Wed 20th

NAV 120.2

Gilts
Some nice fills of 2 GTC orders in gilts to start the day :

sell 5 at 115.95
sell5 at 116.45 (!!)       now short 40.

The market spiked up on the headlines about King voting for more QE, only to end the day down 0.22. Now short 40 G H3, and working a single bid for 5 at 114.25 (GTC).

GBPJPY
Although I think they're wrong, the market is taking a stick to GBP. I suspect the GDP data is rubbish and the employment data is telling the real story, but I'm not fighting it yet, so cut the gbpjpy position (again)

sell 0.5m gbpjpy at 143.062. Now flat

Tha's the second buy high/sell low that I've now done in gbpjpy, which tells me I should stop trading this cross for the moment.

Gold
Having said previously that I now had 100% of the position I wanted in gold, I think that exiting the gbpjpy trade makes room for a little more. A rather sloppy piece of execution after the Fed minutes, selling down $45 on the day. I should have been patient and waited for a better level tomorrow as everyone calms down.

sell 2 gcj3 at 1559.5. Now short 15.

T-bond futures
Same as the gold trade. Appalling execution, selling down on the day after the FOMC minutes. A true D-.

Sell 2 USH3 at 142-27. Now short 15.

I think both of these trades (gold and t-bonds) will be fine in the end, but the contrast with the execution in gilts where I sold the high tick of the day is pretty stark. Sure enough, both these trades ended the day in the red, whereas my average sale in gilts today closed almost a point in the black.


BIG PICTURE

The Fed is starting to think about the exit, and their discussions will be on this topic. This is toxic for the assets which have gained from QE, so we should be trading bear markets in yen (already largely complete, with a 20%+ collapse since November), gold, followed by long dated treasuries and finally eurodollars. Perhaps we trade a range in equities too (after all, the reason the Fed can even think about exit is because the economy is in reasonable shape, which is not the stuff of equity bear markets. Besides, I don't think the positioning in stocks supports a real bear market here, unlike gold, treasuries and EDs).

Tues 19th - nothing to report. NAV 117.9

I'm increasingly convinced that the correct trade is to replace a yen short with a short in gold (both against usd). Gold trades as though the stampede for the exit is just beginning - the trepidation is almost tangible in the price action - whereas in yen I'm starting to find myself buying highs and selling lows, which tells me the trend is faltering and it's entering a range for a while. Time to head to the exit on gbpjpy and usdjpy then.

New trades, Monday 18th

NAV 114.9

 I'm now short 20 of the Simex Nikkei 08Mar13 11500 calls, which doesn't make any sense given that I'm bullish nikkei and that expiry is right ahead of fiscal year end (this is what happens when you leg out of call spreads : stupid), so this gets closed out :

buy 20 NIH3 Mar13 11500 calls at 215

Also I felt as if the yen was going to make a serious assault on the barriers above 94.50 now that G20 is  out of the way, so reset a long there :

buy 0.5m gbpjpy at 145.80
buy 0.5m usdjpy at 93.955

Took a painful drawdown on Friday ahead of G20 and reduced positions, which was a mistake in hindsight. Friday trades :

Sold 1m gbpjpy at 142.623
Sold 20 NIH3 11000 Mar calls at 371
Sold 10 G H3 at 114.72
Sold 3 USH3 at 143-13

The last 2 trades re-established shorts in gilts and T-bonds, albeit at a very poor level in gilts (quite oversold).

The gold trade look more compelling the more I think about it. Price action was awful on Friday obviously, and the market has broken through an uptrend from 2008. It could bottom and recover, but the environment looks hostile to gold to me for all the reasons discussed before. The price rallied from 682 post-Lehman to 1921 in late 2011. Obvious 38 and 50% targets for a healthy pullback would therefore be 1450 and 1301. Since it feels like kicking on an open door, I'm taking a risk and betting that we won't have the squeeze back into the old range (above the trendline mentioned earlier), and so I'm increasing my gold short to full size right here :

sell 3 gcj3 at 1619.3

sell 10 gck3 may 1700 call at 11.0 (expiry 25Apr13)
buy 10 gck3 may 1560/1510 put spread at 10.0

buy 30 gcq3 1400/1350 put spreads at 3.7 (expiry 25Jul) - cheap, but 12:1 for a real collapse over the summer.


Fri 14Feb13 NAV 111.6

Filled on gbpjpy bid :

bought 0.5m at 144.07

Now working 2 GTC offers :

0.5m GBPJPY at 146.93
0.5m GBPJPY at 144.93

Separately, got filled on the GTC bid for 5 more gilts, and decided to cut the JGB short (BoJ will eventually extend to 5yrs or longer. Probably we're going back to the all time high from Jun03 in JGB futures. In the meantime use the disappointment from the BoJ's decision today to close the position) :

bought 5 G H3 at 114.85
bought 10 JGBH3 at 144.04

Gold sold off again. It's starting to look terrible on the chart. Sold another 4 last night :

sell 4 GCJ3 at 1642.1

so now short 7 altogether.

NAV 114.8. Ouch.

NAV 13Feb13 117.6

So much for range trading gilts. Got hit on the GTC bid at 115.95 earlier today, only for them to crash out through the bottom of the range. Still have 5/6 of the position though, next bid is 114.85 for another 5. Hopefully will get hit late in today's session, and be able to sell them back out on a bounce tomorrow as everyone reconsiders. I still want to be short gilts for another 15-20bps ideally.

Other trades today :

1. Got hit on a bid for 5 ush3 at 142-16, taking profit on 1/3 of the bond futures I'm short. Now short 10 ush3. Working nothing at the moment, but should probably cover some more another point lower.

2. Added to Sirius (SXX.L). It traded down 13% this morning on a story about delaying the detailed feasibility study for their potash mine and the resignation of one of the senior staff. Looking through the details, it seems to be a storm in a teacup, so added another 25,000 at 25.25. Total position now 250,000.

3. GBP is getting whacked because of King's comments (ostensibly). I think it's more likely that what's happening is that the flight to safety positions from the EUR are now stopping each other out, aided and abetted by a decent short base from fast money. The data doesn't seem so bleak : rising house prices at last, and strong private car sales. On top of which, there's been a dramatic easing in financial conditions in the UK since November, which won't be visisble in the data yet, but should start to appear in 4-6 weeks time. With Cameron's leadership how can we go wrong ? Anyway, added another clip of gbpjpy :

bought 0.25m GBPJPY at 145.35

Next stop 144.07 for 0.5m, GTC

4. After cleaning out the ESH3 15Feb covered calls I bought 20 ESH3 outright. They've rallied about 8 points (a nice start), so take a little profit and add some time decay by selling covered calls against these too :

sell 20 ESH3 15Mar 1540 calls at 9.00

That's a 33 delta. If we get there by expiry, then the Mar28 1520/1570 call spread (on ESM3, currently 1514) will be making a lot of money, so no regrets involved in being exercised if it happens. And if it doesn't then I have an extra 9 point cushion on the downside. 

bought 5 g h3 at 115.95. Try to trade the recent range in gilts. Work new GTC order

sell 5 at 116.45 GTC

NAV 115.0 12Feb

bought 0.25m gbpjpy 146.415 : rebuilding yen short on today's weakness. I think headline dips in yen crosses are buying opportunities for the next few weeks, unless positioning is at extremes, which isn't the case at the moment. This is very much a toe-in-the-water position, which could be increased several-fold if necessary. On balance I prefer the Nikkei trade for Japanese reflation (since the Govt is starting to jawbone it higher), so this position is just to make sure that I buy gbpjpy after a selloff rather than after a huge up-day.

I've been watching gold for a while. If the US is recovering (I think the evidence is becoming convincing), then the era of declining US real rates ought to be over. In other words, we've had the final Fed easing (QE-infinity), and from here on it's tightening at the margin.

There have been 3 clear beneficiaries of falling US real rates, in my opinion : the yen, gold and long dated treasuries. Other candidates, like the euro, copper or equities for example, have all had some flaw which has counted against them (respectively, the flawed structure of the EU, dependence on industrial demand and hence reflation, and risk appetite). The first 3 caught the full force of Bernanke's easing.

The yen has already started to slide. It can't be as good a short now as at 77. I'm short some fixed income, but it's still too early to go to town on it perhaps (the Fed is still buying via QE, and it's negative carry, and there's lots of talk about Treasuries being in a bubble : not an ideal backdrop). Gold is a different story. It's never been more widely owned as a retail investment. Its bull market has been running in earnest since 2002 - about the same time that equities peaked, more or less. No-one appears to think gold is a bubble, or if they do they're either too embarrassed to say it out loud, or ignored when they do. The point is, the idea that gold might be a bubble is far from a mainstream one.
Finally, it's already come off its high. No-one who bought gold and held it in the last 6 months (and a hell of a lot of people have done exactly this) is in the black. Another $100 lower and everyone who bought since Jul 2011 is under water.

To cut a long story short - sell gold. It hasn't decisively broken, so dip a toe in the water, and hope to be able to get some more sold at higher levels. It might even be worth selling the 1700 calls perhaps...

sell 3 GCJ3 at 1646.30

GTC orders :
sell 2 GCJ3 at 1676.00
sell 5 GCJ3 at 1699.20

new trade today

sell 15 ush3 at 143-18

NAV 112.3

a proper washout in jpy on Fri morning then. Stopped out of my remaining position in gbpjpy at 145.645 (ouch) as a precaution. Don't want to be washed out by a deeper pullback.

Other trades on Friday :

1. EDZ4
Take advantage of the push higher in fixed income to reset some shorts in eurodollars - so

sell 25 EDZ4 at 99.39

these were the ones that I bought back at 99.32 a few days ago, so my EDZ4/Z7 steepener is now more of an outright short than a steepener (+50 EDZ4 vs -125 EDZ7). I'd be fully short if we go much higher, so working orders to sell EDZ4 at 99.47 and 99.49 GTC. The contract high has been around 99.50, and I think it's really hard to get higher than that in the near term. Where to buy EDZ4 back again ? Probably in the low 30s and then more in the mid to low 20s.

2. ESH3
I covered the remaining tail risk from the synthetic short in 15Feb 1470 and 1475 puts, so

buy 50 ESH3 15Feb 1470 puts at 2.00
buy 50 ESH3 15Feb 1475 puts at 2.00

That leaves me with just a 28March call spread in e-minis (100 * 1520/1570 call spread, paid about 12.5 net). Ideally I want to sell the Mar28 1460 or 1470 puts against this to pay for the time decay, but this isn't the right level of the market to be selling puts, so we'll keep that powder dry for the moment. To maintain a long in e-minis, just added some more futures, on the break of the 'ceiling' at 1507 :

buy 20 ESH3 at 1512.75

3. NIH3
The selloff in usdjpy feels like a proper Friday clearout, and has been amplified (as usual) in Nikkei futures. So I'm resetting the jpy short by adding more to the Nikkei position :

buy 5 NIH3 at 11,145



After all that, probably not much net change in my risk position, replacing long gbpjpy with long nikkei and short EDZ4.

Incidentally, the claims number looks ideal for equities. Like payrolls, it puts the Fed firmly on the sidelines, and maintains QE3/4 at 85bn per month for the foreseeable future. That's a nice backdrop for a continuation of the rally - for now.

Carney appearance was a damp squib, as expected. Unfortunately there's been no spike in short sterling tosell into, although there was in gilts at the open this morning, so I've taken the opportunity to increase my gilt short from 20 to 30 contracts, ie

sold 10 G H3 at 116.17

This is in line with the aim of switching the short in L M6 in to a short in gilts from a few days ago. The carry is less painful, it doesn't fly so directly in the face of 0.5% rates and takes advantage of the poor budget fundamentals (which are arguably a positive factor for  L M6) and the crowded safe haven positions in gilts from the last 2 years (which probably now needs to be unwound or reduced).

And there's the wildcard of how the Bank intends to exit its QE holdings - not that I'm holding my breath for a sale announcement, but the lurking threat of something being announced is far from being priced into the mkt.

NAV 06Feb13  114.9

Bought 5 NIH3 at 11,330. Now long 30 NIH3, in addition to the 11k/11.5k March call spreads.

Bought 100 L M6 at 98.66 - closing this out temporarily since Carney is speaking tomorrow. Will probably be a damp squib (does he really want to rock the boat before he's even got the business cards ?), but I'd hate to see the short sterling strip trading 8 higher and feel unable to short it. Will probably work an offer at 98.70/73/76 over the speech.

Bought 25,000 Kawasaki Kisen (9107.JP) at 182.6. The shipping lines are 3 of the worst performing shares in the Nikkei since 2008 (I think they have 2 of the bottom 10 slots, along with the likes of Sharp and TEPCO, which gives you an idea of how beaten up they are - and arguably how overpriced they were in 07/08). Anyway, it's a dash to trash, and they don't come much trashier than this, so I want to be really long this stuff. Seriously though, these were among the most heavily shorted stocks in the Nikkei, and are on stupid p/b ratios. The whole industry is going through a Darwinian survival-of-the-fittest episode, and the survivors are going to have a cost base that will make them wildly profitable in a few years time. Just copy John Fredriksen.

tok advantage of the selloff in esh3 to roll the strike on 28Mar 1540/1570 call spread a bit lower : so in other words, bought the 28Mar 1520/1540 call spread for 6.25. Position now is the 1520/1570 call spread, for a total cost of 12.75 (this was 4th Feb trade date)

Also added a third to the Japanese shipping lines :
bought 15,000 9101.jp at 217.4    (total now 55,000)
bought 10,000 9104.jp at 296.0    (total now 40,000)
bought 20,000 9107.jp at 167.0    (total now 75,000)

Also added 0.25m gbpjpy at 146.87

NAV 05Feb13 110.2

Start of a new month, so updating positions and thoughts – hence something of an essay.

NAV cob 01Feb13            110.7

                                               

GBP

            Single stocks

                        BP.L                        Long 10,000

                                                Short 10 Mar 470 calls

                        RR.L                        Long 7,000

                                                Short 7 Mar 920 calls

                        ELTA                        Long 3,500

                        PIN                        Long 6,500

SXX                        Long 225,000

           

                        The rally has effectively closed out the Rolls Royce long (deep in the money now) and BP is going the same way – depending on what happens with the negligence case in the US courts. Electra and PIN are still trading at unjustifiable discounts to NAV, even though every business they sell is going at a premium to NAV, so I’m keeping these for now.

Sirius is pure option premium. They need regulatory approval for a potash mine in Yorkshire – if they get it they’ll have a great position as a low cost producer of potash, bringing a lot of employment to a deprived area (amongst other things). High risk, but at least 4:1 on the upside in the long term.

No changes imminent here – if the rally closes out the BP and Rolls Royce positions that’s fine, if not then wait till expiry and sell covered calls again.

            GBP rates

                        Short 100 L M6, average price 98.735.

                        Short 20 G H3 (March gilts)

           

                        The short in gilts seems a better way to express this trade than short sterling, given the supply/demand situation, the likelihood that further UK easing is more likely to be FLS than QE, and the fact that the gilt market is crowded with flight-to-safety buyers who are realising that they’ve been running into the burning cinema rather than out of it.  I think this argues for switching the L M6 position into gilt futures when the opportunity arises.

JPY

            Single stocks

                        8316                        Sumitomo Mitsui            long 2000

                        9101                        Nippon Yusen                long 40,000

                        9104                        Mitsui OSK                    long 30,000

                        9107                        Kawasaki Kisen             long 55,000

            Nikkei

                        NIH3                           long 25 (Simex Nikkei)

                        NIH3 11k calls            long 20

                        NIH3 11.5k calls         short 20

The Nikkei still looks like the equity market with the greatest upside, as it’s chronically under-owned and ridiculously cheap, more so relative to JGBs than in absolute terms. The NIH3 position should probably be larger than it is (esp if I get taken out of some of the UK equity positions listed above). With Nikkei vol so high, selling puts or doing covered calls is the way to go.

The Sumitomo position is about 1/5 of what it should be, as the megabanks are such a leveraged trade on reflation. The basket of shipping lines is more of a special situation, which I’m not going into here as it will take too long.

            JPY rates

            Nothing. Ideally I’d still have the IRS steepener 5y 3y forward against 5y 20y forward (positive roll on both legs, and structurally short the back end, which is where the slow-motion JGB meltdown is already running). Not accessible via futures only though, so this is off the menu.

            As an aside, a short in long dated JGBs would be close to being my favourite structural trade right now. The BoJ seems nowhere near to buying the long end, and the bear market has already started. Higher USDJPY, inflation pressure and the risk of reflation running out of control, and the calamitous state of public finances are some of the key factors in favour of this trade.

            JPY currency

            GBPJPY            long 0.75m

            GBP is still suffering from the overhang of safe haven flows, or so it seems. The trade is to switch into an equal basket of USD and NOK (can’t bring myself to buy EUR). Besides, NOK is probably the first central bank in the world to actually start raising rates, so NOKJPY is a great cross to own from that perspective (and others). The short side in JPY speaks for itself. There’ll be no let-up in the pressure while Shirakawa is still running the BoJ, as people will hang their hopes (maybe correctly) for further jpy weakness on getting an ultra-dovish successor. 

USD

Equities

            ESH3                              long 100

            ESH3 Feb 1470c            short 50

            ESH3 Feb 1475c            short 50

This is just a synthetic short in the Feb 1470 puts and 1475 puts with 2 weeks left to run (I took off the 1475 puts on Wed as I had too much tail risk ahead of payrolls, but reset it again this afternoon right after the number for a net cost of 2 points : cheap). These puts have halved after payrolls, now that the event risk of payrolls is gone and since the market has rallied too.

            ESM3 Mar28 1440 call            Long 100

            ESM3 Mar28 1470 call            Short 100

Bought this call spread today for 6.5 points (30 points wide, so about 5:1). This is really cheap upside exposure : the market still seems underweight in stocks (there was almost no noticeable month end re-weighting trade : you’d have expected an equity selloff and fixed income rally after the moves in Jan. Instead we got nothing, suggesting people are using the mkt move to get closer to benchmark). That said, 1570 is clearly a barrier for the rally, so selling the upside beyond there looks obvious.  Hence the call spread.

Tactically I think the trade is to get another few days of time decay on the short position in Feb 1470 and 1475 puts before covering them, and then to sell the Mar28 1460 puts, which are around 15 points. I get paid 15 points for the 1460 puts, against paying 6.5  points for the 1540/1570 call spreads – ie both 40 points out of the money. So I can buy 100 call spreads against just 50 puts for zero cost. And the expiry ties in nicely to quarter end and Japanese year end – perfect for a window dressing rally… On top of that 1460 looks like a level where you ought to buy the market outright anyway, so being exercised on those puts is something I’d be comfortable with (given a Fed on perma-hold after today’s uptick in unemployment). In fact I can’t think of a better backdrop for stocks :

-       stable, if low, nominal GDP growth, so steady revenue growth

-       no cost pressure from wages or energy

-       a market that still seems underweight (no pullbacks to cover the underweight inherited from the fiscal cliff negotiations)

-       Fed on perma-boost at $85bn a month of QE

-       AAPL already deflated, so that risk is neutralised

-       Fiscal cliff deferred, if not properly solved

USD rates

            EDZ4                                    - long 75

            EDZ7                                    - short 125

            3em6 98.125p            - long 350

The EDZ4/EDZ7 steepener is insurance for the Fed changing their mind. If they’re wrong, and the labour market recovers sooner than they expect, then EDZ7 is mispriced by at least 100bps. And that’s before anyone’s unwound a single carry trade. At the same time, EDZ4 is near the top of its range, so I’ve sold out 40% of the long position and working orders to sell the remaining 60% in equal clips at 99.41/99.47/99.49. Look to buy back the 40% I’m underweight in EDZ4 at 99.28/99.21.

The blue Jun 81 puts are interesting. I have 350 of these at an average of 6.5bps. They ought to expire worthless, but the risk/return there is amazing. Time decay won’t be an issue for a month or two yet so nourgent issues there. The chart looks like it’s breaking down to 98.35 – but this contract traded 97.40 in Mar12. There’s a thought.