Wednesday, May 30, 2012
Wednesday, May 23, 2012
Tuesday, May 22, 2012
Monday, May 21, 2012
Is A Greek Bailout Priced Into The Market? I think so.
As expected, Europe is on the radar of investors and traders due to the potential fears of a Greece exit and the potential contagion affects. Other indebted nations in the Eurozone are not helping the situation either. At this point in time, there are basically two outcomes that are on most trader's minds right now.
1. Greece will receive another liquidity injection by the ECB, confidence over the short-term horizon will be restored, however the economic displacement will continue to stay or grow worse. Bond yields in Greece and other PIIGS will decline, along with a brief rally in risk on assets.
2. Greece will fail to elect a sustainable government, confidence will continue to drain in both Greece and most of the Eurozone, Greek bank deposits will decline at a faster pace, Greece bond yields will rise dramatically, and Greece will be compelled to leave the Eurozone.
Given previous occurrences and the fact that sustaining confidence is of utmost importance in Europe right now, I think the market is expecting a Greek bailout. Thus right now there is a premium to purchasing risk-on assets. The $VIX is also still a relatively low levels and has the potential for a much stronger down turn.
At this point there is no real resolution to Greece's economic woes except for outside investment (which is highly unlikely unless Greece is able to somehow make itself look more attractive; a lower currency). We are beginning to see a snowball effect, as each time Greek bond yields rises, it sets off further uncertainty, more bank withdraws, etc.
Although the short-term effects may be uncertain and harmful, I think a Greek exit would be a good thing for Europe and the Greek economy. Greece would then benefit from a lower currency relative to the euro. Germany would have less of a burden to worry about, and more focus would be put on the other PIIGS (or should I say PIIS?)
My recommendation? Given the fact that I think there is a premium to purchasing risk-on assets right now, I think a bearish position in U.S. and global equities, long volatility, and long U.S. and German bonds would be a good position going into the Greek elections this coming June. The risk to reward is much more compelling being short, and the potential rewards are much greater than a relief rally from another bailout. Technically, the market remains broken, and I think a bounce higher should be shorted.
1. Greece will receive another liquidity injection by the ECB, confidence over the short-term horizon will be restored, however the economic displacement will continue to stay or grow worse. Bond yields in Greece and other PIIGS will decline, along with a brief rally in risk on assets.
2. Greece will fail to elect a sustainable government, confidence will continue to drain in both Greece and most of the Eurozone, Greek bank deposits will decline at a faster pace, Greece bond yields will rise dramatically, and Greece will be compelled to leave the Eurozone.
Given previous occurrences and the fact that sustaining confidence is of utmost importance in Europe right now, I think the market is expecting a Greek bailout. Thus right now there is a premium to purchasing risk-on assets. The $VIX is also still a relatively low levels and has the potential for a much stronger down turn.
At this point there is no real resolution to Greece's economic woes except for outside investment (which is highly unlikely unless Greece is able to somehow make itself look more attractive; a lower currency). We are beginning to see a snowball effect, as each time Greek bond yields rises, it sets off further uncertainty, more bank withdraws, etc.
Although the short-term effects may be uncertain and harmful, I think a Greek exit would be a good thing for Europe and the Greek economy. Greece would then benefit from a lower currency relative to the euro. Germany would have less of a burden to worry about, and more focus would be put on the other PIIGS (or should I say PIIS?)
My recommendation? Given the fact that I think there is a premium to purchasing risk-on assets right now, I think a bearish position in U.S. and global equities, long volatility, and long U.S. and German bonds would be a good position going into the Greek elections this coming June. The risk to reward is much more compelling being short, and the potential rewards are much greater than a relief rally from another bailout. Technically, the market remains broken, and I think a bounce higher should be shorted.
Sunday, May 20, 2012
Japanese Economy Comments / Trade Idea
Many have compared Japan to the Eurozone, citing Japan's huge debt to gdp ratio (200%+) as an impending risk to the Japanese economy. Although I agree that Japan's large amount of debt is definitely detrimental to their economy, I do not think that Japan will turn into a Greece, or Spain.
Why? Well the most important factor is Japan has a central bank! At any point in time, Japan can print their way out of their debt. Obviously if not done in a controlled fashion, this would create huge inflation which would make matters worse, but when push comes to shove, Japan always has the printing press as a weapon at their disposal.
Individual countries in the Eurozone however do not have the power to print their own money. The only way for a country such as Greece to solve their debt crisis is to raise capital!...or borrow more (not a long-term solution as we have all come to realize). This brings us to the problem that has plagued the Eurozone: individual countries are unable solve certain economic problems due to their "hands" (and currencies) being tied.
Back to the Japanese economy, the Japanese benefit from a lower currency as they are large exporter (and creditor). The Japanese economy has also seen deflation (negative inflation) for the last 20 or so years and so printing money in the end may be a good idea. The main risk to this occurring is obviously the possibility of hyper-inflation, though unlikely.
In my opinion, the Japanese will not turn into a Greece, as long as they have the printing press on their side. Japan can only default on it's debt if the country lets it happen. However, we would need a significant contraction to see the printing presses start up in Japan, given the deemed failure it was in the early 2000's. For these reasons I think shorting the yen and purchasing Japanese equities (after a further decline below 7000 on the Nikkei 225) would be a good trade given Japan's debt. By purchasing Japanese equities and shorting yen, you are essentially negating the effect of inflation as your profits in equities may be less in real terms, but the profits in yen shorts make up for it.
Why? Well the most important factor is Japan has a central bank! At any point in time, Japan can print their way out of their debt. Obviously if not done in a controlled fashion, this would create huge inflation which would make matters worse, but when push comes to shove, Japan always has the printing press as a weapon at their disposal.
Individual countries in the Eurozone however do not have the power to print their own money. The only way for a country such as Greece to solve their debt crisis is to raise capital!...or borrow more (not a long-term solution as we have all come to realize). This brings us to the problem that has plagued the Eurozone: individual countries are unable solve certain economic problems due to their "hands" (and currencies) being tied.
Back to the Japanese economy, the Japanese benefit from a lower currency as they are large exporter (and creditor). The Japanese economy has also seen deflation (negative inflation) for the last 20 or so years and so printing money in the end may be a good idea. The main risk to this occurring is obviously the possibility of hyper-inflation, though unlikely.
In my opinion, the Japanese will not turn into a Greece, as long as they have the printing press on their side. Japan can only default on it's debt if the country lets it happen. However, we would need a significant contraction to see the printing presses start up in Japan, given the deemed failure it was in the early 2000's. For these reasons I think shorting the yen and purchasing Japanese equities (after a further decline below 7000 on the Nikkei 225) would be a good trade given Japan's debt. By purchasing Japanese equities and shorting yen, you are essentially negating the effect of inflation as your profits in equities may be less in real terms, but the profits in yen shorts make up for it.
Thursday, May 17, 2012
Position Management
Hey Traders!
In this post I am going to go over a bit of my typical position management technique, and I what I believe best suits global macro trading.
Global macro trading is considered to be more of a medium-term strategy. In other words, very rarely will I hold a position for less than a couple of days, and rarely more than 3 months. Obviously, with certain trades, this does not hold true. Occasionally, a trade will last a day, or even a year, but those trades are rare.
You'll notice that I will typically enter a trade, add or cut back on positions, on a regular basis. This is because, although my major trades may be longer term trades, I always manoeuvre around my positions as the markets are constantly changing. In other words my position management style is having a core position and managing around that position using a managed futures approach. For example, I may have the opinion that the gold market will be higher 3 months from now, so I may build a position either by scaling in, or enter full size right away. I do not only scale in as it goes against me, I also scale in as the market confirms my trade. This allows me to capture a better price, as the market is constantly probing different areas. If I enter full size immediately, I will always be looking to trade around my position. So back to the gold example. Say I purchase a full position, and a week later gold rallies into resistance. I would then sell some of my position to limit risk, take profits, or as a speculative trade if I think gold is going to go lower over the next couple of trading days.
In other words, gold will not just go from point A to B without price discovery and market rotation. So although my main core position will make the most money in the end, trading in and out of my position can make me even more profits, or save losses.
In an entire trading year, there are typically very few large macro moves (moves in markets based off of large economic pressures and discrepancies), however there are hundreds of rotation opportunities. Trading the natural rotation can be profitable, however a great year is made when one of the macro moves is caught. Combining the two together, in my opinion, creates a winning management strategy.
Hope this helps!
Julian
In this post I am going to go over a bit of my typical position management technique, and I what I believe best suits global macro trading.
Global macro trading is considered to be more of a medium-term strategy. In other words, very rarely will I hold a position for less than a couple of days, and rarely more than 3 months. Obviously, with certain trades, this does not hold true. Occasionally, a trade will last a day, or even a year, but those trades are rare.
You'll notice that I will typically enter a trade, add or cut back on positions, on a regular basis. This is because, although my major trades may be longer term trades, I always manoeuvre around my positions as the markets are constantly changing. In other words my position management style is having a core position and managing around that position using a managed futures approach. For example, I may have the opinion that the gold market will be higher 3 months from now, so I may build a position either by scaling in, or enter full size right away. I do not only scale in as it goes against me, I also scale in as the market confirms my trade. This allows me to capture a better price, as the market is constantly probing different areas. If I enter full size immediately, I will always be looking to trade around my position. So back to the gold example. Say I purchase a full position, and a week later gold rallies into resistance. I would then sell some of my position to limit risk, take profits, or as a speculative trade if I think gold is going to go lower over the next couple of trading days.
In other words, gold will not just go from point A to B without price discovery and market rotation. So although my main core position will make the most money in the end, trading in and out of my position can make me even more profits, or save losses.
In an entire trading year, there are typically very few large macro moves (moves in markets based off of large economic pressures and discrepancies), however there are hundreds of rotation opportunities. Trading the natural rotation can be profitable, however a great year is made when one of the macro moves is caught. Combining the two together, in my opinion, creates a winning management strategy.
Hope this helps!
Julian
Wednesday, May 16, 2012
Tuesday, May 15, 2012
Monday, May 14, 2012
Friday, May 11, 2012
Wednesday, May 9, 2012
Thoughts On Current Sentiment
Just going to make a quick post on my thoughts on current sentiment in the stock & bond markets. I am just going to go through a run down of each individual market, and my thoughts on each. First though, let's look at the global economy.
European political and economic fears continue to plague the U.S. equity markets. The S&P 500 has dropped 50 points since last week on France and Greek elections, U.S. economic fears, and continuing debt fears around the globe. Fears that the U.S. may be entering a soft patch as also sent money moving into the bond market and out of risk on assets.
Bond Market- The bond market has seen consistent inflows as global economic worries continue to dominate the headlines. Although U.S. treasuries are yielding very low interest rates, investors and traders flock to them to capture at least some yield.
I personally believe that inflows into the bond market should taper off in the next few years and we could enter a bear market in bonds. As the U.S. gradually recovers, the fed will have to raise interest rates, and investors will flock to riskier assets.
Stock Market- The U.S. equity market has been seeing outflows in the past two weeks as global economic fears have seeped into riskier assets. Although the U.S. stock market may be the safest place to put money in global equities, it too is risky enough to cause selling.
I think we should see a further sell off in the next few weeks in the U.S. stock market as global fears are too great right now. Technically, we are also overbought and so I expect to see a sell off to shake out the weaker longs. After the pullback is complete however, I think we should see another rally in equities as the central banks continue to support them.'
European political and economic fears continue to plague the U.S. equity markets. The S&P 500 has dropped 50 points since last week on France and Greek elections, U.S. economic fears, and continuing debt fears around the globe. Fears that the U.S. may be entering a soft patch as also sent money moving into the bond market and out of risk on assets.
Bond Market- The bond market has seen consistent inflows as global economic worries continue to dominate the headlines. Although U.S. treasuries are yielding very low interest rates, investors and traders flock to them to capture at least some yield.
I personally believe that inflows into the bond market should taper off in the next few years and we could enter a bear market in bonds. As the U.S. gradually recovers, the fed will have to raise interest rates, and investors will flock to riskier assets.
Stock Market- The U.S. equity market has been seeing outflows in the past two weeks as global economic fears have seeped into riskier assets. Although the U.S. stock market may be the safest place to put money in global equities, it too is risky enough to cause selling.
I think we should see a further sell off in the next few weeks in the U.S. stock market as global fears are too great right now. Technically, we are also overbought and so I expect to see a sell off to shake out the weaker longs. After the pullback is complete however, I think we should see another rally in equities as the central banks continue to support them.'
Current Positions: No macro trades on right now, I have small longs in oil, gold, and equity for a short term bounce.
Tuesday, May 8, 2012
Monday, May 7, 2012
Sunday, May 6, 2012
Friday, May 4, 2012
Losing Days And The Ability To Remain Nimble And Flexible
I've had a few people ask me lately how I handle losing days/streaks in my trading and so I thought I'd write a post about how losing days affect me, and I'll also touch on some of my risk management techniques, and how they help me manage my emotions and draw downs.
Before I get into anything about how I myself handle losses etc. I do want to point out, EXPECT TO HAVE LOSING DAYS/STREAKS... it is a part of trading and so the best way in my opinion to handle your emotions is to just accept it. You will have bad days/weeks it's a part of trading. Think of it like a business, you have income and expenses... the losing trades are your expenses... all business have expenses!
Another important component to managing your emotions is to have complete confidence in your style of trading/system. If you truly believe in your strategy/system, losing days should not be a problem, as once again, they are to be expected.
Losing trades can also teach you a few things about current market condition and your strategy. For example, whenever I make a losing trade, I take it as a signal that my current bias/opinion may be incorrect...the market just told me that didn't it? In other words, a losing trade is when the market invalidates your thought process. Although I do have max loss amount for percentage wise factors, I typically do not put on a trade with a hard stop in place. I put on a trade because I have an opinion on where the market should be going, and I have reasons as to why it should. The only time I should be closing my position is when my reasons for getting into the trade have been proven incorrect, not because I'm down a certain amount (unless of course it is a safety max loss). These reasons could be, the market reaches a level I wasn't expecting it to, or an economic report comes out that goes against my opinion. All in all, you should have a position in the market, until mother market tells you your wrong.
I also believe the ability to remain nimble and flexible is a great attribute for a trader to have. A nimble trader can switch sides almost immediately when proven wrong. In other words, a flexible trader goes with the flow of the market. He may have an opinion on where the market should be, but if the market's is trending, he has to be riding that trend. In the end this business is about making money and the market doesn't care about your opinion. That is why although it is important to have an opinion, you have to be willing to accept that your wrong, almost immediately.
Today was a great example of a day in which the market (let's use equity, the S&P 500 as an example) invalidated my trade ideas. Today was a losing day capital wise, but was a winning day for me trading wise. I went from slightly bullish yesterday, to more bullish on the opening of today, to completely bearishly positioned by lunch time. I am happy about how I was able to remain flexible and completely switch my trades around today. Let me go through my thought process as the day progressed with a chart of the S&P 500 futures market.
Notice how in about a 1 hour time frame, I have completely switched sides as the market proved me wrong. The best reward to risk trade appears to be on to the downside in the equity market and I have positioned accordingly.
Risk Management Techniques
My entire trading strategy is based upon reward to risk as it just makes sense to me. Although my rules are meant to be broken at appropriate times, I typically never have a reward to risk of worse than 2:1. Why? Well, if every trade has a reward to risk ratio of better than 2:1, I can be wrong more than 50% and still make money! I also assume that I have an educated ability to judge market momentum, and that just adds to the potential profits.
Diversification is also a huge component to my risk management techniques. I like to try and be in many different markets at once, as it allows me to have a pulse of every market, and hedge better. For example, if I believe we will see economic growth in the U.S., I will build a position in the S&P, oil and copper. Why? Simply put, one position may do better than the other. I am also hedging against component risk. For example, when you purchase the S&P 500, you are subject to earnings risk. So if you think the economy will grow in the next quarter, copper and oil should rise, but there is the risk that a few major stock components in the S&P may falter, bringing down profits in that position. Diversification allows me to spread my risks out evenly.
Hope this was an info rich post! Have a great weekend!
Before I get into anything about how I myself handle losses etc. I do want to point out, EXPECT TO HAVE LOSING DAYS/STREAKS... it is a part of trading and so the best way in my opinion to handle your emotions is to just accept it. You will have bad days/weeks it's a part of trading. Think of it like a business, you have income and expenses... the losing trades are your expenses... all business have expenses!
Another important component to managing your emotions is to have complete confidence in your style of trading/system. If you truly believe in your strategy/system, losing days should not be a problem, as once again, they are to be expected.
Losing trades can also teach you a few things about current market condition and your strategy. For example, whenever I make a losing trade, I take it as a signal that my current bias/opinion may be incorrect...the market just told me that didn't it? In other words, a losing trade is when the market invalidates your thought process. Although I do have max loss amount for percentage wise factors, I typically do not put on a trade with a hard stop in place. I put on a trade because I have an opinion on where the market should be going, and I have reasons as to why it should. The only time I should be closing my position is when my reasons for getting into the trade have been proven incorrect, not because I'm down a certain amount (unless of course it is a safety max loss). These reasons could be, the market reaches a level I wasn't expecting it to, or an economic report comes out that goes against my opinion. All in all, you should have a position in the market, until mother market tells you your wrong.
I also believe the ability to remain nimble and flexible is a great attribute for a trader to have. A nimble trader can switch sides almost immediately when proven wrong. In other words, a flexible trader goes with the flow of the market. He may have an opinion on where the market should be, but if the market's is trending, he has to be riding that trend. In the end this business is about making money and the market doesn't care about your opinion. That is why although it is important to have an opinion, you have to be willing to accept that your wrong, almost immediately.
Today was a great example of a day in which the market (let's use equity, the S&P 500 as an example) invalidated my trade ideas. Today was a losing day capital wise, but was a winning day for me trading wise. I went from slightly bullish yesterday, to more bullish on the opening of today, to completely bearishly positioned by lunch time. I am happy about how I was able to remain flexible and completely switch my trades around today. Let me go through my thought process as the day progressed with a chart of the S&P 500 futures market.
Notice how in about a 1 hour time frame, I have completely switched sides as the market proved me wrong. The best reward to risk trade appears to be on to the downside in the equity market and I have positioned accordingly.
Risk Management Techniques
My entire trading strategy is based upon reward to risk as it just makes sense to me. Although my rules are meant to be broken at appropriate times, I typically never have a reward to risk of worse than 2:1. Why? Well, if every trade has a reward to risk ratio of better than 2:1, I can be wrong more than 50% and still make money! I also assume that I have an educated ability to judge market momentum, and that just adds to the potential profits.
Diversification is also a huge component to my risk management techniques. I like to try and be in many different markets at once, as it allows me to have a pulse of every market, and hedge better. For example, if I believe we will see economic growth in the U.S., I will build a position in the S&P, oil and copper. Why? Simply put, one position may do better than the other. I am also hedging against component risk. For example, when you purchase the S&P 500, you are subject to earnings risk. So if you think the economy will grow in the next quarter, copper and oil should rise, but there is the risk that a few major stock components in the S&P may falter, bringing down profits in that position. Diversification allows me to spread my risks out evenly.
Hope this was an info rich post! Have a great weekend!
Non-Farms Come In Slightly Worse, But Not Too Bad 115k vs 170k~ est.
The unemployment report came out today and it appears as though we have had a slight miss vs. the estimates. Typically we would see a sell off on a poor report, but the immediate reaction (8:35) has been quite a mute outcome in U.S. equity index futures. Let's dive in to the number a little more.
Non Farm Payrolls 115k vs. 170k~ est.
The first, and usually most important number, non-farm payrolls, showed a miss of 55k. Usually a miss like this should cause an intense sell off, but the whole picture is not represented by this statistic.
Unemployment Rate 8.1% vs. 8.2%
The unemployment rate actually declined in April, which is a positive factor, but this statistic is not as reliable as the first, as many unemployed people are not counted in the rate due to various reasons (time out of the workforce etc.)
Prev. Month Revision 154k vs. 120k
It appears that last month's (March) job market actually added more jobs than was reported, and so this is a hidden bullish number. Obviously this month's unemployment report is a more important number, but revisions are to be watched as well.
Currently S&P 500 futures are down roughly 0.5%, which is not too large of a fall. I personally believe that this sell off is an opportunity to establish a long position in risk on assets with a tight leash. The reason for this is, a poor number was kind of expected by traders, and most people sold into the report (yesterday's decline). I wouldn't be surprised if we rally later during the day, as people realize this wasn't too bad of a report, considering the upward revisions of previous months as well. ADP and initial claims in April were lacklustre and so, this report was not too bad. Treasuries failed to sustain a meaningful rally, as the 30-year bond is currently up 0.1%.
The above image is a chart of the S&P 500 futures market. The last bar on the chart is the report reaction, and notice how it is a relatively small reaction, in comparison to previous reports and trading days. Typically, reversals are formed after important new events, so the mediocre jobs report may provide a bottoming day.
As you could probably tell, I am currently slightly bullish risk on assets, including equity, copper, and oil. I would be interested in establishing a better position in these assets (as I have little size on) today, with a tight leash.
Good luck traders for the rest of the trading day!
Thursday, May 3, 2012
Current U.S. Economic Statistics & My Projections
In this post I am going to outline a few U.S. economic statistics, and using these figures, give an outline of what I expect in the U.S. and global economy over the next few months.
GDP - Gross Domestic Product equals the total income of everyone in the economy or the total expenditure on the economy's goods and services. GDP includes only the value final goods and services. In other words, GDP gives us a tell as to whether the economy is growing, slowing or flat lining. This is clearly important to global macro traders as understanding where the economy is moving, or expected to move dictates sentiment in various markets. The latest release for GDP came in on April 27th, where the release was less than expected, with Advanced GDP q/q coming in at 2.2% vs. 2.6% estimates. The equity market faltered slightly when it was released but didn't sell of heavily as traders believed the drop off in GDP was simply fall out from the recent global fears. Let's take a look at GDP forecasts for the coming quarters, taken from leading economists expectations:
In summary, it appears as though analysts expect the global recovery in the United States to continue, due to a variety of reasons such as:
-Low O/N interest rates
-Jobs market appears to be recovering
-Manufacturing appears to be coming back
-Consumer confidence recovering
-Backing by central banks and governments to prevent another liquidity crisis
I personally believe we will see a flat to upwards movement in U.S GDP in the coming months. I believe the Federal Reserves support will limit any fears of another slowdown.
Inflation - Inflation is a great measure on the health of an economy. Inflation is the change in prices of all goods and services purchased for consumption by urban households and is measured by the CPI index (Consumer Price Index). Typically positive but low inflation is good for an economy, rampant inflation is not good as that devalues a country's currency, and negative inflation (deflation) is not good because drops in prices cause a drop in production -> drop in demand -> economic slowdown.
Currently the federal reserve targets an inflation rate of about 2% YoY. I believe higher inflation may be a better outcome for the economy right now as bonds are yielding extremely low rates and an increase in inflation should cause bond yields to rise. Higher inflation could be caused by the current liquidity injections the federal reserve has been implementing.
GDP - Gross Domestic Product equals the total income of everyone in the economy or the total expenditure on the economy's goods and services. GDP includes only the value final goods and services. In other words, GDP gives us a tell as to whether the economy is growing, slowing or flat lining. This is clearly important to global macro traders as understanding where the economy is moving, or expected to move dictates sentiment in various markets. The latest release for GDP came in on April 27th, where the release was less than expected, with Advanced GDP q/q coming in at 2.2% vs. 2.6% estimates. The equity market faltered slightly when it was released but didn't sell of heavily as traders believed the drop off in GDP was simply fall out from the recent global fears. Let's take a look at GDP forecasts for the coming quarters, taken from leading economists expectations:
As you can see, out of 72 analyst forecasts, the median forecast expects GDP to rise to 2.5% by the end of this year, and a rise to almost 3% by Q3 of 2013. Now obviously these are just forecasts and can drastically change over the coming months, but the bottom line is economists expect the U.S. economy to grow faster as the year continues on.
Above shows GDP forecasts for the Chinese economy. It is important to watch the Chinese economy figures as they can give a great bellwether for global consumption and economic growth. Recently the Chinese economy has been hit due to a variety of reasons, but analysts expect their growth rate to remain steady to moving upwards. Once again, these figures can change drastically in the coming months.
In summary, it appears as though analysts expect the global recovery in the United States to continue, due to a variety of reasons such as:
-Low O/N interest rates
-Jobs market appears to be recovering
-Manufacturing appears to be coming back
-Consumer confidence recovering
-Backing by central banks and governments to prevent another liquidity crisis
I personally believe we will see a flat to upwards movement in U.S GDP in the coming months. I believe the Federal Reserves support will limit any fears of another slowdown.
Inflation - Inflation is a great measure on the health of an economy. Inflation is the change in prices of all goods and services purchased for consumption by urban households and is measured by the CPI index (Consumer Price Index). Typically positive but low inflation is good for an economy, rampant inflation is not good as that devalues a country's currency, and negative inflation (deflation) is not good because drops in prices cause a drop in production -> drop in demand -> economic slowdown.
Currently the federal reserve targets an inflation rate of about 2% YoY. I believe higher inflation may be a better outcome for the economy right now as bonds are yielding extremely low rates and an increase in inflation should cause bond yields to rise. Higher inflation could be caused by the current liquidity injections the federal reserve has been implementing.
This chart shows U.S. CPI YoY dating back to 1987. As you can see, the CPI index has been in a downwards channel, and is currently rising to the 10 year average of around 2%. The amount of money that has been injected in the U.S. financial system (and current debt problems) should cause inflation to move higher, thus causing equities to rise and bonds to fall.
Given the support from the Federal Reserve through liquidity, I expect to see higher inflation in the coming years. I also believe an interest rate hike will be needed, most likely in 2013, as treasuries are unattractive to investors at these levels.
The above chart is the 2 year U.S. treasury note yield. The 2 year is currently yielding .26% and is sitting at lows not seen since the 1950's. The effects of the federal reserves actions, in my opinion, should cause inflationary growth, sending notes lower and riskier assets such as U.S. equity and emerging markets higher.
The main risks to this trade is obviously a slowdown in the U.S. economy, and a continuing crisis in Europe. However, the risk remains low as 2 year yields can't get much lower, and the U.S. equity market will be constantly supported by the federal reserve. My view is that we should see a pullback in equity soon, which should be a great opportunity to purchase risk on assets. A good hedge for now would be to purchase volatility through puts.
Global Equity Divergences, Job Market
Today at 8:30 EST, initial jobless claims was released showing a much better than expected number of 365k vs a forecast of 375k. This was the first beat for April, lessening fears of a slowdown in the job market, as the recent jump in claims could most likely be due to the Easter effect (seasonality). As of the time I am writing (9:00) the futures have pulled back from their initial spike higher, and look to be rotating lower. Tomorrow the unemployment report is released and so I do no expect to see heavy movement in the markets until then. Given the previous misses in claims and yesterday's ADP report, most traders are probably expecting a lackluster report tomorrow, and so an upside beat should bring more surprise. Currently I am slightly bullish risk on assets, but am extremely nimble as U.S. equity is on thin ice. I remain bullish however because U.S. equities have been known to rally much further than anticipated, even with weak technical structure (QE, Fed support). U.S. Equity has been the best performing stock market of the year (not including volatile, smaller markets), and has been puzzling traders as to why. The reason is both good and bad for the near future. The main reason is, in such a low interest rate environment, investors must put there money in riskier assets, and right now, the U.S. equity market seems to be the safest place in the world vs. Europe's debt situation and china's slowdown. This is also a bad thing for the market as divergences like this can't hold out for much longer. Either we are going to see global equity markets pick up, or U.S. equities are going to break down, to reflect global fears. The best reward to risk trade would be for a breakdown in U.S. equities, and so purchasing volatility as a hedge, may be a good idea at this point.
The above 4 charts are equity market of the United States, Germany, Brazil and Spain in that order. Notice the huge discrepancy between global markets and U.S.. This is due to recent global fears, and these structural divergences can't hold up for much longer. This problem is not just reflected in global equity, but it has also been seen in commodities (oil hasn't been moving to highs) and in individual stocks and sectors, specifically the energy sector has been failing to move to highs.
Julian Marchese
Wednesday, May 2, 2012
Some Thoughts On U.S. Equity (S&P 500)
With European debt fears on the downplay (yet still posing
significant risk), U.S. equities have been continuing their multi month rally,
disregarding poor American economic reports. Recent ADP and unemployment claims
have been suggesting a slowdown in the American job market, and yet money
continues to flow into riskier assets. Why? I can attribute this to many
factors:
-The U.S. simply looks like a better place than most countries around the globe.
-Bond market remains unattractive to most investors with U.S. treasuries yielding the lowest in decades, forcing investors to put their money in riskier assets
-Europe’s picture has gotten better in comparison to last year’s volatility
-The fed continues to back the market with liquidity
Now I ask myself, what would cause this process to cease? We would need to see another dip in Europe, or a harsher slowdown in the U.S.. Continuing fears in Europe would cause the market to correct via spill over fears, and a harsher slowdown in the U.S…. well, it should cause the market to fall. Until one of these two events occurs, it makes sense to hold long into highs.
The market is holding up when it should be falling. Prepare for a significant move in the S&P 500, either up or down. Right now I have a slight bias to higher prices, but should we start to roll over, look out below. I am looking to purchase protection and volatility through puts.
-The U.S. simply looks like a better place than most countries around the globe.
-Bond market remains unattractive to most investors with U.S. treasuries yielding the lowest in decades, forcing investors to put their money in riskier assets
-Europe’s picture has gotten better in comparison to last year’s volatility
-The fed continues to back the market with liquidity
Now I ask myself, what would cause this process to cease? We would need to see another dip in Europe, or a harsher slowdown in the U.S.. Continuing fears in Europe would cause the market to correct via spill over fears, and a harsher slowdown in the U.S…. well, it should cause the market to fall. Until one of these two events occurs, it makes sense to hold long into highs.
The market is holding up when it should be falling. Prepare for a significant move in the S&P 500, either up or down. Right now I have a slight bias to higher prices, but should we start to roll over, look out below. I am looking to purchase protection and volatility through puts.
What Is Global Macro Trading?
Hello Everyone!
In this post I am going to briefly discuss and outline my trading/investing approach to the volatile financial market place of today. So what is global macro trading?
Global Macro consists of 2 words... Global and Macro. What do these terms stand for?
Global - The "global" in global macro means that I am looking to participate in any market place around the world. Many investors/traders stick to one market or one region of the globe, whether it be just U.S. Stocks or European debt markets. Global macro traders however look for any opportunities/inefficiencies in any country, in any market that is established enough to conduct trade efficiently. This expands my trading mandate so that I can profit at all times, as it is almost guaranteed that there is something occurring in one of the thousands of global markets. Also, every market is interconnected. For example, when the European debt debacle was in full swing last year, it didn't only affect European equity and debt markets, but it affected the U.S. economy, Chinese economy, U.S. debt markets and so on. Global also allows me to be diversified. For example, if I have a picture that the U.S. economy will grow at an accelerated pace, I can express my views by purchasing U.S. stocks, emerging equities, selling yen vs. the Australian dollar (carry trade) etc.. By dispersing my position through many different trading instruments, I accomplish two things. 1. I am able to capture bigger moves in different markets, for example, emerging equities may outperform U.S. large caps, and I take advantage of that. 2. I keep a pulse on many different markets. I try to have a position in as many markets as I can, as it allows me to have an opinion, with conviction. In other words, I am more confident with my positions.
Macro - Macro is short form for macroeconomics. Macroeconomics is the study of the behaviour of the economy in general, as opposed to microeconomics (which can be helpful as well) which is the study of the behaviour of economies of certain specific sectors and businesses. Studying macroeconomics allows you to create a big picture of the world and where money is going/should be going, given the variables constantly changing such as employment, GDP, inflation and the likes. Macroeconomics is extremely important as the financial markets are just reflections of the opinions of people BASED on these variables mentioned in the previous sentence. Once you have an understanding about WHY markets move, you are able to enter trades/investments with much more conviction and confidence. Trading on macroeconomic principles in theory is typically a contrarian view, as typically markets over extend from their true value. This is great for traders because typically, contrarian trades offer better reward to risk trading opportunities, which is essentially to the success of any trader in the long run.
In summary, global macro trading is forming an idea/perspective on the economy in general, and trading individual global markets, reflecting your views, using an effective way of managing risk all the while. Global macro allows you to understand WHY market move, and allows you to profit on them.
Look forward to more posts!
Julian Marchese
4th Attempt At Blogging!
Hello Everyone!
My name is Julian Marchese, I am currently 15 years old, and I am an active speculator/investor in the global financial market place, trading in stocks, options, futures, forex, and OTC markets.
My dream in this business is to become a global macro hedge fund manager. My passion to do so has brought me media attention here in Canada as I have been featured on multiple news networks including CBC, CityTV, and multiple online/print newspapers including the Globe And Mail, Toronto Star, and Toronto Life Magazine. You can check them all out here:
My dream in this business is to become a global macro hedge fund manager. My passion to do so has brought me media attention here in Canada as I have been featured on multiple news networks including CBC, CityTV, and multiple online/print newspapers including the Globe And Mail, Toronto Star, and Toronto Life Magazine. You can check them all out here:
I recently also appeared on the hit TV show "Dragon's Den" which is a show where you pitch an investment idea to 5 wealthy investors. I happened to have an automated trading strategy that I wrote that was performing well and so I pitched my strategy to the dragons. I was able to capture 4 out of the 5 dragons for an investment in my strategy. You can check out my pitch here: http://www.youtube.com/watch?v=IQCQh_iYjTU.City TV Appearance: http://www.citytv.com/toronto/citynews/life/money/article/110490--budding-stock-market-guru-is-14-years-oldCBC National Appearance: http://www.cbc.ca/video/#/Shows/The_National/Money/ID=1362843764Toronto Star Article: http://www.thestar.com/business/investing/article/695971
Now that you know a bit about me, let me explain what this blog will be about. This blog will mostly be an outlet for my various views on the economy and financial markets through a global macro trading perspective. I will write about where I think markets will be heading, where the economy will be going, and how we can make money off it. I also currently have a twitter account under @JulianMarchese where I post quick thoughts and live trades! Follow up!
My main goal in this industry is to become a global macro hedge fund manager, while educating and helping people along the way. I hope you gain some knowledge from my posts, and hopefully make some money alongside with me!
Thanks and I hope you enjoy my blog! Let's get started shall we!
Julian Marchese
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