo without the glitter), here are a few questions for readers to consider. Hopefully the formatting will work right this time....
















Posted by Macro Man at 8:17 AM 30 comments Links to this post  

Monday, Monday

Tuesday, February 02, 2010

Yes, Macro Man knows that it isn't Monday. But many risk assets are performing like your average commuter feels on a typical Monday morning...tired, uninspired, and wishing it were the weekend.

OK, AUD has the excuse that the RBA failed to hike rates last night, though the statement probably couldn't have been more hawkish if they had....

...but what's the excuse of "Dr. Copper", which has been taken to the smelter once again? It presents an interesting contrast with recent solid PMI readings.
And the KOSPI, which Macro Man's been following closely for several months now, made a new closing low for the year. What gives?
Macro Man isn't sure.....though perhaps the anomaly is not Tuesday's price action, but Monday's. It's by now pretty well known that since the start of Q4, Monday has been something of a red-letter day (or should that be green-letter day?) for the SPX, as it's notched up 15 "wins" against just 2 "defeats", with an average daily return of 72 bps. Not bad shootin', eh, Tex?

By way of comparison, over the same time period, the other 4 days have notched up an average daily return of -11 bps; ah, there's the bear market we've been waiting for! How unusual is this? Macro Man decided to do some digging. Using daily SPX returns since 1928, he compared Monday's average return with that of the other 4 days over a few time periods.

Interestingly, since the start of the time series, Monday's performance has been notably worse than the rest of the week; despite the sharp nominal rise in the SPX over that time period, Monday's average return has actually been negative!

Since the start of the crisis, meanwhile (defined as August 2007), most of the SPX's losses have come on Mondays....the return from Tuesday - Friday has averaged just -1bp per day.
So perhaps this little "Monday effect" that we've observed is just a statistical quirk, representing "payback" for the unusually poor performance of Tuesday-Friday over the last 18 weeks or so? Maybe, maybe not.

Macro Man looked at rolling 18 week windows (i.e., the time period of recent Monday outperformance) since the start of his time series, comparing Monday's relative performance with those of the other 4 days. Let's just say that if Monday's recent outperformance were a school kid, it would get bundled straight into the "gifted and talented" group, as it's in the 99+% percentile of performance. The same holds true if we expand the dataset to look at relative performance of every day versus the other four in 18 week windows. The current bit of Monday outperformance is in the 99th percentile.
Now maybe it really is just chance...or maybe the tin foil hat crew are onto something Perhaps we'll never know, at least until the current crop of Federales get hauled before another Congressional committee.

Anyhow, Macro Man's advice is to enjoy Monday's while you can...reality will no doubt start to bite sooner rather than later. For the chap in the background of the video clip below, Macro Man somehow thinks it might be sooner....

Posted by Macro Man at 8:48 AM 21 comments Links to this post  

The Devil's Dictionary Of Financial Terms

Monday, February 01, 2010

With apologies to Ambrose Bierce....

agency, n. A criminally negligent organization that purchased and securitized mortgages; a criminally negligent organization that rated mortgages and mortgage securities. The agencies were late in downgrading the Agencies.

bailout, n. A notorious regressive tax; the public underwriting of stupid bets made by overpaid morons. Can you believe their bonus pool was $16 billion a year after the bailout?

bail out, v. To selflessly save the global economy from depression and mass unemployment. If we hadn’t bailed out AIG, the unemployment rate would be 25% right now!

bubble, n. Part of the dual mandate; the monetary policy goal of the Federal Reserve and the People’s Bank of China.

carry trade, n. A financial proposition that concludes with its adherents supine, carried out on a stretcher.

CDS, n. The simultaneous purchase of kindling, lighter fluid, matches, and fire insurance on your neighbour’s house.

conspiracy, n. The only possible explanation for certain types of irrational price action. There’s a government conspiracy to support the stock market; how else could it have rallied 70% since March? A crackpot theory held by nutjobs who can’t admit when they’re wrong. Have those conspiracy theory whackos never heard of an oversold bounce before?

credit, n. An asset universally reviled by financiers during a crisis and claimed by politicians after it.

crisis, n. A frequently occurring one-in-a-lifetime event, generally deemed impossible by those under the age of 28.

exotic, adj. Strange; unusual; rarely-seen. I didn’t think it was possible to lose $200 million in fifteen minutes, but the exotics book just did.

hedge, n. A line of closely-grouped shrubberies; a clever way of adding correlation and volatility risk to one’s portfolio.

hedge, adj. A type of investment fund generally accepted to be dedicated to the proposition of ignoring hedges of every description.

house, n. An abode; an investment. Formerly an asset, now a liability.

leverage, n. The act of turning your problem into our problem.

mine, adj. Trader-speak for a desire to make a purchase. 50 EUR/USD mine, shagger. The sole source of responsibility (and thus the rewards) for a successful trade.

option, n. A financial instrument that offers multiple ways of losing money. If being long vega doesn’t kill you , the decay will.

quantitative easing, n. An unorthodox monetary policy that targets increases in high-powered money rather than interest rates; the act of throwing sufficient sums at the financial system to ensure that the stock market starts to rally.

restraint, n. An undesirable spending habit rarely observed in public; an offense punishable by a targeted taxation regime.

risk, n. A binary analytical framework for the simpleminded; can be either off or on. A characteristic of investment that was largely forgotten in the mid-Noughties

SAFE, n. An organization dedicated to perpetuating dangerous global imbalances.

sales, n. The art of separating a customer from his money.

seat, n. The world’s most valuable furniture; a place at a market-making franchise desk at a bank. Fred made $15 million quoting prices last year, but the seat is worth $25 million!

subprime, n. An ingenious method of granting credit to the poor, thereby narrowing the wealth gap between the classes. Dick Fuld lost $650 million after Lehman’s subprime bets went sour.

volatile, adj. The temperament of your average trader on a bad day; the likely future state of financial markets after long periods of low interest rates.

Warren Buffett, n. Ebenezer Scrooge with better PR.

yacht, n. A monetary black hole; an aquatic trophy rarely seen in close proximity to banking customers.

yours, adj. Trader-speak for a desire to make a sale. 500 e-minis, yours!! Whose responsibility the average bank, insurance company, or housing agency thinks it is to pay for the financial crisis.

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