Recap 9-27-11

Main Items:

  • US Consumer Confidence improved to 45.4 in Sept vs 46 exp and 44.5 prev
  • Richmond Fed Mfg Index improved to -6 in Sept vs -11 exp and -10 prev.
  • The Senate approved legislation to finance the government through November 18th.
  • US cities facing strain from falling real estate taxes and reduced state/federal aid – More than half, 57 percent, of municipal officials said finances were worse in fiscal 2011 than in 2010, the National League of Cities said; “We’re in a situation where they don’t see it getting worse, but it’s not getting any better,” – Bloomberg


  • German GfK Consumer Confidence was unchanged at 5.2 in Oct vs 5 exp.


Remember that month end flows have additional impact when volatility is high. So despite the strong moves the past couple days, it’s may be too early to fade it, although the bulk of the bounce is probably past already. The range top at 1210/1220 on the cash index is probably a better place to flip.

I haven’t commented much on the various EU rescue ideas that have been discussed in the media because they are all ineffective at solving the broader problem, and the market appears to assess that accurately. The EU needs some sort of mechanism with essentially unlimited purchasing power, and there simply isn’t enough political will for that right now by the German electorate and Bundesbank, at least at this juncture. As a result, as I have discussed on prior occasions, we will likely need to get a real crisis before the political will is formed – a crisis that is ultimately tied to Greece’s ability to avoid default, which is tied to its ability to fund itself. The next EU/IMF tranches are in December and March.

In the mean time, correlation and volatility will likely remain elevated. Historically, in this environment it has been difficult to add alpha. A chart of HFRI hedge fund returns against average realized S&P sector correlation (in red) shows this. Even for macro strategies, the necessary reduction of position sizes as a result of increased correlations inhibit generating returns.

So in the meantime, I have been moonlighting as a chart monkey, looking for short term opportunities.




4 thoughts on “Recap 9-27-11

  1. -shortend aud rates
    -longend cad rates
    -us fwd inflation, us front end inflation
    -european covered bonds
    -estoxx dividend futures
    -hkd rates vega vs us rates vega, fx
    -eurchf vs chf fwd rates
    -asia fx vols, rv
    -owning eur-dkk vol

  2. I can’t find anything right now other than the dollar. I feel a lot of people are waiting/ hoping we push down to around 1000… Which would be about the 50 retracement of 2009/2011. That could be a nice starting point for a 4th quarter rally…

    1. Hi Chance –
      Yup, 1000ish seems to be the consensus number where people are willing to take a stab. A mild US recession, taking down earnings by 15% or so, along with a trough p/e of 11 will get us there.

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