Two corrections: then (052006-092006) and now
Note: when I talk about bears and bulls, I am referring to those macro-data/macro-investing driven investors/speculators, whom I believe are the movers and shakers of the market; Of course, they can be bears then and bulls now, depending on their macro views and strategy at the time.
There are of course those long-term “hardcore” bears and bulls, and I assume they don’t change their views and investment positions very much at all.
Then (052006-092006):
Total drop from 051106 open to 052406 intraday low: about 610 points, -5%.
052606: closed at 11278, up 248 from 11030 on 05242006, retracing 39% of -610;
061206: closed at 10706, new low since 051106, -572 from 052606’s close, -933 from 051106’s open, -8%;
071706: intraday 10683, 2nd low from 051106;
092606: closed at 11669, +30 than 051106’s open.
Now:
022107 to 030507: from 12782 to 12050, -732, -5%;
030907: closed at 12276, +226 from 030507’s close, retracing 30% of -732;
Then:
Bear’s offense
Starting on 051106, based on economic data released, bears had a seemingly convincing case that there is a stagnation risk ahead: creeping up of inflation, higher interest rates, slowing down housing, consumption and growth, based on economic data released.
Bear’s last tricks: By middle of 072006, the escalating tension in the
Bulls on trial for 2 months
Bulls had been on trial for about two months, from 051106 to 071706. Bulls had been pre-assumed guilty of “stagnation” unless proven otherwise in economic data;
The start of the ending of bear’s offense:
Starting in early 082006, some bears began to close their longs in oil and CRB and shorts in equities, since data suggests that “soft landing and goldilocks” is coming back and Fed will manage it well with a pause in its rate policy, and bulls are going to get a non-guilty verdict at the end of trial.
Now:
Bear’s offense
“Negative carry” (risk aversion)
Bill Gross clearly articulated bear’s case :
Unless Fed reduce the rate, cost of carrying any asset class, will be remain at 5.25% in US.
Unless Fed reduce the rate, US economy is probably growing at below 5% nominal rate if not going into recession, at this point of cycle and under the burden of housing problems.
The 5% maximum nominal growth and 5.25% of cost of capital, will make carry of most asses classes “negative carry”, except for the front-end of treasuries and if you get there early.
If that’s the case, then why carry any asset at all? Front-end treasuries thus become safety heaven again: Bill Gross thinks Fed will reduce rate eventually and investors will “risk avert” into front-end treasuries once seeing most of their carries become negative, thus there are still capital gains on front-end T-bonds.
As of 03052007, 10Y treasury’s yield is at about 4.5%, just about 10 base points above YTD low of 4.4%.
So, short equities and long T-bonds is probably bear’s game for now. Per Bloomberg.com, “Citadel, the Chicago-based fund, is now estimated to account for more than 10 per cent of trading in the most liquid Treasuries”.
Bulls on trial: for how long?
Bulls are now guilty of “negative carry” unless they can prove “goldilocks”.
Until they can prove that they are innocent of “negative carry”, jury is biased with most of them wearing bear’s glass now, and traders will be busy testing lows.
Let’s see what will come out of economic data and subprime mess next week.
