January post-mortem

January ended with a bang, to say the least. The combination of solid GDP growth, a low ECI, a horrible Chicago PMI, and a Goldilocks Fed sent equities and other risk assets soaring while the dollar and bond yields took a tumble. Mr. Paulson's misinterpreted comments added further spice to FX traders fixing their p/l's at 4 pm London time.

All in, the end of the month was kind to Macro Man. He enjoyed that rarest of sensations, closing the month at a high water mark in P/L.

Macro Man always finds it interesting to dissect his performance and see what went right and wrong:

* Most of the return came from alpha strategies, though the beta return would have been higher had Macro Man slapped on the full equity and G10 carry positions on the last day of 2006

* Equities were the strongest contributor, as Macro Man made 0.68% on his stock positions.

* Currencies were also a net contributor, as Macro Man made 0.39%

* Commodities (including OIH and GG positions, which were excluded from the equity caluclation) were up a whopping 0.05%

* Fixed income subtracted 0.24% from portfolio performance, as Macro Man's bond short was stopped out just a few bps from the low in Treasury yields.

As for February...Macro Man is somewhat nervous with the 'risky asset melt-up' reaction to the Fed. The market seemed to take the statement as one of neutrality, when in fact it still showed concern over inflation. Somewhat surprisingly, inflation breakevens widened yesterday despite the overall rally in fixed income. Higher breakevens are bad for risk assets, not good. If this trend continues it will set up a nasty decline in both equities and EM assets. Macro Man therefore takes profit on the long SPH7 position at current levels (1445.)

The other feature of February will be the G7 meeting in Essen on Feb 10-11. The yen will be talked about but not, in Macro Man's view, mentioned in the communique. Therefore, and bouts of yen strength resulting from G7 patter should be faded. Macro Man may look to add to his short yen bet should the correction continue, then slap on a hedge during bouts of yen weakness.

Macro Man should have bought TIPS against the Treasury market support. He didn't, and for the time being the window has passed. Nevertheless, bonds resting against key support represent an attractive opportunity to buy with a SAR on a break. Macro Man may attempt such a strategy later on in the month.

Today, the risks to the ISM are probably to the upside of what is priced into financial markets. There's only one Detroit, and in any event the Chicago survey has lagged the national survey in recent months- Macro Man reckons that yesterday's 48.8 was the 'same' as the 49.9 registered for the national survey in November.


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