Just when you thought it was safe to go back in that water.....a great white shark from the Great Barrier Reef goes and bites your leg off. While yesterday's US equity market meltdown was home-grown, it left the SPX in no man's land. A month ago, short equity risk was far and away Macro Man's biggest position, but now he has virtually nothing in equities except the tiny, wretched remains of the large cap/small cap trade and a modest long vol position in Europe.
For Macro Man, the most interesting recent developments have come from Down Under (and Just Over). While it has yet to garner too many substantial headlines, the news that National Australia Bank (NAB) has written down its US RMBS portfolio to 10 cents on the dollar could send shockwaves through the financial system.
Much of NAB's book was made up of AAA securities, so to mark them down so drastically certain suggests that "the model", whatever it is, is broken. Now, when you consider that a whole host of banks are either marking this stuff much higher on their balance sheets, or have moved it to the limbo of "Level 3" make-up-whatever-price-you-want assets, a publicly-disclosed 90% write-off on similar assets could represent a rather unpleasant dash of cold water in the face of much larger fish than NAB. No doubt a host of banking execs are cursing NAB into their Cheerios this morning; after all, nobody likes a whistle blower, especially when there's plenty of other bad news to deal with.
Meanwhile, we may have seen the first SWF stop loss in the financial sector. Rumours are swirling that Temasek, Singapore's "other" SWF, has puked some of its stake Merrill Lynch. So far from being the White Knight who saves the day with their hordes of cash, it appears that SWFs may exacerbate some of the selling pressure. Oh dear.
In any event, recent developments may tempt punters back into a trade that can only be described as "equity market crack", long energy/short financials. While it's tempting to call the recent, ahem, "setback" in that trade "just one of those things", Macro Man cannot help but wonder if the sharp reversal of fortune hasn't exacted more enduring damage, or is at least telling us something about slowing growth outside of the US. Remember, kids, don't believe the pipe!
Finally, it's worth noting that the 1 year anniversary of the beginning of last year's FX carry collapse has just passed. Macro Man mused last week about the chances of history repeating or rhyming in NZD/JPY....and sure enough, the cross has started coming a bit lower. Will the same hold true in EUR/JPY, where the pattern is almost identical?
If so, it will require Mrs. Watanabe and the reformed DOTW to capitulate. Recent data suggests record retail longs in NZD/JPY, so one lives in hope...one lives in hope.
