A Raisin in the Sun

“What happens to a dream deferred? Does it dry up like a raisin in the sun?”
- Langston Hughes

Just when you thought it was safe to get back into the water, risky assets start rolling over. Typical! Today may well prove to be some sort of watershed (to borrow a phrase from Dennis Gartman) with the release of durable goods data in the US. And oh yeah, Ben Bernanke is testifying before Congress this afternoon as well.

Readers with memories longer than a few days may recall that both of these items- durable goods and Ben Bernanke opening his trap- have coincided with stock market meltdowns over the past twelve months. That is, in and of itself, sufficient to make Macro Man nervous.

Moreover, while Macro Man had thought that the A-B-C correction may have played itself out in double time, he is now no longer sure. Perhaps it is time to revive the withered remains of Wave C. Consider that last spring, the first day of the Wave C meltdown occurred just under four weeks after the first lurch lower.
Yesterday’s stock market weakness occurred four weeks to the day after the gut-wrenching lurch lower at the end of February...
Now, maybe durable goods will be stellar- it wouldn’t come as a massive surprise. And maybe Ben will be dovish- after all, some of the housing data really has been execrable, and he won’t be too chuffed to see consumer confidence off its highs.

By the same token, however, the market is already expecting a healthy bounce from durables- it won’t take much to disappoint. Moreover, Bernanke may well go to pains to ensure the JEC that inflation remains his paramount concern- note that breakevens are near their recent highs and inflation expectations ticked up in yesterday’s confidence report- and that rate cuts remain far, far away. It doesn’t take a genius to figure out that the market probably wouldn’t like that.

The risk indicator that Macro Man follows ejected him from his carry trade this morning. However, he remains long risk assets as a result of the beta plus portfolio. He will therefore do two option trades this morning to benefit from the expected volatility: one defensive trade, an one offensive trade.

He buys 600 DAX April 6800 puts at 99. This is quite a costly investment in terms of premium (nearly $400k), so if durables are good and Bernanke is Gentle Ben, it may be quickly jettisoned.

He also takes a punt on dollar upside, buying EUR 75 million 1 week 1.3250 puts for 0.10%. Premium outlay is only $100k and it could present some nice gamma scalping opportunities over the next few days. Macro Man will look to buy 20 million EUR at 1.3260 as a delta hedge, should we get down there.

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March 28, 2007 at 11:51 AM ×

This morning's (in Europe) 'MarketWatch' headline, now gone and replaced by one alot calmer, implied - better, shouted - that stocks were being hit hard by the overnight spike in crude. The summary then identifies the damage as -0.3% on the Eurostoxx 600. The market is predicting a repeat of the daily dose of bad news, as in 'no news', and poisons are not yet on the verge of being picked.


March 28, 2007 at 2:40 PM ×

Durables were pretty punk, especially if you care about nondefense, nonaircraft capital goods orders.

I'm almost surprised US stocks didn't open down more than the half-percent or show they're showing now.

Macro Man
March 28, 2007 at 2:57 PM ×

Yes they were. Seems as if the market is relying on BB to be gentle Ben. Interesting that breakevens have widened on the print, another down for equities...