Financial Nursery Rhymes

Blame it on the sun. After a glorious long weekend of relatively warm, sunny weather, Macro Man has developed a creative itch that he just has to scratch. When yesterday's traditional bank holiday poem inspired fellow blogger Cassandra to drop some nursery rhymes in the comments section, Macro Man couldn't resist devising a few of his own.

Consider these financial nursery rhymes a public service to those erstwhile members of the investment community who will now be "spending more time with their families."

Old King Cole was a merry old soul
And a merry old soul was he
For late in June
As he whistled a tune
He shorted the S&P

There was an old woman who lived in a shoe
With a mortgage so big, she didn't know what to do
She used to live in a house on Mulholland Drive
She made $20k but paid three million point five

Little Miss Muffet
Sat on a tuffet
Long of a CDO
But her Triple-B tranche
Made Miss Muffet blanch
Now she earns two and twenty no mo'

Mrs. Watanabe, she sold 10 million yen
The kiwi went to the top of the chart, then she bought them back again
When the kiwi went down she bought,
And then she bought a lot,
Now she's lost all her husband's hard-earned cash so he's left her there to rot

Old Mother Hubbard went to the cupboard
To get her poor dog a loan
So she lied on the docs
(She was sly as a fox)
He ran off when the teaser was done

Ha ha, Black Swan, who's the greater fool?
The shorts, or the longs with their eyes covered in wool?
The month's a disaster, my P and L's quite lame
Would you like to buy my pad I've got on Park Lane?

Jack Cox was quite short stocks
His wife was quite long credit
But when she sold 10 billion yen
He said "She doesn't get it!"

Elsewhere, risk-asset holders everywhere received a reminder yesterday that everything still isn't peaches 'n' cream despite the 109 point rally in the S&P 500. Bank of China, State Street, and Barclays are just three of the institutions fingered in the press as being on the hook for substantial losses due to subprime. And news from the root cause, housing, remains less than favourable.

While yesterday's existing home sales figures were more or less in line with expectations and appeared to show some signs of stabilization, the benign headline masked an ugly underbelly- namely, the supply of homes on the market. The data suggested that there is now 9.6 months' of supply of existing homes on the market; all in, Macro Man calculates that there are now more than 5.8 million new and existing homes available for sale in the United States. It seems pretty clear that housing will weigh on economic activity for the foreseeable future.However, evidence that subprime concerns do not necessarily filter through into economic sentiment and activity came from Germany this morning, where the ifo survey printed a better-than-expected 105.8. Remarkably, the 'current conditions' component actually rose to 111.5 from July's 111.3. What makes the data remarkable is that Germany has been hit by a series of high-profile subprime losses from regional banks, which one might ordinarily expect to hit business sentiment on expectations of tighter credit, etc. That it hasn't happened is another small piece of evidence that Wall Street overemphasizes its impact on Main Street.

This having been said, Macro Man continues to expect a mixed newsflow and sustained period of subtrend but positive US growth. In the near term, he remains of the view that the former factor should lead to another dip in risky assets. His belief in the latter is what makes him want to buy that dip.

Evidence to date from his poll, however, suggest that he has plenty of company on both Wall and Main Street in expecting a relapse in risk asset markets. With more than 200 entries so far, just 15% of the respondents expect the current rally to continue and form a V-shaped recovery. The remaining 85% of the vote is pretty evenly split between the buyable dip (W) and the transition to a bear market, the lambda. Interestingly, the market professionals favour the buyable dip while retail investors favour the lambda.

Does this mean that conditions on Main Street are not quite as healthy as Macro Man believes? It's a possibility worth considering, and he intends to keep a keen eye on the data. In the meantime, he was filled on his sale of 500 ESU7 1500 calls at 17, so his long risk-asset expoure has been (temporarily, at least) reduced.

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Click here for comments
August 28, 2007 at 1:19 PM × This comment has been removed by the author.
August 28, 2007 at 1:20 PM ×

While noting your possible risk/reward trade to fade consensus on a Sept. rate cut, do you feel that Big Ben will lower the fed funds rate at least a little bit in the next 6 months? What do you think the yield curve will look like in the coming months?

Macro Man
August 28, 2007 at 1:42 PM ×

I suppose I think that he will, though I also expect that it would be a mistake. A period of below-trend growth and higher financial market risk premia would actually be quite a favourable outcome for the United States in the long run, insofar as it would encourage more prudent risk-taking and perhaps engender more savings at the household level.

By the same token, at face value the govvy curve is pricing in quite a bit of easing. While some of that is obviously a 'flight to quality' bid to Treasuries, I can't help thining that the government curve will be flatter several months from now than it is today. Not to say it couldn't steepen further first should the front end go psycho bid on more cash market dysfunction.

August 28, 2007 at 4:07 PM ×

"Does this mean that conditions on Main Street are not quite as healthy as Macro Man believes?"

I would venture that the retail investor readers of your blog are equally as disconnected from Main Street as the professionals are, as well as being less experienced in the Wall Street arena.

Main Streeters don't read "Macro Man" or follow the markets, but they can tell you with great accuracy who won on Idol and whether Lindsay Lohan is in rehab or not this week. To get a read on conditions at Main Street, one needs to go elsewhere ...

Macro Man
August 28, 2007 at 4:13 PM ×

Hmm, maybe I should try and see if Perez Hilton or some other really popular blogger could post my poll on their site...

August 28, 2007 at 6:31 PM ×

Hey MM, you wanted firworks, and I think you're getting them now... It feels very much like the bounce/short covering (wave B?) is over and we are entering another leg of the sell-off that marches to the beat of global liquidity fears and an overstretched american consumer. Regards, FR

August 28, 2007 at 7:14 PM ×

Bravo, on the poems MM! Witty as Wilde, wiht just-as-clever turns of phrase.

Markets, on the other hand, are having a veritable Guinness episode, the likes of which after too many pints, one knows not whether the bottom's dropping out of one's world, or the world is dropping out of one's....

Macro Man
August 28, 2007 at 7:49 PM ×

Ah, you've got me blushing, C. Normally, I only get compared to Oscar after being drunk and disorderly in Reading, or when someone says "Hey MM, you're no Oscar Wilde."

FR, whether this is the start of the next leg of the "big'un" or whether it's simply an unwind of last week's low-volume rally remains to be seen. The next micro news of interest will, I suspect, be the investment bank earnings releases in early-mid September.

Cam Hui, CFA
September 1, 2008 at 3:33 AM ×

See my Wall Street Nursery Rhymes

The five little piggies
This little piggy put in a market order...
This little piggy put in a limit order...
This little piggy traded derivatives...
This little piggy traded cash [market]...
And this little piggy got caught insider trading and went
wee wee wee wee wee...
...all the way to Club Fed.

Old MacDonald
Old MacDonald had a farm,
On this farm he had an investment banker,
And a Strong Buy here and a Strong Buy there
Here a Buy there a Buy
Everywhere a Strong Buy!
Old MacDonald had a farm

September 1, 2008 at 2:34 PM ×

Mary bought stoxx on margin
now her arse is a bargain.