Macro Man

On the face of it, yesterday was a pretty quiet day. The Alcoa "earnings" were largely shrugged off (no thanks to Bloomberg, which singularly failed to report operating earnings per share in any headline or story that Macro Man could find), as were the decline in jobless claims (as continuing claims rose quite sharply.) Equities farted around in a range, and ended up largely where they opened. Yawn.

Oh, sure, there was news from the Bank of England, which surprisingly failed to extend its QE program. This caused a bit of a rupture in sterling and a somewhat larger one in Gilts, though such developments may well have flown over the heads of the average equity-based punter.

And yeah, whichever Chinese flunkey was left holding the bag at the G8 summit made the obligatory comment whingeing about the dollar's hegemonic reserve currency role in the global exchange rate system. Once again, Macro Man feels compelled to offer a bit of friendly advice to his friends in Beijing: if you don't want so many dollars, then quit buying them!

Anyhow, with volumes modest the underlying market flavour appears to be one of lethargy. Just look at the Bollinger band chart of the SPX below; the index is at its lower Bollinger band, which means it's a low-risk buy here for a bounce. Right? Right?
Perhaps....but then again, perhaps not. As you can see in the middle section of the chart, the Bollinger band width is unusally narrow, indicating a lack of volatility during the observation period. Maybe this means that we have returned to a low-vol, pre-Lehman, post-green shoots world. Or maybe it's indicative of complacency in the market, and that narrow bandwidth is a coiled spring, ready to explode and unleash its potential energy unto unsuspecting punters.

For some reason, Macro Man favours the latter explanation. In fact, if you look carefully, you can find instances where the spring is already beginning to uncoil. Take European equities, for example (where Macro Man's shorts are concentrated); the Eurostoxx has traded poorly for several weeks now, and as you can see the Bolly bands are beginning to widen.

EUR/USD, has also been stuck in a tearfully dire range; similar to the SPX, the Bollinger bands are at their narrowest width of the year.
So, too, were the bands in USD/JPY...at least until a few days ago when the pair magically fell off the end of a table, raising volatility and widening the bands. Not exactly an endorsement for "risk on", is it?
It sort of begs the question of how long the NZD can remain with its narrowest bands of the year. The well-flagged uridashi redemptions and Fonterra payout announcement looms large on the market radar, and perhaps everyone's already short...thus precluding a move lower.
But if we look at the chart of another illiquid, uber-speculative asset price, that of silver, we can see that when stuff finally starts to move, it can explode lower. The silver chart looks pretty dreadful, which doesn't bode particularly well for either the "risk-on" or the DGDF crowd.
Macro Man is sensitive, however, to charges of bias. He always attempts to be impartial in his analysis, because he finds that doing so yields superior investment conclusions. And so the news isn't all bad. Chinese trade data for June, leaked as Macro Man is writing this, revealed a better than expected y/y decline in imports. We have no granularity yet, so we don't know if this is "real" domestic demand or the final spurt of uneconomic commodity stockpiling.

Of course, exports were slightly worse than expected, and the overall trade surplus (y'know, the number that actually goes into the growth figures) missed by quite a large margin. But hey...we should look for good news where we can get it.

And so, to provide a balanced analysis on this fine Friday, Macro Man is happy to share with you the latest upbeat webcast from China bulls ne plus ultra, Goldman Sachs:

Macro Man was pleased to receive plenty of kind feedback on yesterday's little hip-hop effort, though somewhat chagrined to see that "California Love" is apparently now considered "old school." Speaking of old school, "Going Back to Cali" was suggested as an alternative source of inspiration.....hmmmmm.....I don't think so.

Anyhow, we finally started to get some signal yesterday with the release of Alcoa's earnings after the close last night, which apparently means the return of sweetness and light. True, Alcoa's earnings losses were somewhat smaller than expected, which, for an aluminum producer like AA, might appear to have implications for the global economy.

At the risk of facing accusations of viewing the world through blood-tinted spectacles, Macro Man is sceptical. Last quarter saw an unprecedented action from the Chinese to support ally prices via unprecedented import activity. The chances of a repeat performance would appear sketchy. Moreover, even with this demand and price boost rom China (presuumably to keep Chinalco afloat), Alcoa's revenues barely budged....even though Q2 is seasonally their strongest revenue quarter. In fact, y/y revenues actually fell from 40% in Q1 to 44% in Q2.
So it would seem that the vast bulk of the surprisingly small losses was down to cost-cutting, a fact apparently confirmed in last night's statement. So you'll have to pardon Macro Man if he views Alcoa's "triumph" as a micro issue, not a macro one. From his perspective, that revenue curve looks decidedly L-shaped.

(edit: Alcoa lost $142 in shutting money-losing oprations, which has somehow been magically wiped from the headline EPS figure. If you add that back in, the actual loss per share was worse than expected. If only Macro Man could wipe the losses from closed, unprofitable trades from his headline P/L, this job would be a helluva lot easier....)

Earlier in the day yesterday, European asset markets were impacted by a "massive" rise in German industrial production (3.7% m/m), which comfortably exceeded expectations. While that certainly confirms the end of the production free-fall, it hardly suggests an imminent growth phase. Indeed, an index of the actual IP index shows a) that the May blip barely registers, and b) that up and down changes in monthly production are the norm.

.A stabilization in demand, which appears to be the new bullish theme, doesn't actually imply growth of a V or a W shape. It actually implies an L.....which is hardly good news, and far from what is priced. It's an interesting coincidence, but two banks yesterday presented Macro Man with research that Asian equities are pricing in an ISM reading of between 55 and 60. That's a hell of a lot of good news (and growth) that is already in the price.

And despite today's Aloca-inspired bounce and scepticism from many quarters, the head and shoulders patterns in a number of markets continue to work. Given the optimism embedded in prices and Macro Man's view on the likelihood of an L-shaped recovery, he looks for further downside in risk asset prices.
Finally, it's worth noting that today sees an announcement from one of the few CBs in a tighter spot than the Fed....the Bank of England. Inflation has consistently exceeded expectations, and a prior raft of better-than-expected activity data has recently receded into sharp declines. Oh, and the fiscal situation is worse than that in the US, and adminsitered by a government that's now utterly bereft of credibility.

The market seems to ecpect a £25 billion extension of QE, with a risk that the BOE requests an increase in the size. Macro Man has no real view on the outcome, but it should make for interesting viewing. At the very least, it should take the market's near-term focus away from West Coast rap....

(With apologies to Dre and Tupac)


California...knows how to party
California....don’t got no money
In the citaaaaay of LA
In the citaaaaay of good ol’ Watts
In the citaaaaay, the city of Compton
They keep defaultin’, they keep defaultin’!

Now let me welcome everybody to the wild, wild west
Our bonds are untouchable like Elliot Ness
If you ain’t been foreclosed than you had some success
Pack some books fo’ yo’ cell if you gotta confess
We in that sunshine state with a bomb-site new street
The state where you always find a new build empty
And PIMPCO on a mission for them greens
Lean mean money-makin’-machine cheatin’ fiends
I been in the game sixteen years watchin’ crises
Banks gone down just like Vanilla Ice, geez
Now it’s ’09 and my creditors watch me
My credit rating’s dead just like Liberace
It’s no good, from Diego to the Bay
Your city is the bomb if your city makin’ pay
Throw up a finger if you feel the same way
For the crooks that bankrupted
Californ-i-a

California...knows how to party
California.... don’t got no money
In the citaaaaay of LA
In the citaaaaay of good ol’ Watts
In the citaaaaay, the city of Compton
They keep defaultin’, they keep defaultin’!

Make it make a payment
Make it make a payment
Make it make it Arnie
Make it Cali
Make it make a payment
Make a make a payment
Make it make it Arnie
Make it Cali

Out on bail, fresh out of jail California dreamin’
Soon as I stepped on the scene, I’m hearin’ lenders screamin’
They want my money and alcohol
My life as a west side playa flippin’ houses don’t work at all
Only in Cali where we riot not rally to live and die
In LA we payin’ Fargo not BAC (that’s right)
Dressed in Locs and khaki suits and ride is what we do
To find a mortgage with a rate less than nine point two
Famous because we don’t pay worldwide
Let ‘em recognize from Long Beach to Norway
The statement came and we said no way, it’s west side
So you know the row won’t pay out to no man
Say what you say
Just look at this bomb site today
Let me sell you half the streets in LA
From Oakland to Sac-town
The Bay Area and back down
Cali’s where house prices got a smack-down
Now we bust!

California...knows how to party
California.... don’t got no money
In the citaaaaay of LA
In the citaaaaay of Santa Barbara
In the citaaaaay, the city of Carmel
They keep defaultin’, they keep defaultin’!

Now make a payment...

Make it make a payment
Make it make a payment
Make it make it Arnie
Make it Cali
Make it make a payment
Make a make a payment
Make it make it Arnie
Make it Cali

Uh, Long Beach out tha house, uh yeah
Oaktown, Oaktown definitely lost they house, hahaha
Frisco, Frisco
Hey, you know LA down in this
Pasadena, price gone splat
Inglewood, Inglewood always up to no good
Even Hollywood tryin’ to lose a piece baby
Sacramento, Sacramento, where you at? Yeah

Throw it up y’all, throw it up, throw it up
Let’s show these fools how we do it on that west side
Remember when it was the best side

Yeah, that’s right
West coast, west coast
Uh, California’s bust....
California’s bust.....

If only Macro Man knew how to overdub lyrics on music videos.....

So after China, a country with a considerable aluminum manufacturing capacity running well below max capacity, starts a fairly-clearly-impossible-to-maintain run of aluminum imports like this:
the CEO of Aloca (which, coincidentally or not, is issuing its earnings report tomorrow), is quoted as saying that aluminum demand in China is recovering and they are clearly out of the woods.

Naturally, this remarkable coincidence is being used as a rationale for buying stocks in certain quarters.

Remarkable, indeed.

Sigh. It looked like it was so on, baby, but yesterday proved to be something of an anticlimax. The opportunity hasn't been bungled quite as painfully as Mikey blew one of his; rather, we seem set to tread water until the earnings flow begins in earnest.

Still, there were a couple of notable features about yesterday's session. Stocks initially popped on the better-than-expected services ISM, but swiftly lapsed back towards the low of the day. That, at least, appears to be something of a sea change from price action of the past few months. The market sold off pretty hard to bad employment data on Thursday, and wilfully shrugged off good news yesterday.

What does that suggest about the underlying nature of the market?

Indeed, it took a late-session squeeze from Team 888 (the re-incarnated version of Team 1250, perhaps?) to engineer a positive close on the day.

Still, it looks like despite the optimism of institutional equity investors (try and get your hands on the latest piece from CS' Andrew Garthwaite), the momentum of economic surprise has waned considerably. Citigroup's US economic surprise index has finally started to lurch lower; as this series is both serially correlated and mean-reverting, it suggests that we should expect the tone of US macro data over the coming weeks to be poor.

Perhaps Team 888's mettle will receive a sterner test, and soon.

Elsewhere, today marks the end of the ECB maintenance period, so we should find out this afternoon whether they'll drain much of the recent "wheelbarrow tender." Strangely enough, much of the €442 billion uptake has found its way back on overnight deposit with ECB, presumably to await future liquidity needs.
'Twill be intresting to see what happens if the ECB drains (or doesn't drain) some of this liquidity. One could argue that the reaction of the euro and European equities (particularly banks) should be inversely proportional, though that ascribes a level of rationality to the market that Macro Man isn't inclined to extend at the moment.

In any event, perhaps it's irrelevant. Maybe we're stuck here until Team 888 gives up the ghost.

A belated and abbreviated post today, as Macro Man's been busy dealing with both market and non-market issues. Keeping to the former, he's feeling a bit like Double-Down Trent from Swingers today, high-fiving Sue: "it's on, baby...it is so on....."

Risk assets of every description (other than Chinese equities, natch) are dumping this morning, for reasons that aren't immediately obvious. Perhaps it's the Indian budget (who said 6% plus budget deficits were just for Anglo-Saxon economies?) or perhaps it's just technical selling.

But it looks like commodities are breaking down (Dec 2009 crude looks awful)....
.....and equities are washing with Head and Shoulders this morning.

Macro Man has expanded his balance sheet, so to speak, this morning, by layering additional "risk-off" trades while increasing the delta of one of his "risk-on" hedges.

888, give or take, looms large on the SPX, as it's both the head and shoulders neckline and the 200 day moving average. A break (and futures are currently discounting a gap open just below the level) could bring some of Macro Man's fellow bears back to the party.

If so, Macro Man might have to consider doing more than just repeating Double-Down Trent's line.....

Has your ability to forecast the market gone dry? Feel like equities are being driven by a bunch of flakes? Are you itching to see stocks find their rightful levels?

Well, you can now say good-bye to flakes with Head and Shoulders!

"A few weeks ago I noticed that profits had been avoiding me because of dandruff in my portfolio. But recently I've started using Head and Shoulders to time my trades, and both the flakes and premature short sales have gone away!"

Yes, just apply Head and Shoulders to your market analysis every day, and you'll soon see your dry, flaky forecasting replaced by rich, glossy trades.

"I timed half my trades using Head and Shoulders, and half using ordinary methods. Head and Shoulders kept my portfolio clean, but with with my normal style, the flaky trades came back. You can bet I'll be using Head and Shoulders from now on."

Head and Shoulders is not yet available in the Chinese market.



No driving, no tennis, and no sunshine for Macro Man today, so he's been forced to keep an eye on the market during a slow day. Good thing he's washing with Head and Shoulders!

Although it's only Thursday and the Fourth of July is still two days away, there is potential for an early set of fireworks today. While this afternoon's ECB meeting may be somewhat less interesting than usual, tomorrow's US holiday has pushed the release of non-farm payroll data forward to today.

And you don't need to be an elephant to recall what happened at the release of the last payroll report; a better-than-expected headline generated carnage in fixed income markets, though as the chart of front Dec eurodollars shows, many contracts have subsequently retraced virtually all of their post-payroll losses.
Still, positioning seems a bit lighter (or at least warier) than a month ago, and the Fed has tried to dissuade markets from expecting an early tightening. Given that yesterday's poor ADP figure (which admittedly is as useful for projecting monthly payroll data as a bag of chicken bones and a magic 8-ball) was merrily shrugged off by equities, perhaps the fireworks could come in stock market space today? Just wonderin'....

But we've already had at least one firecracker today, with the Riksbank unexpectedly cutting interest rates and offering a one-year fixed rate tender at 0.40%. Naturally, many of the same analysts who wholeheartedly endorsed shagging the dollar when the Fed cut to 0.25% and engaged in QE now claim that the surprise Riksbank move doesn't alter their (bullish) SEK forecasts. Such is the luxury of not having a P/L...

Elsewhere, the flightless bird looks like it's been dropped out of an A380 and could be set to plunge to earth. There are ~4 bio of NZD uridashi bonds maturing this month, and the bulk appear unlikely to be rolled over. Meanwhile, the price of milk continues to drop; the latest Fonterra auction shows milk prices dropping 15% from May.

(The chart below shows US milk prices, but the trend is very similar.)

A local flavour on the Fonterra auction can be seen below:



Is it just Macro Man, or does this chap remind you of Murray Hewitt?

Elsewhere, the good news keeps on rolling for housing. It appears that the agencies have decided that the best way to deal with a global crisis caused by too much leverage in the housing market is to.....increase leverage in the housing market by offering 125% mortgages!

WTF? Can it really be that these clowns still don't have a Scooby this deep into the crisis?

As always, the solution appears to be throw debt and leverage at the problem and worry about who pays later. Sadly for the state of California, the time to pay is now, and the well is dry. Perhaps receiving a non-legal tender IOU from the Terminator (not personally autographed, alas) instead of a tax refund check won't affect consumption....but then again, maybe it will.

Hmmmm. Perhaps California should consider paying for Chinese imports into Long Beach Port with Arnie-bucks? After all, the Chinese clearly want an alternative to the dollar (which they're either pushing or not for discussion at the forthcoming G8 meeting); given that no major banks are accepting Arnie-bucks, California's IOUs are clearly a distinct instrument. C'mon, Arnie, make it happen: everyone's a winner!

The market giveth, the market taketh away. That's the story in periods of indecision, when punters have little in the way of conviction and are swayed by each new datapoint. The, ahem, creative ways of interpreting the data just add to the "fun."

Take yesterday's figures in the US for example. Equities received an early fillip from the release of Case-Shiller house price data that was a) slightly better than expected, and b) hsowed an uptick in the y/y pace of decline. Somehow, this was spun as representing an uptick in house prices. Actually, when we look at the underlying index, pictured below, we see yet another monthly decline...albeit at a slightly reduced pace.


Regardless of what month-to-month changes in data do for the rest of the year, we should all gird ourselves for quite a bit of volatility in the y/y figures. As the aftermath of various 2008 crises (Bear/Fannie/Lehman), fall out fo the equation, yearly rise in activity (and, it should be added, inflation) will rise sharply.

In any event, the happy times proved short lived after the fall in consumer confidence. Macro Man has mused before on the inanity of the stock market reacting to a measure whose primary driver is prior stock market action, and yesterday demonstrated that it works both ways. What consumer confidence giveth, it also taketh away.

In any event, there was enough in the overnight data for the China believers to keep believin'. Korean exports staged another impressive recovery in June, while remaining well short of last year's peak. Unfortunately, half an hour of digging for the monthly breakdown by country, updated for June, yielded unsatisfactory results. While Bloomberg has some data, it is pretty obviously wrong.

So at this juncture for Macro Man to confirm or deny that Chinese demand is riding to the rescue. Reading some of the ancillary analysis, it looks like quite a bit of the export bounce was down to ships; readers are invited to judge for themselves whether that is either sustainable or particularly healthy.

In any event, Macro Man is savvy enough to get out of the way when the market has its mind made up. And hey, the Chinese PMI was a decent enough number, as indeed have been the European equivalents so far this morning. And didja catch a load of Aussie retail sales? Up a full percent, baby! (Let's not talk about building approvals, though. Please.)

Part of succeeding in this game is knowing when to bet large and when to dial it down. If, as seems likely to Macro Man, the Chinese "miracle" seems too good to be true and the global PMI rebound simply represents a re-stocking phase that will not be met by final demand, the market will give back the opportunities that it has withdrawn over the past few months.

And in answer to mpm's query in the comments section of yesterday's post, Macro Man will countenance becoming more bullish when the good news come from sources other than those known to be, shall we say, economical with the true. Ultimately, Macro Man foresees another consumer downleg thanks to the large mortgage resets looming next year; until he sees some evidence that this hurdle can be successfully surmounted, his heart will belong to the bears, even if he occasionally rents a long risk position if that's the opportnity that the market gives.