Wednesday, April 27, 2011

Update April 27, 2011

Been taking the past few days engaged in heavy fundamental readings. Been clarifying few points about the business as well. We will be moving forwards soon, unfortunately it is often in business that things never go perfectly to plan. Soon to be back on track.

  • Dollar moves have been will in expectations, however as an observer who has not been watching closely the moves seem very dramatic.
  • Gold and silver are also worth mentioning.
  • Crude still remaining elevated as expected

Analyze Capital LLC

Sunday, April 24, 2011

Eurozone Current Account and EUR/USD Comparison (1999 - 2010) - April 24, 2011

Data Source: ECB

Between the colored regions is when the EUR/USD rallied in a general uptrend. Below the EUR/USD Chart is the Eurozone Current Account and below are the components of the Current Account (Net good and services - good exports minus good imports and service exports minus service imports, Net Income, and Net Transfer Payments)

Some Fundamental Observations:
  • The Current Account does not give good fundamental support alone in explaining EUR/USD trends up.
  • The net Goods component of the current account is probably the best fundamental indicator of what supports the EUR/USD trends up out of the Current Account. 
    • Every time the net goods component was positive (Exports in goods > imports of goods; a.k.a more euros into the zone) or rising from negative to positive, there was a strong general uptrend in the EUR/USD
  • The onset of the sub-prime crisis leads to much greater negative net factor income and net transfer payments
    • Into 2011 well into the sovereign debt crisis; net factor income volatility appears to be decreasing and starting to turn positive (a.k.a Eurozone starting to receive more capital back on investments/remittances vs. payout them out more as seen through the sub-prime/financial crisis 2007 - 2009)
    • Net Transfer Payments grew larger and larger as the Eurozone grew, and was possibly exacerbation by the multiple financial shocks in the past three years. Net Transfer Payments remains elevated. 

The most stable period of Eurozone growth appears to be between 2002 and 2004 (green), as the trade balance in both goods and services were positive (especially with goods primary driver), while net income and transfer payments, though negative, were not volatile and large enough to weigh down the current account. As we see post 2006 all three components of the current account become much more volatile. 

After 2006 the Current Account (CA) is not primarily reflected by the trade balance. The trade balance becomes more volatile plus Net Factor Income (NFI) and Net Transfer Payments (NTP) become much larger negative components of the CA. 

However, despite such a fundamental divergence the Euro rallies to all time highs (from 2006 to 2008 from 1.20 to 1.60 - yellow). The rally in the EUR/USD is reflected when the net goods component goes from positive to negative. 

The subsequent shorter rally in 2009 (EUR/USD about mid 1.20s to about 1.50 -blue) is again supported with a sharp reversal in negative net goods to positive net goods (about -11B euros to +15B euros)

The last period I highlight as a general up trend is interesting in that we are seeing a sharp reversal in net goods from Jan 2011 to Feb 2011 from about -14B euros to about -993M euros, but do not have positive net goods yet. 


I have not calculated the data sets, but I would logically assume the exchange rate value is the catalyst for trade movements. Therefore, if the EUR/USD is posting higher highs up to 1.50 resistance and the net goods component of the CA remains below +5B euros (past rallies in EUR/USD eventually posted greater than 5B euros net goods), there will be a sharp reversal in the EUR/USD at 1.50. 

If net goods continue to trend higher beyond 5B euros, it is possible the EUR/USD rally is fundamentally sound and continue beyond resistance. Continued higher highs on the EUR/USD without fundamental support would just be sentiment and speculation and subject to a strong mean reversion. 

Keep in mind of course the nature of the trade data is reported late, and that sentiment can sustain currency rallies on months end before correcting. 

Analyze Capital LLC

Thursday, April 21, 2011

USD Long Term Perspective - April 21, 2011

As a fan of history, I like to give context to current events. Some notes on long term price moves of the dollar index (cash)
  • For ten years, 1987 - 1999, the dollar roughly traded in a range of 80 and 100 ($20 dollar range)
  • I see two Major trends between the period 1987 and 2011
    • Mid 1990's boom - Housing boom, low interest rates, positive technology shock, human capital development
    • Tech Bubble Burst, rising interest rates, 9/11
  • 2008 financial crisis/housing bubble burst cause the dollar index to reach historical lows on the USD cash index
  • Since the 2 major trends cited above it seems ranges have normalized
The 80.00 level is a significant long term psychological level. Both major trends occur above this support level. The support level is broken with the onset of the 2008 financial crisis. The major trends plus the 2008 financial crisis indicate major changes and events in regards to the context of the USD. The rise of the USD coincides with the rise of the US economy in the 1990's which reflected its dominance in the world. The subsequent fall of the USD coincides with the rise of the new strength (not  necessarily dominance) in other major pairs mainly the Euro (the largest component in the dollar index construction) vs. the dollar, which also is inline with the rise of importance of other economies (again not necessarily dominance). 

Of course the 2010 sovereign debt crisis put the Eurozone into question, but looking at the range of the USD movement indicate that perhaps the crisis is not as important as markets would have us believe given much larger USD trends and ranges in the boom and bust described above between 1995 and 2007. As shown in the chart above the period from 2007 onward shows a narrowing US price range. 

What is important is the underlying fundamental structural changes that have occurred over the history as marked by the broken 80.00 support level. Of course I emphasize the strength/importance of other economies does not mean the demise of the USD anytime soon. Significant hurdles to overcome, that can take decades to play out, are still in place; China's pegged currency, world economies' reliance on crude oil, soft agriculture products priced in dollars, and of course the US still being the number one economy in the world. 

Significance may wane, but overall dominance of the USD is still there along with the economic support. Like I wrote in my last POST, a new panacea is needed before we can see further fundamental shifts (I was referencing the energy industry, but the idea applies here as well). 

Some bulleted conclusions:
  • New ranges can be seen between 70 and 90 on the USD cash Index - similar to the $20 range seen between the 1987 to 1997 decade but at new lower level (reflecting strength of other economies)
  • As economies normalize out of the recent volatility periods the USD index has room to range to 70 which equates to 2007 level exchange rates such as 2.00 GBP/USD, 1.60 EUR/USD. 
  • The fundamental structure between Asian economies and Western economies is very apparent in the AUD/USD and NZD/USD as the pairs are reaching new historical highs in literally uncharted prices territory.

PS: todays USD drop caught me by big surprise as I was expecting a much bigger dollar strength correction. Prices can remain elevated for a few months before a real large correction will occur, go with the flow...

April 21, 2011 - 6 month daily

Analyze Capital LLC

Wednesday, April 20, 2011

Motor Fuel and CPI - St. Louis Fed

Taken from the link above

The St. Louis Fed report indicates that for the past four years Motor Fuel has been the real volatile component in the CPI calculation despite its small weight. The CPI trend has a standard deviation (SD) only 2% when you exclude Motor Fuel vs. 5.4% and 6% SD's for headline and food exclusion respectively. 

A historian would laugh at this chosen time frame as such deviations will have no effects in the long run. Though since the FED is short run oriented this perhaps does have real implications for Fed policy, and CPI weightings and calculation as inflation becomes more relevant. 

Also as traders and investors, the short run is what we are interested in, or at least the majority of behavior would often reflect this if not thought. If motor fuel is indeed as important as this report may claim, perhaps focusing on its effects on consumption and growth may led to fruitful macro trades?

Either way, as we progress towards the end of the century weightings will indeed have to change significantly as energy prices will continue become more and more volatile. CPI will have to be rebalanced more frequently. This will all change of course when the next energy panacea is created by huge leap in energy technologies or a new viable source of energy discovery. 

Analyze Capital LLC

Tuesday, April 19, 2011

Lets Talk Gold - April 19, 2011

April 1 YR Gold

Today Spot gold hit 1500 for the first time. Yesterday I tweeted:

Looks like that statement was a bit overstated as the coming weeks happened to be today. Of course today was just a touch on the daily chart. I would look for 3% to 5% pull back for scaling in on an overall up trend. Of course any type of "uncertainty" and "risk" will benefit gold flows. In the short run and long run (Q2 and beyond), there is plenty of fuel to flame the fire bigger. 

Currently traders and investors in the breakout (1425 to 1500) are the smart money riding the trend. We have yet to see the effects from "not so so smart money" which will carry gold much higher. 

Either way, just like in 2010, any rationale will work for you fundamentalist, so pat yourself on the back for creating more self fulfilling prophecies. 

Analyze Capital LLC

Monday, April 18, 2011

The Economist - "Go East Young Moneyman"

Go East Young Moneyman

The Economist writes about the current trend of west to east flows in terms of the mobile labor market.

However, since the start 2011 there has been overheating in Asia Pacific markets with unruly inflation and natural disasters and slowed growth prospects. Many investors are pricing in a bubble with strong asset flows out of Asian emerging markets in Q1 2011.

So despite these worrying developments, the trend is still strong with young people heading to Asian markets to start their career. If and when a bubble burst in Asia I am sure we will see a strong reversal in this trend. When a mass exodus of young talent in the region occurs, is when I will  fly in to pick up the pieces.

If one can tackle great uncertainty successfully, great rewards are sure to follow...

Analyze Capital LLC

Update April 18, 2010

Preparing for big transitions, watching markets lightly:


  • Big gap down on es and SPY today
  • Bearish momentum is strong, last two days of last week higher lows
  • trend still in tact - strong price targets around 1250+ range
  • Perhaps the dollar correction came faster than I expected
  • I would like to see most of the majors correct another 100 to 200 pips more (room for shorting majors vs USD)
  • continued consolidation above new support
  • moves inline with dollar strength today

Continue to maintain same expectations from Here

Analyze Capital LLC

Thursday, April 14, 2011

Markets Update April 14, 2011

Recently I've been playing around with desktop recordings as a way to disseminate information through this blog. After a few practice runs I realized that speaking what I typically would want to write about on the blog is extremely different. For those who are gifted in communications naturally should find it easy however, I believe it will take practice and time to effectively make these videos, as it has taken me years to develop my blogging skills (which still need lots of development).

Hopefully in the near future I will be posting brief videos on market updates in the mean time I will stick to good ole writing.


Brent May 11 6 month daily

WTI May 11 6 month daily

  • Second week of April seeing huge volatility in WTI and Brent
  • Daily moves on the 8th, 9th, and 10th were well over 2 week ATR ranges 
  • Prices currently above new support levels 
  • Brent WTI spreads around historical highs
I expect prices to stay above new support levels formed. Currently Neutral 


Weekly USD Index Rolling

  • GBP/USD - UK inflation report caused a sell off from 1.63 range to 1.625. However markets quickly shrugged off the news and the GBP/USD is back in the 1.63 range. Needs to take out 1.645 for bullish trend to continue
  • Start of the second week of April prices moved up fast and stront to 1.452 and since then has peeked off. Traders shrugged off the ZEW report initially and followed ECB comments on bullish growth. Prices are currently consolidating.
  • USD/CAD - BOC rate decision caused a big jump in the pair. Prices continue to consolidate above 0.96 a possible trend reversal. 
The dollar index is in for a bigger correction, the big question of course is when. Naturally, in this environment you want to trade with the flow. De-leverage if uncertain and scale in slowly and keep stops tight. Markets still want to push Majors/USD higher, and sentiment can rightfully carry markets much higher in that direction. There is a good chance on the Daily USD index with the gaps down will lead to prices in the lower  74 range before real support is hit. Of course when markets correct don't hesitate to short as the move will be big and fast. 


SPX June 11 - 1 month hourly 

SPX June contract
  • Still in strong down trend. 
Thinking down trend is over soon. Longer term bullish, short term neutral

Gold April 11 - 1 year daily
  • Gold April should be rolled over to May now nice tight spread
  • Prices consolidating above support
Long term bullish


Analyze Capital LLC

Wednesday, April 13, 2011

Notes from Presentation on Outlook of Economy 2011 and 2012

William A.  Strauss
Senior Economist and Economic Advisor
Chicago Fed
March 2011


  • In 2010 there has been positive real GDP growth (2.8% latest quarter); though barely above trend rate.
  • He mentions also that 62% of this growth we saw was due to changes in business inventories and not actual goods being sold 
  • Since the 2008 crisis growth has been primarily inventory related but this trend is going to stop

1930’s Financial Crisis
  • The last time a financial crisis was tied to a recession was in 1930. Which is when the Fed did not grow M2 fast enough

Money Supply Issues
  • Capital has been locked up in banks post 2008.
  • Banks refuse to loan out excess reserves
  • Going into 2011 there was a survey to loan officers that showed officers felt tight loaning practices have been easing
  • Saving rate is still about 6% into 2011 (similar rate seen from 2008), which means good for the long term bad for short term growth.

  • The value of housing in the West Coast region is still the worse off in the US with the home values about 50% to 25% lower compared to other regions.  He mentions the negative “wealth effect” this has
  • Surveys show that such a high savings rate will persist since investments in housing and stock markets will not meet investor desired returns/investment goals.
  • Such evidence points to a huge wave of consumption coming back into the economy once it does come back. 

  • Population growth is close to 0%
  • From November to 2010 to January 2011 we’ve seen the biggest drop in unemployment since the 1950’s
  • Expectations for the end of 2012 is 8% unemployment

  • Fed has already made forecast and all policy decisions are done for 2011. The Feds main focus is 2012. (a.k.a  short term risk won’t weigh heavily into policy decisions in 2011 i.e. strong headline inflation numbers)
  • Wage inflation has been benign, the Fed is looking for 2% PCE but it is much lower. Inflation still negligible. 

  • Manufacturing was one of the hardest hit sectors coming off the 2008 crisis when GDP was negative 4%
  • Going into 2011 manufacturing has almost made back all its losses since the crisis and will continue to growth strongly, even though capacity utilization is relatively down
  • Industrial companies like DEER will benefit from this growth
  • Light weight vehicle sales
    • From 1998 to 2007 there were 16 million sales
    • By 2008  It dropped to 9 million
    • Currently at 2011 sales are at 13 million
  • Car industry is becoming more efficient and more profitable currently vs its peak sales years
  • In the 80’s there was an oligopoly in the US markets. The only foreign care in the US was VW. In the 90’s there was a wave of foreign cars mostly produced abroad. In 2011 60% of the foreign cars are made in the US. In 2010 75% of the cards sold were made in the US. 
  • There are now 13 name plate car manufacturers. 
  • Strauss is very bullish on Manufacturing, VW making its return along with Chyrsler, his point is US is still a great place to manufacture goods

More on Housing
  • Housing hasn’t moved anywhere in the past 3 years
  • Mortgage rates low
  • Fed expects Housing Starts to improve in 2011
  • Credit Spreads between High Yield and Corporate credit strong down trend. 

Brief History
  • 2008 there was a brief liquidity trap
  • Great depression
    • Deflation
    • M2 fell greatly
    • Money Base was slow to grow

  • GDP growth will continue to be solid
  • Unemployment is capped at 8% to 2012
  • Inflation expected to maintain at 2%

Monday, April 11, 2011

April 11, 2011 - Second week of April


The end of last week with the Euro hike have really fueled inflation expectations higher and higher.

  • AUD/USD reaching all time highs in the 1.05 range
  • NZD/USD at its ultimate resistance, about to break into new territory
  • EUR/USD approaching 1.45
  • GBP/USD breaking steady above 1.63
All my short term expectations were wrong. I should have stuck to my longer term thesis, USD index is now 74.86 on the rolling contracts. Either way it was expectations and not actual trades, better to loose face than real money. 

EUR and AUD correlation seems to have come back strong since the end of March. I believe prices will be able to consolidate in these high ranges throughout April and possibly even into May before seeing any give back. 

Like I mentioned in one of my tweets, this feels like when the EUR hit 1.42 for the first time last year in 2010. Took months before we saw a significant correction. 


Looking at crude numbers is like looking at a long lost friend. Moving more than 3 dollars on WTI and Brent front months within two days from when I last looked of the Wednesday during the first week of April. 

With warm weather approaching there seems to be no slowing down of demand. It would seem that WTI is still well supplied as more risk goes into crude and we see new contango developing for April. Brent back months are no longer in line and the risk is really pushing Brent to its limits as it goes further into backwardization. 

Historical front month spreads of $14 between Brent/WTI 

Risks to the bull moves:

  • It is unlikely that Saudi Oil can sustain continued substantial increases of daily crude output. 
  • WTI contano will have to be unleashed sooner or later. When supplies start coming back into the market prices should drop rather dramatically.
  •  I believe Cushing is definitely has been at critical mass for some time already. 
  • Resolutions to MENA conflicts
The last point (resolutions to MENA conflicts) seems unlikely to happen anytime and may be enough for it to float brent prices in the 120+ range comfortably. 


Seems that I was a bit thrown off with the SPX touching 1335. It seems from Wednesday last week there are two fails at 1335 on the hourly front month SPX contracts, and going into the second week of April SPX is opening lower. To me in these ranges the SPX correction is not over. 


  • Continued dollar weakness this week
  • Crude maintain highs
  • SPX continues to correct

Analyze Capital LLC

Wednesday, April 6, 2011

Keeping Healthy April 6, 2011

Markets haven't been going to expectation coming off NFP last Friday. It's ok since I have not been engaged actively in markets. Even though this was supposed to be a week of less stress and reading and research, it still amazing has still been stressful.

Part of Analyze Capital's Risk Management Guideline is to maintaining a healthy balance between "Body, Spirit, and Mind. A trader/manager who is unbalanced will not be able to perform at his or her best.

I will be turning of the platform for the rest of the week and ignoring price movements to get back in a healthy balance for next week. Unfortunately, some of the most exciting events will be coming up.
  • AUD employment change
  • BOE asset purchase targets
  • BOE rate decision
  • Friday's CAD unemployment
Didn't see the EIA weekly status update today, but ill be reading the data over the next few days. 

Analyze Capital LLC

Tuesday, April 5, 2011

Inflation, Commodity Prices, and Portfolio Diversification via CME education - April 5, 2011

Here is an interesting two page article via the CME.

The CME trys to demonstrate using commodities as diversification tool via futures curve can be an effective way to diversify one's portfolio.

  • They point out academics claim inverse correlation between stock markets and inflation
  • They elaborate further that this is not always the case
    • Demand pull inflation has positive correlations with stock markets in either recessions or bullish economies. Therefore commodities = bad diversification tool in such periods. 
    • On the other hand Supply Shocks will result in inverse correlations = good diversification tool in such periods (Neg supply shock --> higher commos prices --> negative stock prices via cost push inflation and vice versa)
  • Of course the latter point is what they want to stress since negatively correlated assets are ideal for MPT (modern portfolio theory) practitioners for "diversification". 
  • So of course then, as they point out, it is key for the portfolio manager to be able to distinguish between demand pull and cost push inflation. 
  • They way the CME suggest to do this is by looking at the futures curve, a.k.a backwardization and contango. 
  • The CME believes that a contango curve will lead to demand pull inflation and backwardization will lead to cost push inflation. 
I believe the CME of course is trying to conclude that if you are seeing rising inflation and can identify it as cost push inflation via some type of backwardization curve, commodities can make a great diversification asset class. They give a Class III Milk futures example of the year 2003 as a backwardization period and the 2008 crisis as a contango period. **This is a bit off point but the Class III front month from mid 2010 has been one heck of a wild ride! I think its one of the most amusing charts to look at in the past few months. 

I would like to point out from the above:
  1. Even though the CME is able to get closer to a better diversification idea with futures than academics has, the picture is still even further more complicated than supposed
  2. The importance for dynamic portfolio re-balancing and qualitative measures in MPT practice 
  3. A way to deal with inflation given the current environment (2011 and forward)
1.) Though the CME certainly does have a point, the past year and months have not necessarily behaved in the way the CME has suggested due to the unique nature of the recession markets have come out of. In addition, over longer time frames the CME maybe correct, but when a portfolio manager is faced with high interim volatility like we saw in march 2011, a manager may re-balance a portfolio inefficiently due to the disconnect of what the CME theory suggest and what actually happens or what is portrayed in the media. 

For example this past March I saw brent crude oil spike to 116 - 117; expectations were all about a negative supply shock due to MENA risks. However, brent stayed in contango for most of the month. Had a manager re-balanced according to expectation all diversification effects would have been lost. 

Technically this negative supply shock should lead to cost push inflation and push the curve into backwardization. Either the OPEC increase of production worked REALLY well and fast, or there is a lagged effect of the higher prices ( and we have yet to see backwadization which will lead to a lower stock market). 

Furthermore, even though the past year  firms have seen rising costs, many of the firms are lush with cash and are able to swallow the cost increase without passing it on to the consumer. There have been quite a few negative supply shocks (e.g. corn markets and wheat markets) in the past year. However its very possible, with ample cash, firms are willing to take a short term loss, so that a backwardization curve may not filter through to cost push inflation and thus negate any negative correlations or diversification effects (commodity prices up and stocks down). 

My two examples above of course outline 
  • qualitative risk where a manager re-balances according to wrong expectations
  • and possibly reading a futures curve that would lead to a sub-optimal portfolio due to unique economic and financial environments
This of course leads me to my second point;

2.)  Perhaps the reason why David Swenson was so successful was in that he was able to understand context and thus appropriately apply the correct qualitative measures to his portfolio re-balancing. The easy part perhaps are the quantitative measures; determine allocations for efficient portfolios, determining institutional investor utility, figuring appropriate risk levels. Perhaps the hard part is being able to effectively incorporate qualitative measure when re-balancing portfolios so that institutional targets and goals are not missed. 

In this respect, this is where discretionary managers and traders can truly add value, and where purely investment oriented algorithmic processes lack value. Using inappropriate static models in the wrong context is sure to lead to disasters or undesired results. Traders and discretionary managers are constantly working with thesis, and models, and adjust views according to context to achieve desired results. Of course such methods are borderline art and will turn off purely quantitative mindsets. To which I would respond, watch Andrew's Lo presentation on "physics envy" which explains why such thinking is a fallacy. Both qualitative and qualitative processes are very necessary to achieve much more efficient results. 

3.) Currently the Fed expects inflation to be capped at 2% to the end of 2012. In half an hour today, we will hear Bernake speak, and he will most likely speak about the current oil spike as causing transitory effects. A one off effect, which in the long run has close to no lasting effects. Just like how Greece and Ireland default effects were small spikes in a overall strong downtrend of High Yield to Corporate credit spreads over the past 3 years. (I believe those inflation estimates are for headline inflation as well, in other words core CPI growth probably even less).

That being said, an manager should ensure superior returns vs the rate of inflation. Ideally a manager's returns that far exceeds 2%  annually for the next few years probably won't have to worry about inflation. If a manager is struggling with being able to return 2% annually perhaps it is time to decrease your assets if your AUM growth has been inversely correlated to your returns(or spin off some other fund), work on new scalable models if returns have been stagnant at current AUM, or perhaps inject new human capital into your firm. Worse case scenario you can do what Man Group did and acquire a better firm with a better track record.

Of course having returns higher than 2% is ideal for Analyze Capital as portfolio management is trading oriented. Positions usually will not exceed more than a few months and have positions within daily time frames and are purposely concentrated. Analyze Capital does not practice traditional portfolio management, but however does use some of it's concepts.  Managers who are stuck with long term core positions such as traditional portfolio managers that practice MPT or funds that require longer time frames may have to worry about the effects of inflation over the long run.  

Overall though, I would say the risk of inflation is going forward is low if anything. Focusing on alpha generation should be enough to negate any effects of inflation. Of course if the exact opposite happens and we get hyper-inflation, putting money into an asset class like gold would be beneficial. The flight to quality would certainly make gold an interesting asset to follow again, and allocate to, in the case of hyper inflation(lately it has been very boring imho). 

PS. of course the CME doesn't care what you use for whatever purpose as long as you use "their" products

Analyze Capital LLC

Monday, April 4, 2011

Physics Envy - Andrew Lo

  • Lo's example of nano technology is not a very good example of the uncertainty and the huge premia (premiums?) one gets for taking on such uncertainty as it implies one must create new models in order to get such a premia. However he redeems himself and clarifies his point in his response to the first Q&A question. Indeed you can take old well known models and as long as you bring them to new context where there is "uncertainty" can you reap the huge premia reward. 
  • Yes quants don't have all the answers but that certainly does not completely negate their use. Though the idea of testing theory and models, something akin to applying the central limit theorem, will take a long long time in actual business/financial/economics practice. Further more, then what amount of testing and time is needed for a theory to be deemed true? Apparently a few decades isn't enough as we seen in modern economic/financial history. 
  • I also rather enjoy the chart of Lo's five levels of risk and the related fields of study associated to each risk level. This clearly shows that economics and history can be said to be far more difficult fields of study than physics and harder sciences in that the level of uncertainty is much higher in academic development or practice. 

Analyze Capital LLC

Sunday, April 3, 2011

Agenda First Week of April 2011

April 03, 2011

Weekly Agenda
  • Complete legal documentation
  • File with the S.E.C - (mid process)
  • File with the NFA 
  • Open corresponding bank accounts
  • Research 
  • Portfolio analysis
Trading was on the menu, but not sure if I will do that as there is a lot of other things that need to be completed. Perhaps small trades with minimal market coverage. I think I'll take this week as a reading and research week. Last month was a bit hardcore and going forward won't be any easier after seeing market action from last week. 

Analyze Capital LLC

Friday, April 1, 2011

End Month Performance of March (21st to 31st) - April 1st 2011

Traded the fourth week of March but not the last.

4th Week Performance -  March 21th - March 25, 2011

  • Open Week - Long GBP/USD @ 1.6233 from last end week - Closed @ 1.63077 - March 21, 2011
  • Open Week - Long WTI @ 102.28 from last end week - Closed @ 104.97 - March 22, 2011

WTIGBP/USDTotal CentsTotal Pips
+269 cents+74 pip+269 Cents74 pips

This was the performance from within the week though both these positions were initiated from two weeks ago and were unrealized gains.

The overall realized P&L:

WTIGBP/USDTotal CentsTotal Pips
+27 cents+198.7 pip+27 Cents198.7 pips

  • As you see from the realized P&L my second crude trade for the month was timed extremely poorly. For about a week and a half WTI was in down trend for about 2 ATRs. I sat through 2 ATRs of uncomfortable volatility. The proper risk management would have been to set stop loss at 1 ATR reassess on the third week then sat through another 1 ATR of downside volatility and setting it wide enough to be able to catch the recovery that we saw end month. That strategy would have garnered at least 300 - 400 cents vs the 27 cents I realized.  In the end though I'm glad I stuck to my views and convictions of seeing the 105 squeeze I was looking for. The move going into April is another story on its own for another day to tell...
  • GPB/USD trade was overall a very solid trade. I caught about 66% of the move up to about 1.64. I bailed early because I was going out of town and didn't want to manage my position when I was away. Also, wasn't sure how the UK inflation report was going to turn out. Even If I stuck through the inflation report which would have been about 100 pips more, the reversal was hard and fast and probably difficult to time. If anything I would have resulted in the same realized P&L. I sat through about Daily volatility of 100 pips or so before the move took off. 1 ATR risk management would have been sufficient but I was using broad 1.60 base support. 

So my total trades for the month of March realized P&L:

Total CentsTotal Pips
+981 cents+32 pip

Majority of cents come from crude exposure on front month trades (Brent, WTI) and with one week trading the dollar index.

The reason why the pips are so low was because of my poor poor poor NZD trade. Talk about bad timing. Fundamentally I was right but was trying to fight the crowd. In the end the move I wanted came and again came much faster than I expected. The pound was an excellent trade and had I de-leveraged a bit on my NZD trade the pip significants would have been greater. Either way 32 pips is better than negative pips.

Overall a very good positive month thanks to energy trades. My second trade was almost a disaster but I stuck it through. Better risk management would have improved P&L significantly. Got to stick to the discipline...

Analyze Capital LLC

NFP April 1st 2011

It would be funny if today's BLS played an April fools joke on the NFP release. Too bad that won't happen.

The initial reaction has been dollar strength coming off the hour of the release. Whether or not this is sustainable is still questionable.

NFP numbers coming in at

  • 216,000+
  • and UE at 8.8%

Not gonna bother to break down the rest of the numbers (you can do that HERE).  Initial equity reaction via futures seems positive. I'm looking for continued dollar strength, S&P500 to stay below 1333 by close and oil to give back gains. 

Analyze Capital LLC

European Bond Spreads on March 30, 2011

March 30, 2011
European Bond Spreads March 30, 2011
Chart taken from Calculated Risk via bloomberg

Spreads remain quite high on the 10 years. Risk is still there. In light of the EUR that keeps on rising at the end of March 2011, eventually the price will have to reflect some of these risk factors/fundamentals. It is very possible that the ECB rate announcement might be the catalyst for such a move.

Analyze Capital LLC

April Fools Day London Hours - April 1, 2011

London Hours

  • Seems End of Asia trading will end up positive for equities; the only downers seem to be Japan and India
  • Crude fell from its yesterday highs through Asian trading
  • Overall Dollar largely unchanged over night with slight weakness over Asian Trading (overall strength from previous session)
  • European Equity futures point to lower open
  • Rumors on cheap Japan having cheap banking loans to the system
  • More US Fed speakers talking with Hawkish tone
  • Softer China PMI

Bloomberg comes up with more stupid headlines "Australia Boom Pays Men Without Degree More Than Bernanke" , the guy is a semi-public servant what do you expect? Its amazing how compelling this growth story has been. I was really correct on my NZD view on my targets however I didn't expect it to move with the speed that it did so I completely missed out on the action. Also, the effect of the RBA rate decision again had very limited effects over maybe two weeks. Asia fundamental growth is there, or this is all speculation at this point. While OECD growth has been largely inflated the past few years (QE one through infinity, pomo, stimulus, austerity sentiment blah blah blah blah).

Going into NFP within 6 hours I get the feeling these levels have been to hesitant. Expectations of anything less than 125,000 to 145,000 is bad while the bar is set even higher currently. I dunno the effect of missed expectations on this, but I'm leaning towards a dollar correction that will weigh in on crude initially. This will likely carry into early next weak before continuing a dollar weakness trend.

Going forward I'm looking at:

  • EUR/USD needs break about 1.425 then 1.428
  • Markets looking for rate hikes next week for the EUR/USD to support yields
  • GBP/USD continues its weakness within the majors breaks below 1.593 will see accelerated lower prices
  • In general large divergences of fundamentals and sentiment (AUD, EUR, USD)
  • ISM later today along with EUR employment data and PMI releases

Don't think the Eurozone can handle a rate hike for whatever reason. Fundamentally the region is too weak - essentially what we are seeing is the "buy the rumor sell the fact."

UK econ data is still very fuzzy with mixed reports which has definitely been weighing in on the pair. However, a bullish selling point is that 1.60 still remains a good support.

Again with Australia, it is either a true growth story or spectulation. I think this big move up to 1.03 the latter part of the highs have been speculation. Prices will give back some pips into next week. Overall though, greater than parity has been a good call. Just a matter of time before NZD follows.

To much risk to take leveraged positions today. Trade small today. Today and into next week I expect a reversal in the trends we saw all this week (Equities up, Crude up, Dollar down).

Alexander Lê
Managing Partner
Analyze Capital LLC

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