The “Trash Crash” of the past month caught a lot of hedge funds on the wrong side. They were much too long the speculative frothy part of the market. The hedge funds had been chasing the momentum of stocks such as Facebook, Tesla and all the biotechs. Once these bubble stocks topped, and as their positions went against them, the market entered into a liquidation induced feedback loop.
The trouble with liquidations is that you never know when they are going to end. They don’t necessarily stop when valuation reaches a certain point. They only stop when the weak hands don’t have to sell anymore. Sometimes the weak hands can be so leveraged and offside that their selling causes even the strong hands to be forced to sell (think 2008). Other times the liquidation is intense but is quickly over as the positions move over to the rightful owners that can withstand the day to day swings without having to sell more as it goes lower.
I believe that the “Trash Crash” liquidation of 2014 has run its course. The hedge funds are no longer puking out positions, and in fact, if I had to guess, I think they are now set up with a lot of cash (or even short risk) waiting for the next big move downward.
Hedge fund managers waiting for the next decline</a> </div>
Yesterday I covered my short equity hedges. I am late, and I would have preferred to have bought the lows a couple of days ago, but the only guys who seem to be able to do that are the ones reporting their trades on Twitter after the fact.
At this point I am neither bullish nor bearish on the equity market. I just don’t know where we are headed and don’t feel like I really have any edge.
If you did force me to have a position though, I think I would choose long. I am a huge skeptic of the current valuations, but I feel that the hedge funds have quickly switched and have now over played their hands on the downside. They will be scrambling to put risk back on the sheets before you know it.
Natural Gas – returning to an old friend
Lately I have noticed a lot of smart people taking long positions in natural gas and the associated equities.
I did a little research on their rationale and from what I can fathom, it can best be summed up like this: low prices over the past 5 years has caused investment in natural gas exploration to dry up and an especially cold winter has left the natural gas stocks at dangerously low levels. There is very little ability to quickly ramp up production, and if there is an especially hot summer that requires the creation of lots of electricity to run our air conditioners, some analysts are forecasting potential spikes to $15!
Here is a chart of the natural gas in underground storage:
The storage is indeed at dangerously low levels. But what is really strange is that the natural gas market does not seem that concerned. Have a look at the chart of the nat gas curve:
Nat Gas curve for one year out</a> </div></p>
The curve is basically flat right through the summer and does not start to rise until the winter months.
I have long being a nat gas bull and given the precarious low storage, combined with the relative flatness of the curve and the smart guys quietly buying nat gas, I think the time to initiate a position is here.
Yesterday I bought each month of the nat gas curve out one year. If there is a squeeze I don’t know when it will happen, so I want to make sure I am long the right month. I also bought a little Birchcliff Energy which is Seymour Schulich’s energy company. I know that it has already moved a long way, but if the bulls are right about the nat gas price, then this move in BIR will have just started.
Birchcliff Energy</a> </div>
I will be on the lookout for more ways to play this theme and will be most likely adding more nat gas names in the future.
Putting the Short Yen back on
As I mentioned, I believe that the hedge fund liquidation has run its course. Given that, I am trying to return to my risk posture that I held before I went on the defensive.
Over the past month there has been a lot of worry that Japan is going to blink when it comes to their aggressive monetary policy.
I don’t think for a second that Japan is going to alter their policy. In fact, I believe that if their economy continues to sag, they are going to dramatically increase their aggressive easing.. I have written about this before, and I am sticking to my theory – Japan is all in. They are half way down the mountain, and there is very little chance they are going to climb back to the top. No, their only real option is to point the skiis downhill and go for it.
Given this belief, I need to have a short Yen position on. I was worried that the hedge funds were going to cover their large shorts and push the Yen higher, but if the general hedge fund de-risking is over, then their short Yen buybacks are probably behind us. You can see from the CFTC non-commercials net position that there was indeed some short covering over the last couple of months:
Yen CME Non-Commercial Net position</a> </div></p>
Given the long run poor outlook for the Yen, I doubt we are going to get the speculators moving to a net long position (or even neutral), so the rise from short 150k contracts to short only 87k contracts is probably all we can ask for in terms of short covering.
Here is the chart of the Yen:
USDJPY (higher rate is Yen weakness)</a> </div></p>
Although I hope that support from 100.80 to 101.30 holds, I am going to prepare myself to ride this position for a longer time period than usual, and will sit through (and maybe even add) if we go down to 100 or below.
I am returning to my core long term short Yen.