Hi there ladies. Friday, huh?
Why update a blog on boring matters such as investments and global macro events when Carnaval is just around the corner in Rio de Janeiro? And the streets are boiling with party people from all over Brazil and some parts of the world, the bars are full of cold beer pints and broads as lovely as the readers?
Because there is still time to write a quick post over a nice meal while Jason Mraz plays on the stereo. And THEN head out the door to relax a bit after an interesting week behind black and shiny Bloomberg screens.
A few days back, at the closing of the bell I tweeted about entering a short position on the Ibovespa stock index paired with a short position on the USDBRL.
So the idea is shorting 1 unit of Ibovespa future and shorting 1.4 units of USDBRL, 50% of NAV.
Why?
I am a bit clueless about the next short-term general market move.
But I believe the market will remain range bound save bad economic surprises (which I think will happen, but not right now).
And I don't see substantial risks of a snap down or up.
I believe a lot of good news is already here, most of it is priced in and the global economy has lost a good deal of momentum.
So it makes sense to me to sell volatility, but delta-hedging is really not my game. In case you followed my wording in the past year you will recognize that I don't put new trades on very frequently. I don't think selling straddles, strangles, etc will work. At least I can't tweet every delta-trade I'd do, right?
Historically volatility decreases in a slow moving bull market. I don't think we're in one right now at these levels.
So what kind of position benefits from low volatility and works well in a range-bound market?
What kind of position benefits if volatility actually snaps and there is a crash or mild down-move?
What position has the support of policy makers in some ways?
I think shorting an expensive market (the Ibovespa) at 9.30%/year carry sounds reasonably good.
To avoid losing money if the index trends upward I think it makes sense to add a negatively correlated asset, adjusted for volatility, that also has a very decent carry in it and that is selling the USD and buying the BRL.
How so?
Back to P/E levels on the Ibovespa... Last year I mentioned that it made sense to buy brazilian stocks when the government signaled that they were cutting rates. That was exactly around the time the Ibovespa crashed. Unfortunately I was away from the financial markets at the time (early October) and so I didn't do my first very bullish trade for the The Tail Chaser Portfolio. What a shame, huh? Readers have me as a permabear. Something that I am not. I just started working in these markets in March 2008. So from all that I saw and read I think I just became too skeptical about reverting to the 1990s and 2000s means.
But anyway. Ibovespa's forward P/E is around 10.25 now.. that's an yield of 9.75%. The Jan13 DI future is now at 9.30% or something. So the index is yielding about the same. Difference is that what is the volatility on depositing your money in a DI-linked federal bond? It's very close to 0%. I missed the train up the hill in 4Q11 when the yield curve collapsed after the sequential rate-cuts and the Ibovespa rally, but I think the train is losing steam and now. Longer-term interest rates are already over 100bps above the Jan13. So yielding more than the Ibovespa.
But hey... rate cuts = activity growth, no? Yes. True. But at the same time there is an ongoing fiscal consolidation in Brazil. Dilma seems to be a very technical president and she is shoving politics aside and treating the country's macro landscape as a machine. The current government + central bank demonstrate that their desired level of inflation is higher than the previously adopted 4.5%/year. And they're using macro-prudential measures, fiscal consolidation and nominal rate cuts to bring real interest rates down.
What I believe will happen? I think Brazil has lost a bit of an opportunity to implement important reforms. Reforms of its fiscal code mainly. THAT would help bring overall interest expenses down all over the country. Bring some efficiency and competitiveness to local companies x global companies.
So being the local companies relatively expensive already in terms of multiples and growth expectations and being Brazil a country of indexation in inflation I believe there is substantial risk that inflation will bottom at a much higher level and then trend up again eating away profitability and stability. Eventually, if I am right, markets will price in interest rate increases (they are already...) and activity will stall too. And this added carry will add fuel to the BRL.
So that is my base case for the upcoming 12 months for my beloved Carnaval-nation.
And the short USDBRL in this picture? Well, it is a cross with humongous carry compared to others around the world. It has the desired negative correlation with the risk markets and at the same time 2 things reduce the risk of holding this position the way I believe I understand it:
(A) BERNANKE! The dove will for sure bring on MBS purchases/QE3/TwistAndShout/whatever you wanna call it if the economy stalls and market crashes... that means USD debasement and ZIRP until 2020.
(B) The Brazilian central bank doesn't want the BRL to appreciate dramatically, but at the same time it does trade on the short side too if there is a spike. When the USDBRL showed up above the 1.90 line last year we saw a massive intervention to, at least, dampen volatility.
So... in quick words:
1 - The Ibovespa is very expensive x other countries' stocks so I believe its upside is limited.
2 - I am not a believer in the low rate x low inflation x brazilian efficiency combo that would fuel stocks
3 - I think there is limited room for the USDBRL to explode upwards save a market crash, that means the Ibovespa down.
4 - In case the markets crash there should be greater currency debasement efforts by the Fed and intervention from the brazilian central bank to also reduce the volatility of the USDBRL cross.
Why update a blog on boring matters such as investments and global macro events when Carnaval is just around the corner in Rio de Janeiro? And the streets are boiling with party people from all over Brazil and some parts of the world, the bars are full of cold beer pints and broads as lovely as the readers?
Because there is still time to write a quick post over a nice meal while Jason Mraz plays on the stereo. And THEN head out the door to relax a bit after an interesting week behind black and shiny Bloomberg screens.
A few days back, at the closing of the bell I tweeted about entering a short position on the Ibovespa stock index paired with a short position on the USDBRL.
So the idea is shorting 1 unit of Ibovespa future and shorting 1.4 units of USDBRL, 50% of NAV.
Why?
I am a bit clueless about the next short-term general market move.
But I believe the market will remain range bound save bad economic surprises (which I think will happen, but not right now).
And I don't see substantial risks of a snap down or up.
I believe a lot of good news is already here, most of it is priced in and the global economy has lost a good deal of momentum.
So it makes sense to me to sell volatility, but delta-hedging is really not my game. In case you followed my wording in the past year you will recognize that I don't put new trades on very frequently. I don't think selling straddles, strangles, etc will work. At least I can't tweet every delta-trade I'd do, right?
Historically volatility decreases in a slow moving bull market. I don't think we're in one right now at these levels.
So what kind of position benefits from low volatility and works well in a range-bound market?
What kind of position benefits if volatility actually snaps and there is a crash or mild down-move?
What position has the support of policy makers in some ways?
I think shorting an expensive market (the Ibovespa) at 9.30%/year carry sounds reasonably good.
To avoid losing money if the index trends upward I think it makes sense to add a negatively correlated asset, adjusted for volatility, that also has a very decent carry in it and that is selling the USD and buying the BRL.
How so?
Back to P/E levels on the Ibovespa... Last year I mentioned that it made sense to buy brazilian stocks when the government signaled that they were cutting rates. That was exactly around the time the Ibovespa crashed. Unfortunately I was away from the financial markets at the time (early October) and so I didn't do my first very bullish trade for the The Tail Chaser Portfolio. What a shame, huh? Readers have me as a permabear. Something that I am not. I just started working in these markets in March 2008. So from all that I saw and read I think I just became too skeptical about reverting to the 1990s and 2000s means.
But anyway. Ibovespa's forward P/E is around 10.25 now.. that's an yield of 9.75%. The Jan13 DI future is now at 9.30% or something. So the index is yielding about the same. Difference is that what is the volatility on depositing your money in a DI-linked federal bond? It's very close to 0%. I missed the train up the hill in 4Q11 when the yield curve collapsed after the sequential rate-cuts and the Ibovespa rally, but I think the train is losing steam and now. Longer-term interest rates are already over 100bps above the Jan13. So yielding more than the Ibovespa.
But hey... rate cuts = activity growth, no? Yes. True. But at the same time there is an ongoing fiscal consolidation in Brazil. Dilma seems to be a very technical president and she is shoving politics aside and treating the country's macro landscape as a machine. The current government + central bank demonstrate that their desired level of inflation is higher than the previously adopted 4.5%/year. And they're using macro-prudential measures, fiscal consolidation and nominal rate cuts to bring real interest rates down.
What I believe will happen? I think Brazil has lost a bit of an opportunity to implement important reforms. Reforms of its fiscal code mainly. THAT would help bring overall interest expenses down all over the country. Bring some efficiency and competitiveness to local companies x global companies.
So being the local companies relatively expensive already in terms of multiples and growth expectations and being Brazil a country of indexation in inflation I believe there is substantial risk that inflation will bottom at a much higher level and then trend up again eating away profitability and stability. Eventually, if I am right, markets will price in interest rate increases (they are already...) and activity will stall too. And this added carry will add fuel to the BRL.
So that is my base case for the upcoming 12 months for my beloved Carnaval-nation.
And the short USDBRL in this picture? Well, it is a cross with humongous carry compared to others around the world. It has the desired negative correlation with the risk markets and at the same time 2 things reduce the risk of holding this position the way I believe I understand it:
(A) BERNANKE! The dove will for sure bring on MBS purchases/QE3/TwistAndShout/whatever you wanna call it if the economy stalls and market crashes... that means USD debasement and ZIRP until 2020.
(B) The Brazilian central bank doesn't want the BRL to appreciate dramatically, but at the same time it does trade on the short side too if there is a spike. When the USDBRL showed up above the 1.90 line last year we saw a massive intervention to, at least, dampen volatility.
So... in quick words:
1 - The Ibovespa is very expensive x other countries' stocks so I believe its upside is limited.
2 - I am not a believer in the low rate x low inflation x brazilian efficiency combo that would fuel stocks
3 - I think there is limited room for the USDBRL to explode upwards save a market crash, that means the Ibovespa down.
4 - In case the markets crash there should be greater currency debasement efforts by the Fed and intervention from the brazilian central bank to also reduce the volatility of the USDBRL cross.
5 - a large dose of carry in a risk-adjusted combo-trade.
6 - large inflows into Brazil originated from large grain crops being paid for in the upcoming months
7 - corporate money being brought in by capital markets into Brazil to finance Petrobras and other businesses.
8 - More carry trades being put to work as more governments indicate they want financial assets to reflate.
Of course. I could be wrong. Next post will likely be about the 1-year anniversary of the blog. I'll post its 1-year performance of Feb 8 2011 and the famous and, of course very much expected by all readers, letter to investors.
Now let's head out. Have a great weekend.
PS: Petrobras released its earnings this week. They were very bad and markets detonated the stock today, down 7-8%. By the way, the common and preferred shared of the company represent 10.5% of the Ibovespa index. Want a piece of this action? Government-run business, bad profitability and had a huge run since last year.
6 - large inflows into Brazil originated from large grain crops being paid for in the upcoming months
7 - corporate money being brought in by capital markets into Brazil to finance Petrobras and other businesses.
8 - More carry trades being put to work as more governments indicate they want financial assets to reflate.
Of course. I could be wrong. Next post will likely be about the 1-year anniversary of the blog. I'll post its 1-year performance of Feb 8 2011 and the famous and, of course very much expected by all readers, letter to investors.
Now let's head out. Have a great weekend.
PS: Petrobras released its earnings this week. They were very bad and markets detonated the stock today, down 7-8%. By the way, the common and preferred shared of the company represent 10.5% of the Ibovespa index. Want a piece of this action? Government-run business, bad profitability and had a huge run since last year.
*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
