Monday, January 23, 2012

A few updates

So it has been a long, long, long time since I have written much around here.
Let's say I am back, likely not posting as often as I used to, but I'll try to keep things running around here. Very unlikely that I will post content from others frequently as that takes up a lot of time.

From now on prepare yourself to read a bit more about commodities, especially energy and agriculture, being some of it towards the micro-side of things.

So... updates? What has happened to the portfolio since the last update in September?

I had closed the BRL DI Futures July 12 receiver on December 2nd of last year @ 10.07%, 300% of NAV.
That means a (10.89% - 10.07%) = 82bps * ~3 gain, minus negative carry, loss of duration as time went by and exposure of the profit/loss generated by fluctuations in the USDBRL. The trade added +1.47% to the NAV of the day the trade was put on.

The driver behind this exit was that a lot had been priced into the curve by the market, the financial markets had rallied a lot and the loss of duration just made the risk-reward worse by the day. I could have increased the duration, but at the time it made sense to stand still and look around with less risk in the books. The portfolio was 'bear enough'.

The EURBRL short posted earlier was also closed last week.
Entry @ 2.3912 spot-ref. Exit @ 2.2764 spot-ref. Directional gain of +4.80%. Adding carry [125 days, around 2.15bp/day] and the fact that the PnL of the trade generated exposure to the USDBRL the trade performed well at a total of +7.36%. Size was 20% of NAV when entering the trade, so the trade added +1.465% to that date's NAV.
The risk-reward of this trade was tough while riding it. The first few days were absolutely horrible, warranting even a "Should I stop out?", but looking from higher grounds the portfolio as a whole performed very well in times of extreme stress. So it was a way to add some carry to the portfolio while adding what I consider to be a more positive tune to it, while adding some "risk-on" touch to it.

Do I believe that this trade has more to go? Long-term yes, due to secular fundamentals of Europe x Brazil. But  short-term perhaps. I think there is a clear support @ 2.18 and the risk-reward here gets a bit worse in my opinion.

Now a bit of cheap-talk.
The risk-off tune of the market has decreased remarkably due to, in my humble opinion, the gigantic 3-year LTRO (EUR~500bln) done by the ECB in December together with rate cuts and the ongoing implementation of the sovereign bond buying program. These go a loooong way into demonstrating that the ECB is no longer such solid warrior against inflation and is, it was about time!, joining politicians that want to save the euro zone and the european financial system / economy. They're not worried about moral hazard, not worried about newspaper headlines stating that the ECB is giving money to banks and helping capitalism desintegrate. They're engaged in avoiding a catastrophe.

This helped investors bid in sovereign bond auctions. THAT is critical for a function european financial system. Also key for confidence. It was key for the recovery seen in global risk markets. And what a recovery it was.

So it brings me to the other update which was a short on the S&P futures @ 1307 (ESH2, 25% of NAV).

Because I think the correction was already brutal and I see way too many people already celebrating the start of a new bull market. People patting themselves on the back saying that the US won't fall back into recession, etc. This is now consensus. Herd behavior. When these words go together I've got to act.
What were the positives? What will make some positive impact in global growth?
- ECB's LTRO + SMP + rate cuts acting as QE/monetary easing/provider of liquidity
- Some better-than-expected economic data coming out of the US
- Major easing globally from large countries such as Brazil, China, Australia, etc.
- Short squeeze and risk under-allocation.

This is a more tactical trade and there's no love in it. Short-term horizon for pain here.
I need to do some reading on matters 'global activity'.

I will need more time to elaborate on the negatives, but it is time for bed now.
Quick note: I do regret not shorting the damn Italian 6m CDS @ 412 bid back when the markets priced a global collapse in September. Shoot first. Ask questions later. And also the CDS from Argentina. These exploded also, while the debt profile of the country isn't horrendous.

Open positions: *sizes relative to NAV when trades were entered
+200% of NAV in Dec16 Germany CDS
-25% ESH2
+100% May14 USDCNY Call 6.80
+100% Mar14 JPY Swaption Payer 4.00%

I am thinking about switching the Dec16 CDS into a 10y tenor. Better upside x carry and smaller spread-roll-down too. I would couple this with a 1/5 size in short EURBRL.

*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

No comments:

Post a Comment