Tuesday, August 23, 2011

And we're out of the currencies

Last Friday we got out of the expiring ESQ1 Put Fly 1150/1125/1100 position @ ~10.17. Unfortunately we didn't have balls to take the whole lot to expiration or even a tiny part of it. That would have been a 7.9 : 1 trade. But the ESU1 Future settling at 1124, very close to what we call 'the fly's ass' in Brazil, was pure luck. We got out at an average price of around 10.17 which I thought was an already fantastic 2.8 : 1 risk-reward. And with 'fly' above I mean the insect. Tiny, huh?

I am here to try to bring in positive returns and to reduce the overall risk of the portfolio. Gambling, I want to think, is a small part of my job.

We also announced the exit of the Currency Basket. Entry here.
Well... I had been in love with that currency basket for a long time, but I only talked about it here on the blog a few months ago, when the bullish components of it were losing steam already. What a lesson.

That is why I got out. Only the bearish component of it, the CHF, was steamrolling over the other currencies.
The CHF moved 12.3% x entry, while the other currencies moved very little.
The second lasgest move was -2.9% in the CAD. Then +1.4% in the NOK and +1% in EUR, +1% in BRL, +0.9% in GBP and -0.3% in CLP.

It was clear to us that the long CHF was very crowded trade when, even with equity markets going sour, credit markets finally giving up and widening considerably and with gold making new highs fastly, etc, etc... CHF was squeezed lower by 5%. Bells rang and we got out.

Comparing the GBP and the EUR x the Commodity / Higher growth currencies I noticed low volatility, but also no help. So basically my reading was "home bias" is working against me and stronger political and economic "we want stability and status quo forces" from the developed economies working against me.
Not to mention the brazilian and chilean authorities intervening in the markets. The swiss authorities intervening. The japanese authorities intervening.

I lost the big move on this basket (shown below, in another chart), but it is okay. It was a great lesson.
I still think that in the medium-term/long-run this basket will outperform, but in times of stress there is a lot more capital from the US, Europe and the UK around the world, as direct investments in hard assets, as hot-money, as carry trades.

I will then save volatility in my portfolio and reduce the overall exposure to currencies. We are living interesting times now. And every time I mention interesting times it should be translated as "I expect great opportunities ahead". Perhaps now is the time to be very cautious and looking at cheap entry points in a variety of plays, perhaps even bullish trades, being a bit contrarian.

I have an eye out for the 6m or 1yr Argentina CDS. I will speak more about this later. If risk markets collapse Argentina will be beaten up so badly that very interesting opportunities will whisper in my ear "Buddy... it's time. Wake up. They export soybeans and corn and wheat. And after volatility is down there will be inflows. Low levels of debt despite bad politicians and run away inflation."

So... Two charts:

1. The total return on this basket we announced here, including carry (+2.36%)
2. The return on this same basket, but since 1-june of last year when I first looked at it and started mentioning it to friends and colleagues (+14.36%)

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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