Trick or Treat for Markets?

This equity price action is becoming almost Biblical: "and on the fifth day, the market rose again...." Macro Man was somewhat bemused by the enthusiastic reception to yesterday's GDP number, by the economics profession at least as much as the marketplace.

After a four-day slide, that an above-consensus real GDP print encouraged a bounce was hardly shocking, particularly in light of the history of the last seven months. Yet the reaction from sell-side economists: "A very strong report! We're upgrading our forecasts!" bordered on the nonsensical.

For one thing, the margin of the consensus "beat" was razor-thin: 0.3% annualized is less than 0.1% q/q. That this is the advance number that will be revised twice in the next month or two provides even less reason to go overboard with the enthusiasm.

More viscerally, however, to Macro Man's mind the report was actually worse than expected. Years of poring through Japanese national accounts data have taught him that in deflationary/bubble-bursting/highly distressed economies, nominal GDP is what matters. And on that score, the resultant figure- + 4.3% q/q, SAAR - undershot the 4.6% consensus by the same margin that the real figure beat it by.

Moreover, as the chart above illustrates, the quarterly nominal growth was well below "trend", even as the real figure exceeded trend. Colour Macro Man unimpressed. Of course, there were some positive aspects to the report: residential construction rose for the first time since 4Q05. Of course, whether that can continue with plenty of untapped housing supply from foreclosure sales remains to be seen. Similarly, the surge in auto sales and the decline in the savings rate last quarter suggests that it will be difficult to maintain a 2.36% contribution to growth from household spending.

Meanwhile, the latest interesting twist out of Korea occured last night. Industrial production surged 5.4% in September, taking the y/y growth rate to 11% and the underlying production index to an all time high. This, combined with the smart bounce in the US, surely gave a tasty boost to the Kospi, right?

Nuh-unh. After a half-hearted gap higher on the open, the index sagged badly into the close, falling to its lowest level since August 20th. The divergence between the Kospi and IP is curious, not least because the Kospi peaked more than a month ago, leading other markets by several weeks.

At the risk of beating a dead horse, Macro Man finds it very interesting and very troublesome that a cyclical market like Korea with apparently rock-solid macro fundamentals is trading so poorly. By way of comparison, the SPX was at 1007 the last time that the Kospi closed as low as it did today.

It's the season for tricks and treats (hint: here comes the obligatory Halloween tie-in); somewhat worryingly, it's becoming a tad tricky to tell the difference between them. The evidence is increasingly mounting that the naked liquidity trade is coming to an end, and that markets will soon have to float or sink on their own merits. Judge for yourselves what that implies for the goodies that have stuffed many high-beta portfolios over the past couple of quarters.

Comments

[doubleguns:]

No treat this time, its a trick.

Oct 30 09:40 AM

[Mad Hedge F...:]

nbi A few years ago, I went to a charity fund raiser at San Francisco’s priciest jewelry store, Shreve & Co., where the well heeled men bid for dinner with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area’s premier hotties, who shall remain nameless. Suffice to say, she has a sports stadium named after her. The bids soared to $6,000, $7,000, $8,000. After all, it was for a good cause. But when it hit $10,000, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer’s remorse came to me and offered his date back to me for $9,000. I said “no thanks.” $8,000, $7,000, $6,000? I passed. The current altitude of the stock market reminds me of that evening. I have just had one of the best years of my career, and have cashed out of most of my positions so I can greedily await payment of my year end performance bonus. If you rode gold from $800 to $1,050, oil from $35 to $80, and the FXI from $20 to $40, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now? I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands. But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: “There is a time to fish, and a time to hang your nets out to dry.” At least then I’ll have plenty of dry powder for when the window of opportunity reopens for business. One of the headaches in writing a letter like this is that while I publish 1,500 words a day for 250 days a year, generating about half the length of War and Peace annually, you really need to tinker with your portfolio on only a dozen or so of those days. So while I’m mending my nets, I’ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again. And no, I never did find out what happened to that date.

Oct 30 09:46 AM

[cyclingscholar:]

Hey Macro-man...are you a fan of kim'chi? Whats with the emphasis on Korea? Don't you know that if the KOSPI doesn't reach new highs soon, they are gonna open up a brokerage at the border at Panmunjom and let the PRK folks buy stocks?

Oct 30 01:01 PM