Through my years on Bay Street, I have been fortunate to meet some really smart traders. In fact, the Globe & Mail wrote a big article titled “The Smartest Guy on Bay Street” that profiled one of the fellows who sat on our desk… (actually towards the end he didn’t physically sit on our desk because management had to move him to another room, but that is a story for another day). This trader was one of the shrewdest traders on the street through the 1980s and 1990s. My favourite anecdote about this trader was when the CEO of our investment bank stepped down, there was a shareholders’ meeting welcoming the new CEO. The speaker joked that they would have given the CEO job to the trader, but they didn’t think he would have taken the pay cut.
Although I respected this trader, I always thought that the article had the wrong guy. He was no doubt fantastically smart, but one of the other fellows that worked with him was genius smart. This fellow’s ability to understand trades, combined with a brashness to put them on in size, was truly amazing. To this day I think he is the smartest guy that I have ever met.
Years later when both traders had left the bank and were trading for hedge funds they had started, there was a trade that put them at direct odds with each other. A Canadian steel company was going through a restructuring and many hedge funds were investing in the debt and the sliver of equity that remained. It was a complicated mess and there was a lot of negotiating between the bond holders, the employees and the government. Many hedge funds had rushed into the trade, buying the debt of the distressed steel firm in the hope that the restructuring would allow it to be paid back. The “smartest guy on Bay street” was at the forefront of this trade. He owned gobs of the bonds and as the situation developped, he also started to believe that the equity might be worth something as well. He started buying the stock and was soon “all in” on this trade. It looked like it was going to be a home run trade for him and all the hedge funds that had tagged along (and there were lots).
Then the trade started to go sour. I can’t remember the details of what went wrong, but soon the equity which had risen dramatically was offered at pennies as the market realized that there was no hope of the equity being worth anything. Then the bonds, which had also risen dramatically, started to plunge. Next thing they knew, all the hedge funds were well offside. At one point it looked like the bonds were going to be very near worthless as well. It turned into a giant clusterf**k.
After a few tense months of negotiating the restructuring went through and the hedge funds managed to recoup the majority of their investment. Instead of being wiped out, they were merely scarred. For a lot of Canadian hedge funds, this trade ruined their year.
The next year as these hedge funds were marketing to potential investors, the same story was repeated over and over. “We were having a great year, and then we got tagged with Stelco.”
However the marketing pitch was dramatically different for the “genius” trader that had previously worked for the “smartest guy on Bay Street.” His hedge fund’s sales spiel was; “we were having a good year until Stelco… and then we turned a good year into a fantastic year!”
The “genius” trader had been patient and not rushed into the trade with all the other hedge funds. He had sat on the sidelines and watched them as they all over extended themselves. Then when the shit really hit the fan, and there were no bids at all for the bonds (since most hedge funds that would usually be buying them were already long), he swooped in and bought them all. He ended up making a fortune on this trade.
It was a valuable lesson that I will never forget. Often the very best trades are when all the really “smart” guys have already bought and have struggled with the trade. They rarely are able to time the bottom perfectly, so when they start buying, I often just put it on my radar instead of jumping in immediately.
Which brings me to today’s topic. A week ago I read this great piece by Brett Arends about why he was buying the Russian stock market. I must admit that I have been toying with the idea of buying Emerging Markets in general and given the worries about Ukraine, I was drawn to the cheapness of the Russian markets.
The Russian small cap ETF that Brett highlighted is definitely down a long way…
RSXJ Russian Small Cap ETF over the last year</a> </div>
And when you back up even further in time, it gets even cheaper looking…
RSXJ over the last 5 years… down a long way</a> </div>
I was about to attempt my best Rothschild impersonation and buy at the sound of cannons, when I remembered the story about the Stelco restructuring.
I suspect that Brett will be correct about his Russian ETF purchases. But I just don’t think there is any rush to get into the trade… For now I am going to put it on my radar and watch as the smart guys rush in…
Remember the worst thing about buying cheap markets – they always get cheaper first…
The MacroTourist’s EUR trading – amateur hour
I have been short the Euro and the trade has been going against me. Although I am not happy about that, not all my trades are going to work, so I don’t get too fussed about losing positions.
I am however embarrassed when I am short for no good reason. And I am doubly embarrassed when I have the opposite trade on versus my convictions.
Over the past few months, I have repeatedly emphasized that the ECB was the tightest Central Bank out there. This tightness is resulting in a strong Euro.
Somehow I convinced myself that the ECB was going to change its stripes and was about to loosen their monetary stance. I was “hoping” this would happen instead of actually “observing” what was happening.
In trading “hoping” is a recipe for disaster. The famous commodity trader Ed Sekoyta has a line about traders using their into-wishing instead of intuition. That was what happened with me on the Euro trade. I correctly analyzed the facts that the ECB was overly tight, but then assumed that they would see the same set of facts and react accordingly. The reality is that the ECB knows they are tighter than the other Central Banks and they don’t care. Although I think it is the wrong policy, it is the actual policy that they are pursuing. My trades should reflect that reality. They don’t and I need to give up on my short trade.
Yesterday I covered half of my Euro short and I am going to bring in the rest of the position by the end of the week. I will be flat by the week-end.
EUR chart… consistently strong as the ECB continues to be overly tight</a> </div>
My trading in the Euro has been amateur hour… For those that might be bearish, my covering is probably the best thing you could ask for as I will very likely make the top when I buy it back…
Here is a picture which best sums up my EUR trading… fail…
UPDATE: Short Euro. Covered half of this disaster yesterday. Will cover the other half today or tomorrow. Will be flat by the week-end.
Short CAD. Will add through 1.12. Stop 1.09. Conviction 2
Buy TIPS short TLT spread through long dated options. Conviction 3
Short Nasdaq 100 futures and short Eurostoxx futures Fed is going to taper until something breaks. Conviction 3. No stops for now
Short 10 Year US Treasury Futures with half of position married to out of the money calls Conviction 6
Short US 5 Year Treasury Futures. I expect the Fed to continue to withdraw stimulus aggressively. Conviction 3
Short US 2 Year Treasury Futures. I think the downside is a move from 31 bps to 25 while the upside is a move up to 50 bps. Conviction 4
Short Mar and June 2016 Eurodollar vs long equivalent BAX futures. Conviction 3
Long March 2014 VIX Futures. Conviction 2.
Long a tiny position of puts on TSLA and FB. Just for shits and giggles. Conviction 1. Stop – none: when they go to zero the market will do it for me.
Short European stocks via ESTX50 index vs Long S&P 500. I continue to believe that the ECB is too tight relative to the Fed and the BoJ, and that this will translate into relative weakness of European equities. Conviction 4
Short Yen. Conviction 3
Short JGB futures. I can’t call myself a macro trader without this widow maker on the sheets. Small position for now, but will add aggressively at the first sign it is working. Conviction level: 1. No stop.
Long Yen volatility. I believe we are entering a period of increased volatility for the FX pair. Conviction: 3
Long 30 year US treasury volatility. Swapping half of this position into Yen volatility. Conviction 2
Long various deferred crude oil futures contracts. I own a variety of different expiries in years from December 2014 all the way to December 2020. Conviction level: 4. No hard stop.
Long precious metals smorgasbord. Long gold, silver and platinum futures. I also believe that the closed end ETFs (CEF.A CN Equity or PHYS US Equity) which are now trading at discounts versus years of trading at a premium are a good way to play this idea. Conviction level: 4. Using the year end lows as a stop for half the position.
Long grains. Long deferred corn, wheat and soybean futures. Conviction level:5. No stop period.
Long Ithaca Energy IAE CN Equity. See previous posts. Conviction level: 5
Long Input Capital INP CN Equity. I have not yet written this up, but I really like this story. More to come in coming days. Conviction level: 5