Wednesday, June 20, 2007

From short, to long, back to short.....

Yes, I have split personality - one day I am long, the next I am too scared and take profit.....but that's the conditions for high frequency macro fund like myself - today's issue:

The Merril Lynch liquidation of Bear Stearn High Yield Fund. Merrill did not agree terms with Bear on the credit and will initiate liquidation in an auction today. I do not, per se, expect any issues in placing theses papers, what concerns is more the follow on effect from this. Should these papers trade below their present level it could have serious implication on the ABX Index, which already trades below February low!!!!!!!

Something is wrong in high credit land. Yes, the central bankers tells me their is no spill-over from sub-prime, but having two major investment banks fighting is out via media and auctions does not exactly tell me things are smooth sailing either?

I am still working hard on the liquidity index and spent yesterday reading excellent piece by Soc. Gen's Research team, Stephen Gallagher & Aneta Markowska, titled: EcoInsight, Global liquidity cycle ebbing it strikes me doing one index would probably be too ambitious.

My solution should include: central bank action as measured by real Fed Funds plus minus 1 std. dev. (upper vs lower is 0% at 4%) making the present 3% towards higher end of average.

That's the easy part, now I need to find some way to expand on traditional measures, but as everyone used VIX, credit spreads, and leverage I need to find something different. (note: I get research from probably eight investment banks each morning - and EVERYONE has the same message day-by-day which leads me to think it's value is ZERO!)

So...I need some inspiration if any of you can help?

My present theme, if I have any, would be: Some disappointment with US data next few weeks, which will take yield back down and T-bonds to minimum 108-ish or even 111 16/32 ish.

This should lead US dollar lower, stock markets slightly down, and yield lower. I have felt all year that fixed income was the REAL STORY. The sovereign wealth funds have made big macro difference, so their action needs to be followed. Having sold April-May it seems sovereign are again on the bid for fixed income.

Short-term the lack of new data this week makes sub-prime the front news story.

The auction itself should be ok, but the follow up and the renewed focus on the sub-prime area should lead to some nervousness, this comes at a time, where momentum is coming out of the market on the indices and where we have had a few earning warnings.

The investments banks tells me to be fully loaded during the summer and some evidence from "counting" also indicates this summer could be good:

Since 1914 - the average return from the mid-term year low (2006) to its next peak pre-election is 50% which should mean Dow sees 16.000!

This type of "counting" makes for interesting analysis, but the concept of history repeating itself in mirror image is a stretch as fundamentals and micro changes simply is not the same every four years.......but point being: from analytic point of views there is not really ANYTHING to worry about ... liquidity is getting tighter, long-end has reacted with steeper rates, but private equity and other leverage players will tell you Fed model is still saying equity is cheap.

I do however note that New Zealand does not like the currency being part of global gambling, not that they have succeeded in containing further gains, Brazil have instituted more restrictions and there is yet another rumour of hikes in China.

End of the day, we will not know what and when this paradise like scenario changes but right now the micro changes are making noises which makes me defensive.

Present positioning:

FX: Short EURCHF, new position from today. Took profit in long EURUSD (even though all of above is positive EUR.USD).....

FI: Bought T-bonds, new position from today.....reason above.

Equity: Went from 2 units long Dax to 1 unit short this morning. Stop 1 ATR away.

Commodities: Long Crude on the break in August contract.

1 comment:

Agustin said...

Steen. Good post! One area that remains largely untouched is ... "euro-liquidity". Everyone --myself included-- focuses on dollar-based liquidity. True, it's still the dominant factor, but if the euro gains as an international reserve currency, this would be useful. One problem: the ECB does not publish the stock of euro-denominated bonds held by foreign central banks, as the Fed does...