Monday, April 19, 2010
Well, well, well. When the Macro Man's away, the markets will play! Your author is back in front of screens this morning for the first time in a week and a half, though had his flight been scheduled a day later last week he'd still be stranded on the west side of the Atlantic. You know it's been interesting when a volcano shutting down all air traffic in Europe for more than half a week is pretty far down on the list of things to talk about.
Despite all the focus on Greek bailouts and Chinese revals (or the lack thereof), obviously the 800 pound gorilla in the market's living room is the SEC fraud case against Goldman. Now, Macro Man is no lawyer, nor does he play one on TV. But on the face of it, the particular case in question looks pretty damning, assuming that the SEC can prove that Paulson, rather than ACA, selected the turds for the Abacus CDO in question.
Of course, Macro Man vividly remembers that in the summer of 2007, Deutsche Bank was notable for a road show to investors demonstrating how to short various components of the subprime universe. He also recalls a Michael Lewis article referencing such road shows (though perhaps not the DB one in particular) wherein it was noted that short sellers actually created more product for
eager greedy stupid willing investors to purchase. Somehow, Macro Man cannot help but think that there are more skeletons in this particular closet, and that no one will come out smelling particularly sweet.
What does it mean for GS? Who knows. The actual fine for this particular instance is unlikely to approach anything like the market cap wiped off of Goldman's share price on Friday. On the other hand, the SEC does not allege "fraud" lightly; being lumped in with the likes of Enron and Worldcom doesn't exactly suggest that GS's goodwill should emerge unscathed. Moreover, it would be entirely consistent for Goldman, if found guilty, to be banned from a number of different businesses, not all of which are extinct, which could impact future earnings streams.
All of this is supposition, of course. Perhaps the real shock factor is that GS, so widely perceived to be in bed with the government, has been cast back down to reside with mere mortals. Certainly, this is a gesture that will resonate with Main Street....for the time being at least. The real question, of course, is what it means for markets. From Macro Man's perch, it is pretty obviously a potential catalyst to reverse what has proven to be an astonishingly steady 15% straight-line rally. Futures have already broken the uptrend...
..even as cash flirted with the 61.8% Fibonacci retracement of the entire move from the '07 highs to "Satan's low" last year. (Of course, while the eye naturally concludes that the 61.8 level was hit, the index actually fell short of it by 18 points. But hey...close counts in horseshoes, hand grenades, and Fibonacci retracements.)
So for choice, Macro Man would look for a bit more downside from here. 'Twould be especially telling if today's early-sesh futures weakness is maintained during cash trading; the failure of Magic Monday to do its thing could well be a signal to punters that the market regime has changed, if only temporarily.
Of course, equity weakness should provide further support for bonds, which had already started performing decently during Macro Man's absence. One theory as to why (and indeed why bonds had traded so poorly previously) can be found in the Fannie Mae 4.5's, which traded dreadfully in late March/early April on fears of what the end of QE would mean, but have snapped back smartly since.
Macro Man was also gratified to see one serial Asian currency pegger revalue its domestic unit and commit to a path of steady appreciation moving forward. No, not the Big Kahuna; far from it! Macro Man refers, of course, to Singapore, whose TWI (proxied by DB) is shown below. Now, there has been some speculation that the MAS would not move as they did without some knowledge or view on China's attitude towards the RMB. Macro Man is personally sceptical of this view, if for no other reason than he made very good money two years ago being long SGD/short RMB even before the renminbi ground to a halt that summer.
Moreover, it may be the case that the Chin3ese prefer to assess the impact of their other tightening measures before moving on the currency. The new rules to curb property speculation appear to be having an impact; the Shanghai property index has made a new low for the year, helping to send the overall Shanghai index down close to its lows for the year.
Perhaps that's an environment in which the powers that be would adjust the FX regime, but somehow Macro Man thinks not. Indeed, we're only twelve days from a May, a month that typically ushers in a suboptimal seasonality for risk assets. And hey, perhaps thanks to Goldman, perhaps May has come early this year....