With the recent rise in LIBOR we have been reading a lot of concerns over what it all means.  The two main arguments that we have seen is that either it is due to liquidity concerns or it is due to the supposed recovery in the United States economy.  For many reasons we obviously fall on the side of this being led by fear and liquidity rather than due to a recovery and an expectation of the Fed raising rates anytime soon.

3-Month LIBOR

The first thing that would lead us to assume that this is due to panic and not recovery is the way in which LIBOR is rising.  What we mean is that if you compare it to T-Bills it usually trades very much in line except in times of fear.  Looking at the chart below you can see that the last three times that it has diverged was also when we had banking system fears.  The top in the summer of 2007 which kind of started off the whole mess, fall of 2008 when the world seemed to be falling apart in front of us, and then in late winter 2009 when we already had the ZIRP in place but it looked like things might be getting even worse.  Of course once things got back on track and the end of the world as we know it was at least postponed the relationship got back in line with LIBOR at a slight premium to T-Bills like regular times.  Another thing that we find odd is that if LIBOR is rising on a recovery then why aren’t T-Bill or  2-Year Treasury yields climbing?  Would bond investors not drive yields higher if they thought this recovery had legs?

3-Month LIBOR and T-Bills

Looking at other money market spreads shows much of the same thing.  Namely that spreads are going up, this by the way is usually not a good thing.  Looking at the TED spread, LIBOR-OIS spread, and 90-day commercial paper-T-Bill spread you can see that they have all been climbing since the Greece and EU problems really started to gain some attention.

Money Market Spreads

Now lets look at some spreads in other nations.  It should come as no surprise that they are also on the rise.  In the first chart we have the EURIBOR-OIS spread, after spiking higher it has continued to inch its way basis point by basis point wider and wider.

EURIBOR-OIS

Next up is the TIBOR-OIS spread.  As you can see it is also rising although a lot slower then in the US or in the EU.  As we will see in a few charts however that is how it always is.

TIBOR-OIS

Finally we have the UK LIBOR-OIS spread. Again it should not be much a surprise that it too has been climbing quite a bit.  The UK is weak and its nearest mega-economy the EU is weaker.  Banks are and should be scared.

UK LIBOR-OIS

Looking at the three spreads over the last few years you can see in the chart below that the global banking crisis affects them all.  Another thing worth noting is that Japans spread (the yellow line) may be rising slower but the swings have been far more muted the whole time.  Of course Japan has been dealing with a broken banking system for almost two decades now.

EURIBOR-OIS  TIBOR-OIS  UK LIBOR-OIS

We will end this post with one last indicator that we follow closely and that is the VIX.  This volatility index is simply an average of stock, bond, currency, and commodity volatility indexes.  If most asset classes are seeing an increase in volatility it rises and if most are declining it goes down.  As you can see in the chart below it has been going up the last few months as many market participants are once again focusing on risks.

Average VIX

In closing we have many concerns in our current situation.  Some pundits claim that markets are headed higher and that we are under estimating the recovery.  They say that everyone is too worried and that the fundamentals are strong.  We apparently are looking through an entirely different lens.  With the EU continuing to deteriorate we cant help but wonder how investors can look at the rise in LIBOR as anything but bad.  While Greece is indeed a small nation the Euro is what is at stake.  Yes, the same Euro which is probably the biggest economic experiment of the last 30+ years.  In addition to the EU we have “regular” geo-political concerns as well like Iran, the Korea’s, and our future energy supply.  So while we could of course go higher we definitely should be concerned.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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A few weeks ago in our newsletter we discussed our view on the EUR/GBP.  Essentially we were leaning towards the downside as it appeared that the pair was about to break lower.  While initially we were drawn to this trade due to the great triangle pattern, the more we look at the fundamental situation the more we like it.  Basically both of these currencies are loaded with issues.  But with the UK having taken a lot of pain early via QE and the EU just now opening up to the idea that all is not well let alone QE,  we think that this pair has a ways to go.  Heck we think that the EU might lose the U here in the next few years as the PIIGS saga plays itself out.

FXE-EUR/FXB-GBP

Yellow Area=First target

Next Line Down=Measured Move

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are short the EUR/GBP

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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Today in the Financial Times there was an article entitled “Macro Funds Miss Out On Crisis” where they show how many macro funds are currently lagging their expected performance so far for 2010.  While it is true that many funds are relatively flat e are surprised that the article had nothing good to say.  We being proponents of Global Macro as not only a strategy but as the best strategy across a full market cycle decided to take it upon ourselves to look at Global Macro against the SP500 from the beginning of the crisis October 2007 to now.

What we find is that while the SP500 is down -24.41% from the beginning of the crisis, the HFRXM Global Macro Index is basically flat at +1.04% for that same time.  In fact if you had invested $1000 in each of the HFRXM and the SP500 on October 1, 2007 your investment in the Global Macro Index would be ahead of the SP500 by 33%.  So while you wold not have huge absolute gains, you would also not have huge absolute losses.

$1,000 Invested In HFRXM and SP500

Of course such comparison offer little real value since the SP500 is a horrible benchmark for a macro trader.  Global macro encompasses stocks, bonds, commodities, and currencies so it should be relatively uncorrelated to any one asset class.  What sets global macro apart from other strategies is that it enables the trader to go wherever they see the best opportunities.  Of course just because they have the flexibility does not mean that they will catch every move, but it does allow them the flexibility needed to avoid large losses.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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In the investment world it should be no surprise to anyone anymore that outlying events actually happen with a decent amount of regularity. Looking at the past 12 years we have had the Asian Contagion, Russian Default, LTCM, .Com crash, housing crash, and the subsequent crash of everything else. Most of these are one in a gazillion year type events and yet they all happened inside of 12 years. Statistics while useful, are not able to perfectly model the real world.

So mixing stats with history let us look at the MOVE Index. The MOVE Index, essentially the bond markets VIX, typically trades between 128 and 79. Anything outside of those two lines is at least one standard deviation from the mean. As you can see in the chart below we are currently more than one standard deviation below the mean and look to be headed lower. (Click on chart to enlarge)

MOVE Index

Of course the interesting thing about the MOVE Index is not what level it is at but what tends to happen when it reaches certain levels.  Essentially whenever the MOVE Index drops below one standard deviation something blows up. Apparently bond market investor complacency is a better gauge of “too complacent” than other volatility gauges.

Drops below the lower one standard deviation have preceded the following events

-First Gulf War

-Asian Contagion

-LTCM bailout/Russian Default

-.Com tech crash

-Housing/Credit crisis

While it is not a crystal ball, see the extended period below one standard deviation preceding the credit crisis, the MOVE index is still a good risk gauge with a solid track record of saying investors are too risk averse or that we are too complacent and therefore not really aware of the risks on the horizon.  Consider this the yellow light, its not saying stop but its not saying go either.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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One of the many indicators that we track is that of the Los Angeles and Long Beach port data.  Combined these two ports handle almost 50% of the shipping traffic for the United States so they are obvioulsy useful in order to follow global trade.  As you can see in the chart port data s very seasonal.  You can see that total trade (the green line) typically peaks in October and typically bottoms in February.  Sometimes this cycle is off by a month in either direction but for the most part it’s very consistent. (Click on chart to enlarge)

LA and Long Beach Port Data

While total shipping volume, outbound plus inbound containers, is down over 25% from the peak back in September of 2007 it is important to look at the same month due to seasonality.  Looking at shipping volume from Feb 2010 against the peak Feb in 2007 shipping is down -13.7% or 118,562 containers.

So is trade improving or getting worse?  By breaking the data down into performance by month we can see if this January and February are better or worse than other years.  In the chart below you can see that for 2010 Jan and Feb were both actually slightly above their historical averages.  The average January sees traffic shrink by -3.10% and this year it only shrank by -3.05%.  February sees an average decline of -4.42% and for 2010 it only declined -2.89%. (Click on chart to enlarge)

Port Data Seasonality For Jan And Feb

Frankly right now the data isn’t screaming at us.  Numbers are coming in close to the historical norms but overall there is little to get too worked up about. Basically port data is currently telling us that the recovery is still in progress but that nothing is really improving or declining.  What would be a constructive sign would be to see March where we have a historical average increase of 10.69%.  A large miss would be a bad sign while an average or even slightly higher number would be considered by us to be very bullish.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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One indicator that we follow is that of the 5-Day Equity Put/Call Ratio.  In fact it was one of the indicators that helped lead us to call for a correction back on January 12th in our post “It’s Time For A Pullback In Stocks”.  A few days later the SP500 started its 9% pullback.

So what is it saying right now?  If you look at the chart below you can see that the reading on the 5-Day Equity Put/Call ratio is at its lowest (most bearish) level in over four years with a reading of .50. This of course coincides with a near new high in the SP500. (Click on chart to enlarge)

SP500 and 5-day Equity Put/Call Ratio

While we aren’t calling for a new correction, we do think that we are likely in for a pullback of sorts before moving higher.  We remain bullish in the medium term as breadth remains strong and many industry groups continue to break out.  While shorting is definitely an option, in light of our longer term outlook we have instead opted to hedge our long exposure with some slightly out of the money options.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We hold long positions in several industry group ETF’s and puts on the SP500.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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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

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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One important indicator for gold is the Goldollar index.  The Goldollar index is formulated by taking the price of gold and multiply it by the US Dollar Index.  This has the effect of giving us the trend of the price of gold isolated from movements in the US Dollar.  As far as we know the Goldollar index was devised by the McClellans of McClellan Oscillator fame.  Just as the developers intended we use this index to help forecast and confirm what the price of gold is likely to do and what it is currently doing.  If the Goldollar index breaks out to the upside gold usually follows, and if it tanks then gold follow to the downside as well.  While it is not perfect it has definitely aided us in our trading.

So what is the Goldollar index showing us right now?  As you can see in the chart below the Goldollar index in the lower pane looks similar to the gold chart in the upper pane.  The main difference is that the Goldollar index has broken out from its consolidation and is right at its highs and gold is not.  While not the holy grail, and therefore sometimes wrong this would indicate to us that in the relatively near future gold will be moving higher. (Click on chart to enlarge)

Gold and Goldollar Index

Disclaimer-currently hold no position in gold but that is likely to change soon

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

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Since launching The Macro Trader in November of 2007 our subscribers were able to avoid the crash of 2008 and while we were not as short as we would have liked we were profitable, all this in a year wen the SP500 was down -38.5%.  Recently we publicly called the downturn in the Euro in our blog post entitled “Is It Finally Time To Short The Euro“  as well as calling the correction in the stock market with our post “It’s Time For A Pullback In Stocks.”  While we definitely do not get everything right we do strive to provide some of the best and most actionable research available.

If you have been a blog reader and enjoy what you read then take a $1 trial to our weekly newsletter The Macro Trader.  Simply click on subscribe, pick your subscription and you will be given the first month for $1 and then either be billed monthly, quarterly, or annually depending upon what you choose.

In our weekly newsletter we cover stocks, bonds, commodities, and currencies.  We run a model portfolio using ETF’s so that our research is accessible to both retail and institutional investors alike.  Every other week you will receive an extensive letter with tons of in depth research and on the other weeks you will receive a shorter version with summarized versions of our views and any new actionable trade ideas.  In addition to the weekly letter we also send out regular mid-week updates with trade ideas, research, commentary, etc.  If you want great research and actionable trade ideas spend the $1 for a one month trial, it is likely the lowest risk trade out there.

Happy Trading,

Dave@TheMacroTrader.com

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We run several different models that help us to determine what the market is favoring in regards to style-growth/value and size-market cap and right now they are pointing to a potential mean reversion trade going long Large Cap Value against Small Cap Growth.

Looking at the chart below you can see that over essentially the last decade the Russell 1000 Value and Russell 2000 Growth ratio has reached extremes around 1.00 and .82.  We are obviously nearing the lower end of the range where the Russell 1000 Value index typically takes over. (Click on chart to enlarge)

Russell 1000 Value/Russell 1000 Growth ETF Ratio

Since these types of mean reversion trades can last for a few years at a time it is important to look at as much data as possible.  Looking at monthly Russell data from 1979 to now you can see in the lower panel below that when normalized using a 36 month moving average that the ratio is more than one standard deviation away from the norm.  While it has been, and could definitely become more extended we are looking at this as a potential pairs trade using the ETF’s IWD for the Russell 1000 Value and IWO for the Russell 2000 Growth indexes. (Click on chart to enlarge)

R1KV/R2KG Ratio and Mean Reversion Charts

We also like the fundamentals of this trade.  If as we believe we are going to see what we are calling a slowth (slow growth) period for at least the next year or so and possibly for the next five plus years (what PIMCO calls the “new normal”) it would follow that the market would start to back out of small cap growth stocks and go to areas where there is more safety of principal as well as decent and reliable dividends.   This area typically is large cap value where most of the companies are diversified across the globe, across product lines, and have large cash positions.  In addition to the macro landscape, on a valuation/expected returns standpoint this area is also favored by some well known asset class return forecasts such as the GMO 7-Yr forecast seen in the chart below. (Click on chart to enlarge)

GMO 7-Yr Forecasts for US Stocks

Disclaimer-The Macro Trader currently does not hold any of these securities.

Happy Trading,

Dave@TheMacroTrader.com

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