Tuesday 8 October 2013

Sep update

Sep update

indexed NAV
monthly return
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
Jun-13 36.9% 729.55
Jul-13 -12.6% 637.46
Aug-13 -1.7% 626.31
Sep-13 -9.6% 566.31

I feel like calling the US authorities and demanding my money back. I'd have put Summers for Fed chairman and an initial taper both as high probability outcomes, and obviously neither was. Having had a humiliating week in mid Sept, P&L preservation demanded a serious cut, so at least I've been largely on the sidelines during the current political fiasco in Washington.
I don't have a clear idea how to trade this situation - it's completely binary, driven by political egos and everything is correlated (so no good hedges that I can see). It beggars belief that the politicians will consciously drag us over the edge, but the gridlock and the dynamics in Washington are pushing that way. After all, everyone was aware of the risk of war in 1914 and no-one wanted it (well, maybe one did), but it still happened. I have some Schatz and Bobl calls 20-30bp OTM in case the unthinkable happens. The only long term position I'm keeping is long Japanese banks.

Things I'm watching with a view to enter when (if ?) the debt ceiling/shutdown is resolved :

Japan - people are starting to question Abenomics, which seems premature as you wouldn't expect it to be an easy straight line process. Offshore positions are being trimmed while domestic retail and institutional money are preparing for what could be the next leg (NISAs, GPIF asset re-allocation for example). BoJ seems to be talking down the JGB market and attempting to floor yields at 0.50, which sets up an interesting risk return there perhaps. I want to get the all clear from Washington first though.

Aussie - I'm out of the slowdown trade, as the data has bounced and housing seems to be following the NZ route.

UK - the recovery was looking great, until Osborne decided on a huge dose of adrenaline straight into the heart muscle (aka Help To Buy). Cue all 1 bed flats repricing to £600k. It seems unlikely to end happily. Being long GBP against CHF and AUD was a nice trade, but I'm now on the sidelines as explained.

USA - I'm concerned that everyone "knows" a default is unthinkable and that sanity will prevail. Markets are convinced that default is unthinkable, so they're not inclined to panic - but a market panic is the only tried and tested way to break a Washington logjam. So it's Catch 22, the downside being that if something goes wrong in this game of chicken then things fall apart extremely rapidly. Perhaps too rapidly for the authorities to react. The role of Treasuries as collateral seems to me the weakest link.

I'm out of the game till the odds are better.

Wednesday 2 October 2013

insurance trade

Generally insurance trades are a waste of money, but the House Republicans seem determined to test that idea to destruction. It's a ninety-something percent probability that the debt ceiling is fixed by mid October, but if it isn't then it's nice to have protection. The best I can see is schatz and bobl calls expiring on Oct25th.

If the politicians screw up, the US could be in selective default soon after Oct 17th. That will raise a question mark against the eligibility of Treasuries as collateral for CSAs etc, and there'll be a mad scramble for every other government bond as banks and hedge funds try to get hold of replacement collateral. That points to Schatz and Bobl calls. Surprisingly the Nov calls (25th Oct expiry) are cheap : 0.01 for the Schatz 110.70 calls and 0.02 for Bobl 126.00 calls. If the unthinkable happens Schatz will trade to negative yields - we were there last year after all, so the precedent has been set - and these calls are in the money. Possible payout ratios could be 50:1 or higher, which seems a lot better than anything available in spx puts.

The real purpose is obviously to provide the backstop to buy equities if/when things are looking really ugly. We're not there yet though.