Speaking of currencies...

Heck if this is important, but I will post this anyway. It is an introduction to what will follow.

Below 2 charts.
- UK's Non-EU Trade Balance, 12m rolling sum, in 10^6 GBP.
- UK's Total Trade Balance, 12m rolling sum, in 10^6 GBP.

The trend seems clear. An american high-school cheerleader would say something like "Oh. My.God. The Industrial Revolution is soooo 1800's".

The country has bad deficits, high debt-to-GDP, banks that were nationalized, activity that has been stagnant for the past 6 months, high unemployment, high inflation and still loose monetary policy. Did I mention they're tightening fiscal policy (still loose). Issues with London losing the battle against other global financial centers.

Would you like to buy Sterling? Only if I had the time to go check out the Royal Wedding, my friend!

The GBP is included in the "Printing-Presses" currency category I have here on my side together with the USD and the EUR.

The JPY should be included also as these guys are THE owners of Canon, Kyocera and the likes. They MASTER the skill of printing. They invented Quantitative Easing! BUT, on the other hand, since their stocks have moved down 75% since their bubble peak in 1989-90 and their bonds can't go much higher (bad risk-reward, 30year @ 2.03% with 105% net debt/GDP, 200% gross debt/GDP, bad demographics, low savings rate) they have been investing abroad for years. Their stock of wealth abroad is massive. So, contrary to what is considered common-sense for every other country in the world, the japanese currency, the yen, actually appreciates when there are market stresses. Natural disasters, financial disruptions, etc, all make the Yen go up, especially against the USD. Wow. Now add positive net-exports flows... Positive current-account... and you get the Central Bankers of the world intervening in the market selling the yen to try to stop the trend. Right after the earthquake we heard from a currency dealer 'Our yen books are cleared now. ALL stop-losses have been triggered". That was right after the JPY rose 3.80% in 15-minutes. And the BoJ came to the market.

So if I were to add the JPY to a basket of currencies it would be on the 'long vol' side. Buy long-term deeply out-of-the-money YEN puts while buying some spot JPY. Why? Well, it seems to reduce the overall volatility of the basket in periods of stress.

A basket I am very interested in at the moment is:
- short USD, EUR, GBP (33% each), perhaps short 3-5% AUD.
- long BRL, CLP, CAD, NOK, CHF (30% / 15% / 20% / 20% / 15%)

I'd include the JPY on the long side @ 5% of the basket, to reduce stress-volatility, increase the sharpe of the trade, taking 1% from each other currency, like the CHF.

This basket has a decent carry, especially nowadays!, bets against bad balance sheets and negative real interest rates.
The long side is structural commodities + higher growth + better stablished banking system (CHF = gold) + bit better demographics

It has performed very well since the end of the crisis, 15%+ since June 2010. And I expect it to keep performing well.
Downside risk is massive stress, like seen in 2008, before the printing presses are set to full-throttle again.

Even though the long-countries have better balance sheets they're still net-debtor. A lot of foreign capital within these economies that could be pulled out. Their higher growth is of course dependent on that. Not to mention their foreign reserves that contain US Treasuries, etc.

Anyway... Currency trends tend to last for years, decades and I do not think we're at a turning point yet. If you consider the drivers of growth on the two sides of the equation here I believe the basket is looking good: (A) population growth + (B) marginal productivity gain. The only time this doesn't work is when there's no capital to support A+B, which is global financial stress.

So... what do you think? Emails to theintriguedtrader@gmail.com are welcome with a brief background of yourself.

*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

Barton Biggs: BUY THE DIPS!

Barton Biggs, author of Hedgehogging, an interesting book about the hedge fund industry and raising money for a fund, former Chief Strategist for Morgan Stanley, is always a good read, specially for me.

Biggs is usually very bullish (last year he turned bearish for about 15 minutes reducing his fund's exposure. After a quick bounce in the equity markets he turned around and increased his bullish bets. He was right), so, bringing arguments contrary to my structural fundamental view on the global economy.

Again he has valid points and acknowledges important facts: US housing double-dip and EM inflation.

His take: the recent meltdown is actually bullish for stocks as it helps policy makers fight inflation.

And I agree 100% with him.

His multi-year experience in "structural fundamentals x corporate earnings" is very important to any investor, one that I have to work on.
Tail risks are to be hedged. Not to be bet on (unless asymmetry is hugely positive, with expected return barely around 0/positive). On the opposite side of catastrophic tails resides politicians, Governments and their Treasuries with their printing presses, powerful industries and Central Banks. Always there to structure the bail-outs.

2011 05 10 - Itaú Global Connections #41 - Barton Biggs, Traxis Partners

*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

Regarding Corporate Culture and Investment Process

Through the link is a video that contains, perhaps, one of the most important aspects of an investing firm (and any other successful business or relationship I think):
- Truth-at-all-costs

That means.... 

"We won't sacrifice the pursuit of truth for ego or hierarchy or any other things that in a lot other places stand in the way (...) What are you willing to give up to reach truth?

"What we're willing to give up is feeling comfortable, feeling superior, bosses feeling like they're in charge."
"We're going to settle things on logic."

Bridgewater Website: Culture

Ray Dalio's Speech - 7th Annual Hedge Fund Industry Awards

Another useless piece of data

Investor Business Daily (IBP/TIPP) Economic Optimism Index

Like the PMIs, a reading over 50 indicates a positive outlook while a reading below 50 signals a negative outlook. There's no chart on this one per its description on Bloomberg, but you can see above that for the overall index the current one is the 2nd worst reading since August 2010, better only than last month's data. And the index was above 50 for 2 brief months (Jan-Feb) and now it is like FLO RIDA's track again: "Low, low, low"

With the red underline are the 'worse' than current readings. Two for 'Economic Outlook' (the previous 2), out of 10.

*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

The Quality of Jobs has Decreased

The Rise of the McWorker
(h/t nakedcapitalism)

The evidence points to the latter. According to a recent analysis by the National Employment Law Project (NELP), the biggest growth in private-sector job creation in the past year occurred in positions in the low-wage retail, administrative, and food service sectors of the economy. While 23% of the jobs lost in the Great Recession that followed the economic meltdown of 2008 were “low-wage” (those paying $9-$13 an hour), 49% of new jobs added in the sluggish “recovery” are in those same low-wage industries. On the other end of the spectrum, 40% of the jobs lost paid high wages ($19-$31 an hour), while a mere 14% of new jobs pay similarly high wages.
As a point of comparison, that's much worse than in the recession of 2001 after the high-tech bubble burst.  Then, higher wage jobs made up almost a third of all new jobs in the first year after the crisis.
The hardest hit industries in terms of employment now are finance, manufacturing, and especially construction, which was decimated when the housing bubble burst in 2007 and has yet to recover. Meanwhile, NELP found that hiring for temporary administrative and waste-management jobs, health-care jobs, and of course those fast-food restaurants has surged.

Not too good.

*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

NFIB Small Business out

And down. Around the same level as last October.

Calculated Risk has some charts on this 

I read somewhere the other day some interesting statistics about job growth in the U.S.
It mentioned that large companies, in the long-run, actually destroy jobs: automation, robotics, outsourcing, etc.
It mentioned that small and medium businesses were actually the largest driver of job creation in the U.S.
So I bring this morning's NFIB Small Business Optimism Index.

It is 3.3 points below the recent high in February (2 months ago). It is lowe than the 6-month moving average that has just stabilized.
It is 9.2 points below the average of 2000-2007.
 
And the table below shows that some (in my opinion) key aspects of the index are making new recent lows (marked with a red 'X').
The second month in a row that people expect the economy to actually get worse, the worst expectations in at least 6 months.
Plans to hire at the lows of at least 6 months, expectations of higher sales also at the lowest... BUT higher selling prices at the highest in as many months.

Speaking of a consumer-squeeze, right?

*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