It's said that the three most important things in real estate are location, location, location. Given that US housing was the genesis of the current global financial crisis, it's worth keeping that little aphorism in mind, as the story of yesterday - and indeed the whole crisis - can be summarized as dislocation, dislocation, dislocation.
Wanna see someone getting screwed? You don't have to be choosy in your search. In FX, as Macro Man documented yesterday, USD/MXN completed melted up......and then, in a Wile E. Coyote moment, collapsed right back down. While explanatory rumours swirled, Macro Man has yet to hear a completely satisfactory explanation for the roller-coaster ride.
Fixed income? Look no further than swap curves. One would normally expect that a 50bp easing to steepen the curve, but these ain't normal times. 2 year swap yields are nearly 40 bps higher than they were at 11.59 London time yesterday, while 30 year swaps are close to 10 bps lower. The result? A massive flattening of the 2-30 swap curve: pretty much the opposite of what both the textbooks and common sense would tell you to expect.
While the pain is all too evident in equity indices, you don't have to look too far beneath the surface to see an absolute horror show in single-stock land. Perhaps the most obvious example of the distress in equity land is the distress surrounding Volkswagen (VLKAY.PK) stock. While there are a lot of moving parts to the background (a Porsche stake in VW, Lehman facing trades blowing up, etc.) the basic premise of the trade is classic RV. Take two economically-similar share classes...and when the share prices diverge, sell the rich one one buy the cheap one on the expectation that they will re-converge.
When it works, you make a bit of dough. And when it doesn't, you get charts like this:
Ouch!
So where from here? At the time of writing, AUD/JPY is up 8.5% from NY yesterday's close, so normal service has clearly not been resumed. As Macro Man has noted over the past few days, he thought that a coordinated policy response would generate a bounce in stocks. So after yesterday's 50-beeper, he went net long....for about half an hour, then cut his purchases at a tiny profit and resumed normal short service.
It's probably premature to call the policy easing a failure, however. After all, 24 hours after Hank Paulson announced plans for the TARP on CNBC, the SPX was 8%-10% higher than just before the announcement...and we can all probably agree that that didn't ultimately support equities.
The next couple of days may ultimately mark the bottom. With the resumption of short-selling in the US today, the door will once again be open for squeezes. And tomorrow's Lehman CDS settlement auction is an obvious flashpoint; while it could prove to be a disaster, it could also ultimately become the cathartic moment that equities need to rally.
The old magazine-cover indicator is also suggesting that panic may be setting in; certainly the dislocations that are evident across markets are symptomatic of panic. So Macro Man once again finds himself prepared to acquire a net long delta, though at the moment he wants to see how equities digest higher LIBOR fixes. Of course, that view is a flexible one; anyone with skin in the game knows that this is no market for simplistic worldviews or sweeping generalizations.
After all, simplistic assumptions are one of the root-causes of these market dislocations; Macro Man is doing his damnedest at this juncture to keep an open mind and a black P/L.
