Monday, August 31, 2009

Bank Holiday Poem: On the Aging Effects of the Financial Crisis

When you were named Chair of the Fed,
Black hair adorned your beard and head.
With youthful vigour you raised rates,
So to avoid Greenspan's mistakes.

But crisis came, and rates were slashed
As banks all hoarded excess cash.
And as your special programs grew,
Just look at what they did to you.

Your programs (what were they all called?)
Turned your beard white and your head bald.
But you've no time to look or care:
Your "green shoots plan" is constant prayer!

Friday, August 28, 2009

Good Riddance

TGIF, eh? The week's almost over, and all Macro Man can say is "good riddance." He's actually scratched out a bit of P/L this week, but overall the last five trading days have been deeply unsatisfying. Hey, at least the SPX managed to break away from the 1025 tractor beam yesterday...closing higher after trading weak for most of the session. Deeply unsatisfying indeed.

But even that was a visit to Xanadu compared to what can only be described as a classic FX screw job last night. Just before 3 pm New York, when most spot jockeys are more interested in the latest Mets injury or the Yankees' Dr. Evil-esque payroll, some bright spark decided to jam a $3 billion order in USD/CHF through the market. Supposedly this was to fund a purchase for the UBS share tender, but Macro Man has his doubts, given the timing and manner of execution.
(By way of discalimer, he had no position in FX, so was unaffected by last night's carnage. Price action like last night's isn't exactly tempting him to rush back, however.)

Bloodshed of a more predictable type came in the Aussie fixed income market overnight, following on the heels of an article from well-known RBA watcher Alan Mitchell suggesting that the bank could begin hiking rates as early as Q4. The entire strip beyond front-Sep was mullahed by at least 20 bps. Ouch!
This, of course, raises the question of how much growth and green shoots the Fed and ECB would need to see before contemplating a tightening. US Q3 GDP is now tracking at something like 4-4.5%, and if the inventory surge continues a similar result in Q4 is certainly not impossible.

Jeff Lacker was on the tapes yesterday expressing a desire to avoid the mistakes of Easy Al during the last cycle, when rates were left too low for too long. If and as CBs like the RBA start putting up rates (rightly or wrongly), surely some sort of risk premium will be introduced into G4 fixed income markets if growth numbers keep up?

After a 60-70 bp rally in the reds and an en fuego bond market, Macro Man can't see much of a risk premium there. So perhaps that's where he should be directing his energies for the time being. Ironically enough, of course, the very introduction of a risk premium in rate markets could well be a key catalyst for a lurch back into the second half of a W-shaped growth profile early next year.

Macro Man suspects that it will be some time before he can say "good riddance" to the hit-and-run trading methodology that's carried him through the last couple of months....

Thursday, August 27, 2009

Blood From A Stone

Yesterday's post brought a flood of responses, with suggested trades/themes ranging from micro security selection to the classic macro big picture trade. Suffice to say that there was no consensus on either product or should make for an interesting sprint into the end of the year.

Meanwhile, in real time, asset markets continued to bewilder Macro Man. The German ifo survey printed another new cyclical high and exceeded naturally the euro got clubbed and Bunds went bid.

Then, a few hours later, headline durable goods orders blew away expectations, as did new home sales. Equities yawned and Treasuries maintained their relentless march higher. Macro Man seems to adopt the bewildered look of Have I Got News For You's Paul Merton with distressing regularity.

He knows it's August, but trying to connect the dots in this market is like squeezing blood from a stone. China finally announced some measures to curb some of the more bubblicious aspects of its stimulus program....and A shares yawned. Meanwhile, Spoos seem to be super-glued to 1025 this week. If today's GDP and claims data can't rouse equities from their lethargy, it would appear that the rest of the week might be more profitably spent on the golf course (at least, it would if Macro Man's rehabbing knee permitted him to play.)
One market where punters see a bit more opportunity is in UK fixed income, specifically the short sterling strip. It was little more than a month ago that Macro Man mused about playing an early reversion to a tightening bias from the BOE. This month's expansion of QE put paid to that; fortunately, Macro Man hadn't deployed any capital towards the view.

Market focus is now swirling towards the possibility that the BOE reduces the rate it pays on deposits, possibly towards a punitive negative rate. This, the thinking goes, would spur more lending towards the real economy...or at least the interbank market. Whether that actually happens is up for debate.

In any event, the strip has shifted dramatically over the past month, with front Sep trading nearly 10 bps through the current LIBOR fix.

While a lot of juice has surely been squeezed out of the trade, the market has evidently seized on a deposit rate reduction as one of the few attractive opportunities as the summer winds down. Yesterday saw extraordinary volume in the short sterling options market.....some 375,000 contracts traded (compared to just over 50,000 in the Euirbor market.)

While some of the front-end stuff offers decent value, there was a lot of focus on the June 2010 contract, with punters buying call spreads nearly 100 ticks out of the money (i.e., closer to an implied rate of zero than they are to the current rate implied by L Z0.)

Maybe these trades will be epic winners...though they are low enough delta that it will take a long time to find out. But given the uptick in things like US housing and Merve the Swerve's propensity for swift U-turns, Macro Man can't help but think that some of these trades are trying to squeeze blood from a stone.

Wednesday, August 26, 2009

Looking Ahead

The fun just won't stop, will it? It's been a bum-clenchingly slow day today, which follows on the heels of similarly uninteresting days over the past week or two. Add in the fact that asset prices don't appear to respond to fundamental news (at least as Macro Man understands it), and you have the sort of classic August meandering that used to characterize the late summer before the onset of the financial crisis.

There doesn't even seem to be much point in short-term trading at this juncture, as the playing field is far from level. The security cordon around US data used to be pretty tight, but yesterday's consumer confidence figure was leaked, to the exact decimal place, several minutes before the official release. Perhaps the IRS will send Macro Man a pair of cotton khaki trousers with his next tax return, because it certainly feels like the US is turning into a Banana Republic.

Then again, given yesterday's budget projections, maybe not. Perhaps Big Ben can underwrite a new pants program sometime in his second term as Fed chief.

Anyhow, given the lack of action, interest, and predictability in today's market, it's perhaps worth looking ahead to September, when punters and fund managers of all stripes will be back from holiday and investment flows will be driven by rationales more compelling than "which stock has the lowest price?"

Now, normally, Macro Man could and would compile a list of favoured themes for the last four months of the year and try and figure out the best way to play them. Perhaps he has been numbed by the Novocaine of recent market lassitude, or perhaps his underlying belief in a noisy Q4 (as Lehman base effects and the inventory cycle wreak havoc on comparisons) is dominating his worldview, but he's struggling to come up with exploitable themes with which to go for it into the close of the year.

Sure, he's on board with the "lower for longer" game in front ends, though he expects quite a bit of vol in the reds in coming months. And while Macro Man believes that there's a good risk that the wheels come off of the Chinese equity "miracle" after National Day on October 1, that's a view that he's content to trade once he sees that it's actually materializing.

Other than that.....there's not much. Currencies are such a wasteland that Macro Man half-expects T. S. Eliot to start covering him. The further out you go in the yield curve, the less conviction he has in forecasting...hell, he can't even explian what he's seeing in real time! Perhaps there's an argument to start paying EM rates in certain sectors, though if Macro Man's "double dip" thesis is correct, that trade won't look so clever. Commodities? Macro Man's always been a tourist there...and given the surprise of the squeezes in, say, the base metals, a foray into these markets looks about as atttractive as a holiday to Flint, Michigan.

Maybe Macro Man just needs another cup of coffee this morning, or maybe he just needs to get August out of the way to focus his attention. But right now, his crystal ball is looking decidedly cloudy. So he throws it open to readers: what are your favourite themes and trades for the rest of the year?

Tuesday, August 25, 2009


Well, it may (or may not) be the case that bonds are trading rich, but regardless, the valuation gap (insofar as it exists) remained wide open yesterday. Had Macro Man not unsuccessfully tried to call the top in equities more than once throughout the year, he'd be tempted to label yesterday's price action as a classic blow-off high.

Low volume and a bearish candlestick on the index are ample reasons for caution. However, digging beneath the surface, it certainly appears as if the quality of the equity rally has deteriorated significantly. Among the top performers in US equity land, on on heavy volume to boot, were well-known turds Freddie and Fannie.

Now it's true that another turd, AIG, has been enjoying a renaissance for a number of months now, much to Macro Man's dsbelief. But this month the Agencies are tracing out what appears to known in the trade as a "Lazarus" pattern, e.g. coming back from the dead.

Macro Man asked one of his banks, a US institution that is generally assumed to be extremely well-placed, WTF was going on with FNM and FRE. And the answer that he got virtually defied belief. To paraphrase, he was told that interest in these stocks is primarily driven by retail, who believe that the low share prices mean there is less downside and that the stocks have the furthest to rally.

Now, Macro Man doesn't know if this explanaton is true or not (any readers with more insight are encouraged to chime in!) But if it is, it must represent the apotheosis of stupidity as an equity investment strategy. And that is usually the sign of a market headed for a fall.

Beyond that, Macro Man cannot help but have concerns over the divergences that he's observing. Yesterday, he highlighted the divergence between a relatively bid fixed income market and equity strength. He was somewhat surprised to see bonds and front ends rally after the Bank of Israel hiked rates yesterday.

As far as he can recall, this is the first tightening by and central bank coming out the other end of the easing cycle. What made it particularly interesting is that a) the BOI adopted QE in February, b) BOI governor Stanley Fischer was at the Jackson Hole conference that seemed to adopt a "lower for longer" consensus, and c) Fischer himself punches above the BOi's weight, having held senior positions at the World bank and IMF.

Might this be a roadmap for a surprisingly early exodus from QE by more important central banks? Perhaps, but markets appeared to dismiss the possibility yesterday with a wave of the hand.

Closer to home (or at least, Macro Man's book) has been the interesting and frustrating divergence between equities and other pro-risk assets such as emerging market foreign exchange rates. Ordinarily, one expects a strong negative correlation between Spoos and EMFX, and indeed that's what's been observed for most of the year, including this month. So what's the problem?

Well, the issue is that return correlations caputre the direction of daily moves without saying too much about their magnitude. And what's been happening recently is that on the days when stocks do well, EMFX goes up a little, but when stocks go down, EMFX gets butchered.

So while the 3 week daily return correlation between the SPX and USD/TRY and USD/BRL is somewhere around -0.8, the aggregate return to the friendly macro punter has been less impressive. Indeed, over the past three weeks USD/BRL and especially USD/TRY have both risen (i.e., the emerging currencies have gone down versus the dollar) even as the SPX has tacked on a 2% plus gain.
So in a sense, EMFX has given you none of the upside and all of the downside of a "risk-on" position. Great! At the same time, bonds have traded persistently bid, the Baltic freight index has been pummelled, and Chinese stocks have gone from rock star to reality-show reject.

Oh, and a strange bid has emerged for the worst of the worst of the US equity market.

Interesting divergences, to stay the least, particularly as we approach a period of seasonally poor performance for stocks. Perhaps this time, equities are "right" and everything else is "wrong."

Then again, perhaps not......

Monday, August 24, 2009

Why Aren't Bond Yields Higher?

Macro Man is still shaking his head over Friday's crazy equity squeeze (as well, it must be conceded, to clear the lingering after effects of a day spent watching cricket and quaffing Pimm's on Saturday.) Why oh why can't the US release housing data at 8.30 NY time, rather than 10 am after equity options have already expired?

Still, Macro Man can't complain too much. His back-book SPX hedges managed to reap a windfall gain, courtesy of the absurd settlement price procedure of the CBOE listed index options.

While it's tempting to write today about the apparent break-out in stocks, and wonder whether it's a low-volume sucker's rally or a straight shot to 1100, Macro Man has other things on his mind today. Specifically, bond yields and why they aren't higher.

After all, since the onset of the crisis a couple of years ago, there's been a pretty strong positive correlation between stock prices and bond yields. To be sure, the relationship is not and cannot be a linear one ad infinitum, as you're comparing a trending series (equity prices) with a mean-reverting one (bond yields.)

But still, on shorter-term horizons, one can characterize bond yields as trending, which renders a side-by-side comparison somewhat more apt. And what we can see is that bond yields are closer to their three-month lows than their three month highs, despite the fact that the S&P is now at its highest level in ten months.
The bid for bonds seems all the more perverse given that we have another glut of supply this week in the US. Oh sure, the auction sizes are not quite as big as feared in some quarters, which may have given a temporary fillip to bond prices. But the amount of supply is still bloody enormous in absolute terms. And the pattern of the last several months is that dealers either demand a tasty concession (i.e., drive prices lower) ahead of the auction....or they get steamrollered after.

So far there's been no concession to speak of judge for yourself what may happen after the auctions. Perhaps dealers are holding out hope that the foreign CB bid will be back throughout the week after they finally showed their hand a couple of weeks ago.

One mitigating factor for the valuation of Treasuries has been the ongoing decline of LIBOR, where the key 3m setting fell more than a basis point per day in the second half of last week.

Running a simple two-factor model of equity prices and LIBOR suggests that bond yields should not, after all, be north of 4%...though the model admittedly is at its high setting for the year.

Still, it suggests that fair value for US 10 year yields is well north of current levels. Macro Man wouldn't be surprised to see us there sooner rather than later, and prefers to concentrate his long fixed income bets at the shorter end of the curve.

Oh, and as for equities: perhaps it's time to revive this playbook for valuing and trading equities? Sure feels like it...

Friday, August 21, 2009

If You Can't Say Anything Nice...

...then you shouldn't say anything at all. At least that's the wisdom that Macro Man and Mrs. Macro try to impart upon the Macro Boys. Regular readers will observe that your author often fails to live up to his own advice....but not today.

Maybe it's the sunshine....maybe it's vital cricket match being played here in London....maybe it's today's equity option expiration....or maybe the market's just ground down by recent erratic price action. But despite today's expiry and the start of he Jackson Hole conference, today just feels like an "old skool", dreadfully slow August day. And the lingering effects of jet lag have rendered Macro Man unable to say anything useful about it. He just has nothing to say about a market that does a 10 point round trip on an old rumour of Chinese policy tightening (that, ironically enough, doesn't seem to disrupt Chinese markets in the least!)

And readers with useful insights are welcome to share....the floor is open.

Thursday, August 20, 2009

Space Mountain

The worst thing about coming back from a holiday in America is the jet lag. It's been four days since Macro Man returned from the States, and he's still struggling mightily to get to sleep before 2 am. Ugh. Hopefully he can get caught up over the weekend and have a little bit more energy next week.

Unfortunately, markets aren't providing much inspiration thus far upon his return. He referred to the market "roller coaster" yesterday....well, it's continued apace today. It's beginning to feel a bit like Space Mountain, actually.

FX is a particularly fruitless field at the moment. Macro Man has zero G10 FX risk for maybe the first time in history, and frankly at the moment he can't see anything that looks attractive to him on the horizon.

He has a couple of charts to illustrate how difficult that market has been. Consider two of the more consensus macro FX views out there: long NOK and short NZD. The love for the NOK is virtually universal, with something like 4 sellside research groups separately recommending the same exact trade (short GBP/NOK.) The reaction to today's Q2 GDP figure was telling...although overall GDP was much weaker than expected, sellside focus was exclusively on the solid mainland figure. The hatred of the kiwi is longstanding and, if Macro Man examines his own views in the harsh light of day, possibly a little stale.

Anyhow, the street hates NZD and loves NOK. So naturally, NZD/NOK has enjoyed an uber-rally for most of the year.
FX struggles are hardly confined to thematic macro punters. At least we can decide to stay the hell away. CTAs, meanwhile, have to run their models continuously. Their payoff profile is one that replicates a long vol position; in a world where VIX has gone from 45 to 25 over the past 5 months, this has unsurprisingly not been a pleasant time for the trend followers.

The Barclay FX CTA index, shown below, would dearly love to ride a roller-coaster; at least passengers on Space Mountain get to go up before they go down.

Wednesday, August 19, 2009


It's tempting to slap some old-time Beach Boys on the iPod these days, because Macro Man seems to be spending most of his time surfing the waves of a "risk on/risk off" market. The waves seem to be bigger and more frequent than those on America's south Atlantic coast, if not quite matching up to Hawaii's North Shore yet.

Exhibit A comes from China, which shrugged off its yesterday's 1% rally in the SPX and its own tepid bounce earlier in the day to close down 4.3%, below the 2800 level cited locally as the average entry price for domestic funds. True to the surfin' motif, however, H shares (which remain open 75 minutes later than Shanghai) put in a reasonable bounce into the close.

What's somewhat amusing is that some of the most vociferous proponents of the China bull story (both in terms of local returns and its impact on the world) seem happy to dismiss the 20% pullback with a cavalier wave of the hand. Perhaps this is appropriate...but then again, perhaps not. Macro Man was amused to see that Goldman now forecasts a RRR hike and 3 rate rises next year, but expects this to have no impact on the Chiona bull story.

Hmmm....a market that is floating on a sea of liquidity will receive a policy tightening, and this won't have an impact? OK. What is interesting is that retail interest in Chinese equities seems to be on the wane; the pace of new brokerage account openings has decelerated quite a bit from its late July peak.
Coincidentally or not, that late July peak coincided with the top in Chinese stocks. More ominously, it came quick on the heels of the dreaded "sky dog" eclipse. Macro Man pooh-poohed the ol' extra-terrestrial pooch at the time, but it seems as if he was mistaken in doing so.

Elsewhere, the Bank of England surprised markets (or at least Macro Man) by revealing that it had voted 6-3 to hike QE this month, with Merve the Swerve in the minority. What was shocking was not that there was a split decision (Macro Man expected this, given that he didn't think the Bank would extend QE at all), but that the decision was split in favour of doing more, rather than less, QE.

Zowie! Merve reminds Macro Man of a religious convert, such is his zeal for Gilt-buying these days.

There was no mention in the minutes of taking deposit rates negative or anything like that, rumours of which had fueled a sharp rally in Sep short sterling. Unlike every other front contract out there, Sep sterling is trading 10 bps through the current LIBOR fix...which itself is only 25 bps through the policy rate.
Obviously, LIBOR fixes have been coming down and could well continue to do so...but the same holds true in the US, for example, as well. And with only a 25bp basis to policy, risks must surely arise that the pace of LIBOR reductions slows if not stops...leaving that front contract looking vulnerable, surely?

Just another wave to surf...

Tuesday, August 18, 2009

Getting Back Into The Swing

Macro Man is still getting back into the swing of things, though he can confirm that real-time price action is indeed as noisy as it appeared to be on the South Carolina coast. Yesterday's weakness in risky assets has begotten a bounce thus far today; as has been the case recently, price action appears, on the face of it, to contradict the newsflow somewhat.

Yesterday's limp trade in US equities, for example, ignored further improvements in the Fed's Senior Loan Officer survey, which showed modest reductions in the tightening of credit (epitomized by the C&I survey below) and improved demand for loans in some sectors.

The spin that Macro Man saw was that this was less positive than expected....hence the lack of equity market reaction. Given that, from his perch, this result was probably about the best that could be expected, he can only conclude that, far from bullish equity sentiment being sourced in a flow-of-funds argument, it is actually based on equity punters really drinking the recovery kool-aid.

Anyhow, after yesterday's limp US trade and recent carnage in China, the stage was set for an interesting day's trade in Shanghai. There was certainly fodder for a further sell-off, via a Bloomberg story suggesting that included among the products of the stimulus package is a flourishing trade in copper speculation amongst the country's pig farmers. (Bubble, ccough, bubble.)

But as has been its wont recently, China confounded the Western expectation and put in a bounce today, helping to spur a recovery in risk assets during the European morning. So, too, has the release of data suggesting scope for a bounce in the trajectory of nominal GDP. The German ZEW, flawed as it is, surprised top the upside, with current conditions finally ticking higher.

In the UK, home of QE, meanwhile, CPI printed higher than expectations....again. While it remains below the 2% target, the undershoot is now pretty marginal (0.2%.) Interestingly, core CPI has recovered quite sharply indeed; if one believes that core CPI is an accurate herald of underlying inflation pressures (and to be fair, there is not much evidence that Merve thinks this way.....yet), well, then the BOE will have a rather interesting dilemma confronting it in a few months' time.

But that will likely be a story for another day (if not quarter or even year.) In the meantime, Macro Man expects a rather noisy period where tactical, rather than strategic, trades are likely to maximize his risk-adjusted returns.

Monday, August 17, 2009

Back (Sort Of)

Macro Man is back.....sort of. A misadventure in setting his alarm last night left him sleeping in, working from home as a result, and...well....still a little groggy.

Suffice to say that it was one of the more uneventful summer holidays, market-wise, that he could recall. Oh, sure, there was a bit of noise either side of payrolls (and OK, he did trade a fair amount on payroll day itself), but there were no real bombs, either of the literal or market type.

Given last week's roller-coaster ride, Macro Man wonders what sort of state the psyches (and P/Ls) of market punters may be in. The comments section in this space gave him some idea...but erratic price action usually does not spell "fun and fortune" for most directional players.

Anyhow, he's back now and open for business in the commerce of new ideas....or the revival of old ones. As frequent commenter Nemo has pointed out, Shanghai's turned pig-ugly during your author's absence.
If sustained and indeed extended, that should bode relatively ill for both equities and all things EM, the latter of which has served as Macro Man's "risk-on" nexus for the past month or so.

From his perch, the rally in short ends looks pretty extended, and while there's more room for upside further out yield curves, there's still the elephant-in-the-room of pesky supply considerations.

Technically the euro looks pretty poor, which is a tad ironic given Germany and France's much-ballyhooed exodus from recession. While it's tempting to slot it, bitter experience has taught Macro Man not to get too excited about potential technical breaks in the euro, particularly when swimming in CB-infested waters.

No, from where Macro Man sits, the trade that seems most compelling is one that is painfully familiar. He had a decent run during his time off....time to spend some of that P/L on developed-market equity index puts.

Wednesday, August 12, 2009

What Payroll Number?

Now, Macro Man has been getting a lot of sun....certainly more than he does in England. And yes, he's been drinking a lot more margaritas than usual. So maybe he's just a bit fuzzy. But he could have sworn that there was a pretty strong payroll figure released a few days ago. He even has some sort of recall of fixed income getting whacked.

And yet, when he looks at the reds today (exemplified by September 2010 Eurodollars, below), he sees a contract trading well above its pre-payroll levels.

Perhaps he should have a few more margaritas to set his mind straight....

Thursday, August 06, 2009

A Poll

Tomorrow sees the release of what could be a critical NFP figure. After another solid run-up in risk assets, perhaps markets are vulnerable to a poor number? Anyhow, it may be instructive to see where punters expect the SPX to trade until MM in the poll below!