Friday, October 26, 2012

I'm a CTA... Get Me Out of Here!

 One of the elephants in TMM's room has been the behaviour of the markets in the US morning. Strange things have been afoot that have had us scratching our heads as to what piece of macro is missing from our puzzle. But of course as we alluded to yesterday, one can never just focus on one of the many functions that drive a market and indeed TMM are following a scent that leads them to an old favourite - positioning. 

Glancing through some of the recent performance figures at some of the larger CTAs,  it's apparent that the last month has not been a time of deep joy. So putting 2 and 20 together, along with some clues from some recent regular intraday move timings, TMM are getting the sense that the past two weeks' correlation break down can be explained by CTAs reducing their equity and bond longs, and also their Usd/Jpy shorts in a "Help! I'm a CTA, get me out of here" exodus. 

Interestingly, whether because of the "get me out of here" move or just because of [insert popularist reason for equities going down], Eminis have now done a 5.01% (remember spurious accuracy confers authority) move peak to trough. One argument we have heard from bears was that we haven't had a 5% correction for ages. Well we have now. Will that do? the 100day moving average is not far below around 1391, but without further significant CTA unwinds it may be hard to breach. 

Now something else. As one goes through an existence in markets one of the human characteristics that displays itself is, despite all logical reasoning, spurious pattern recognition. In fact the market and media rely on it. It was only a week ago that every down move in equities was being blamed on the 25th anniversary of the 1987 Great crash. But anniversary events are rarely repetitious. Ok, yes they are in a calendar terms and yes, some of TMM's family Christmases have been exceedingly repetitious re sock presents, but anniversaries of horrors rarely repeat the horror. If you are concerned about anniversary dates then we recommend a temporary flip back to the Julian calendar from the Gregorian and then back again thus avoiding the problem. Just as we advise reciprocating round numbers in FX to avoid "Bigfiguritis". 1.3000 Eur/Usd becomes a lot less important when it's 0.7692307 Usd/Eur.

But having said that, there has been burnt into TMM's mind a couple of seasonal turn dates. One has been the 16-18th of July and the other has been that you buy  October the 27th. This has always been a supposition rather than anything proven but we did find THIS  that does sort of substantiate the feeling.

 Of course we have a wee event coming up that we should meld into our date selection. US elections. Sitting on the London side of the pond TMM get the feeling that our US friends are still overestimating how close the election will be and we wonder if this actually due to a reporting bias coming from our Wall Street brethren, driven by their own desire to have a tax cut (Tin Hats TMM - Think that might light the comments column up as we have just broken rule 1 - Never mention politics, religion or gold prices). But we do have to have a look at our scenarios. 

Option a)  (our expected one)  Obama wins - perhaps we see a knee-jerk sell off in SPX - But we buy the dip.

Option b)  (not expected) Romney wins - look to sell late December given his economic policy will be sure to cause a near term recession.

But whoever wins we think equities run higher 'til Christmas.

 So when do we buy? Well to be honest we have a fair amount onboard already and are toughing it out despite some delta adjustment style trimming, but what little room to add we have we will be using on Monday and then the famed election. 

But for now, whilst the CTAs cry "get me out of here" TMM are hunkering down eating Witchetty grubs hoping they don't get voted out of the competition.

Thursday, October 25, 2012

Calculated Stupidity

Yesterday TMM were tripped into thinking about the complexity of algorithms and their place in this world against old fashioned humanness.

 This subject quickly emerged in our chats with respect to markets, with most of TMM expressing the opinion that none of  them had an intelligent thought to express today. This then led to the observation that there was little point in having an intelligent thought as this year has seen supposedly intelligent process regularly run down by algos anyway. So perhaps the non-clever clever thing to do instead, to counter the algos, would be to put on trades that are so unimaginably stupid on conventional levels they may just be stupid enough not to be sniffed out by the clever bots. "That'll fool em !"

Which led us to consider the background issue of the European Parliament and their budget process - Could it be that they've been using this method of "so stupid it may just work" for years?

 But back to High Frequency models. Though TMM have found themselves run over by them in the past, we don't feel it fit to complain other than about ourselves as we are not evolving fast enough to anticipate the "thought" processes of this type of player that now sits at the poker table of markets. TMM do not think the answer is to ban them from the casino just because they win at other people's expense but to learn and adapt. TMM simplistically think that if algos are causing distortions in markets that move prices to places they really shouldn't be on your own measure of value, then you should celebrate the opportunity they give you (even in flash crashes) not curse them.  If however your view is that they are terrible because once you own the position they push prices through your stop loss, then really you do have to get a grip on what markets are. If someone owns a share then they should be allowed to sell it for whatever reason they like, whether you agree with their method of analysis or not. That's just how it is. If we start stipulating the methods of investment process a fund manager has, or even day punters, then you might as well fix prices daily at a committee made up of members who have elected themselves as spokespeople to represent only their own views over those of a huge disparate seething mass of differing opinions.

Oh good Lord. No! It can't be that we have just described the EU Parliament and their budget process again, could it?

But HF algos weren't actually the trigger to this debate, it was started by the problems we humans have now convincing computers that we are humans and not other computers. Most web pages insist on the user going through some sort of test. It started fairly easily with typing in the clear letters displayed in a box, but now one has to squint through reading glasses at a blurry picture of someone's door number and then untangle a ball of string to pick out the letters of a word that isn't a word. It's a nightmare. Even persuading a bank telephone service that you are a) human and b) not a human criminal mastermind is equally challenging. Don't they realise that they are creating, through Darwinian selection, a process that will ensure that only algos will ultimately be able to pass these tests?

  If computers are so so smart these days, then TMM suggest that instead of trying to prove our humanity through higher intellect we should switch tactic and instead prove our humanity through our stupidity. 

"Can we have the 3rd, 75th, and 125th Cyrillic characters from the original Tolstoy novel we gave you to read when you opened this account followed by the hash key?"

" I never saw Toy Story and what the f is a hash key? Just gimme my balance you f'in stupid machine" 

"Thank you we have identified you as human, we will now connect you with another human who will be able to understand your low level intellect"

 " XXXX off"

Or just stick a "please use other door" sticker on the only opening door of a pair. That should keep the bots out but let most of humanity in.

Or perhaps we should just go short of usd/jpy.

Wednesday, October 24, 2012

Introspection Day

Today the financial blogosphere has lit itself up with some introspective self-illumination as to what is happening within the structure of the financial blogging space.

Abnormal Return's Tadas Viskanta  kicked it all off and has obviously twanged a nerve throughout the community as the marvellous Josh Brown picked up on the theme , Felix Salmon then wrapped up those 2 posts and others are joining in.

Team Macro Man, for their pennyworth, cast their vote behind Josh's Third theorem of Financial Blogging evolution.

"My third theory is probably closest to reality, though:

3. Many bloggers have simply been so completely dead wrong about the post-crisis period we've been in (Hyperinflation! Depression! Social Unrest! Hoard Water and Dry Goods!) that they simply have no audience left. Keep in mind that many of the 2008-2010 generation of bloggers were misanthropes who had been rooting for a collapse all along. They came out of the woodwork and began blogging motivated by a mixture of I-Told-You-So schadenfreude and the desire to predict the next crisis, which was obviously an imminent thing. Only it didn't happen (I know, I know, any day now). And having blown all of their personal credibility on failed Cassandra-ism, having recognized what a horrendous disservice they've done to those who've heeded them, they've simply moved on. Many went to Twitter instead where there is a less permanent record of their bullshit.

It should be noted that we witnessed this exact same exodus in 2007 and 2008, but during that period it was the more bullish bloggers and stock pickers that disappeared. They too experienced this sense of guilt and purposelessness when the wheels fell off and all of their investment ideas became humiliating at best and dangerous at worst. Inevitably, the wheel will turn again and the doomers (along with their blogs) will make a comeback. I look forward to it - those bloggers are far more fun to read than today's Apple-worship crowd."


But TMM would like to add their own metric to the calculation. The actual interest out there in all things financial to the non-financial folks who only become marginal financial folks when there is a buck to be made, a trend to be followed or a disaster or boom to be called. When things flat-line they swiftly retreat back to the real world. We have long held that our readership figures and indeed comment count, are highly correlated to bearish disaster markets. This accounts for the disasternista blogs and followers that Josh alludes to and certainly our trend towards bullish views over the past year seeing a fall in readership. We have long felt that the blogosphere is an environment where readers go for substantiation of their own prejudices, "free money" ideas, self-promotion through comments, humour and finally for intellectual self-improvement.

So what has 2012 given the reader? A year of stalemate between bull and bear, a year of no bust and no boom and a year of flat returns (yeah, yeah OK apart from you dear reader, we know you've done really really well through genius etc etc). But really, if you are a disasternista you have retreated to Zero Hedge's citadel, the bulls have retreated to regular bank research where, excepting the showmen "Albert Edwards" of this world, there is a tendency towards positives and everyone else who was being kept interested by the high octane of the past has basically wandered off to pursue their proper jobs. Lucky buggers, as some of us are left HAVING to scratch a living in the drying pond of finance.

And have the markets been tough? Yes. And are the men in the middle feeling the pinch? Yes. And is it just coincidental that the outbreak of introspection is not confined to the financial blogger but is being expressed right across the field of finance? Here is a very interesting take from the inside on FX.

So if the markets are rubbish and the readership is losing interest then why carry on? Everyone has their own reason but as far as Team Macro Man go we have had our doubts as to the worth of why we are doing it and have been through our own period of introspection.

We took on the role after being asked to keep the flame of Macro Man alight as the original had to depart the blogosphere due to a reason not quoted elsewhere - Employer restriction (it is worth considering this function as a filter bias towards the type of folks that do actually blog). We were hugely flattered to be considered for the role as none of us had any experience in public writing and it was a huge challenge, but the ethos of writing to test one's own ideas in a forum has always been key and has indeed been very useful. As long as you have some. When we started, ideas were coming as thick and fast but this year has seen long periods of us just riding old themes and yes, post frequency does suffer. Unlike a newspaper that always have to have something on the front page no matter how trite, we can just not publish.

However it has been tough and we have been pretty close to calling it a day this year as the other great pressures we have in our day jobs dominate. When times are hard work has to take preference over the hobbies. And as a non-profit non-advertising blog, this really is a hobby.

In summary, we don't think the introspection of the evolution of the financial blogger is a one off. It is more a symptom of a general introspection the whole financial world is feeling in the face of a rapidly changing environment.

However, Team Macro Man will keep plugging on.

Tuesday, October 23, 2012

False Dawn Or False Dusk

Much like watching animals in a zoo, particularly dangerous ones, rangey markets create excitement the closer they get to their boundaries. Last week's excitement in the bull pit has already faded as the beast retreated back into the shadows and today the excitement is in the bear enclosure as equities approach various supports. But TMM are as sanguine as ever towards many of the screams of encouragement.

As far as earnings seasons go, this one has been somewhat disappointing. While earnings have beaten expectations, they have not done so at historical beat rates, revenues have missed and guidance has been rather downbeat. The question, as always, when interpreting such releases is deciding whether (a) the information is new, and therefore forward looking, and (b) what the implications of that news are. So what do we learn from these reports then? Global growth was pretty weak over the quarter - particularly in China and in Europe, CapEx intentions have fallen in the face of electoral and fiscal cliff-associated uncertainty. Well TMM would argue that none of those are particularly ground breaking observations, in the light of the macro data over the summer and the constant barrage of debate around the election and the fiscal cliff. And on the guidance front, it doesn't exactly seem as though corporates know any better than the rest of us, with Caterpillar, for example, forecasting that their earnings over the next year would be in the range +5% to -5%. i.e. - "We'll either make more money... or we'll lose money". Thanks guys, really insightful.

So in our eyes, while bears are excited to seize on disappointing earnings news, TMM reckon these are all a bit backward looking. And there are several reasons why. First, unlike late-2007/early-2008 when earnings news began to worsen, policymakers are no longer behind the curve - cast your mind back to that period, and it was marked by large intra-meeting rate cuts by the Federal Reserve, attempting to catch up with the fast-deteriorating economic data, while the ECB and BoE refused to ease policy due to still worrying about inflation risks. This time around, earnings season has come just a few weeks after the most extraordinary central bank easing measures introduced to date: QE-Infinity and the ECB's OMT. These have had a dramatic effect in easing financial conditions over the past six weeks, the effects of which will not have fed through to the real economy yet - it's just too early. Markets, as forward discounting machines, are likely to concentrate on future earnings, rather than backward-looking ones.

Second, again - unlike late-2007/early-2008 - the economic data has begun to rebound: particularly in the US and Asia, but also in Europe. The bottoming in PMIs, exports in Asia and the reacceleration of China into the New Year are all positive for earnings going forward. Third, it appears to TMM that many are extrapolating the weakness seen in Tech earnings to the broader market, but that masks a rotation that is ongoing and a positive one at that - out of defensives and into cyclicals (See below chart of GS Cyclicals vs. Defensives).

Fourth, the weakness in risk has thus far appeared restricted to equities themselves, as cross-asset correlation has collapsed, as has that of the index itself (see below chart of implied correlation). Add to that the volatility bleed across the board as central bank liquidity suppresses risk premia, and it is hard to get to get too excited about a down trade. That said, as per TMM's last post, we do advocate buying cheap tails for protection.

Fifth, regarding the election and fiscal cliff debate, TMM are of the mind that this is a two stage wall of worry. Once the election is over, that is one hurdle of uncertainty passed, and markets are likely to squeeze higher, no matter who the winner. And secondly, TMM struggle to think of an "issue" that markets have discussed both so much and so early, than the fiscal cliff. The result of that, in TMM's minds, is that the market already discounts a significant probability of going off the cliff, and that even a going over the cliff for a few days until an agreement is made is unlikely to phase markets much beyond a knee-jerk, and certainly not anything like last August's broad de-risking. This is as much a fact of investors not exactly holding a huge amount of risk.

Finally, while last night's late rally was attributed to a spurious article suggesting further FOMC easing, it has been noted by many that there are often mutual fund inflows at the close. And the large nine-week stretch of equity outflows finally came to a close last week. So TMM are of the view that real money is likely to be accumulating length into weakness - and the low volume sell off this morning feels to us as though it is merely HF and CTA activity. Absent major macro news, TMM would argue the old adage applied "don't sell a quiet market". Buy the dip.

Thursday, October 18, 2012

Buying the wrong tails

The Chinese data overnight isn't a game changer, but supports the increasing sense seen both in data elsewhere and in prices that China has indeed had a soft-landing and is beginning to recover. Of course, while the lack of catastrophe and the turn in the Pork cycle means that easing is unlikely to be aggressive (2008/9-style), in the absence of "new" news to conflate the Asian recovery story that the trend is in place. As indeed it appears to be in markets in general, as somehow Spain has managed to get its 10yr bond yield down to 5.5% despite a lack of ECB buying. Remarkable.

Now, onto something else that's been bugging TMM and spurred something of a debate. What is going on with the seeming monotonic collapse in the Libor fixings and commensurate cheapness of the 2yr USTs. It seems somewhat incredible to consider that 2yr swap spreads at 9bps sit at close to their record tights given all the Libor shenanigans, and general concerns about bank solvency in Europe. But that is where we are.

And when compared with Schatz, in particular, it seems even more confusing. TMM totally get the EMU-break up option priced into Schatz. The trouble is, that while the pay off in such an event will of course be massive, the probability of it being triggered was always pretty low. And put in the context of what appears to be a drive in Europe towards fiscal union (of a sorts) and the ECB's determination to "do whatever it takes to preserve the Euro" (see OMTs...), even the most sceptical would have to concede that the probability of a Euro-break up has fallen by a significant degree.

But upon drilling down into the constituents making up the swap spread, comparing 2yr UST with OIS and Schatz with EONIA, it seems that the value of the liquidity option priced into Treasuries is less than that priced into Schatz, at -11bps vs. 7bps. This relative premium began to appear in Spring 2010 as the Euro-crisis flung itself centre stage and reached its wide just prior to the LTRO.

Though the Schatz leg especially has retraced quite a bit since the Greek election, TMM still reckon that this relative pricing is wrong. Because back in the old days (well, not even that long ago), when there was a liquidity crisis, or EM crisis or even any old "risk-off" event, it was the front-end of the UST curve that saw the greatest flight to quality and associated liquidity premium. And in all such events, German short-end paper underperformed the US. Of course, that all changed in 2010. Or did it? Since then, the majority of liquidity events have been Europe-centred, and particularly around the potential break up of EMU. So given the Deutschemark call option, it certainly makes sense. But TMM have found themselves wondering if the market is mispricing the relative liquidity premia here: Schatz may well have performed better in recent history, but it is only likely to perform in an EMU-breakup event, while USTs can perform in any idiosyncratic risk shock (Iran, a Brazil blow up, a Chinese government collapse etc etc).

A discussion with fellow punters yesterday afternoon saw TMM's view met with some scepticism... even suggesting things like FRA-OIS could go to zero (more on that below...), or that there is no point trying to buy 2yr Notes until Operation Twist is done, given that O/N General Collateral is 30-ish bps. The latter is certainly a reasonable view, but by the time Operation Twist is done, the market will likely have moved already. And TMM were always taught that when liquidity appears abundant everywhere, it's worth shipping some in as a hedge against a long risk portfolio... of course, the daily P&L bleed becomes frustrating and it's very easy to then stop out... only to see the thing rip back up straight away, leaving your book exposed. Lessons learned the hard way. But it does seem to TMM as though perhaps the market is so focused on EMU break up risk that it has forgotten everything else that can happen and is buying the wrong tails. It's also worth noting, that usually you only get *really* paid to own convexity when an idiosyncratic "unknown unknown" event hits.

Anyway, back to relative valuations.

Generalised risk events seem to arise about once a year... often twice, but let's be conservative. In days past, this has sometimes meant as much as a 20bps move in spreads. Of course, now, there is bucket loads of liquidity everywhere, supplied by the world's central banks. So it is probably fair to accept that such moves will be less than in the past, but again, liquidity often appears to be an illusion when the sh1t hits the fan. Anyway, this is only a back of the envelope exercise, so let's guess we only move 12bps which would be about 60% of prior moves (and would roughly corroborate with the move seen ahead of the Greek election). On the Schatz side, in a full break up we could imagine a price move of say 20%, which is roughly something like a 900bps move. TMM would argue that policymaker commitment has reduced the probability of such an event to something like 1% per year. So the expectations would be 12bps per year for the UST (100%*12bps) and 9bps/year for the Schatz (1%*900bps). TMM are perhaps being a bit naughty here given that Schatz would also rally in a generalised risk off, but then, in an EMU-break up event, UST would arguably rally significantly too, so it's not too much of a stretch to argue that the liquidity option priced into 2yr Notes looks like it is now too cheap relative to that priced into Schatz.

Onto the other part of swap spreads... Libor...

The Wheatley Review - amongst the general amount of liquidity everywhere - has driven Libor fixings down as banks crowd for fear of getting sued and given the fact that US Financial CP rates are around 15bps, there's certainly the argument that Libor should be lower given the concept of bearing some resemblance to "market-traded" rates. The trouble is, the Libor spikes of the past couple of years have never been about US banks: instead, by the marginal borrower from Europe, and the overall rate is going to be a blended average of all these borrowers. The chart below shows the US Financial CP rate (orange) as a proxy for US banks, Natixis 90d USD CP (red line) as a proxy for the higher-quality banks in core-Europe issuing directly in the US, the rate implied from borrowing at 3m Euribor domestically and swapping into USD (for those European banks that are able to borrow privately in Europe, but not directly in the US), the rate implied from borrowing at the ECB's MRO/LTRO and then swapping into USD (for those banks that are unable to borrow from anyone apart from the ECB). Obviously, since Draghi's game-changing speech, all of these measures have moved lower. The question is, how much lower can these now move, given the dramatic normalisation seen so far?

It's not easy to know how to weight the above measures, but given this is all a back-of-the-envelope exercise, a simple regression is probably the best way to get a sense of things (see chart below). And looking at that, it's possible to argue that the 3m Libor fixings have over-shot the actual funding market improvement.

Putting all of the above together, TMM reckon buying 2yr Swap Spreads in the US, buying 2yr Notes outright (assuming Ben keeps his promise) and buying 2yr Notes vs. Schatz all look like reasonable ways to get some tail hedges on the book.

Tuesday, October 16, 2012

All Talk and Missing the Action

We should do that more often. When we want markets to move we should write about them being dead because it's all a bit interesting again and debates have been raging in camp TMM. 

It all kicked off in the TMM camp this morning with a debate as to whether Krugman was a genius, or just a once genius who has now been swept up by political hackdom, accidentally wandered into the BBC anti-austerity camp, been given a cup of tea and if not careful will go all Niall Ferguson on us.  Let it be recorded that to allay further dispute an entante cordiale was signed amongst us agreeing that the BBC were so stuffed with their own economic sensationalist agenda that it was THEIR fault and we'd leave Mr K out of it. His genius (or not) should not be judged over a bleeding obvious "may or may not" statement as to the worth or failure of UK austerity plans. Maybe Krugman is to the BBC what Jack Welch is to conspiracy theorists.

Next came the discussion that QE operators may be considering ripping up the debt they bought. Not much of a debate, but where Gold would go on it was, mostly resting on the number of noughts on the end. 

Then there was  *GERMANY OPEN TO PRECAUTIONARY CREDIT FOR SPAIN, LAWMAKERS SAY, Leaving German debt asking the market-  "Do you expect me to Pay" and the response -  "No Mr Bund we expect you to die". It does smell as though the Spanish comments for no need for ESM may because they are actually arranging a "Bailout Lite". 

Then there was Canada - Carneys dovish comments have shoved CAD off its perch and even the stalwart last bastion of AUD shortness,  AUD/CAD has started motoring higher. (no bad thing for TMMs AUD positions)  but Carney's status led to further debate over the next Governor of the BoE and how, as with Soccer managers, it is no longer compulsory to have a CB governor of team nation origin. Soon followed a resurrection of TMM's game of Fantasy Central Bank, where we select our dream team of central bankers and policy makers for our ultimate "Policy Makers United" team. Judging by past England football performance perhaps we should leave Italians and Swedes out, but Draghi's heroic efforts at the ECB have him a firm favourite. The results will maybe make a later post.

Whilst all this was happening we were steadily missing the development of what now appears to be the strongest possibility we have had for a break higher in markets for a while as various earning continue to "surprise" to the updside. How many "surprises" make a "huh"?

  Finally TMM are getting a little bored of random indicators popping up and being lauded as heralds of either the next big crash or rally or Mayan end of the world. Coppock has cropped up again and we add it to Hindenbergs, Battledeathcrosstar Galacticas and all the other "no no really, it really works" indicators with silly names they have in their bottom drawer of indicators that don't work.

If it really is that easy then TMM wish to join in and launch their own TMMLTBI (Team Mystic Meg Load the Boat Indicator) 

TMMLTB Indicator - Team Macro Man have developed the TMMLTB Indicator with one sole purpose: to identify the commencement of bull markets. The indicator was devised for use on making shed loads of money but is suitable for use on any market index or average, pint of beer or bottle of wine.  

This indicator is currently sitting at BOLIVIAN.(see glossary)

Monday, October 15, 2012

Tax the Car to Save the Cart

The China data is on the face of it a bit of something for everyone. The headline's were a surprise to some, but not to all (see our last post), but market response has been pretty muted and in general are pretty quiet, which is a theme that is probably worrying anyone who has to make a daily shilling to pay the fixed costs that don't go away. Fine for the long term investor, in fact a relief, but for speculators without other day jobs it must be getting painful.

Market volatility falling
Market volumes falling
Opportunity falling
Margins tightening
Profits falling
Speculators being squeezed out.
Reduction in staff levels at banks.

 Does it sound as though the score is
Regulators 1   -  0 Finance Industry ?

If the public, political and regulatory environment is morally against you making money by any other means than being a nurse, teacher or doctor is it worth trading in markets that are under more scrutiny and where profits are more highly visible.? Is the reaction of public opinion and regulatory oversight driving those on the margins that most need regulating out of sight? Why ever list and bear the burden of regulatory burden or shareholder pressure when instead you can fund through loans through private investments? Why list as a fund when you can slip below many radars as a "family office"?

So that's the financier's argument - Regulation stealing our lifeblood and driving the margin underground. Now TMM have never been in favour of such idiotic ideas as transaction taxes or procyclical accounting rules, but they do get a sense that their compatriots are not being entirely honest with themselves. In TMM's careers, trading floors have been stuffed with plenty of eejits that can barely count, let alone exhibit analytical understanding of the complex drivers of economics, markets, or even things as simple as what a cash flow actually is.  In prior jobs, TMM lost count of the number of times they were asked to do a USD/JPY trade for "value yesterday" - it is staggering just how many in finance do not understand what happens once you have pressed "Yours" or "Mine" because, you know, it's kind of important (especially when your counterparty is about to go bust).

Without wishing to spark a debate about academics vs. practitioners, because this is not at all what this is about, TMM reckon that the inability of the industry to make money post crash and the associated staff cuts, are more a case of The Invisible Hand catching up. Witness, for example, the creeping transformation of businesses like FX towards the Sales-Trading model or even just the Direct Market Access model (see the eruption of electronic platforms).

Ditto, the realisation that under Basel III - a regime that has deservedly met much criticism for its pro-cyclicality at a time like this. But if you designed a regulatory system for banks from scratch, you probably wouldn't have designed anything particularly different. So TMM are continually reminded by a UBS report last year suggesting that BarCap would never have turned a profit over the past decade or so (we forget the exact dates) under such a regime.

So the question becomes - and this relates to a previous post on RBS and UK banks- to what extent did banks merely make profits as a result of the implicit subsidies put upon them. And related to that, their staffing levels - it is particularly staggering in the UK that productivity in the financial industry has fallen dramatically and has been suggested as one of the principal contributors to the UK's productivity puzzle.

So is the conclusion really that it is NOT:

Regulators 1 - 0 Financial Markets

And instead:

The Invisible Hand 1 - 0 Financial Luddites

Now let's have a look at private wealth buying up productive assets. As "C" put it in comments to our last post - 

"With hindsight somewhere down the line I think the world will wake up and realise that while most of it was hiding, long term real wealth was busy buying up the worthwhile productive assets available. I really think that is what is happening quite insidiously many of today's assets won't be coming back for sale at significantly lower prices for the foreseeable future. They're now being held by people who don't need ,or want to sell simply because there is an ever diminishing pile of worthwhile productive assets left to chase with whatever money they liquidate."

TMM  agree that this is happening but the argument that regulation is driving deals underground or at least away from regulatory scrutiny does not pass muster as the one true driver. There are plenty of agreements now between tax havens and "everyone else" to go after these kind of things too re: regulation/taxation. Perhaps the real reason, is a function of Mark To Market  volatility as you don't have to MTM private holdings in the same way as listed equity. Exactly what we are seeing with volumes falling as faster money is being transferred to "stronger hands". Long term 1 - Short term 0.  The fact that equity is so cheap, with the Equity Risk Premium at levels not seen since the early 1980s,  makes expected returns look fantastic especially against debt. De-equitisation has certainly been a theme over the past 5 or so years and TMM would argue that this is more the reason than anything more sinister.

So TMM are left in conclusion that the reduction in volumes, the reduction in volatility, the pressure on margins and the evolution of markets is part of a natural rebalancing that has been long overdue and it is unclear as to whether any one set of factors can be blamed more than it just being a natural confluence of inevitability. But as we know, everyone has an agenda and there are enough excuses for failure amongst the probable causes for everyone to find their own "not my fault guv".

Monday, October 08, 2012

Asian Exports Turning?

Well TMM had a weekend that that belied the rather pleasant weekend weather in the South East of England. If bad things come in threes then we are in credit for a while. Nothing serious such as health issues but every job embarked on turned into a cascade of disaster. TMM call it the photocopier syndrome when just sending out a copy of a document turns into a nightmare involving phone calls to photocopier help desks, keys to stationary cupboards being locked in drawers of secretaries who are out to lunch and finally ends 6 hours later being covered head to foot in photocopier toner (probably with your trousers missing too). Which is just like our frustrations in today's markets - only it feels that if we are not careful the colour of that toner ink will be red.

Our micturating into the gale force blast of AUD bearishness has left us just above our stop loss positions and seeing how AUDJPY and everything JPY crossed has taken a battering this morning we are sanguine about the outcome . Brace yourself boys this might hurt. Equities are however holding better.

Today is back to "Price is News" and it does feel as though the market is scrabbling around for fresh bad news to pin on the lower numbers. To TMMs amazement and to some extent interest as surely this must be the real lesson, Jack Welch has become the mascot of every conspiracy theorist out there. If Jack Welch says its conspiracy then it must be conspiracy. All TMM can do is remind folks that there was once a time when Tom Cruise and David Icke appeared normal.

Moving on...

TMM have been watching with some interest the Asian export data that seems to have been largely ignored by a market that believes that the China slowdown and that of the region more broadly, is the only game in town. Fair enough. The trouble with this view, however much policymakers (and Jim O'Neill) carp on about economic rebalancing within the region (or the much vaunted capital outflows from China) is that the evidence is not particularly convincing. At best, the externally led slowdown (driven by Europe and the US to a degree), has optically meant that consumption and investment have ticked up a bit (mainly as a result of exports to Europe kind of, well, collapsing), but also in halting one of the primary themes of the past decade - that of Asian FX reserve accumulation as the US and Europe have imported less. It is easy to see how the story of capital outflows and the end of the Asian currency appreciation story could be spun, particularly given the outflows seen from China earlier this year.

But it's all kind of stopped now, with Asian central banks once again being forced to intervene to weaken their currencies, USDCNY spot trading at the bottom of the band (as suddenly onshore banks have found themselves long of Dollars) and there are signs of an export-led recovery in the region - once again the function of ISM and its Orders/Inventories components bouncing dramatically over the past couple of months. Indeed, putting this together with the stabilisation in the European PMIs, TMM's model of Real Chinese Export Growth is signalling a reasonable bounce:

So far, so just a model... But last week's Korean Export figures showed a robust bounce, particularly in electronics. And Taiwan's export numbers this morning similarly showed a dramatic improvement, beating expectations for just a 1% YoY increase, to +10.4% YoY. And it does not appear to be the result of any particular distortion, showing broad-based strength across the board, in terms of sectors. When looking at the regional breakdown, however, it becomes a lot more interesting: while exports to Europe remain weak, falling 10.5% YoY (though up from -17.4%), exports to China jumped 6% (vs. -5.7% last month) and to the US by 2.7% (vs. -8.4%). And this, in a month that traditionally see exports fall, seasonally. This is a big turnaround from the weakness we have seen over the past few months and suggests that activity has begun to rebound.

One of TMM's pet hates is the seeming inability of commentators to look at Real Export Growth rather than the Nominal numbers, especially when these statistical agencies so generously provide us with Export Price data... Nevermind... Anyway, the below chart of Real Export Growth in the region also suggests a rebound, while Singapore lags somewhat, and is one of the main reasons TMM have liked shorting SGD vs. the basket as something of a hedge for their long risk views. Though, going into the MAS meeting this week, the risk reward is probably not enough to be adding to that position right here, especially given the impression that we are not alone in this trade.

So, adding it all up, TMM reckon with China back this week, the potential is there for the market to reassess the Asia slowdown trades, because it looks to us as though these are - particularly in China and Australia - past their sell-by date.

Wednesday, October 03, 2012

Taking the Plunge.

Plan a) was to buy at last night's close. And we have, filling up on the small "just in case" purchases on Monday with more risk stuff. The path to getting to that "buy" though has been not quite what we were looking for so confidence isn't as great as it was when we planned plan a). But life is never easy. 

Coming in this morning it would appear that the Australian trade data has shot to the top of the gloom league and coming after the RBA rate cut, the confidence that Australia is going down the Swann(ie) appears consensual.  Our inboxes are full of  deep analytics as to why Australia is doomed, blended with a melange of charts as to why everything Australian is doomed, suffused with articles on why the RBA is so behind  (also why the AUS statistics office is so rubbish at keeping up with the times) and the whole lot bathed in a coulee of "Toldja so's" from every short term player on the street. So in TMM's eyes that is a full set.

 It s been a long time since trade data has caused such a stir and TMM look back nostalgically to the days when US trade data was the highlight of the month, as opposed to today's young upstart of NFPs.  The Australian stats was indeed a "shocker" and like the internals of much of the Aussie data, is turning sour. But despite all the shouting and shrieking this morning, Australia is not a Spain.  On the face of it 5.5% unemployment and growth within trend (for now) hardly deserves some of the current calls for interest rates to fall as far as 2 to 2.5% which is effectively zero real rates.

 The global risk platform doesn't look as though it's falling apart either and it would appear that the World ex Aus is not really that stressed today with European equities doing ok and even the Aussie favourite diggers Rio and BHP up from last night's closes.  So if the Aud selling is not on global functions and it's solely local "It's rates mate" and future outlook, then why is AUD/NZD higher?  For the NZD to take more of a bath overnight when the news is meant to be Aussiecentric smacks of something being out of line.  TMM will do something suicidal and buy some AUD here with tight stops as we anticipate, once again, short term positions being taken on long term views  being taken out to the old ball mill to be scrunched. And if they aren't by tomorrow ? But then hey,  its a tight stop. We can wear it. Not very macro, but then we get the feeling there aren't many folks out there putting on really long term views and hanging on to them. 

It's October and historically a time for grief and like a frightened cat on a hot tin knife edge playing tennis with hand grenades against a canine Federer wearing a tee shirt with "Don't Look Now" written on it being served balls by red cloaked dwarfs whilst Kruger chants  "One, Two, Freddy's Coming For You"... we are pretty scared.

Especially as it's gone so  so..   so... quiet..

Monday, October 01, 2012

Golf Balls

Ball-into-hole-knocking reached a new crescendo last night when some European ball hitters put their balls into some holes having hit them less often than their American friends. Well, we say friends but they weren't that friendly at the start. Who would have thought that ball hitting was important enough to a) boo others over and b) stay up all night wiping man years of productivity off a Monday morning around Europe as bleary eyed golf fans compare notes of wonder that a German can be cheered by British to take a team led by a Spaniard to victory over Americans. 

TMM have been known to knock balls into holes themselves and the original Macro Man was actually fairly good at it, which we put down to his taste in clothing (joking old friend). But there is something very strange about a sport which will allow players to wear clothing that is solely derived from oil, coloured in shades that would make an acid-house party look monotone and cut in styles that would have befitted any individual era but are so mixed up that when melded together and sprinkled with  diamonds and  random words like "Ping" or "Teitmeyer" (or something similar) couldn't be less fashionable than a 2 year old's worst efforts rifling through the dressing up box. Yet what is more they refuse to allow us mortals to play in natural cotton jeans, with not tucked in muted toned tops or, sin of sins,  with off-white rather than pure white socks!

 "Sorry sir, it's tradition". Well so was syphilis in our family but we managed to change with the times. Golf is to fashion what Apple is to maps.

TMM have also been wondering if oversleeping Golf fans have a tendency to be bearish, as there is a distinct lack of bear activity this morning. It is begininning to feel as though the feel good factor of sports events does roll over into financial markets. We suppose that on that basis US markets should tank this afternoon (sorry guys)! 

Our plan "a" (see last post) was to expect markets to push on down today after a storm of gloomster press stories and continued European unrest.  Yes, the brick chucking has continued in Spain over the weekend but the market response has been very muted. The start of month, start of quarter move back into equities and euro things has been notable and whilst it could be seen as a one day wonder, it has spooked TMM enough to prompt us start buying a little bit of risk a day earlier than our plan "a". 

That really is it for now. May your balls go where you want them to without you having to hit them too much.

Addendum at the request of the original Macro Man.

Team Macro Man would like to unreservedly apologise for the glaring error in the above text. We inadvertently stated that the original Macro Man is "good at golf". We would like to make it clear that this could not be further from the truth. He sucks at golf, though prefers to think he 'gets his money's worth'. We would like to further apologise to him, his family and any poor sods who have had to play with him.