Thursday, 3 June 2010
Heavy going
Boy this market is making heavy weather of this counter-trend rally. Feels weak and like it is struggling to get through the heavy resistance up to 1110. Nevertheless I think there could be a quick rally helped by the jobs number up to the 1140 area I suggested last week. Lack of tightening in the Treasury yields in the weaker times in the market makes me think there is no fear so the the least resistance for equities is up. That said I will be flipping pairs trade to short delta at around 1140 and will buy the10s and possibly initiate new index shorts if we are unable to get above 1150.
Friday, 28 May 2010
Weekly pnl review
Flat on the week after trimming my TLT and short Cable on Monday/Tuesday. Plan for next week is that I will fade any rally above 1140 by switching from long delta to short delta on my DTN/SEF pair trade. Will also take any move in the 10 year to the vicinity of 3.40 to re-build my long Treasuries after the recent TLT selling, albeit with a shorter duration. Will consider adding short S&P if there is a strong bounce off the 1140 level suggesting the downdraft of the right shoulder. However given that this pattern seems so obvious I don't believe it will actually happen. Will also continue to reduce short Cable as it seems to be bottoming and GBP vs a trade weighted basket is threatening to break out of its downtrend.
Friday, 21 May 2010
Weekly pnl review
Had a good couple of weeks with a gain of around 2% putting me up just over 6% for the year. Given I have been around 50% cash for most of the year and far too early in a couple of trades I am happy with this. Only change was that I trimmed 25% of my TLT on Thursday in anticipation of the fear dissipating a bit on Friday and reduced short Cable by about 15% today as the dollar looks like it is pausing and it seemed a good time to take a little bit of profit.
Not planning to do much next week unless there is a strong move. All the stocks on my watchlist all look much too expensive. Unlikely to add to shorts unless we get a weak melt up in the early part of the week which might tempt me to at least reduce longs and maybe add something on the short side.
I may also cut my short GBP a bit depending on how DXY looks Monday/Tuesday.
Not planning to do much next week unless there is a strong move. All the stocks on my watchlist all look much too expensive. Unlikely to add to shorts unless we get a weak melt up in the early part of the week which might tempt me to at least reduce longs and maybe add something on the short side.
I may also cut my short GBP a bit depending on how DXY looks Monday/Tuesday.
Thursday, 20 May 2010
Deflation, hedge funds and the Euro
I have a lot of things going through my mind so please excuse me for being a little rambling in this post.
Couple of things I learned today – a number of hedge funds have de-risked considerably in the last few days. Also the German government will pass the bailout bill comfortably tomorrow as the opposition parties will abstain. So where does this leave us?
The hedgies are now effectively sitting out of the market. As yet volumes are not suggesting that their nervousness has translated into wider selling by individuals and, more importantly, long only funds. Key thing for the direction of the market is how much the market decline fuels redemptions from the liquid long only funds. As fund managers have to be mostly invested they will not yet have had chance to sell much but their hands may be forced by redemptions if fear starts to spread. The next few days will be crucial and hints of wide scale redemptions could be scary for the market given the non-participation of hedge funds.
I am not sure I see real fear yet although LIBOR, Gold and T Bills need watching closely. I can foresee some chioppy action over the next month as hedge funds dip their toes back in the water but also think that each little rally will be faded as there are undoubtedly funds and individuals who feel like they are behind the curve in de-risking their books.
Regarding the EUR the bailout may prompt a short term bounce. However I again think this will be faded in the next couple of weeks as this bailout does NOTHING to address the underlying imbalances in the Euro area. The fiscal austerity which will be needed to create the appearance of fairness for the people of the financing states will cause macro indicators to continue to decline and EUR less than 1.15 seems inevitable.
On a longer term dynamic there have been a number of indicators from US and Europe ex UK that the deflation train is coming to town. Even if this correction does not run much further in the next couple of months I can see some fierce rotation between asset classes. I think that too many investors are positioned far too early for inflation. They made the increased money supply = inflation mistake and have not appreciated the velocity of money.
Despite the efforts of central banks to increase nominal GDP, which is the way they have chosen to “address” the incredible debt destruction ongoing. However despite doubling national debt in the UK and US (and soon Europe) they have barely managed to get nominal GDP positive. This suggests that the velocity of money is still falling as banks keep all the extra money supply as reserves against losses still to be taken. Moreover the uncertainty caused by the poorly planned actions of CBs and Governments is causing the demand for loans to be restrained, even if the banks were in a position to provide them.
Therefore deflation is setting in as the current re-inventorizing cycle comes to an end. The policy makers response will surely, at some point in the next year or so, be to unleash another round of QE. That is potentially when the inflation beast starts to rise and I have no idea where investors will be able to hide
Couple of things I learned today – a number of hedge funds have de-risked considerably in the last few days. Also the German government will pass the bailout bill comfortably tomorrow as the opposition parties will abstain. So where does this leave us?
The hedgies are now effectively sitting out of the market. As yet volumes are not suggesting that their nervousness has translated into wider selling by individuals and, more importantly, long only funds. Key thing for the direction of the market is how much the market decline fuels redemptions from the liquid long only funds. As fund managers have to be mostly invested they will not yet have had chance to sell much but their hands may be forced by redemptions if fear starts to spread. The next few days will be crucial and hints of wide scale redemptions could be scary for the market given the non-participation of hedge funds.
I am not sure I see real fear yet although LIBOR, Gold and T Bills need watching closely. I can foresee some chioppy action over the next month as hedge funds dip their toes back in the water but also think that each little rally will be faded as there are undoubtedly funds and individuals who feel like they are behind the curve in de-risking their books.
Regarding the EUR the bailout may prompt a short term bounce. However I again think this will be faded in the next couple of weeks as this bailout does NOTHING to address the underlying imbalances in the Euro area. The fiscal austerity which will be needed to create the appearance of fairness for the people of the financing states will cause macro indicators to continue to decline and EUR less than 1.15 seems inevitable.
On a longer term dynamic there have been a number of indicators from US and Europe ex UK that the deflation train is coming to town. Even if this correction does not run much further in the next couple of months I can see some fierce rotation between asset classes. I think that too many investors are positioned far too early for inflation. They made the increased money supply = inflation mistake and have not appreciated the velocity of money.
Despite the efforts of central banks to increase nominal GDP, which is the way they have chosen to “address” the incredible debt destruction ongoing. However despite doubling national debt in the UK and US (and soon Europe) they have barely managed to get nominal GDP positive. This suggests that the velocity of money is still falling as banks keep all the extra money supply as reserves against losses still to be taken. Moreover the uncertainty caused by the poorly planned actions of CBs and Governments is causing the demand for loans to be restrained, even if the banks were in a position to provide them.
Therefore deflation is setting in as the current re-inventorizing cycle comes to an end. The policy makers response will surely, at some point in the next year or so, be to unleash another round of QE. That is potentially when the inflation beast starts to rise and I have no idea where investors will be able to hide
Wednesday, 12 May 2010
GBP and the election - part deux
OK - so I called the election wrong. Looks like there was a lot more anti-Tory feeling than I had reckoned with. Nevertheless some of those anti-Tories now find the party that they voted for in a coalition with those same people. Therefore my trading call to watch for a long GBP unwind was not a bad shout. Cable noticeably failed to rally on the establishment of the coalition government which makes me think that the market has already twigged that a) whoever is in charge will be a hostage to their terrible fiscal legacy and b) this coalition will be undermined by the left wing members of the Libdems who will look for the first opportunity to grab power away from the current leadership. I therefore remain very bearish on GBP.
Friday, 7 May 2010
Weekly pnl review
Up 2% on the week as TLT and short financials went orbital and GBP weakened although the 2 midcaps which make up 10% of the portfolio both got murdered. Long reality (DTN) vs morality (SEF) was up slightly although US financials proved surprisingly resilient amongst the carnage. Consensus is for a bounce next week in the context of a newly established downtrend. Fear seemed to dissipate, at least in the US later in the week so this is possible, but given the lack of shorts in the market I think another plunge takes place at some point in May before this correction ha run its course.
Only change in the portfolio was a rather fortunate decision to finish clearing up residual long equities (about 3% of the portfolio) on Tuesday.
Only change in the portfolio was a rather fortunate decision to finish clearing up residual long equities (about 3% of the portfolio) on Tuesday.
Wednesday, 5 May 2010
GBP and the election
It looks pretty clear to me that the Conservatives will win tomorrow’s election. If I was going to guess I would say that they will win with a majority of 30 seats.
Smart money has been pouring into this outcome via a long GBPEUR trade. However I think that this is now a dangerously crowded trade. GBPUSD has weakened in the last few days despite the money pouring into GBPEUR which makes me think there could be a squeeze even in the event that the election goes as expected as the promised bounce in GBP fails to arrive (as everyone and their dog are already long). There could be a really vicious squeeze if the Conservatives do not win outright. I would therefore avoid this trade in the next week. I am short GBPUSD (big) and short GBPEUR, GBPCAD, GBPAUD and GBPJPY in smaller sizes.
In the long run I am very bearish on GBP. It was only good old fashioned jingoism which kept us out of the Euro and our fiscal situation would easily have qualified the UK for membership of the PIGIUNS ® (Portugal, Italy, Greece, Ireland , UNited Kingdom, Spain). Given the disastrous fiscal and economic position of the UK I do not think that the ability to inflate our way out of default should lend support to our currency.
Smart money has been pouring into this outcome via a long GBPEUR trade. However I think that this is now a dangerously crowded trade. GBPUSD has weakened in the last few days despite the money pouring into GBPEUR which makes me think there could be a squeeze even in the event that the election goes as expected as the promised bounce in GBP fails to arrive (as everyone and their dog are already long). There could be a really vicious squeeze if the Conservatives do not win outright. I would therefore avoid this trade in the next week. I am short GBPUSD (big) and short GBPEUR, GBPCAD, GBPAUD and GBPJPY in smaller sizes.
In the long run I am very bearish on GBP. It was only good old fashioned jingoism which kept us out of the Euro and our fiscal situation would easily have qualified the UK for membership of the PIGIUNS ® (Portugal, Italy, Greece, Ireland , UNited Kingdom, Spain). Given the disastrous fiscal and economic position of the UK I do not think that the ability to inflate our way out of default should lend support to our currency.
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