The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The minutes from the Apr 26-27 FOMC meeting focused a lot on the exit strategy of its current extraordinary policy BUT the key question that was not answered and not really discussed was WHEN as they said “the 1st key issue was the extent to which the Committee would want to tighten policy, AT THE APPROPRIATE TIME…” The first step, when it happens, would be the halt to the reinvestment payments of principal on agency paper and Treasuries but they said specifically that they don’t know yet when this will happen. Bottom line, they know the party has to end at some point soon but there is no time yet on when. Their continued concerns with growth and belief that notwithstanding the rise in commodity prices and inflation readings, has them still unsure when to proceed with the unwind. Mark this down as my personal guarantee, the unwind won’t be a pretty, smooth process and is potentially going to be highly disruptive just as taking away heroin from an addict is messy (from what I’ve read).

We’ve posted a few items about the dollar recently (See this and this). the recent counter-trend strength in the buck is what has roiled commodity markets as well as equities.

Today’s NYT has an article that on a possible greenback rally, Some See Rise Ahead for Dollar:

“Could the long dollar slide be over?

For the better part of the past decade, and particularly in the last few months, the American dollar has been the 98-pound weakling of the foreign exchange world. It has lost value against almost every other global currency — not just the euro, pound and yen but even the Romanian new leu and the Latvian lats.

Driven largely by the Federal Reserve’s policy of printing dollars to help spur a healthy economic recovery that remains stubbornly elusive, the dollar, weighed against a basket of other currencies, hit a 40-year low this month.

But betting against the dollar may no longer be such a safe play — not necessarily because of any sudden macroeconomic shifts but because of a sense that the long dollar sell-off may have finally gone too far. Since May 4, the dollar is up 4 percent against the euro and 2 percent against the pound, while rallying against the Romanian and Latvian currencies as well.

In light of the article, let’s take another look at a few Dollar charts:

>

US Dollar Swings

click for larger charts

>

Dollar vs Major Currencies

>

Previously:
Dollar’s Biggest Decline? 2001-08 (April 23rd, 2011)

The value of the dollar: Five factors for investors (Washington Post, April 23, 2011)

The US Dollar, Annotated (April 29th, 2011)

Source:
Some See Rise Ahead for Dollar
LANDON THOMAS Jr.
NYT, May 17, 2011  
http://www.nytimes.com/2011/05/18/business/global/18dollar.html

What do the Blair Witch Project, credit cards, and the human condition’s need to keep up with the proverbial ‘Jones’’ have in common? Well, one leads to the other.

>

Source:
(Visual Economics)

The S&P500 and Nasdaq tested, traded through, and closed above their 50-day moving averages aided by a huge reversal in Apple, the rest of tech, and an impressive late day broad market rally.   Another positive was the behavior of the VIX, which fell 3.8 percent from yesterday’s close.

The key question is “was that it?”   We’re not sure, but doubt it.  With zero percent interest rates and the 10-year at 3.10 percent the equity markets are holding money hostage as there is no place to go.   Today felt like a wasted day at the Circle J Ranch as traders seemed to be getting short and buying back stock from each other.   Nothing was really resolved.

Nevertheless,  one must respect the action and look to history for direction.  The chart below shows that on November 29, the S&P 500 similarly pierced its 50-day by 0.31 percent intraday only to close 0.88 percent above the 50-day.   The VIX also fell 3.1 percent that day.  This set up the 12.85 percent sling shot rally into mid-February.

Today the S&P 500 traded through its 50-day by 0.40 percent and closed 0.39 percent above the 50-day.   The VIX fell 3.8 percent on the day.   We doubt the S&P is done with the 50-day and ready to rally likes its  Novie 29.   Recall,  QE2 was just launching back then and is now ready for the dry dock.

We’re respectful of today’s action, but we think the jackhammers will be back banging on the 50-day at least a few more times before the market sounds the all-clear whistle, which you know it never does.    Stay tuned,  friends.   (click here if chart is not observable)

>
click for larger chart

~~~

Source:
Global Slowdown to Hit by Summer, Even for U.S., Says Achuthan
Stacy Curtin
Yahoo Daily Ticker
http://finance.yahoo.com/blogs/daily-ticker/global-slowdown-hit-summer-even-u-says-achuthan-130920838.html

Last week, I chatted with Wally Forbes about what was going on in the fund world, the markets, the economy:

“There are lots of opportunities, even if you’re not happy with the economy. Let me rephrase this precisely. Whenever I get a tirade from either an institutional client or a fund manager about the, “Fed is doing this and it’s just terrible,” I always have to say, “Hey, you know what? If you want to join a think tank in D.C. and become a Monday morning armchair policy wonk, you can. But that’s not what my job is.”

My job is to look out at the landscape and say, “Where are the opportunities?” I could read you chapter and verse as to why I think all the policy decisions that the Fed has done is wrong, from LTCM to Bear Stearns to ZIRP. I – literally – wrote a book detailing all of their screw ups.

But that’s what I do on my weekends. During my day job, I have to turn over rocks and say, “Where is there opportunity to deploy capital?” And I think a lot of people make the mistake of ignoring opportunity, and overlooking risk. It’s one thing to be a fan and either cheer or jeer while sitting up in the cheap seats. But it’s something else entirely when you’re on the playing field.”

The whole interview is fun stuff . . .

>

Source:
Stop Criticizing Bernanke, Start Finding Investment Opportunities
Wallace Forbes
Forbes May 17 2011
http://blogs.forbes.com/wallaceforbes/2011/05/17/stop-criticizing-bernanke-start-finding-investment-opportunities/

While Muni Fund Investors Flee, Others Pounce (Bloomberg BusinessWeek)

Fiscal crises in states and cities have prompted big withdrawals from muni-bond funds. Investors with more risk tolerance are being lured by yields near 4 percent

The fiscal crisis in states and cities is a buying opportunity for John Hirsch. He’s been snapping up municipal bonds since the beginning of the year, taking advantage of falling prices as muni mutual funds are forced to sell bonds to cover withdrawals. Hirsch, 57, is looking for income and isn’t worried about fluctuating market values. “I have no interest in trading bonds,” says Hirsch, a consultant to the medical industry in Clermont, Fla. “I’m going to hold until maturity, and at maturity I’ll get the face value back.” Investors have withdrawn about $48.5 billion from U.S. municipal-bond mutual funds since Nov. 10, pulling money for 25 weeks straight, according to Lipper US Fund Flows, a research company in Denver. Those withdrawals have forced mutual fund managers to sell, putting downward pressure on prices. Investment-grade muni-bond prices have dropped 3.7 percent in the six months through May 6, as measured by the Bank of America Merrill Lynch (BAC) Municipal Master Index. That has driven yields on bonds in the index, which rise when prices fall, to 3.74 percent, which is equivalent to a taxable yield of 5.75 percent for an investor in the top 35 percent federal tax bracket. That’s up from 3.46 percent on Nov. 10.

Comment:

See the bottom panel of the chart below.  Mutual funds investors started selling muni mutual funds the week of November 17, 2010 and have not had a weekly inflow since.  See the middle panel of the chart below.  Every week since December 29, 2010 taxable fixed-income mutual funds have seen inflows.

So what happened on or around November 17, 2010 to chase investors out of muni mutual funds?  Many like to blame Meridith Whitney’s now famous 60 Minutes interview in which she said, “You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.”  The problem is this interview occurred on December 19, over a month after the outflows began.  You can’t cause the past.

Back on November 15 we noted that investors started to run away from the muni market when the Build America Bond (BABs) program was not renewed.  A lot of issuers of BABs would instead return to the tax exempt market.

click for larger chart

With most Asian stock markets rallying overnight with the Shanghai index at a one week high (Indian Sensex in contrast at a fresh 8 week low), commodity prices are bouncing with copper in particular back above $4 and a touch above its 200 day moving average. With respect to Greece, the rhetoric is getting more heated between the ECB and other EU members over what to do next. ECB member Stark said a Greek debt restructuring “would create a catastrophe” as he believes that it “would wipe out part or all the capital of the Greek banks.” The Greek drama continues to be a global focus, not because of what it means for Greece specifically as their economy is tiny but what the implications will be for Ireland and others if bond holders and thus banks are negatively impacted. Spain’s bond yields are quietly rising to a 3 week high. In the US, with mortgage rates falling to a fresh 5 month low, the MBA said refi’s in turn rose by 13.2% to a 5 month high. Unfortunately, purchases couldn’t gain any traction as they fell 3.2%. II: Bulls 45.6 v 51.1 Bears 19.6 v 18.5 Correction 34.8 v 30.4

I began my career in finance as a trader. Our compensation was based on a combination of trade volume and performance gains. We were given little in the way of training — pretty much thrown into the deep end of the pool, while the head trader screamed “Swim!”

These were the early days of multi-player gaming. I would spend the day scratching out small gains, before going home flat. (Carrying an overnight position involved more risk than we were allowed to assume).

Then came Quake. After the close, we would hijack a price server, and a dozen or more guys would jack into the trading floor network for a quick round of blast and run. Although mid 1990s game might appear crude compared to today’s HD rendered graphics and 3D physics engines, these were totally immersive experiences. You would get completely lost in the nether world; what was supposed to a quick hour to blow off some stress fragging the guys you sat shoulder-to-shoulder with. The RPG/Nail Gun/Hammer driven shoot ‘em up often lasted deep into the night. It was where I first understood what the phrase “glorious kill” meant.

The parallels between trading and the shoot ‘em ups was obvious: You feel your way around a shadowy world where perils and rewards lay around each turn. In the beginning, you get toasted regularly by people with superior kno0wledge and firepower. After a while, you develop a familiarity with the lay of the land, learn where some power ups and weapons were hidden, and start to out shoot your competitors.

I was reminded of those early days reading a piece in The Atlantic about the daily work of traders at a bulge bracket firms. Although a trader’s actual job is quite specific — a “complex combination of rules and triggers” to generate specific monthly returns relative to risk and volatility — the work itself increasingly resembles MMOGs:

“Mind you, the game the traders play is nothing like Mario or Zelda or Megaman. It’s not a shoot-em-up or racing game. What it is is more like Starcraft or maybe TradeWars: an intense, cerebral, massively multiplayer real-time strategy game. It’s a game grounded in information: prices, mostly, but also all kinds of news and rumors and oblique signals, whether by way of balance sheets or CNBC. It’s the kind of game that requires the player to immerse himself in data, distill from it a sort of strategical gestalt, and convert that high-level battle plan into a series of discrete maneuvers, in this case trades on the open market.

The difference here being, of course, that it’s all real.”

Situational awareness and the ability to juggle are not only required skills:

“What stands out instead is a whole lot of fine-grained maneuvering: flitting from an open chat window over to a spreadsheet to run quick scenarios based on a new idea; backing off from a trade to see where his risk is at for the day; tracing counterfactuals (“if I do this and the market does this and I do this…”); catching a position on the verge of a critical price, diving into “crisis mode” for two minutes, eyes fixed on a few specific numbers, poised to react with a chord of contrapuntal trades; leaning back to watch the market for certain thematic trends; shouting to one of the senior traders on his desk when he’s confused about something; blocking half an hour to drill down into the details of a contract’s code; working out a low-level tactical “line”; jotting quick calculations and graphs; executing a series of rapid trades, running through a mental checklist to avoid mistakes; kibitzing with colleagues; responding to e-mails; eating; and keeping an eye on the news.

He says that his attention span has shortened but that in return he’s picked up two abilities: broad situational awareness, i.e., the ability to juggle lots of disparate facts in working memory; and the pre-scandal Tiger-Woodsian knack for blocking out distractions when something big is on the line.”

I would imagine most traders can confirm similar sensations between gaming and trading.

When I shifted from, trading to research, I experienced two difficulties: The first was pulling the needle out of my arm. Trading is a drug that involves lots of dopamine. All of the psychological discussions we have here, at least in part, trace to an early recognition that trading for an adrenaline high is not a formula for making money.

The second? The end of those late night Quake games . . .

>

Source:
On the Floor Laughing: Traders Are Having a New Kind of Fun
James Somers
The Atlantic May 9 2011
http://www.theatlantic.com/technology/archive/2011/05/on-the-floor-laughing-traders-are-having-a-new-kind-of-fun/238570/

~~~

Source:
Never Short an Uptrend, Says Louise Yamada
Matt Nesto
Breakout, May 17, 2011
http://finance.yahoo.com/blogs/breakout/never-short-uptrend-says-louise-yamada-160506438.html