Author: Asianmacro

Asianmacro was formerly a bank proprietary trader and hedge fund manager but is now a beach bum managing his own wealth. Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself. *While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith. Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.

Sell in May & Go Away … the question is what?

May 6, 2014May 6, 2014 Asianmacro2 Comments

It is May now and the famous ”Sell in May & Go Away!” mantra always resonate in financial markets. The question this time is a challenging, what to really sell?

The top 10 & bottom 10 performers in global equity indices are shown here. You will notice that the top performers are really those marginal frontier markets mostly that nobody really invest in a big way. While the bottom performers are some of the bigger markets that have sold down substantially already like Nikkei 225 (Japan) and Hang Seng (Hong Kong).

Similarly in currencies below, besides NZD (New Zealand dollar) & Gold that have gained more than 5% against USD, the best spot returns are from relatively illiquid currencies that nobody owns much of; while major currencies like EUR, GBP, CHF are only 1% up for the year which is almost a rounding error.

If there is something that I want really want to sell or short in May, I guess I am now looking at cheap downside bets in NZD, Gold and IDR. Asianmacro never like the frothy levels of milk anyway and prefers soy latte rather than regular milk latte coupled with an exuberant Kiwi banking sector holding up the economy http://blogs.wsj.com/economics/2014/05/06/new-zealand-banks-arent-playing-ball-with-rbnz/ . For Gold, I can find more things that glitters like LED lights & the safe haven bid due to the Russian / Ukraine fears are overplayed. Lastly in the case of IDR, well the Jokowi feel good effect in Indonesia is all but played out. The follow on Presidential elections will take on a more complex Javanese shadow puppet play that will mean more uncertainty http://www.thejakartapost.com/news/2014/05/05/prabowo-desperately-seeking-partners-jokowi-flexes-muscles.html that the markets will not like soon.

Scrapping the bottom-of-the-barrel for yields

May 6, 2014May 6, 2014 Asianmacro2 Comments

It has been a profitable ride especially for Asian credit investors buying into rated and unrated high yield bonds issued by a plethora of Asian companies over the last 2 years. Credit spreads have tightened significantly from the wides in 2008 but are still higher than the pre-2008 crisis levels. A number of friends who have been doing well ”earning the carry” and had never sold out during the number of scares when credit spreads widened temporarily have asked me whether it’s time to exit.

I have always believed that credit trading is not trading in the real sense as it’s about getting the multi-year credit cycle correct and being lucky more often than smart. It’s also about being able to ride through a long enough period for the ‘carry’ and ‘slide’ to compensate for any ‘marked-to-market” valuation gyration loss in capital in the interim before maturity or pre-mature exit.

As such, I do not think that we will revert to the pre-2008 crisis ”Old Normal” in Asian credit spreads (*as seen in the illustration). We are in the zone of the post-2008 crisis ”New Normal” in Asian credit spreads with perhaps another 30 b.p. tightening vis-a-vis the Credit Suisse Asian Bond Index Credit Spread Index as a reference.

But are we scrapping the bottom-of-the-barrel in this? Just like leaving a good tip at a restaurant after an excellent meal as an appreciative diner … perhaps it will be more prudent to exit early, leaving some money on the table for others chasing yields and sleep better at night ! (*Although it is not an Asian practice to leave tips in restaurants … perhaps it might prove to be penny wise, pound foolish for those who insist in staying till the very end)

No Fear!

VideoMay 5, 2014May 6, 2014 AsianmacroLeave a comment

I have but one opponent. And it is Fear. You motivate me. You drive me. You elevate me. You define me. With fear, I am fearless … I have not commented on the financial markets or the world in general for almost a year. And for good reasons as there is nothing much to opine […]

It’s a few hours before U.S. employment report … Of Trees payoff & cheap optionality

July 5, 2013May 6, 2014 Asianmacro1 Comment

There’s a sense of palpitation in the air ahead of every U.S. employment report on the 1st Friday of the calendar month that will then set the tone of all markets across all asset classes. The question is do you try to do something ahead of the economic figure release in an attempt to ”guess” what it will be vis-a-vis the market consensus whereby all current markets before the figure release should be trading at what will be the appropriate ”fair value” ex-ante to the consensus expectations?

Illustration 1: Ex-Ante Path Tree Portfolio Impact Assessment Model

Asianmacro over the years have designed some path dependency tree diagram model with some amount of assumptions in assigning my ex-ante probabilities of each outcome going out to at least 4 to 8 nodes ex-post figures. This does not tell me what to do but rather the consequences if I leave my portfolio as it is and the resultant impact after the figures ex-post … so that I can decide what I need or should do if I am worried about the expected portfolio value ex-ante or a particular node outcome especially if it involved a substantial drawdown even though the probability might be low ex-ante, before the figure release. An example of a screenshot output of my model is found above in Illustration 1. It is actually quite interesting to note that this exercise is seldom done even in most financial institutions or funds where a over reliance on VaR models is really less than ideal since it is backwards looking using historical volatility & correlation data like looking at the rear view mirror of a car when driving!

Illustration 2: Payoff Diagram for TYQ3 Puts 125 / 124.5 / 124 / 123.5 Condor

Anyway, it is definitely a toss-up of the coin on such events like U.S. employment data although I must say that Q.E. tapering or exit is definitely on the cards and it is only a question of when. But it will be low risk-reward ratio to attempt to be long or short any instrument ahead in size and that is when Asianmacro likes to exploit some cheap option strategies if they exist due to heightened volatilities or skews.

My favorite at the moment is buying some cheap put condors on UST 10-year note futures with expiry in two Friday on 26 July 2013. Recent history has shown that 10-year yields move between 20-30bp in the next 2 weeks post U.S. employment reports with 50% of the move occurring in the 2 trading days following the release. Current UST 10-year yields is at 2.50% and I am looking at it to head to 2.2/2.3% or 2.7/2.8% by 26 July 2013 and not be here by that point in time.

Asianmacro managed to buy the downside put condor with payoff shown in Illustration 2 for less than 1bp with 10x payoff. This is the kind of odds I normally like with definable downside risk of 1bp and making 10x max-payoff should UST 10-year yields rise to 2.7/2.8% for 26 July 2013 expiry.

*Asianmacro is a beach bum managing his own wealth. Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself. While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith. Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.

Making a home run

July 4, 2013May 6, 2014 AsianmacroLeave a comment

Asianmacro has not posted since the 1st week of May to smell the roses into early summer and also in travels across Europe. Looking back in the past where I have been in the futures open outcry pit, a bank market maker and then proprietary trader, followed by stints as a hedge fund portfolio manager … I came to realise that the most amount of money is only made slowly over time when you can sit comfortably on a position and for your investment thesis to bear out (*assuming that you have correctly done your homework and not stopped out way beforehand).

This meant that position sizing must be such that for longer term trades to bear out and perform well to make that home run, it must not be over-leveraged such that you cannot sleep at night with all the gyrations and noise that the market will invariably move like a butterfly flapping its wings at the slightest breeze!

Notice how Warren Buffet always appear to be such an investment stud with most of his positions reaping home runs more often then not and covering his losses or ”mistakes” elsewhere. Mr. Buffet has the ultimate advantage in having a ”cheap & almost free float” of investment capital via the perennial annuity premiums collected from his insurance business (where the cost is even lower than deposits obtained by banks who similarly will lever up to make loans & other investments). This allowed him to almost ”never cut loss or stop out of his positions” and we all know that even a broken clock will tell the correct time twice in a day … Mr. Buffet can in fact be proven right most often than not as ”in the long run, we are all dead” does not apply to his investment style.

Asianmacro certainly do not have the good fortune of owning an insurance company and also with the capital size of Mr. Buffet. Nevertheless, as highlighted above, from the 20 years of cutting my teeth and learning from the losses made while accepting with humility that I was probably more lucky than smart with my winners … In any given year, there are probably about 1-3 real serious tradable themes that you can express via a trade that is ”medium” term of 3-12 months of more in investment horizon that will be the 10-baggers. Most of the other time when you are fiddling & twiddling your fingers, you should not be doing anything much unless you have the systems, tools, inclination and skills to do some short term noise & gyration trading … you could be expending more energy than ever for very small incremental returns.

If you look at my postings this year, my 3 medium term thematic trades consistently were:

Long USD preferably via DXY futures on medium term U.S. economic recovery.
Short AUD/USD where the lucky chaps down under end their spell of good fortune.
Short China and/or underperformance of Asian equities.

They have all performed well YTD 2013 and there is no reason to close out the trades or a change in the theme.

Asianmacro will probably be eating, drinking, lazing and snoozing a lot more over summer. But will try to wake up from my stupor now & then and post again (*on shorter term gyration noise opportunity) and potential medium term thematic trades as I start my re-assessment for H2 2013 into 2014 outlook in deploying my capital again.

Good luck!

QE expectations = When bad news is good news … and vice versa

May 1, 2013May 6, 2014 AsianmacroLeave a comment

In a normal world when economic data are poor and getting poorer, governments are running out of policy options if they are even effective with twin deficits, central banks are faced with unemployment and banks with poor balance sheets and little credit expansion, companies are faced with little growth prospects, declining profit margins and lack of innovation and ideas to deploy their shareholders’ equity ….. the stock markets should be lower, the currency should be under pressure, and rate curves should flattened between the 2-10 years but steepened between the 10-30 years … ceteris paribas.

But we are not in a normal world since 2008. In a world where you get a series of QE either from the same country (Fed in the U.S. http://youtu.be/PTUY16CkS-k and ECB in Europe to a large degree) or in a tit-for-tat move by BOJ in Japan since November 2012 …. everything turns on its head. Bad news on any economic, political or financial front becomes good news in that the odds of QE as another nuclear weapon to be unleashed by a Central Bank rises!

On the back of such expectations across Europe, U.S. and Australia … we have seen rapid gains in their stock markets in the past 1-month outperforming those in Asia / Emerging markets where these countries cannot cut rates (as inflation is already rampant).

Asianmacro is light on risk at the moment and retreating to his cave as it is too high in levels to be long risks comfortably going into summer; but might be pre-matured too to be short risks as well!

Happy summer holidays in advance to everybody as I will be heading out to Europe soon to catch some nice action over there and also to suss out what is happening on the ground. Something bad always happen over summer, for those who think that this time is different, oh well …. (*P.S. Watching those ”I Know What You Did Last Summer!” movies might provide some inspiration).

China Rumour Mongering on a Friday …

April 19, 2013May 6, 2014 AsianmacroLeave a comment

Illustration 1: If CNY trading band is widened .. be careful what you wish for as CNY weakened previously!

Rumour #1: Heading into the G20 Finance Ministers meeting this weekend, the first rumour is that China will probably widen the yuan’s trading band within the next three days after central bank Deputy Governor Yi Gang signaled policy makers will loosen control over the currency. China is always astute in playing its cards leading to any G20 Finance Ministers meeting to avoid being labelled as a currency manipulator and be in everybody’s good books. Asianmacro think this is possible but do be mindful that it can also mean two-way volatility where CNY can also depreciate and not just appreciate in a straight line.

Rumour #2: There is report that MSCI has had a meeting with China SAFE & CSRC in allowing China A-shares to be included in MSCI EM index. With the recent CNY appreciation trend, the talk about pushing back RQFII approval process, the fully deregulation of QFII mechanism and the opening of capital account would still be a medium term event if not a long term occurrence. The source of the rumour can be attributed to this article http://finance.sina.com.cn/stock/yjdt/20130418/213915196798.shtml. It is funny how rumours always starts on Friday and spread like wild-fire by brokers who work their phones tirelessly starting with the calls to their top clients and working down the list. Do note that brokers are not necessarily there to ”warn” you of things but their incentive is to get you to do something and execute / trade more so that volumes are churned and they earn their commission dollars! Asianmacro think this rumour is long in the tooth and probably not today or any more likely in the near future ….

SHCOMP rallied and spike up higher on these rumours and dragged everything else along. I will not be a buyer of these rumours especially #2 …. and will use any stupid spike up in risky assets to sell them short!

P.S. Will be looking at good levels to short CNY NDF and also add to DAX and SPX and AS51 shorts on rally due to the China rumours and feel good.

The EUR/AUD FX Cross and VXO alarm bells are ringing

April 17, 2013May 6, 2014 AsianmacroLeave a comment

Illustration 1: EUR/AUD FX cross exhibit high correlation & R-square with VXO … predictive ability of unknown stresses ahead in financial markets when both heads higher?

There are a number of price movements of various financial instruments that Asianmacro had observed before that I simply do not have a logical explanation that satisfy either a scientific mathematical finance approach or a qualitative explanation. Perhaps I do not have the eloquence nor knowledge of those strategists or economist in coming up with convincing arguments for everything that happens since my pursuit is simply on whether to buy, sell or hold in making profits as the sole objective.

One phenomena that I chance upon is the propensity for EUR/AUD FX cross together with VXO (http://www.cboe.com/micro/vxo/) to always head higher when markets enter into some uncertainty especially when negative events start occur or develop in the financial markets.

Illustration 2: EUR/AUD FX cross heads higher post Gold collapse since 12 April 2013 & Boston bombings …. sign of potential further negatives ahead to develop in markets?

I will be very cautious and on a somewhat ”sell risk on rally” mode across various asset classes especially stocks and commodities as this unexplained EUR/AUD & VXO indicator is flashing on my radar screen. Whether it is due to AUD/USD coming off and under pressure due to poor China economic data (http://www.scmp.com/business/money/markets-investing/article/1215611/investors-dump-stocks-poor-china-economic-data) …. or EUR/USD heading higher … Damn how can that be with uncertainty in EU still smarting from Greece, Cyprus, …… ? It does not matter … I rather be lucky than smart!

All that glitters … is not Gold nor Silver …

April 16, 2013May 6, 2014 Asianmacro1 Comment

Illustration 1: Datta Phuge’s 3.3 kg gold shirt cost him US$250,000 … right before gold’s collapse …. Impeccable wrong timing !

Asianmacro had been busy slaughtering the pigs in the gold market. That is why I was quiet and did not have time to comment on the markets in recent days. The old saying, ”Bulls make money, bears make money, but the pigs get slaughtered!”‘ is always true on Wall Street. The gold bugs that have held onto their End-of-Days view or the debasement of wealth via fiat money explosion due to QE …. whatever theory that you pick … they are all beyond my intellectual comprehension. Asianmacro only know that in the long run, we are all dead and there are just too many stubborn longs out there.

Never had so much fun shorting something that cannot even muster a bounce and the last time it was such must be like 1997 during the Asian financial crisis when Asian currencies and rates move at such speed and pace.

$1250 gold and $18 silver is not unthinkable.

AsianMacro

Musings on Asian macro economic trends and financial markets