The Fed finally acknowledge the possibility of tapering & QE exit. Barring weak data, I think equities run into the sand here, so I've cut all my FTSE long this afternoon, sold some S&Ps to offset my AAPL long (not at a great level) and to keep a semblance of balance, covered half of my short in EDU7 and all my jgb short.
Basic view is that the dollar rally continues (so keeping the short in audusd, the long in usdjpy and the Aug put spreads on gold), and that the bond market needs to probe the upside in US yields. Perhaps 2% becomes the floor in 10y yields, and we set up for a test at 2.35-2.40 (obvious when you look at the chart). I don't see how equities can ride out the uncertainty of an end to QE3 in the meantime, and the direction of most pain now seems to me lower - so net short stocks, for the first time since I can't remember when.
Another trade I like is buying EDU4/EDU5 below 40bps (currently 37). It's a big if, but if the Fed starts tapering in Sept (so they can see Jun and Jul payrolls before starting the communication process at Jackson Hole and Humphrey Hawkins in Aug), then they could reduce in 20bn increments every 3 months and terminate QE3 by next Jun, when it looks as though unemployment will hit their trigger of 6.5%. In that scenario, U4/U5 should be closer to 75bp, so perhaps 50-60bp risk-adjusted. The low in the last 2 years is 23bps. Scale in from 37 down to 28bp.
That timetable looks persuasive to me since Bernanke retires in Jan 14 and has to hand over to Yellen or whoever else it turns out to be before then. The big unknown is what the economy (& the stockmarket) does in the face of higher yields. Cross that bridge when we come to it...
Wednesday, 22 May 2013
Monday, 13 May 2013
Mid-May update
Trying to update every trade is too labour intensive, so I'm going to restart this with a monthly summary and occasional updates when appropriate.
First a summary since starting :
monthly
date return NAV
Current views :
The US has shrugged off the sequester and the fiscal cliff and is finding its footing. Higher US real rates in the months ahead are starting to be telegraphed by the Fed but the markets haven't yet priced this. Until this idea really sinks in (perhaps it needs a few more Hilsenrath articles or a series of speeches by Bernanke/Dudley/Yellen), equities will continue to rally on the back of QE3/BoJ liquidity. I want to remain long stocks and also have trades for higher US real rates.
Japan's recovery is still under-owned (esp by Japanese retail), and the UK economy is better than the market realises. The FTSE trades very well (retail is apparently very bearish), and I'd like an opportunity to add a position here.
Europe is a confusing mess and I'll avoid it at all costs.
I was pushing pretty hard on risk-on trades till late April, but have switched to a more balanced stance by shorting audusd (and even buying some puts on NKY and ESM3), which should work if there's a deflation scare here. I don't think there will be, and it works for many other reasons, but it's good to have that angle covered better than before.
Primary positions :
Long EDZ4/EDZ7 steepener, with covered calls sold against the EDZ4 leg (99.50 short dec calls) to improve the carry and cushion the effect of a selloff on the EDZ4 leg.
Short audusd. The main post-GFC safe havens (usdchf, usdjpy and gold) are all down ~25% from their mid-2011 peak. Audusd is down 10%, has an election this Sep (tighter fiscal policy from the Liberals ?) and the PMIs have collapsed. China appears to be switching to a less resource intensive phase of growth, and is anyway at risk of becoming credit constrained. Could audusd drop another 10-15% here ? The terms of trade are eroding, and 80% of the c/a deficit is being financed by LNG capex flows. Very unstable.
Long usdjpy - no need to spell this out in detail. Have taken profit on 2/3 of peak position, so will trade it more opportunistically now.
Long Japanese stocks. Have closed out my Nikkei position (too soon unfortunately), but still quite long the megabanks, Nomura and the shipping companies (8306, 8308, 8316, 8411, 8604, 9101, 9104, 9107). Wondering whether to buy Sony/Panasonic/Sharp too. Japanese pensioners will presumably buy the bluest of Nikkei blue chips when they are forced back into the market, and the megabanks and brokers control the retail distribution channel. Obvious.
Short gold. No need to spell this out either - the chart says it all. It looks like it's entering the second down leg after rebounding from its April collapse, which should target around 1200-1250. Took profit on half my position, but still running a reasonable 1400/1350 Aug put spread.
Long AAPL. How can it go down much when they are going to buy back 15% of the outstanding stock ?
Secondary positions :
First a summary since starting :
monthly
date return NAV
| 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 |
Current views :
The US has shrugged off the sequester and the fiscal cliff and is finding its footing. Higher US real rates in the months ahead are starting to be telegraphed by the Fed but the markets haven't yet priced this. Until this idea really sinks in (perhaps it needs a few more Hilsenrath articles or a series of speeches by Bernanke/Dudley/Yellen), equities will continue to rally on the back of QE3/BoJ liquidity. I want to remain long stocks and also have trades for higher US real rates.
Japan's recovery is still under-owned (esp by Japanese retail), and the UK economy is better than the market realises. The FTSE trades very well (retail is apparently very bearish), and I'd like an opportunity to add a position here.
Europe is a confusing mess and I'll avoid it at all costs.
I was pushing pretty hard on risk-on trades till late April, but have switched to a more balanced stance by shorting audusd (and even buying some puts on NKY and ESM3), which should work if there's a deflation scare here. I don't think there will be, and it works for many other reasons, but it's good to have that angle covered better than before.
Primary positions :
Long EDZ4/EDZ7 steepener, with covered calls sold against the EDZ4 leg (99.50 short dec calls) to improve the carry and cushion the effect of a selloff on the EDZ4 leg.
Short audusd. The main post-GFC safe havens (usdchf, usdjpy and gold) are all down ~25% from their mid-2011 peak. Audusd is down 10%, has an election this Sep (tighter fiscal policy from the Liberals ?) and the PMIs have collapsed. China appears to be switching to a less resource intensive phase of growth, and is anyway at risk of becoming credit constrained. Could audusd drop another 10-15% here ? The terms of trade are eroding, and 80% of the c/a deficit is being financed by LNG capex flows. Very unstable.
Long usdjpy - no need to spell this out in detail. Have taken profit on 2/3 of peak position, so will trade it more opportunistically now.
Long Japanese stocks. Have closed out my Nikkei position (too soon unfortunately), but still quite long the megabanks, Nomura and the shipping companies (8306, 8308, 8316, 8411, 8604, 9101, 9104, 9107). Wondering whether to buy Sony/Panasonic/Sharp too. Japanese pensioners will presumably buy the bluest of Nikkei blue chips when they are forced back into the market, and the megabanks and brokers control the retail distribution channel. Obvious.
Short gold. No need to spell this out either - the chart says it all. It looks like it's entering the second down leg after rebounding from its April collapse, which should target around 1200-1250. Took profit on half my position, but still running a reasonable 1400/1350 Aug put spread.
Long AAPL. How can it go down much when they are going to buy back 15% of the outstanding stock ?
Secondary positions :
Short JGBs - a short term trade for a few days around the auction cycle. Not wedded to this at all, but the chart does look ominous. Not a propitious sign for global fixed income.
Long some 1wk 1600 ESM3 puts. Just in case
Long some Nikkei Jun 14000 puts. All the HFs are on the same side of the boat right now.
Long gbpusd, so that some of my audusd is in fact gbpaud, but on a tight rein. No sense trying to pick a serious fight with the usd rally.
Wednesday, 20 February 2013
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).
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.
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
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
Monday, 18 February 2013
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
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
Thursday, 14 February 2013
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.
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.
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