The Bizarre Activity in the Low-Grade Financials

Farewell, summer, we hardly knew ye.

The commuter trains were noticably fuller this morning as the passage of the August bank holiday signals the onset of autumn and full staffing levels. With Labor Day on the horizon, there are likely to be another few days of liquidity impairment and potentially sluggish trade, but for all intents and purposes it is tempting to put one’s hockey net in the street and yell “Game on!”

It was a year ago tomorrow that Macro Man scaled into equity shorts at elevated levels, and sure enough, 52 weeks on, major indices are once again at localized highs (but running out of steam.) We’re now a month away from National Day in China, the trigger date that Macro Man had circled in his calendar for fireworks.

It seems as if the (pity) party has started early, however, as Shanghai has extended its early-August weakness to lapse back into a bear market. Recent confirmation that whenever you trade with China, you’re actually selling them a free option is clearly not the best of news, and we surely must be close to the point where the man on the street starts selling with greater vigour.

And while it is oh-so-tempting to suggest that this spells doom and gloom for the SPX, SX5E, and the like, Macro Man has finally thrown up his hands in final, utter, complete disbelief and lack of understanding at what’s going on in developed market equities.

In yesterday’s fairly lackluster session, Lehman Brothers-Lehman Bloody Brothers!-stock traded 125 million shares, rising to 18c. In the last two sessions, that share price has more than tripled. Now, Macro Man gathers there is some stuff going on with respect to the vultures picking over the carcass of LEH, fighting for scraps. But he cannot think of any rational reason in the world why anyone would want to buy Lehman (OTC:LEHMQ) common stock….hell, until yesterday’s move was pointed out to him, he didn’t know that Lehman stock still existed! Gee, he wonders if he can get a quote on Enron or Penn Central…

Meanwhile, US equity volumes are being dominated by what can only be termed as a “cavalcade of turds.” Macro Man recently highlighted the surge in volume in the Agency stocks….evidently the same thing is going on in Citi (though at least there, there’s been a recent conversion of prefs to common.)

Trading volume in these three shares has, according to Brett Steenbarger, recently exceeded the total volume on the NYSE by a pretty comfortable margin. Macro Man has no idea what’s going on there but finds it difficult to avoid contemplating something sinister.

So while he likes the short equity trade (what else is new?), at the moment his risk allocation is relatively modest. One of his investment maxims is that it’s virtually impossible to forecast what you’re going to see if you can’t even explain what you’re currently seeing. And while it’s tempting to strap on a big short in stocks given the waning momentum and ancillary signals from bonds and EM, this bizarre activity in the low-grade financials is preventing him from saying “game on!”

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