Macro Man

Macro Man was chagrined to find, upon emerging from his house this morning, that his windshield had iced over for the first time this autumn/winter. Fortunately, because his regular train is still AWOL, he's getting a later service, which afforded him the time to retrieve a scraper and do the business.

Little did he know, however, that the ice on his windshield had come straight from the veins of the marketplace. Dubai is yesterday's news, evidently....he's had no Nakheel price updates from FX monkeys at all this morning, and while the Dubai equity index has cratered again today, developed market stock futures are back threatening their highs of the year.

The dollar's also thoughtfully taking a beating, stirring the fire in the loins of the risk-orgy crowd. It now seems to be a popular proposition that the pain trade into year end is once again the melt-up; if positioning really is that sparse, Macro Man wonders, why did the market absolutely crap itself when the Dubai news hit the tape?

In any event, the lust for gold, both literal and metaphorical, is back in play today, and the barabarous relic has posted a fresh all time high this morning, tickling but not breaching the $1200/oz level.
Meanwhile, the FX carry crowd is once again swaggering about, perhaps at least partially because of policy divergence in the Asian time zone. The RBA hiked rates again overnight, in line with leaks yesterday but contrary to some speculation at the height of the Dubai panic. The BOJ, meanwhile, called an emergency meeting and announced a 3 month tender facility at 0.10%. Not exactly earth shattering, and hardly the thing to break the back of the deflationary spiral. But with 3 month TIBOR just under 0.30% and the yen near 14 year highs, it was enough to rally the strip and generate a small bounce in USD/JPY. How sustainable those are remain to be seen.

So here we sit, with ISM, the BOE/ECB announcements (will the last LTRO be fixed or indexed?), and payrolls yet to come this week....and Spoos are within spitting distance of their yearly highs. The last few months have seen a strong equity rally on the third or fourth trading day of the month; this time around, markts don't want to seem to wait.

Maybe they really do have ice in their veins.....or maybe they have ADD. Is a warm jumper or Ritalin the solution? We'll know more in a few days.

OK, so it looks as if disaster may be averted in Dubai: the latest hot rumour is that the central bank will guarantee all Dubai World debt. This is not altogether shocking- was this not among the rationales for the big intraday equity bounce on Friday?- but has nevertheless provided comfort to bondholders. The (in)famous Dec '09 Nakheel bond was recently quoted 65/70....well below par, but certainly a damn sight better than the 40-mid price that Macro Man saw on Friday morning.

Equity holders, on the other hand, may be left holding the bag...or at least that's the fear. The Dubai stock market, open for the first time since Wednesday, has cratered lower, down more than 8% at the time of writing.

That price action looks pretty grim, doesn't it? Well, yes and no. The chart above is clearly pretty ugly. But it's worth taking a step back and putting it into context. The Dubai equity market was always telling us that they were buggered; the index has barely recovererd any of its massive 2008 losses this year. Seen in this context, today's meltdown barely registers. Indeed, taking the message from equities, one wonders why the recent turbulence surrounding Dubai World constituted that much of a surprise....
In any event, the price action of the last 72 market hours has been ugly. Both longs and shorts have been stopped, in, say EUR/USD, which put in a nice 2% 3-day range not long after Macro Man observed that realized vols were at post-Lehman lows. It took a pretty firm stomach to hold positions through the "Dubai meltdown."
Indeed, observing price action across markets, Macro Man feels a bit like Tiger Woods' next-door neighbour. He can see that something bad is happening and that people are getting hurt, but he's not sure exactly what's happening and the people who do know aren't talking.

Friday's post-NY close price action in equities is a case in point. A few minutes after US equities closed at 6pm London time, someone did a bit of a drive-by in Eurostoxx futures, sending the price more than a percent lower. Macro Man felt like he was enrolled in Journalism 101. Who? What? Where? Why?
Anyhow, for the time being it seems as if we've stabilized. The euro's above 1.50, Western index futures have held onto Friday's gains, and for some reason oil is still chugging higher. But with month-end upon us, there's ample opportunity for fixing-driven noise.

And bubbling below the surface, Greece remains aa source of worry. Wolfgang Munchau suggests that Europe will not ride to the rescue, while the WSJ reports that the Greek government will flog their paper to the Chinese. While China is justly proud of its thousands of years of cultural history, they might do well to consider a proverb based on the Greco-Roman tradition: Beware of Greeks bearing gifts....

Sometimes, those little guys matter. That seems to be the message of the past twenty-four hours where rumours/uncertainty over a possible default by Dubai has created a good-old fashioned panic in asset markets. It's been what...eight and a half months since we've felt remotely like this? Seems like a lifetime ago...

In fairness, this isn't quite the same as the post-Lehman maelstrom. While Dubai's debts are not inconsiderable, they pale in significance when placed side-by-side with queries over the viability of the entire global banking system. Still, those itching for a good crisis will take what they can get, and the implication for financial market pricing is exacerbated by the fact that the US is on its Black Friday post-Thanksgiving hangover and that Dubai itself (with the rest of the Muslim world) is out 'til Tuesday for the Eid al-Adha holiday.

Oh dear. So in impaired liquidity conditions, we are unlikely to see any real news on the catalyst for a few days. You can almost see the boogey-man emerging from the closet, can't you, coming to fan your darkest fears (or at least to aim a shotgun at your favourite position flamingo.) Those Nakheel bonds, the chart of which Macro Man posted yesterday, have been quoted as low as 32 mid this morning, and are now trading around 45 mid. For a bond that went 112 paid on Tuesday, that's got to hurt.

Now, while the good times might roll again on Tuesday if, as many suspect, Abu Dhabi rides to the rescue on a white camel to backstop/guarantee Dubai's debts. Still, there's been quite a bit of technical damage exacted on the marketplace. Frankly, Macro Man isn't sure how much appetite there will be to reload next week (and month)...he is curious to hear informed readers' views.

Anyhow, gold has crashed through its steep uptrend, at least temporarily, today....
...and while EUR/USD is still clinging on to its uptrend (as well as the 55 day moving average), its hold looks precarious. A crash below 1.48 could confirm the reversal in gold. Jeez, that breakout above 1.5064 seems like a looonnnggggg time ago...

It's squeaky-bum time for owners of equities, many of which have crashed through interesting levels in these illiquid markets. Owners of the Hang Seng, for example, must feel like they are riding the London Underground. "Mind the gap...."

A key to whether this sell-off has further to go or is merely an early Christmas sale (it is Black Friday, after all!) may well be what happens to LIBOR. The entire risk-asset orgy has been propelled by the normalization (and then some!) of LIBORs since the imposition of QE. Should LIBORs begin to move out as we approach the end of the year, that could spark concerns of a more systemic kind...and likely give this sell-off legs.

Punters have already come to that conclusion, and there has been good interest from "smart money" to sell the front LIBOR contracts. It's a nice trade at the highs, as your stop is the current LIBOR fix. Selling at a 8-10 bp discount to curent LIBOR, with settlement just 3 weeks away, is perhaps less interesting.
So there you go. Not only do you have to watch for news of an Abu Dhabi bailout of Dubai, but you've also got to see if LIBOR bloows out or not. If it's "yes" on the former and "no" on the latter, then we may well revert to an "as you were" risk/reflation rally (particularly if today's jitters dissuade the ECB from monkeying with the LTRO next week.) If it's "no" and "yes", however....well, then maybe we really could see a good old-fashioned panic...

It's Thanksgiving today, which means heavily impaired liquidity and, thus far, large price swings. Before Macro Man starts to "cook" Thanksgiving dinner (i.e., put the turkey on the barbecue to roast while Mrs. Macro does everything else), he has time to once again count his blessings after what has been another eventful year:

1) First, and most importantly, that Mrs. Macro and the Macro Boys are healthy and happy.

2) That it was he, rather than they, that suffered a serious knee injury while skiing in February.

3) That he works in an industry that provides intellectual stimulation, indulges his competitive instincts, and offers plenty of fodder for his satiric side.

4) That just about everyone he knows from Lehman (hint: none of them were assemblers, traders, or sellers of packaged turds) has landed on their feet.

5) That despite being wrong in his big picture views for what seems like forever, Macro Man has managed to scratch out a bit of P/L this year.

6) That he has an open enough mind to hedge his bets and change his behaviour when he is wrong, even if the view is unchanged.

7) That his firm has a) been so supportive of his injury rehab efforts, and b) managed to cobble together another good year

8) That he has not taken a dime, directly or indirectly, from any taxpayers....

9) That he was not in any way invested in the December 2009 bonds of Nakheel, which have plunged over the last 24 hours on a restructuring announcement. They're currently trading around 70; a 40 point drop 3 weeks before the supposed maturity has gotta hurt...
10) That this space continues to attract a frankly baffling number of readers and a high calibre of interaction with other market punters and observers. Thanks for reading....

....and best of luck for the remainder of 2009.

It feels like an either/or kind of market doesn't it? With a number of key asset prices (SPX, EUR/USD) approaching their extremes of the year in liquidity-impaired holiday markets, it feels like we're either on the edge of a breakout/melt-up or witnessing perhaps the last chance to sell vol at decent levels before the end of the year.

The dollar has taken a bit of a bashing today against both the euro and the yen, no doubt helped by the Fed's relatively sanguine view in last night's minutes on recent dollar weakness. EUR/USD has traded on a 1.48 or 1.49 handle every day since October 9, so at this juncture it is probably still premature to get too excited about today's move. As you can see, one month realized euro vol is (unsurprisingly) now at its lowest since Lehman went bust.
Still, there's plenty of precedent for big currency moves in thin markets; Macro Man has the feeling that if the previous high of 1.5064 were to give today, then tomorrow may well break the streak of consecutive "1.48 or 1.49" days.

Macro Man's scepticism over yesterday's Shanghai "collapse" proved to be well-founded, as the Comp rallied 2% today. While that scepticism didn't make him any dough, it at least prevented him from doing something stupid, which is at least a start when you're on a cold streak.

Lest we all think that everything is hunky-dory, however, there are a couple of reasons to doubt that the future will be wobbble-free. The FDIC confirmed that its insurance pot is now negative, which is strangely apt insofar as the taxpayers' net return on providing insurance to the banking sector has also been negative!

Meanwhile, in Asia, the State Bank of Vietnam officially devalued its currency over night. Asia watchers may recall that it also did so in May 2008, just a few months before the rest of the world went "kaboom." So far, the rest of Asia andd EM has happily shrugged off the Vietnam news, and Macro Man can be glad that he hasn't been positioned in a Vietnam/metals relative value trade.

As you can see, long dong/silver has not been a winner this year....

It's tempting to get sucked into writing about today's sharp decline in the Shanghai Composite (pictured below) and what it might mean for developed markets. The problem is that at this juncture, Macro Man isn't sure that it means much at all. In both 2008 and 2009, the r^2 between the 'Comp and the SPX has been zero; in illiquid markets two days before Thanksgiving, it's not at all clear that that's about to change.
Instead, Macro Man would like to touch briefly on a couple of bigger issues surrounding the "once in a lifetime" crisis that we've all lived through over the past couple of years. Your author has recently opened a personal "time capsule" of sorts. When he left the US in May 1994, he had little clue that he'd not return save for a 3-month soujorn in the summer of '95. So he bunged most of his worldly goods into storage....where they remained for the better part of a decade and a half.

Finally, upon the insistence of the divine Mrs. M, Macro Man had these goods shipped to the UK to put an end to the dreary (and expensive) routine of paying quarterly storage fees. Opening the boxes provided a glimpse into his life in his early 20's. Clothing of dubious quality and appalling style brought gales of laughter from Mrs. Macro. A television dating from roughly 1980 served as something of a museum piece for the Macro Boys ("Daddy, what are these big circles on the TV? And where is the remote?") And boxes of books provided an insight into Macro Man's reading habits in the early 90's.

One volume in particular caught Macro Man's eye: Den of Thieves, by James. B. Stewart, which explores some of the insider trading scandals of the 1980's. Over the weekend, Macro Man picked it up and started reading. While it is tempting to think that our current crisis is the result of unrivalled cupidity and stupidity, even the first few chapters of Den suggests that Ecclesiastes 1:9 was correct: there is nothing new under the sun.

From the buffoonish Dennis Levine to the utterly corrupt Ivan Boesky, the cast of characters could easily have been taken from the murky underworld of subprime and structured credit. While it's true that the government wasn't a direct participant in the insider scams, as they are today, from Macro Man's perch that's merely a question of scale. And it's refreshing to see that some things haven't changed; an episode early in the book describes how Marty Siegel of Kidder Peabody wins some banking business because he pitched to the client's need, whereas "Goldman just talked about how great Goldman is".

Switching topics, Macro Man has always been an enthusiastic proponent and particpant in sports. Not only does a healthy body produce a healthy mind, but sports forces one to deal with winning and losing, teaches something about teamwork, and enforces a discipline that practice and hard work are required to improve. These are hardly startling insights, but they nevertheless provide a gentle introduction to the real world to minds as callow as the Macro Boys' (aged 7 and 6.)

And so the recent France-Ireland World Cup qualifier is apposite. The matchup was part of a process that sought to identify four teams to qualify for the World Cup from the eight second-place finishers in the European group stages. Once it became apparent that France was going to enter the play-off process, rather than qualify by winning its group, FIFA decided, ex-post, to seed the playoffs, ensuring that the "big" teams would have a relatively easy path to the WC.

This inherently put the "small" teams, such as Ireland, at a disadvantage by robbing them of the chance to be randomly paired against a fellow minnow. It seemed particlarly hard luck on the Paddies, who'd already had to confront the other 2006 World Cup finalist, Italy, in the group stages.

Of course, when France snatched a 0-1 victory at Croke Park in Dublin, the result looked like a foregone conclusion. Yet the plucky Irish went to the Stade de France and outplayed their hosts, leading 0-1 after ninety minutes and sending the fixture into extra time. This naturally skewed the tie in favour of the home side, who would be playing the critical half-hour at...err...home.

In any case, ten minutes or so into extra time, France snatched the winning goal through the most famous hand-ball since Maradona's:



Note the immediate, frenzied reaction of the Irish to Thierry Henry's blatant controlling of the ball with his hand. The referee and linesmen missed the call, but it's abundantly clear on television replay. Surely such technology is available to correct a blatant violation of the laws of the game?

Sadly, no. For reasons best known to himself, FIFA supremo Sepp Blatter has seen fit to ignore the desires of most fans and many participants and refused to sanction the usage of any technology in officiating the game. The result is a series of increasingly shambolic decisions from referees in high-profile matches.

The Irish, understandably irate, requested a replay from both FIFA and the French Federation. They were unsurprisingly refused, despite a precedent for ordering a replay on a refereeing error. Of course, that was between two insignificant teams, Bahrain and Uzbekistan, not a big team like France.

When Macro Man and the missus showed the video of the French "goal" to the Macro Boys the next day, they irately shouted "that's not fair! Henry cheated!" Nevertheless, despite close to universal derision, even in France, Les Bleus are going to the World Cup.

Yep, sports can definitely teach valuable life lessons to youngsters. And the lesson, in this case, is that there's definitely such a thing as "Too Big To Fail."

As we embark upon Thanksgiving week, thus ushering in the low-liquidity holiday silly-season, you can almost hear Slade (or is that Quiet Riot?) in your ear as you watch the screens. If you're a noise trader, there are rich pickings to be had; if you're a signal trader, thre's not much you can do but pick your spots and bear it.

Still, there have been a couple of interesting features as we kick off the week. Gold has made (another) new high, seemingly dragging the DXY down in its wake.

Speculation that the ECB is moving towards an exit strategy received a boost on Friday when they announced changes to the ratings requirements for ABS collateral from March onwards. While there's no suggestion that rates (either the refi or EONIA) will necessarily rise in conjunction with this change, given the relatively rich market pricing, it's probably not a surprise that the euribor strip has been sold on the back of the announcement. However, the strip is now pricing the rise in euribor to be relatively front-loaded, which opens up some interesting curve trades.
Meanwhile, the Brownian motion of the SPX continues apace, with short term chartists no doubt keying on the little head and shoulders pattern on the short-term chart. At this point, Macro Man has no strong conviction on how the price action will resolve itself; given holiday illiquidity, all it will take is a big order to confirm or negate the pattern. Yawn.
Thrown in some noise about soverign risk, and you've got the perfect recipe for a headbanger's ball this week. Whether that describes the noise of the market or the relationship of Macro Man's noggin to his desk remains to be seen...