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Saturday, 1 June 2013

May update




      Month    Mthly return       NAV

15Nov12 100.00
Nov-12 17.8% 117.77
Dec-13 37.4% 161.78
Jan-13 38.1% 223.40
Feb-13 -3.3% 215.92
Mar-13 12.4% 242.62
Apr-13 30.2% 315.81
May-13 68.8% 533.08

May was obviously one of those months when just about everything goes right, unlike Feb. I left the Nikkei party at 14000 (a bit early, but not complaining) and switched from long usdjpy into short audusd around 1.02. Bernanke fired the starting gun for a fixed income bear market which could have much further to run, and gold turned down as hoped from its rebound near 1475. About the only thing that didn't work was being long cable, but that stopped out at zero cost, so could have been much worse.

Looking forward, the trades with momentum are audusd (lower) and US fixed income (rates higher), which overlap on the US side. The Chinese steel inventory liquidation is getting serious, so iron ore and coking coal seem to have further to fall. Gold looks precarious, but crude and copper are treading water, so it's -3 on a scale of (-5,+5) for Aussie's terms of trades. The miners are thinning and stretching out their capex pipeline - the term is spaghettification -  so the 1% GDP tailwind is turning into a similarly sized headwind. How will they finance the c/a deficit as the capex inflows fall off ? In addition,  how many investors without an EM mandate are long audusd as a surrogate for China exposure ? It's hard to find bullish factors for aussie at the moment.

(A wildcard is the Sept general election : Labour look set to lose, having screwed up the fiscal position, so it might be politically expedient for the Liberals to run on a fiscal responsibility platform. In that case Australia could be getting a dose of austerity just as the capex cliff kicks in, which would only mean one thing for the RBA and audusd.)

US fixed income is all about May and Jun payrolls. If the labour market holds up (which is what the strength in consumer sentiment might be suggesting), then the Fed's rhetoric about tapering will continue, possibly aiming for a taper in the Sept meeting. They've been notably quiet about the recent selloff - tacit approval, perhaps ? Is this the dog that didn't bark ? I think so. My favourite trade here is a u4/u5 steepener, with a target above 60 (this could be the front calendar spread as rate hikes come on to the agenda, and since we're starting from zero I think we could see 100 or higher as the market starts to consider how far the Fed has to travel). Also short EDZ7 and long some low delta green Jun and blue Jun puts, just in case there's a blowout payrolls and the bond market goes into liquidation mode. It'll happen one day.

Japan will be interesting again soon. Right now, it's almost un-tradeable, with 500-1000 point swings in the Nikkei every other day. At least some of the selloff must be a month end effect - we were up 16% at one point this month, so there's some reallocation to be done. And there's the inevitable shakeout after a 70-80% 6 month rally. However the LDP doesn't want to go into elections with the Nikkei having a fit, and they seem to be strong-arming GPIF, Yucho, Kampo and the more docile private sector investors to support equities and take the pressure off JGBs. Fairly soon the storm should blow itself out, and there's a trendline coming in from the start of this rally at about 13000, so I've tentatively sold some July 13000 puts as a first step towards buying the dip. In 3 months' time this *could* look like nothing more than a "healthy"correction : a market that rallies 75% in 6 months is going to have 20% corrections instead of 5% ones, but that doesn't make it a bear market. Incidentally, there's a lot of confused thinking about JGBs. If JGBs collapse, how can the currency rally (they're collapsing because of fiscal sustainability concerns, not because of an imminent cycle of hikes after all). And if the yen falls, the exporters are in even better shape. Obviously the banks will have 'issues' (although they've shortened duration hugely after 2010), but ultimately they'll be bailed out by the Govt if necessary. Too big to fail. A 20 year JGB bull market was hardly wonderful news for equities, so perhaps a JGB bear market will be ok.

Elsewhere, I'm completely out of FTSE and SPX, but still sitting with AAPL, which seems to have quietly put in its first higher low in a year. When they eventually release a new product, perhaps the market will look at the chart and the p/e and feel uncomfortably underweight. People will always need iphones, after all !

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