The Worst Isn't Over Yet

Well, the latest edition of policy "shock and awe" was released yesterday, with FASB adjusting the mark to market rules and the G20 promising a Dr. Evil-esque "one triiilllliiioonnnn dollars!" for the world economy. Markets were so excited that they barely noticed the disappointment from the ECB.

Well, that's not entirely true. The euro rallied sharply against the dollar (because in a 16 vol currency pair, an extra 25 bps makes the carry sooooooo much more attractive), and the front end of Europe got butchered. While euribor fell quite a bit, the real carnage was in Schatz. Macro Man stands by the view that German two year bonds are a much more attractive proposition than short-term lending; sadly, the market doesn't agree with him. Perhaps he can employ new FASB guidelines, as his model suggests that Schatz yields should be 1% rather than 1.5%?

While Macro Man will leave a full dissection of the G20 announcement to others, he is left waiting for Messrs. Brown and Sarkozy to move swiftly on the tax haven issue that has troubled them so much. He is looking forward to seeing a clampdown on noted tax avoidance centers like the Isle of Man, Channel Islands, British Virgin Islands, and Monaco. Or will Gordo continue to turn a (literal) blind eye to his island stashes while Sarko is unable to see over Les Alpes-Maritimes, even with platform shoes? Inquiring minds want to know.

Speaking of dodgy tax havens, the SNB received the green light, from the data at least, to make another foray into fighting deflation. Swiss CPI fell 0.4% y/y in March, lower than the expected -0.1% and the most intense deflation (or is that "extreme disinflation"?) since 1959. Given the reaction to Hildebrand's comments yesterday, the SNB may decide that for the time being, words are more powerful than trading tickets. But the marginal impact of jawboning will ebb swiftly; the only words that the market will want to hear is "One fifty five bid, your amount."

And of course, today sees the release of the US non-farm payroll data. Macro Man omitted mention of it over the past couple of days because it feels as if the market just doesn't care. The market feels like it's in the mood to shrug off a horrible number; hey, it's a lagging indicator, China's recovering, Dr. Evil has saved the world, etc. etc. etc. A "mere" 500k job loss figure, on the other hand, could be met with cries that the "worst is over". Or so the theory goes.

In any event, Macro Man expects another wretched figure as his little model suggests that the unemployment rate will tick up to 8.6% - 8.7%.

At this point, Macro Man is looking forward to the weekend. He might pay away a bit of option decay, but at least he knows where that is coming from. It feels like he's been scuffling for about three weeks now; while the P/L damage has been fairly modest, the intellectual hit has been more considerable. It's all part of the business, of course, but he's looking forward to a couple of days where he's not saying "WTF?"

Comments

[Glen L.:]

To Urbane Gorrila: I gave iatamike a thumbs down because of the advice to ride out the bear market rally. Lots of folks are going to lose their shirts on such advice. I gave you a thumbs down because you quoted Keynes, who was always wrong, and what you quoted is one of his dumbest. The market is never irrational, even though many of its players make mistakes in tandem. The reason is that so many of them were educated in government schools, and so believe practically anything the government tells them it's doing to help the markets will actually work. Sometimes it takes a lifetime to unlearn your government schooling, and sometimes a lifetime is not long enough.

Apr 04 10:47 PM

[Erick Tippett:]

As a former high-school instructor allow me to suggest ( though
you demonstrate facility with knowledgeable data ) that you learn
to write in a more direct and less florid (cutesy) journalististic style!
It will help so much the people who really need economic enlighten-
ment to understand what the hell your're talking about. Of course
that obviously doesn't apply to your commenting and often exhaustively long winded respondents to this article!

Tally Ho!

EDT
Chicago, Illinois

Apr 05 12:56 AM

[Pretzel Logic:]

Yeah, the market is in "bad news is good" mode right now. The rational is that things can't get worse -- and maybe they can't. But they're pretty bad already.

On Apr 03 11:07 AM schlumpf wrote:

> in cnbc the bulls wrote, its a good sign that the job losses are
> higher. The recession is over because the job losses are higher.
>
> I know everybody is long now. but this is crazy.

Apr 05 06:53 AM

[dcb:]

Sell in may and walk away?

Apr 05 09:35 AM

[dcb:]

further market moves upward depend upon bringing the retail customer back in. That is why all the talking heads are screaming bull after they have bought on the low side and everyone was in despair. Earnings will continue to go down. I expect to see a concerted effort to push the indexes higher draw in the retail customer and drop down.

Is it only me or does anyone else notice all the bulls scream buy when we at critical resistance levels but not when we are as far as we have ever been in the oversold condition.

although Marc Faber has been very good at pointing buy and sell points. we are overbought, but if John Q public can be fooled we could go much higher. This would help the banks to sell equity and replenish funds that are getting more difficult to come by from our never ending government.

Additionally, big banks buy at the bottom, citi releases data, at every resistance point the government has a plan that adds fuel to the fire and then the talking heads swarm en mass. this give really good profits to the trading desks at fund depleated banks.

We do also know that fed and treasury are doing everything they can to go past congress and avoid legislative oversight in their effort to get funds to banks. (this can't be debated at this point).

Like macro man I have done his analysis and said WTF. So, since macro man can't understand I have added my own alternate analysis. I am not saying it is true, but I think there is enough anecdotal evidence around that it should be in you analytical paradigm.

Apr 05 09:52 AM

[dcb:]

YOU SOUND LIKE A PRACTITONER OF WAVE ANALYSIS. i WOULD be interested in your supporting data, and it follows my belief that we were getting close to a real low but didn't hit it.

I will say that government is doing as much as it can to prevent that low, and I don't know if will happen.


On Apr 04 01:52 PM maxe wrote:

> This is wave 2 up of the 3 wave bear market, which will result in
> new lows, 6 months away at a minimum i would think. Bull markets
> unfold in 5 wave uptrends and bear markets unwind in 3 wave downtrends.
>
>
> If you keep this simple big picture rule you will not be caught out
> in a big way. I expect this rally may go on for several months, so
> yes buy the dips.

Apr 05 10:03 AM

[Medici:]

Forget about un-employment, what about Under employment? Then there is the lack of credit worthy borrowers.... And thats assuming that there is even money for credit worthy borrowers and if there was $ to borrow, is there something to buy? Maybe a Goverment Owned Car Company....

Apr 05 10:06 AM

[dcb:]

David,
At this level S&P about 820 and dow 8K what the expected earnings should be. we may be correctly valued or even undervalued right now with more of the bad to com in the future. I don't know.


On Apr 03 04:56 PM David White wrote:

> I agree with Larry House above, the market does need to pull back
> here. My original target for this rally was $87 on the SPY. Now I
> am not sure if we are going to reach it. Alcoa reports Tueday afternoon.
> That report has to be ugly. They have had huge layoffs. Those alone
> will likely cause the GAAP numbers to be terrible. That is without
> even considering the reasons for those layoffs. There will likely
> be many more ugly reports to follow. The reality of Q1 earnings will
> almost certainly bring an end to this market rally.The mark to market
> changes don't take effect until Q2. As good as much of the news about
> government actions has been lately, the broader news has still been
> atrocious.
> 1) ADP's roughly 750,000 jobs losses.
> 2) GM and Chrysler remain a huge problem.
> 3) Residential real estate lost 19% in value year over year. This
> almost ensures that there will be lots of future foreclosures as
> more and more people are underwater and out of work.
> 4) The unemployment rate is at 8.5%, and it is predicted to go
> up to more than 10% within just a few months. I have seen estimates
> as high as 12% so far.
> 5) The commercial real estate market is supposed to implode this
> year.
> 6) The credit card debt defaults are rising quickly.
> 7) The ISM manufacturing numbers and the services numbers are still
> horrendous.
>
> I could go on, but you get the general idea.
>
> The change to mark to market will likely decrease the depth of the
> recession. However, it will just as likely broaden the bottom of
> the recession as actual losses are spread out further. Obama is a
> great communicator. The government has taken some positive actions,
> but we are still very much in trouble. It is hard to believe this
> market can keep going up the way it has been.
>
> I should also point out that I thought the late December to early
> January rally would go to $100 on the SPY. I was a little overly
> optimistic about that rally. Chances are I may have overestimated
> the upward push of this one too.

Apr 05 10:10 AM

[Plan B Econ...:]

It's not easy being a contrarion when everyone else is a contrarion.

Apr 05 01:05 PM

[realold:]

IMacro man seems to be near to the real situation. The third person writing is just horrible, however. To me, the real situation is that the Obama administration, per his VP, is "not letting any diaster go unused" or words to that effect. All the "stimulus" is really welfare and, as such. helps no one in the long run. If we were really building infrastructure, then we would have something. In reality, infrastructure spending is what 3% of the total spending?

My point is that the market and the economy are headed for a long long slide. Money that could go to growth is going to government and welfare. Although Bush style government just makes the wealthy better off, Obamanomics will draw us all down to the least common denominator - poor.

How could anyone see the market going higher or apply Elliot wave theory to this political and human disaster? I trade the market, but expect only brief upward movements. Long term, it will be very difficult, probably impossible, just to stay even. Invest in gold, and have it confiscated.

Good luck to all.

Apr 05 03:51 PM

[Brent C.:]

I don't know how many times lately I have read that 1st Q numbers will be terrible and that will drive the market down.I think by now that is old news and it is baked into the market.Its set a bar for expectations. Anything a whiff above terrible numbers will be seen as "better than expected" and that will keep this market going to DOW 10,0000.

Apr 05 03:58 PM

[Conan the B...:]

Of course, the worst isn't over, it wasn't over in 1974 or 1982 but the Market went up anyway.

Apr 05 04:33 PM

[JDinKC:]

How is the stimulus like welfare when almost all of it is going to tax breaks and infrastructure spending. Another uneducated wingnut, better for you to keep your little pennies out of the market.


On Apr 05 03:51 PM realold wrote:

> IMacro man seems to be near to the real situation. The third person
> writing is just horrible, however. To me, the real situation is
> that the Obama administration, per his VP, is "not letting any diaster
> go unused" or words to that effect. All the "stimulus" is really
> welfare and, as such. helps no one in the long run. If we were really
> building infrastructure, then we would have something. In reality,
> infrastructure spending is what 3% of the total spending?
>
> My point is that the market and the economy are headed for a long
> long slide. Money that could go to growth is going to government
> and welfare. Although Bush style government just makes the wealthy
> better off, Obamanomics will draw us all down to the least common
> denominator - poor.
>
> How could anyone see the market going higher or apply Elliot wave
> theory to this political and human disaster? I trade the market,
> but expect only brief upward movements. Long term, it will be very
> difficult, probably impossible, just to stay even. Invest in gold,
> and have it confiscated.
>
> Good luck to all.

Apr 05 07:05 PM

[RatWatcher:]

This worked well in both 2007 and 2008.


On Apr 05 09:35 AM dcb wrote:

> Sell in may and walk away?

Apr 05 10:53 PM

[Lin:]

Fred Voetech - you are correct re the boomers " they ain't spending nothing . just yesterday in my subdisvision I came upon a 61 year-old couple who " both Had pensions + doing well ". They were cutting down a fallen tree on the lawn of a ' foreclosed home ' to put in their woodstove for heat this winter ! These folks ' reported doing well".The boomers spending ? Dream-on , NOT going to happen !
Medici + realold , I concur with your sentiments !

Apr 05 11:36 PM

[Skeptical Ben:]

Is Youngolf actually Alan Greenspan?


On Apr 04 10:05 AM youngolf wrote:

> Well, I would, or might, unless I decide to do something else based
> on whether or not the choice or destiny, depending on which is first,
> may present itself, unless I don't have a choice....
>
> The rest of this page intentionally left blank.

Apr 06 04:54 AM

[Carousel:]

The San Francisco Chronicle had an article on Sunday about the lack of prosecutions and an assertion that this credit crisis is not real. The writer said that it's a deep recession from too much debt and too much debt-financed consumption but that the idea that it's because consumers and businesses can't borrow more is a lie devised by the banks to justify handing them a lot of money that they aren't going to lend to consumers and businesses anyway.

Check it out: www.sfgate.com/cgi-bin...

Apr 06 02:41 PM

[Stone Fox C...:]

based on the comments, the active investors sill appear to be bearish.... hmm

Apr 06 05:50 PM

[anarchist:]

relax, have a valium to relieve your tension, nervousness, and anxiety.


On Apr 04 12:56 PM G23ROCKS wrote:

> I hate it when people talk in third person. It really detracts from
> an otherwise good article.

Apr 07 03:12 PM

[Mad Hedge F...:]

Let me join in. Today I spoke to my old Morgan Stanley boss , Barton Biggs, who is so bullish that he believes we are only one third to one half of the way through the current stock market rally. Barton, voted best international strategist for seven years, and one of the founding fathers of investment in emerging markets (with some pushing from me), now runs Traxis Partners, a major global macro hedge fund. This earnings season will be a disaster, with forecast S&P 500 earnings at $40-$55 or lower. But hedge funds are still net sellers of assets, according to well placed prime brokers, and most still expect a retest of the lows at 666 in the S&P, or new lows in the 400’s. The capacity for the industry to take on new risk is therefore huge. Also encouraging is three consecutive monthly improvements in the Purchasing Managers Index (PMI). He sees this year as a replay of 1938, when a huge rally ensued after a long bear market, with 1938 valuations to boot.

Apr 07 05:35 PM