10-Yr Swap Spreads hit their lowest level since 1988 on 3/9/10 hitting 3.25.  How many more days until they go negative? (Click on chart to enlarge)

10-Yr Swap Spread

Go short Treasuries, its the most obvious trade ever right?  While they might go up or down the MOVE Index continues to forecast less and less volatility, which at least to us indicates that the market is not expecting yields to change a whole lot anytime soon. (Click on chart to enlarge)

MOVE Index

Not sure if Chanos is right on China being in a huge bubble, but looking at the chart it appears as though at least a few investors are less than bullish. (Click on chart to enlarge)

FXI China ETF

We just crossed the one year anniversary of the current rally/bull market the other day.  Over that time on a weekly closing basis the SP500 is up over 66%.  This has been the largest one year rally in over 60 years.  We are starting to hedge our long exposure as we are currently cautiously bullish. (Click on chart to enlarge)

SP500 1-Yr Rolling Returns

Back in December we shorted the Euro on the basis of the EU being weak, overvalued, and sentiment becoming far too one sided.  In these pages we also looked at buying the USD on a technical basis. Looking at the USD and T-Bills however shows another reason for the USD rally. (Click on chart to enlarge)

US Dollar and T-Bill Yield

Happy Trading,

Dave@TheMacroTrader.com

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Since the Match 2009 bottom many correlations have held extremely well.  We covered one in a previous post titled “US Dollar Correlation Breaking Down” and other ones here.  We can now add one more broken correlation to the mix.  TIPS and GOLD have been trading very much inline with each other over the last nine months or so.  The primary reason for the correlation is that since they are both seen as inflation hedges they should trade together.

As you can see in the chart below gold and TIPS have trade very much in line for most of the last nine months.  Over the past two weeks however the two instruments have diverged with TIPS going higher and gold going lower. 

GLD-Gold ETF and TIP-TIPS ETF

So the big questions are why are these diverging and how can we make money from it.  You irst have to decide if you think inflation is going up or down and if you think TIPS and Gold are good inflation hedges.  If gold is a good hedge and you think that inflation is going to increase then you would want to be a buyer of gold.  If you think that inflation is set to decrease or that inflation expectations are overdone then you would likely want to short TIPS.  The other main way to trade this is to bet on a convergence and a return to correlation.  To take advantage of this you could buy gold and short TIPS.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-No positions in the securities mentioned.

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It has been a while since the last time we posted our global GDP weighted yield curve.  While it has been months it might as well have been a day as nothing has really changed.  After being inverted for all of 2007 and most of 2008 the yield curve flipped and became extremely positive as central banks worldwide lowered short term rates.  You can see this very clearly in the chart below of the G-10 nations short and long term rates. In spite of Australia raising theirs, short term interest rates remain extremely low everywhere else.

G-10 Short and Long Term Interest Rates

Another way to look at interest rates and in fact the title of this post is by using the global GDP weighted yield curve.  In the chart below you can see the global yield curve.  While it has fluctuated it has essentially gone nowhere for the last eight months.

Global GDP Weighted Yield Curve

So whats The Macro Traders outlook?  We think that things will remain more or less the same for most if not all of 2010.  On the deflationary side banks have not started to lend, real estate is not going up anytime soon, debt deleveraging is in overdrive, unemployment is as bad as ever, etc.  On the inflation side commodities are up, stocks are up, and bonds are up.  At best we would call this a standstill.  So while we could envision long term rates going higher on credit risk, yes we think that sovereign debt is full of credit risk, we think that short term rates will remain low for most if not all of 2010.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is long TLT

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While many investors are calling for a large drop in long term Treasuries we are currently seeing a good risk reward trade to the long side in the long bond.  In the chart below you can see our reversion to the mean chart on the 30-year Treasury yield.  When it is stretched to the downside things are bearish and when it is stretched to the upside it is bullish.  Right now it is stretched almost 1.5 standard deviations away from its historical mean which usually leads to a move lower in yields and a move higher in bond prices. (Click on chart twice to enlarge)

30-Year Yield Reversion to the Mean Chart

As you can see in the chart below of the 30-Year Treasury yield we are at the top of a long term downtrend in yield.  Each time since the 1987 that yields have hit this line they have gone lower.  Eventually this will stop and yields will breakout to the upside but if history is any guide and the trend continues than at least for now yields are once again headed lower. (Click on chart twice to enlarge)

30-Year Treasury Yield

Finally lets look at the LT 20+ year Treasury bond ETF.  As you can see below it has found support over the last seven months in the highlighted $86-89 range.  On the upside we have resistance around $98.  The risk to reward is quite favorable right now as we can risk $1-2 with an upside around $9.  (Click on chart twice to enlarge)

TLT-20+ Year Treasury Bond ETF

So while this may be the time that Treasuries tank and yields go screaming higher we doubt it and are modestly positioned to the long side.  Eventually we will be shorting Treasuries but not until yields break out and end the trend that has been in place for over 20 years.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is currently long TLT

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We keep hearing that long term Treasury Bonds are going to tank and that we need to get short before they fall off a cliff.  While this may very well happen, we doubt that it occurs anytime soon.  We are not alone in this view as Bill Gross and the gang at PIMCO seem to agree.  While some argue with his view of a new slow growth period the market does not seem to have an issue with it.  Not only has Helicopter Ben said that the Fed is not raising rates anytime soon, but market indicators are saying the same thing.

One Treasury indicator that we use is the MOVE index which is a  “yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30.”  As you can see in the chart below it has been falling since July as the market has come to the realization that we are in for a slow growth period and that the Fed is not going to raise rates any time soon.

MOVE Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is currently long AGG

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Interest Rates and the MOVE Index
URL: http://www.themacrotrader.com/2009/11/18/interest-rates-move-index/

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While a lot has been made of the RBA raising Australia’s short term rates over the last week the fact is that most of the world is not doing quite as well.  Whereas Australia actually has some inflation the United States, Japan, and Europe are still not growing and rates are likely to stay around their current levels for at least a few more quarters.

Australia on the other hand was able to avoid a large part of the current global recession by supplying Asia, namely China, with commodities.  As you can see  in the chart below the short term rates have climbed but in spite of this the long term rates are still basically unchanged. (click on chart to enlarge)

Australia Interest Rates

Looking at the G-10 as a group we can see that rates are low and aside from Australia and New Zealand rates are essentially unchanged for the past six months as central banks continue to fight deflation and disinflation.  The trend is flat and likely to stay that way. (click on chart to enlarge)

G-10 Short Term Interest Rates

With the current rally and all the talk of inflation you would expect that long term rates would be climbing but instead they are flat to trending lower in every single G-10 country.  Treasury bonds night be in the bubble of a lifetime but we are not seeing that yet with lower rates and extremely slow global growth, especially in the developed world. (click on chart to enlarge)

G-10 10-Year Interest Rates

If you want to see a cleaner chart with the average G-10 long and short term rate you can look at the chart below where we have taken a simple average of G-10 long and short term interest rates.  As you can see everything has remained the same for a few months now. (click on chart to enlarge)

G-10 Interest Rates

Finally lets look at the whole investable world.  As you can see in the chart below the Global GDP weighted yield curve has been flat since May 2009 with very little change.  If inflation is hitting the world right now then it would appear as though bond investors are clueless.  In our experience bond investors are rarely clueless and we are inclined to bet with them.  Right now we are looking at potentially re-entering our long bond trade as investors come to the realization that we, along with investors such as PIMPCO (maybe its PIMCO but the way that Bill Gross ran the Fed last winter we can’t help ourselves) , see slow to negative global growth over the next year and probably for the next few years as the worlds financial system rebuilds, assuming we get that far. (click on chart to enlarge)

Global GDP Weighted Yield Curve

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long some GLD, DBV, and HYG

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: G-10 Interest Rate Trends
URL: http://www.themacrotrader.com/2009/10/16/g-10-interest-rate-trends-macro-trading/

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Why are bonds going up at the same time that gold is climbing? Real yields are the highest that they have been since the late 1980’s and the third highest in the last 100 years, investors expecting slow to negative inflation and growth are buying and will keep buying as they grasp for yield. (click on chart to enlarge)

10-Year T-Note Real Yield

Why has the SP500 continued higher even when earnings have been weak and unsustainable and demand has been virtually non-existent?  There are several contributing factors such as the oversold condition, sentiment, etc. but our favorite one is that the Government is debasing our currency and in the process it is driving asset prices but not their actual values higher, if your investment in the SP500 is up but the actual value of your dollar is equally low then have you actually made any money? (click on chart to enlarge)

SP500 and US Dollar Index

If we are in a deflationary environment then why is gold climbing higher?  No one wants to hold the US Dollar so instead of being a inflation/deflation play the current move of gold is based more on the devaluation of the US Dollar than anything else-It’s a currency trade. (click on chart to enlarge)

GLD-Gold ETF and US Dollar Index

If housing is cheap, interest rates are low, and everyone wants to trade their US Dollars for other assets than why aren’t housing sales going through the roof?  While your mortgage broker may be calling and saying that rates are at or close to all time lows the reality is that real rates are at their highest levels since 1987, cheap money my #%$. (click on chart to enlarge)

Real 30-Year Fixed Mortgage Rates

If demand is so weak than why has oil been so strong?  Once again it gets back to not wanting to hold US Dollars, when the USD bounces oil will likely get hit hard. (click on chart to enlarge)

West Texas Crude Oil and US Dollar Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long some GLD-Gold ETF

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: One Question, One Sentence, and One Chart Answers
URL: http://www.themacrotrader.com/2009/10/08/macro-trading-one-chart-answers/

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Gimme fuel, gimme fire, gimme that which I desire,

Can’t fight the need for speed,

I’m loose, I’m clean, I’m burning lean and mean, and mean.

Ignite the open trail,

Excite, exhale, comin on, hot from hell, yeah hot from hell.

-Metallica “Fuel for Fire”

Where has all of the money gone? We know that the world should be running out of green ink any day now due to the Treasury printing money 24/7, but with all of this money coming into the economy we would have expected runaway inflation.  Up to now we have seen, for the first time in decades, steady deflation.  In fact as you can see in the chart below, since 3/1/09 YoY CPI has been negative. (click on chart to enlarge)

CPI 12-Month % Change

One reason why we have not seen any inflation is due to the personal savings rate going up and private sector leverage going down.  For baby boomers and really anyone who has been investing for the last 15 years, things are looking bad.  From 1995 to now, investors using a 70/30 stock bond mix, rebalanced monthly and adjusted for inflation, have seen a CAGR of only 3.89%.  Add to that the debt loads that most people have, and it makes sense that the personal savings rate has shot higher and from all estimates looks to be going higher still. (click on chart to enlarge)

Personal Savings Rate

So the question remains where has all the money gone?  Looking at the  WSBASE which defined by the St Louis Fed as the sum of currency in circulation, reserve balances with the Federal Reserve Banks, and service-related adjustments to compensate for float-it is obvious that overall money supply has absolutely exploded to the upside. (click on chart to enlarge)

WSBASE

So where has all of this money gone if not into the general economy? In a relationship first pointed out by Andy Kessler, the WSBASE has tracked tradeable assets like the SP500 and corporate bonds since the March bottom.  If you look at the two charts below you can see that movement in the WSBASE has led the SP500 and Dow Jones Corporate Bond Index by about a month. (click on charts to enlarge)

SP500 and WSBASE

DJCB and WSBASE

When no one else wanted to own assets the Fed stepped in and became the buyer of corporate assets and has been the fuel that has driven this market higher.  In a vacuum this is not a bad thing, but we are not in a vacuum.  With the government putting all of the money into tradeable assets and not into the real economy, we end up with a market that could go down in flames at any moment.  What happens if the Fed backs away and stops buying?  If they stop buying, we run the risk of everything falling again and taking us right back to where we were.

The Fed in their infinite wisdom and bubble loving culture, continues to trade one bubble for another.  This time however, it appears as thought the bubble has not only been engineered by the Fed, but they have been the driving force behind it all.  As opposed to the housing bubble–where the Fed lowered rates and left them low but allowed people to build the bubble with their stupid home buying–this time the Fed lowered the rates, borrowed the money, and is spending the money.  Unfortunately for us when the bubble pops “the money” is really our money, and we come out on the losing end….again.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In our weekly newsletter The Macro Trader we are long SPY, LQD, HYG, DBV, and UDN

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Give Me Fuel Give Me Fire
URL: http://www.themacrotrader.com/2009/10/01/macro-give-me-fuel-give-me-fire/

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If over the past six months or so it has seemed as if you were partying like it was 1999 it might be time to reevaluate your stance.  One thing that we have been taking a closer look at lately is the pricing of risk.  Obviously when investors think that risks are low they will demonstrate risk seeking behavior.  We have seen this as the SP500 has climbed 56.6% from the March lows to the highs on 8/28/09.  With a rise like that you would think that 2008 never happened, of course if you believe that then you also believe  in a land of make believe with money trees, the fountain of youth, and SI models for all of us.

Of course some investors counter saying that while things could be better we are seeing the beginning of a recovery.  They then say that while the market will likely climb slower, that it will still climb higher.

While the above scenario is possible, anything is possible.  The more important question is to decide if the rewards outweigh the risk involved in being long equities right now.  Or even if at this point the better risk reward trade is to the downside.

Lets look at a few “risk gauges” or “fear indexes” as the press likes to call volatility indexes.  The first is of course the VIX.  After spiking to all time highs in October and November of 2008 we are already well on our way towards what was considered a “normal” level back in early 2008 before Bear Stearns.  The potential risks were obviously very mispriced at the beginning of 2008, are they mispriced again?  While likely not as off as they were at the beginning of 2008 we still think that there are a lot more real and potential risks then the market is currently pricing in. (Click on chart to enlarge)

SP500 VIX

What about foreign markets?  How do investors perceive the potential risks abroad?  Well if the VDAX is any gauge then investors see a rosy future in Europe as well.  Again maybe there are no big risks and maybe the EU is rock solid.  Then again maybe not.  With the complete lack of liquidity that businesses have had over the past several months in the EU it is really surprising that the VDAX is back to pre-crisis levels. (Click on chart to enlarge)

German DAX VIX

What about other asset classes?  What are investors saying about potential risks?  Using the MOVE Index which measures the range in which Treasury yields are expected to move over the next 12-months we can see that even here investors are becoming increasingly complacent.  What happened to the runaway inflation that we keep hearing is right around the corner?  Right now the market is saying that we will be in a 130 basis point range for the next 12-months. In The Macro Trader weekly newsletter we are long the TLT 20+ Year Treasury ETF and are expecting a bigger move then is currently implied via the MOVE index. (Click on chart to enlarge)

MOVE Index

Even in the currency markets we are seeing extreme complacency.  Apparently investors the world over are back to selling dollars in exchange for anything.  While the USD has its issues other currencies do to.  Right now the currency markets are not participating in the Keynes beauty pageant where you are trying to pick the girl that you think the judges will think is the beautiful.  No, with the current state of the global economy we are in the least ugly pig contest where we are only trying to find the least ugly.  That being said investors do not appear to see a lot of volatility any time soon. (Click on chart to enlarge)

JPM G-7 VIX

Even the emerging market currency volatility index is showing complacency. What happened to the banking issues in Eastern Europe? Apparently they vanished, or at least that is what it seems as though the market is telling us.  (Click on chart to enlarge)

JPM Emerging Market FX VIX

Even commodities markets are pricing in realtively low risk. While the price history of the Crude Oil and Gold volatility indexes does not go back as far as we would like, you can get a feel for what is happening as both indexes are dropping at a very steady rate.  Do investors really think that volatility will stay that low?  What happened to the oil spike if demand comes back?  And what happens if gold breaks $1000 on fears of hyper inflation?  (Click on charts to enlarge)

Crude Oil VIX

Gold VIX

Another excellent tool to evaluate the blind risk taking happening right now in the stock market is the JunkDEX invented by Bill Luby over at VIX and More.  By taking an equal weighting of junk stocks AIG, FNM, C, CIT, and BAC you can see how crazy or composed investors are acting. While we have seen, and actually use, an index of high momentum stocks we had never thought of making an index that tracks junk stocks to gauge investors risk appetite.

As you can see in the chart of the JunkDEX below the junk led the market off the bottom and then lagged until the last month when the index shot up +157.36% in a little over a month.  While it has pulled back over the last two days we are still in awe that investors are dumb enough to buy this junk at these prices. (Click on chart to enlarge)

VIX and More JunkDEX* vs SP500

After looking at all of this we need to ask ourselves if the rewards outweigh the risk to stay long?  Or if we should be flat or short.  In case you have not guessed we currently think that the risk reward is pointing to the downside.

Looking at the QQQQ we have a setup with a solid risk to reward situation. As you can see in the chart below the QQQQ has rallied back to its 50% retracement level, its 200-week moving average, and its downtrend line extending from October 2007.  While it could of course rally higher we like the risk reward enough to have put on a modest short position in our weekly Macro Trader newsletter. (Click on chart to enlarge)

QQQQ-NASDAQ 100 ETF

While not quite as nice of a setup as the NASDAQ 100, the SP500 also looks like a solid risk reward trade to the short side.  As you can see in the chart below of the SPY-SP500 ETF it has rallied up to the upper Bollinger Band and has already started to come back in.  We are looking for a move back to at least the $95-96 area. (Click on chart to enlarge)

SPY SP500 ETF

Obviously anything can happen.  The market could go up every day for the next year, or it could go down every day, but our job as traders is to look for the best risk to reward scenarios that we can find and place trades on probable scenarios and right now we think the most likely scenario is for the market to at least have a pullback if not a correction back towards its 200-day moving average.  Of course if this happens we will see the volatility indexes tick upwards to more realistic levels given our current economic environment.

*Our JunkDEX differs a bit from the one you can see at VIX and More.  After looking into it we found that  we built the index by simulating a $1000 investment in the index and in the SPY and Bill built it by normalizing the index starting value so we have slightly different values.  But don’t worry as the chart looks essentially the same and shows the same investor insanity.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter as well as our accounts we are currently short some QQQQ-NASDAQ 100 ETF and long some TLT 20+ Year Treasury ETF.

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Volatility Indexes, Risk Appetite, Mispriced Risk, And Where We Think We Are Headed
URL: http://www.themacrotrader.com/2009/09/02/mispriced-risk-macro-trader

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One of our favorite, as well as one of the best indicators that investors can follow is that of interest rates.  Since we are global macro traders we follow interest rates across the globe for every country that we can find reliable data.  We track short and long rates for 58 different countries for use in many of our models as well as for other indicators like global and regional yield curves.

As you can see in the chart below (click to enlarge) short term rates for the G-10 are low.  In fact right now there are five countries that are following a zirp (zero interest rate policy) and consequently their 90 day rates are down under .5%.

G-10 Short Term Interest Rates

After dropping significantly throughout the second half of 2008 as Government Bonds went into the stratosphere, rates have since recovered quite a bit during 2009.  As we mentioned in a previous post on Treasury Bonds we think that just like rates overshot to the downside they have also overshot to the upside.  With recent comments by the Fed that essentially said that they will not be raising rates for the next year…or two, we are a bit taken back by the sell off in Treasuries the past few days.  (click to enlarge)

G-10 Long Term Interest Rates

The chart below  (click to enlarge) shows the average 90-Day and 10-Year government yield for the G-10.  In our view this chart shows how the ECB was very slow to lower rates while still preoccupied with the fear of inflation in the fall of 2008.  Looking back, and even at the time, this view was ludicrous as everything on the planet was dropping like a rock.  In fact the world at one point had lost 42% of its wealth.  Obvioulsy rates were eventually lowered but we were, and still are a bit amazed by the lack of understanding shown at the depths of the crisis by Jean Claude Trichet and his crew.

G-10 Short and Long Rates

Here is the chart (click to enlarge) of the G-10 GDP weighted yield curve.  As you can see it is extremely steep with the spread at 2.63% after having been negative back in late 2007.  Remember back in 2007 when people were saying that this time it was different and that the economy was great?  Well they were wrong and the yield curve gave a big neon flashing warning signal.  We were fortunate in that by heeding its cry we were able to not only preserve capital but actually generate positive returns in 2007 and 2008.

G-10 GDP Weighted Yield Curve

Finally here is the Global GDP Weighted Yield Curve (click to enlarge).  Using the country weightings in the MSCI index it is made up of 40 different countries. It has hit new highs this week at 2.20%.

Global GDP Weighted Yield Curve

Happy Trading,

The Macro Trader

Dave@TheMacroTrader.com

TheMacroTrader.com

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Global Interest Rate Trends
URL: http://www.themacrotrader.com/2009/07/16/global-interest-rates

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