Looks Like Lloyds Will Have Further Writedowns

Perhaps its the after effects of an unusually deep Sunday night sleep, or maybe it’s the knowledge that it’s going to be a big week (what with option expiry and everything), but Macro Man’s brain still feels slightly groggy so far this morning.

In a way, he feels like Odysseus, tempted by the siren song of a weak opening in stocks. While his brain is screaming “sell! sell! sell!” like Randolph and Mortimer Duke, thus far Macro Man has lashed himself to the mast-head of responsible risk management, trading the noise until the opening price action resolves itself into signal.

To be sure, the newsflow has been broadly bearish thus far. CIT looks to be on the brink of imminent demise- well, they would be if we didn’t live in a world where anyone larger than an eight-year-old’s lemonade stand wasn’t deemed “too big to fail.”

Meanwhile, the big banks have confirmed that they won’t accept Arnie bucks any more, leaving some in California scrambling. Hmmm….will Vegas do an over/under on when the Federales ride to the rescue and guarantee all of California’s debts?

Anyhow, more viscerally, it looks like Lloyds will be writing down another mountain of turds this quarter. Man, that’s sooooo 2008! That commercial property has led the losses is particularly telling, given that US bank earnings kick off tomorrow with the mighty GS. One of the reasons for ongoing bearishness and scepticism over US financials has been the elephant in the room that is looming commerical property losses.

Of course, that’s more of an issue for later in the year and into 2010. Of more immediate concern for the “all is well” crowd may be the renewed decline in that old chestnut, the Baltic Dry Index. While Macro Man pooh-poohed the significance of the rise earlier in the year, subsequent evidence clearly confirms that it foreshadowed a rally in equities and commodities. So we should perhaps pay some attention to the fact that it’s tailed off again recently, particularly in light of the “commodity stock-piling is over for now” stories coming out of Beijing.

In that vein, it’s interesting to observe that some heretofore resilient EM equity markets are reaching interesting technical junctures. Ship-building titan Korea, for example, made its highs of the year last Thursday. But it fell sharply today; much lower, and the KOSPI show could face cancellation.

More broadly, Macro Man was struck by a Bloomberg story today suggesting that EM stocks are now at their most expensive levels since October 2007. EM overweights have been a popular position, both according to record-high flows and anecdotal surveys from the likes of ML and CS.

Interestingly, the MSCI emerging markets index, proxied by the EEM ETF, has traced out a virtually identical head and shoulders pattern to those seen in more developed, “un-de-coupled” markets.

The difference, of course, is that the EEM has yet to break its neckline. If it were to do so, prompting an outflow of profit-taking, Macro Man can’t help but wonder if that could be the much-discussed missing catalyst to send global stocks sharply lower.

(Yes, Macro Man’s talking his book here…..but if you’d been long EM stocks for 30% and then saw them start to head lower in a haurry, wouldn’t you wanna ring the register?)

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