Hunting Season for Potential Trades

Yesterday was instructive, n'est-ce pas? The ISM was substantially stronger than expected (OK, new orders dipped slightly, but employment rose sharply to exceed 50), equities popped sharply higher.....and then spent most the rest of the session melting away. Sometimes it's possible to over-intellectualize things: at the moment, stocks trade like they got 'em but they don't want 'em.

When Macro Man hears phrases like that, there's only one thing that pops into his head: hunting season. Flamingo hunting season. To be sure, flamingo-hunting has been in play for stuff like EUR/USD, ADXY, and broad indices for a couple of weeks. But now it looks like the hunters, having bagged their quota of big-game flamingos, have started poaching out-of-hours.

Macro Man wrote about Sunday night's ZAR/JPY carnage yesterday; last night saw the poachers go 2/2, as EUR/HUF was the victim of what is known in the trade as a "drive-by" stop loss run, which is an occupational hazard when you leave stops in illiquid pairs with NY spot desks.

More generally, taking a step back and observing the performance of the "naive" G10 carry basket (long the 3 high yielders, short the 3 low yielders), we can see that (unbelievably!), it has recouped nearly all of its "end of the world as we know it" losses. If you were fortunate enough to put this thing on close to the lows, you no doubt are feeling fine. But the very vehemence of the rebound would suggest that G10 carry is heavily positioned. Add in the fact that AUD and NOK are especially beloved of reflationistas, and the potential downside for those currencies on a continued flamingo run would seem considerable.

And what of intra-equity market price action? Here, too, we observe an interesting dynamic. The chart below represents the relative performance of a basket of turds (some of whom don't currently exist [though their stocks are still listed], and the rest of whom wouldn't exist without government largesse) against the SPX. As you can see, there have been quite a few peaks and valleys over the year, with the relative outperformance in March and July/August looking like short-covering rallies in the turds.

Anecdotally, however, people have gone long these turds on the flimsiest of rationales, and now it appears to be going wrong. Indeed, the roll-over closely resembles that of June/early-July, a period which happened to coincide with quite a sharp downdraft in stocks.

It's hunting season, all right. How long the season lasts may depend on Chief Gamekeeper Bernanke tomorrow night - that is, assuming that the poachers follow the guidance laid down by the Fed. With so many flamingos turning into turkeys, however, there's probably no guarantees even after tomorrow night.

Comments

[Mad Hedge Fund Trader]

bhi It all leaves me wondering, are there are snakes of a different variety lurking in the markets today? Many of the great long term plays I baled from on October 13 are suddenly a lot cheaper. The Canadian dollar (FXC) has plunged from $97.50 to $92, crude (USO) has backed off from $42 to $39, Baidu (BIDU) cratered from $440 to $355, and First Solar (FSLR) got whacked from $164 to $120. At these prices are they golden nuggets waiting to be scooped up from the ground? Or are they venomous vipers, coiled and waiting to strike an outreached hand? I vowed I would stay in cash for the rest of the year, until I lock in bonus payout. But if the best of breed investments drop much from here, I will be sorely tempted to nibble.

2009 Nov 03 11:00 AM

[The Geoffster]

Warren Buffet blogging on SA? Is this for real or is it Cetin redux?


On Nov 03 07:03 PM Buffett's big buy wrote:

> good articles 4 slow news day:
> financeopinionss.blogs...

2009 Nov 03 09:07 PM