Eurostoxx vs S&P 500
Although over the last couple of weeks my Euro currency trading has been about as graceful as a George Bush press conference, the ECB’s continued tightness has worked wonders for my short Eurostoxx 50 / long S&P spread trade.
EuroStoxx50 / S&P 500 ratio</a> </div>
Granted, Putin’s invasion of Crimea hasn’t hurt either.
This trade has moved a long way in my favour and it is time to ring the register on half the position.
I still think that as the ECB refuses to expand its balance sheet that this spread drifts lower, but nothing moves in a straight line.
China bears crawl out of the woodwork
Lately there has been an increased awareness of the massive credit troubles in China. It actually makes me laugh that investors are now so panicky about the Chinese economy. A few years ago when smart guys like Jim Chanos were warning about the massive overbuilding in China, the bulls were publicly deriding anyone who wasn’t drinking the Chinese cool-aid. Claims that he “just didn’t get it” and “he hasn’t even been to China” filled the air. Since then Chanos has proved spot on in his analysis. China has been a massive disappointment for investors, and now that the truth has become clear, investors are deciding that maybe China is not such a good investment after all.
At the risk of getting too cute, I am going to stick my neck out and say the bearishness that surrounds China is too thick.
Have a look at these headlines from my research feed:
“Magic” Collateral: A Frank Look At The Sheer Credit Horror About To Be Unleashed In China
Latest data confirm China slowdown
China Loan Creation Tumbles, Lowest Credit Growth In 20 Months
Four signs of economic slowdown in China
China “Crisis Gauge” Hits Record High Amid “Flight To Quality”
Chinese Credit Concerns Clobber Copper; Collapse Continues To Lowest Since July 2010
Prem Watsa’s 9 Observations Why There Is A “Monstrous Real Estate Bubble In China Which Could Burst Anytime”
China Corporate Defaults: More to Follow
Don’t get me wrong, I think China made monster mistakes with misallocation of capital that will prove to be the largest credit bubble in history. But I think that the officials are able to turn on and off the taps more directly than most other economies, and given the overwhelming pessimism, we are due for a little good news. I am not going to act on this, but it wouldn’t surprise me in the least if we see China stabilize very soon and growth resume.
The tide has now completely flipped and whereas before everyone was a China optimist, they are all now pessimists. Just as the optimists were too bullish a few years ago, the pessimists are probably too bearish today…
US economy continues to improve
Of late, the markets have been overwhelmed with geopolitical worries, but the good economic news continues to trickle in. Yesterday was no exception as there was a handful of better than expected economic reports.
Initial jobless claims decreased to 315k compared to the 330k that was expected. The continued claims were 45k lower than expected at 2855k. Retails sales were reported generally 0.1% higher across the board. And there was even signs of inflation with the Import Price coming in at 0.9% as compared to the 0.5% consensus.
Market pundits continue to emphasize the handful of bad economic reports, but on the whole, it is difficult to argue that the economy is showing excessive weakness.
I continue to believe that absent a geopolitical shock, the US economy will surprise to upside.
Selling oil from the SPR was more mopey than stupid
I was all ready to get indignant about the Obama administration’s decision to release 5 million barrels from the Strategic Petroleum Reserve. I was going to write this post that stressed the word strategic. It seemed that trying to send a message to Putin by selling oil from the SPR was a dumb waste of a very valuable insurance policy. The SPR was to be used in true emergencies, not in some big game of chicken between two nations. My indignation was only reinforced when I listened to commentators like John Stockman who publicly chastised Obama for mis-using this resource.
But then I did a little research to calculate how much of the SPR Obama just “gave away”. And I was shocked to learn that the SPR is almost 700 million barrels. So the 5 million barrel “message” that Obama just sent was less than 1% of the total stocks.
If anything I am now a little embarrassed for Obama that he did so little. Seems kind of mopey. This sale is so small it is just a rounding error. I still think it was stupid, but I am hesitant to chastise Obama for anything except bluffing with such a small ante.
And by the way, for those who don’t think that markets anticipate and fully factor in news ahead of time, have a look at this chart of Crude Oil during the last week:
By the time the news was announced, the insiders who “got the heads up” had already fully discounted the news. The price moved ahead of any official announcement.
Update: Short European stocks via ESTX50 index vs Long S&P 500. Covering half of this trade into the recent dip. 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 2
UPDATE: Short Euro. Covered the other half of this traffic accident yesterday. Taking it off the sheets and trying not to make a mess again.
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 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