Tuesday, August 10, 2010

Late night snack?

I've banned my family from the house, and am delaying my attendance at this afternoon's festivities at the beach to sit in front of my screen for a couple of hours.  I think the Fed meeting announcement may offer the opportunity to pick up (or give away) a few quick dollars on a trade.

The run-up in stocks, run-down in Treasury yields, and decimation of the $ over the past weeks may have something to do with the expectation of QE part deax.  If there is no announcement of such this afternoon, we could see a nice reversal.  Even if there is an announcement, it could be a "buy the rumor, sell the news" type moment.

How to play it the possibility that there is no QEII announcement... a few possibilities.  One would be the buy the DX or calls on the DX.  Another might be to sell T-bonds or puts on T-bonds ...

Okay, thought about for a minute and bought some puts on T -bonds and sold short some AUD vs the USD.  I like the risk/reward here.
Update at 9 AM on Wednesday ...

Covered the AUD short at a 50 pip profit and the T-bond puts at a small loss.  Made enough to buy a a few dozen top-necks for dinner and then take the kids out for ice cream tonight!

Tuesday, August 3, 2010

The National

Sorry to my Southern friends, but this post is about the true National, not that other one where they play the Masters each year.   Yes, I'm talking about the National Golf Links of America.  Let's get my feelings about this place out early ...  I won't go so far as to say that The National is the finest spot on the planet for golf, but if there's a better one, I haven't been there.

Several years ago,  I had the opportunity to legitimately play a couple of rounds at The National's next door neighbor, Shinnecock Hills.  In order to protect the innocent, I won't name names - let's just say I gave some valuable advice on the direction of interest rates to an old Penn chum who was working at an IB (I want to say it was Salami Brothers, but I'm not positive), and he showed his gratitude by hooking me up with a member at Shinnecock.

A brief word about Shinnecock ... quite simply, its an American treasure.  There is no better US Open venue and its a great course for the average player.  I played 36 holes there over two days with the wind blowing and the course in US Open-like condition.  I would rate the two 80s I shot over those two days up there with any sub-70 round I ever shot as the finest golf I've ever played.  Shinnecock also inspired one of the funniest (and probably true) lines ever about golf - Lee Trevino's description of the 160 yard 11th as "the shortest par 5 in America".

After my 2nd round at Shinnecock, I took a right out the parking lot and continued on the narrow winding road leading away from the main drag of The Hamptons - Rt 27 - and towards the extremely private National Golf Links of America.  When I say extremely private, I mean it.  Check out google maps for that area - you'll find Shinnecock, you'll find Southampton Country Club, you won't find The National.

For a golfer, I cannot imagine a greater drive than the road leading into The National.  I wish I had the writing skills to describe the beauty, the privacy, the intense golfing spirit in the air as the road meanders among a couple of The National's holes before turning left and running up towards the parking lot and clubhouse.

As private as The National is, there are fine days in the summer when it probably doesn't have more than 20 rounds played on it (and some of those played by caddies/staff after they get off work).  The day I was there (a nice day in July, about 4 in the afternoon), the place was nearly deserted.  I quickly figured out that I could park in a spot just below the 2nd tee, walk a few feet up a hill onto the tee, and be on the course without anybody from the clubhouse being able to see me.  However, pressing business back in the real world prevented me from playing that day.  I walked around a few holes and then left.

 As beautiful as the drive into the course was, the drive out was gut-wrenching.  I had tears in my eyes leaving that place, determined to come back and play someday, but not positive I would ever get the chance.  Two years later, I would get that chance.

A friend of my brother's had a house in Bridgehampton and he invited all of us out there for a few days in July.  On my first afternoon there - a cool, overcast Wednesday - I drove right out to The National.  Again, the place was essentially deserted.  I like to start on #1 wherever possible, but this is an impossibility at The National.  Its tiny pro shop is located right next to the first tee.  Since the place gets so little play, each and every person walking by is sure to get noticed.

From my stopover 2 years earlier, I knew exactly what to do.  I parked right below the 2nd tee, skittered up the hill onto the tee, whacked a drive down the fairway, and was off onto the finest course I had ever seen.  I played 2 thru 18.  By the time I came off the 18th, there were a couple of people milling around, and I couldn't have cared less if I got caught at that point.  I walked onto the first tee, played #1 (a fabulous hole), walked down the hill from the 1st green, stuck my clubs in my car, and drove away.

I would very much recommend Golf Club Atlas' description of The National, from where all of the pictures on this post are taken.  I will end this post with the same great line from Bernard Darwin as Golf Club Atlas ended theirs ... "Those who think that it is the greatest golf course in the world may be right or wrong, but are certainly not to be accused of any intemperateness of judgment. The National Links is a truly great course; even as I write I feel my allegiance to Westward Ho! to Hoylake, to St. Andrews tottering to its fall.' Indeed.

Thursday, July 22, 2010

Stay the course

I appreciate the emails, but I just don't have a lot to say.  It is no longer a supposition.  The facts are becoming clear.  These facts have begun to be reflected in the interest rate markets, but have not yet taken hold of the currency markets.  Here they are ...

  • The Chinese real estate bubble is imploding
  • This will take the Aussie real estate bubble and the Aussie economy down with it
  • Aussie monetary policy makers have moved from a tightening stance to neutral
  • They will soon move to an easing stance
  • The purest way to play this has been and will continue to be purchasing Aussie 90 day bill futures
  • The additional way to play this will be by shorting the AUD, or by buying puts on the AUD
  • I have been long June 2011 and Sept 2011 90 day bill futures for a couple of months
  • I am also an owner of out-of-the-money Sept 10 and Dec 10 puts on the AUD/USD
  • I am also short the AUD/JPY
  • The 90 day bill futures have made a nice move higher, but can easily move another 200 basis points
  • The AUD is off of its Spring highs, but remains stubbornly tethered to the S&P 500 - essentially moving tick for tick with American stocks.  As long as the stock market hangs in there, the AUD appears to be going nowhere.  I am reminded of the GBP in the Spring and Summer of 2008.  It was clear that the jig was up in the UK during this period and that the GBP was on a train to $1.50-ville.  The only problem was that the currency markets don't always read the newspapers.  As late as mid July 2008, the GBP was still trading around $2.00 and my wife was on the verge of leaving me after enduring months of me screaming at my computer screen. Starting in late July, the markets began to get things right (though I still scream at my computer screen and my wife remains on the verge of leaving).

Levitating until late July 2008
(click on chart for clearer image)

AUD/USD in 2010
Stubborn fucker
(click on chart for clearer image)


Markets often take their time about things, and inertia is a powerful force.  Also, gubmint officials around the globe are scared shitless of losing their jobs and will bail like hell to prevent markets from reflecting reality.  Patience, grasshopper, patience.

Remember my Eurodollar call options - how many weeks and months did I have to sit with these things, while stocks zoomed and economies bounced?  Over time, reality won out - stocks stalled, and economies slowed once the steroids wore off.  Now, 0% rates in the US are in the process of being priced in all the way to Dec 2011 and beyond.

The Oz Trade is working, not as much and as fast as I would have hoped, but it is working.  I will continue to read everything, play lots of golf, enjoy my kids, and get ready to spend most of the rest of the summer at the beach (starting this coming Monday!).  The Oz Trade train has left the station.  All that is left is to find opportune times to add to my positions and wait, just wait.

Friday, July 9, 2010

LOL ... wut?

You can't make this shit up.

The ink had not yet figuratively dried on my last post (where I gloated about my recent gains and also predicted a coming significant setback to my account) when the Aussie dollar put in its exact bottom for the past few weeks and began to melt up to the tune of 4.5 cents over the next 72 hours.  In a similar vein, my Aussie 90 day bill futures put in their exact top and proceeded to give up about 20 points over the following 72 hours.  The move in the Aussie 90 day bills (where I have the most money at risk) was not nearly as significant as the move in the currency, but still, Mr. Market, can't I enjoy my winnings for at least a few hours?

Its one thing to prognosticate about this crap.  I suppose I will really be getting good at this game when I can cover my positions, and maybe even reverse them when I sense a strong countertrend move is coming.  Perhaps I ask too much of myself.

In any case, my main thesis and main position remains the same - Aussie short term rates are headed lower over the next year.  The 90 day bill futures have not fallen enough to entice me to add to my position.  As for the AUD, I believe it will follow Aussie rates down.  I remain an owner of out of the money puts on the AUD/USD.  These were so cheap that their expiration at zero would only cost my account a few basis points.

That said, I have to add that I'm beginning to have my doubts about the American Peso, I mean Dollar, in the run-up to the November elections.  We may have a Parliament of Whores in Washington, but they're not idiots.  There's a bad moon rising in this country and they know its about to sweep them out of power.  Every effort - fiscal and monetary - will be made to keep the economy held together with bailing wire for the next few months.  I don't know weather it will work or not, but I'm not sure I would sell any currency against the USD right now.  When I'm ready to add to my AUD shorts, it will be by shorting AUD/JPY.

Tuesday, July 6, 2010

The Oz Trade (update 1)

View The Oz Trade

What do you want me to say?

Let's strip away the fake modesty ... I'm smoking hot.

My June 11 and Sept 11 Aussie 90 day bill futures hit new highs tonight.  The move has been a nice one so far, but at this point the market has only gone from pricing in 100 basis points of tightening to zero.  I expect to see interest rate cuts being priced in soon.  These contracts have another 200 basis points of upside.

90 day bill futures in Oz
Just the start of a move

My AUD put options are up between 50% and 100% in about one week.  As the Aussie 90 day bill curve moves from flat to pricing in cuts, these puppies could double again ... easy.

As I mentioned in my last post, I also put some bids out there on deep OOM  Sept and Dec 30 year T-Bond options as well some June 11 Eurodollar options.  Only a few of the bids got hit and they've moved little if any in price.  I know I said I was only interested in these as a short term trade, but the more I think about it, that's not a good strategy.  Rather, these are options to put in a drawer for awhile.  If they hit, they'll pay off 10-fold or more.  In the more likely scenario that they don't hit, I'll have decreased my trading capital by a handful of basis points.

Having said all of this, I am aware that nothing I own (especially a winning position) moves in a straight line.  First, the mere fact that I am writing this cocky post means I'm setting my account up for a nice beatdown.  Second, my views are becoming or have even become consensus views.  Check out this apocalyptic piece from Ambrose Evans-Pritchard.  I don't want to suggest that AEP is part of the thundering herd of sheep ... let's just say news of the possible return of the Global Financial Crisis has made the papers - act accordingly.  I am not ready to close out any of my positions, but I have mentally prepared myself for a reversal in my good fortune - hopefully, I can stick to plan and add to my postions when the time is right.

I remain long June 11 and Sept 11 Aussie 90 day bill futures, long AUD Sept and Dec puts struck between 68 and 75,  long Sept 10 and Dec 10 UST-Bond puts struck between 100 and 115, and long June 11 Eurodollar puts struck between 98 and 98.25.

Tuesday, June 29, 2010

Learning to love the option

I played a brutal member-guest golf tournament in New England over the past few days - 18 holes Friday, 27 holes Saturday, 18 holes Sunday.   The long drive alone to and from the tourney gave me plenty of time to mull over my plans.

Up until my eurodollar call option trade of late 09/early 10, I don't think I had ever purchased options before.  This has been a big mistake.  While I'm proud that I've made money with my speculative trades over the years, in looking back I don't think I've made nearly what I should have made.

By holding outright positions in futures contracts or currencies, I have always exposed myself to the "noise" of the markets.  In 2008, believing that GBP was headed from $2.00 to $1.50 was easy enough.  Holding a leveraged outright short on GBP while it moved from $1.85 to $1.90 in the middle of its move down was not so easy.  I was forced to either get bounced out of the trade or hold a much smaller position that I would have liked.  Purchasing a $1.50 put on the GBP would have been a better idea.

Its pretty clear even to an options novice like myself that deep out of the money options are mispriced.  Options pricing models assume that prices move along a bell-shaped curve.  In reality, extreme prices are far more likely than the the models would show.  By now, everyone has heard of Black Swans and Fat Tails - these terms are referring to the greater than expected likelihood of extreme price moves.

I arrived back home on Monday morning determined to try and just use options to express my ideas for at least the next few months, with the first trade being puts on the Australian dollar.  While my Aussie 90 day bill futures continue to eke out new hights, the AUD has performed far stronger than I would have expected.  This won't last.  The Aussie economy is weakening and the AUD is going to come under serious pressure.  Should the GFC (Global Financial Crisis) return in any form, the AUD is going to zero (approximately).  To that end, I purchased some deep out-of-the-money Sept and Dec puts on the AUD yesterday.  I used a range of strikes, starting at 75 and down into the 60s (the AUD was trading around 87 and change).

The next trade is strictly short term ... in looking at Treasury yields and the Eurodollar curve, it seems that a new recession and short term rates at zero forever have been completely priced in.  Treasury and Eurodollar longs are going to need to see a brutally bad employment report on Friday to hang with their postions.  If the NFP isn't that bad, I think we could a see a nice bounce in rates.  This morning, I put some bids out there on out-of-the-money T-Bond and June 2011 Eurodollar puts - these could be easy doubles.  As I'm typing, the bids haven't been hit.  It looks like Treasuries are going to have a big day today - I expect to get filled at some point.

P.S.  For what its worth, I completely agree with the assessment that the economy is in the shitter and that the Fed stays at zero forever.  However, the rest of the market has now priced this in - the time is right for a short-term fade.

Tuesday, June 22, 2010

Joining the Crowd

This whole Yuan revaluation deal is one of these classic moments where everybody in the investment industry and blogosphere feels the need to comment in order to show how Byron Wien-ishly up on events they are.  Most go like this ...

The Chinese authorities have clearly become more confident of a global economic recovery.  Combine this with a desire to deflect criticism ahead of the G20 meeting, and the growing understanding of the need for the Chinese economy to become more integrated with the world, and the need for this revaluation becomes clear.  This ensures a soft landing for the Chinese economy and has the additional benefit of increasing the purchasing power of the average Chinese citizen, thus easing pressures of social unrest.  With heavy gold purchases expected this summer in India, Chinese authorities want to deflect rising tensions with their Indian counterparts ahead of what is likely to be an especially bad monsoon season.   As the ECB is well into its purchases of Greek, Spanish, and Irish bonds, the Chinese Central Bank wanted to send a clear signal that they will hold their proportion of Euro reserves at 18%.  Additionally, the Polish elections over the weekend gave a clear signal that historically high sunspot activity is going to make it essential for political leaders to assure that copper stockpiles in the export-dependent Guadong province remain high.   ...
This is clearly one of those opinions are like assholes, we've all got 'em moments.  Its all pablum.  If you want to read more of this crap, search out someone like Jim O'Neal.  Jim is a GS guy and has staked out a position as the Larry Kudlow of China ("a state-controlled economy is the best way to prosperity").  Maybe he's right, maybe he's not, but he makes Kudlow-ite Ned Riley look like Bernard Baruch.

As someone who is long the Aussie interest rate markets and planning to get short the Aussie currency, I have a great deal of interest about the direction of the Chinese economy, since China is the marginal bid in pretty much everything Australia produces.  I will humbly interject a couple of comments/questions into what has mostly been an absurd discussion:

  • Pretty much all of the punditry on the planet assumes that the Yuan must appreciate versus the dollar.  Given that, we can assume that a lot of money has been positioned for this appreciation.  It is well to remember that there are no one-way bets in this world.  Is it possible that the Yuan falls in value?  What would be the implications of that?  Since no one expects this, might there be some incredibly cheap options on a Yuan devaluation out there?  I plan on closely looking into this.  Watch this space.
  • Why is it that the same folks who decry the slightest bit of central planning in the US (omigod Obama wants to run the auto companies and health care, and Congress might actually regulate the banking system!!!) seem to believe that some Communist Party hacks in China can not only perfectly divine the direction of the global economy, but also pull a few levers and expertly direct the fate of their own 8 trillion dollar, billion person economy?
  • Why is that the equity prices, resource prices, and resource currencies have moved in a straight upward line over the past two weeks.  Is it possible that this announcement, like pretty much all other government announcements, found its way into the markets before it hit Bloomberg?
Before I go to bed tonight, I plan on re-reading Vic Niederhoffer's classic discussion of Delphic Oracles from Education of a Speculator.