Don't Step in Front of the Market Steamroller

Markets have suddenly become moderately interesting again (though they remain bum-clenchingly illiquid), helped along by yesterday's Fed announcement of quasi-ZIRP and quasi-quantitative easing.

Perhaps Macro Man is alone in this sentiment, but he didn't actually see much new news in yesterday's announcement. Sure, the target Fed funds rate was a bit lower than folks expected, but given that the effective funds rate has closed between 0.10% - 0.20% for the past two weeks, the surprise on the target rate is largely irrelevant.

As for the "bazooka" that the Fed wheeled out yesterday, hasn't all that stuff been announced already? OK, fine, they laid out the commitment to maintain uber-low rates for an extended period for the first time....but anyone who's read the Bernanke papers on Japan and QE knows that that is just part of the playbook.

So it was with bemusement that Macro Man saw a lovely risk rally and the dollar sell off. Equities have frankly been fairly uninteresting for Macro Man recently, and the minuscule trading volumes of the past few days suggest that he isn't alone.

What was curious about yesterday's trading is that it brought Macro Man's risk appetite indicator (proprietary, don't ask) back into positive territory for the first time since the week before Lehman went bust.

So naturally, this morning's been filled with feel-good stories like another Russian devaluation, the Swedish national debt office starting to take currency punts on the krona because they're worried about SEK weakness, and Deutsche Bank failing to call a Tier 2 bond.

The real story of the past 24 hours or so has been the weakness of the US dollar. Macro Man wrote a few days ago that he was getting a bit worried about his dollar bullish stance (and thus brought his exposure back to neutral) but was not yet prepared to jettison it. Clearly someone has had no such reservations, as the EUR has traded up to a high of nearly 1.42 against the buck this morning. It closed November below 1.27.

Tempting as it may be to extrapolate a new trend of dollar weakness on the back of QE, Macro Man remains cautious. The scale of the move has been exacerbated by the abjectly poor market liquidity. What's interesting is that none of the many banks that Macro Man speaks to has reported seeing much in terms of broad-based flow.

While Macro Man's old chums Voldemort and Co. have evidently been active, in the private sector the real players have been trend followers, a cohort who could not care less about whether the Fed follows a policy of QE or PE.

And small wonder - CTAs are one of the few solid performers in the leveraged fund world.

But here's the thing - what goes around, comes around with the trend-following types. Aggressive buying today could easily be followed by aggressive selling tomorrow, next week, or next month.

For the moment, Macro Man is happy to step aside and let the models have their fun. If 2008 has taught him anything, it's that stepping in front of a steamroller is not a particularly pleasant experience.

Comments

[sg hammer:]

The secondary (daily) Delineator turned up on November 21st giving a target for SPY of 99.50. Since that date, the primary (30 minute) Delineator identified 5 separate long trade opportunities. Yesterday's signal came 3.5 hours prior to the FOMC announcement.

2008 Dec 17 08:36 AM

[investor88:]

Agree with Macro man. By all means trade [long or short] but do not step in front of the steamroller.

2008 Dec 17 08:37 AM

[stox2buy:]

trade?

better make sure you are on the right side of the market.

easy?

99% of the people got it wrong most of the time.

one of the hardest thing in life is to make a decent living by trading, it's a lot easier said than done.

i haven't seen one successfully doing that for the past 20 years.

2008 Dec 17 11:04 AM

[cyclingscholar:]

AHA! SO your indicators come from Lord Voldemort, Macro Man! No wonder that ELDER wand (Bernanke) has been so ineffective. He did not seize his position by killing his predecessor. Apparently Lord Voldemort had a few more Horcruxes than he led Dumbledore to believe...perhaps hidden in other vaults at Gringotts bank...about the only bank which is solvent these days.

cyclingscholar

2008 Dec 17 11:31 AM

[Moon Kil Woong:]

People should not be cheering 0% interest rates. As the author mentions about the Weimar Republic, it shows such an act is usually an act of desperation. In that case, tantamount to pulling a gun out and shooting your economy in the head.

Interesting enough, another Axis power also did this, Japan. They are still suffering from it after all these years. A 10 plus recession followed by a lingering dead economy is not something I would consider the least bit enticing.

So why do I see so much cheering on websites yesterday aout the rate cute. Perhaps because the average person is a bit clueless about what they should know about, economics and the theory of what money is and what it does.

I had hoped the financial media was a bit better but I should not expect too much should I. After all, who would cheer the appointment of Lex Luthor Paulson who orchestrated Goldman's success on getting their clients to buy CDS certificates while they shorted them. Yah let's put the fox in charge of the henhouse because he knows how meaty and delicious their young taste.

2008 Dec 18 12:57 AM

[johngonole:]

I have no idea where the market or the economy is going. Really upset that I didn't buy stocks on either of the last two big market dips. Still the economy in a macro sense is unraveling. So calling a market bottom is tough. I agree that the market trades on what people expect future earnings to be. I realize most people believe the market predicts future economic action but I disagree. I disagree because its basically saying the market in whole can predict future macro economic activity. I think people move in heards and the heard has no more of an idea of where we are going than I do.

I'd like to see mergers, insider buying, and rising prices of some sort before saying we've hit bottom. It is possible we've hit bottom but I think we could go back down and hit it again.

What does scare me is that I actually think the Fed and govt have been very very proactive. For the average person the actions of these institutions seem to be much more aggressive than would seem necessary. I mean most people still have their jobs, etc...

With such a reaction by our govt and fed and yet with the economy still going down one must now conclude that the people in high places know or at a minimum think that the down turn could be very very bad. They have pressed the economic booster peddle down to the floor. The effects of past boosters should start to be felt soon. If they are not could be scary!!!!

Again I will freely admit at this point that I'm surprised we are where we are so fast AND I HAVE NO IDEA WHERE THE MARKET IS HEADED.

2008 Dec 18 03:19 AM