The Sneak Attacker

I've moved

2010-12-15T20:35:00.002-05:00

Thanks for all of the emails since my last post. I apologize for stopping so suddenly without explanation. Unless I get a serious urge, I will not be posting here anymore. I have taken a writing job with a very exciting company - SeekingAlpha - where I am the Global Currents Editor. I've been there for about a month and am having a wonderful time. You can catch my writing here:

http://seekingalpha.com/currents/global

I started this blog about a year ago with my Trade of the Year - Dec 2010, Mar 2011, and Jun 2011 Eurodollar calls struck at 99, all purchased at prices ranging from 0.10 to 0.13. The Dec10s just went off the board somewhere around 0.75, as I expect the Mar11s and Jun11s will, making these 5 to 7 baggers. Naturally, I sold out of my positions sometime last Spring, making just about 3 times my money.

The other trade worth committing serous money to was The Oz Trade. This one was very profitable through the summer, but sunk back to break-even as China and Oz continue to motor ahead (this too will pass). I covered my position on this trade when I took the new job - not because I was required to, but because I don't think its wise to have a leveraged position on something I'll be writing about ... and I do believe that a crack-up in China and all the countries relying on China to be the marginal bid in everything they produce will be a story I will be covering in the next 18 months.

I'll see you over at SeekingAlpha.

Late night snack?

2010-08-10T14:00:00.004-04:00

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!

The National

2010-08-03T01:41:00.007-04:00

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.

Stay the course

2010-07-22T02:05:00.008-04:00

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).

GBP/USD

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.

LOL ... wut?

2010-07-09T02:49:00.007-04:00

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.

The Oz Trade (update 1)

2010-07-06T00:06:00.007-04:00

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.

Learning to love the option

2010-06-29T08:31:00.003-04:00

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.

Joining the Crowd

2010-06-22T02:46:00.003-04:00

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.

You don't say ...

2010-06-18T04:38:00.002-04:00

Remember the classic NYT piece from April after a two month run of stocks being up nearly every single day, Interest Rates Have Nowhere to Go But Up. Fast forward to now and we get, Treasury Bonds Defy Expectations from the FT. Turns out long term Treasuries have returned about 20% on an annualized basis thus far this year, while American equities are flat.

I think the FT ought to amend the title of that article to Treasury Bonds Defy Idiots' Expectations.

While I personally was not long longer-term Treasuries, I was long calls on Eurodollars that profited immensely as it became clear that the Fed was not jacking up rates any time soon. As that trade became nearly fully valued (in my opinion), I have exited that position and moved on to a trade with a similar thesis and greater upside, The Oz Trade.

I continue to be long June 2011 and Sept 2011 Aussie 90 day bank bill futures contracts. I plan on shorting the Aussie dollar soon as well. I would prefer to do this by buying put options on the AUD and am monitoring the pricing for these.

You say tomato, I say ... tomato?

2010-06-15T00:24:00.013-04:00

Otherwise known as We Live in a Binary World.

Why bother with analysis?

Just figure out where stocks are going

S&P 500 vs Australian Dollar

Click on chart to get a clearer image

S&P 500 vs Copper

Click on chart to get a clearer image

We live in a Binary World

2010-06-11T03:09:00.003-04:00

Never confuse genius with a bull market.

There doesn't seem to be an asset anywhere on the planet that doesn't take its cue from the direction of American equity prices. American equity prices often seem to take their cue from whatever news occurs overnight in Asia or Europe. Thus, my clearly sophisticated and brilliant analysis of money rates in Australia is worthless when the direction these rates seems to be solely determined by what happens between 3 and 4 each day in the American stock market, which apparently is determined by irrelevant (and most likely somewhat made-up) news such as the month-to-month change in Chinese export volumes.

News out of China (or Greece or Spain or Hungary) good = stocks up = interest rates up = currencies (non-US dollar) up = commodities up.

News out China (or Greece or Spain or Hungary) bad = stocks down = interest rates down = currencies (non-US dollar) down = commodities down.

Thus, while the Oz trade has been nicely profitable for the couple of weeks I've had it on, I have no illusions that I had somehow perfectly timed a change in policy coming out of the RBA. This trade is up because equity prices were down. End of story.

Now what I'm talking about here are short term movements. The key to trading in this environment is to try and pick an asset whose direction over a longer period of time will become a little less coordinated with the direction of stocks. I don't know about anybody else, but I haven't the slightest idea of what direction stocks are going. If every trade I make is dependent on where stocks go, then I might as well close my account.

This is why I'm so proud of my Eurodollar trade. I originally got into this trade in the summer of 2009, adding substantially to it around the New Year. It seemed as if each rally in stocks (and there were a lot of them) hammered the Eurodollars and pushed down my options, but over the course of several months, the value of these options just started to squeak out small gains eventually tripling in value before I finally sold out of them.

This leads me to one major conclusion ... that in this environment, options seem to be a far better way to express a trade idea - the value of options will mostly ignore much of the short term noise being produced by soon-to-be-forgotten news flow. Since options on Aussie 90 day bill futures are not available, I am stuck with owning them outright. To combat the short term noise, I am forced to hold a far smaller position that I could if options were available.

If I am going to go the options route, I do have put options on the Aussie dollar available to me. Sadly, with volatility so high lately, the price of these options are very high. I have not yet found any months or strikes that look attractive.

The price has turned up (even if you can't see it)

Lots of room still left on the upside

For the moment, I continue to be long June 2011 and Sept 2011 Aussie 90 day bank bill futures - currently a profitable position, but exceedingly vulnerable (in the short run!!!) to a rally in stocks. If any of these stock rallies last more than a day or two, I would expect a significant pullback in the price of these futures which I will use to add to the position. Watch this space.

The Canuck Trade

2010-06-01T08:02:00.002-04:00

View The Oz Trade

We've got our own Australia right here in this hemisphere. Its called Canada - a natural resource economy with a rollicking housing bubble.

I don't have time for a long post this morning, but the overnight rate in Canda is 0.25%. The market is expecting a series of rate hikes by the BoC to cool their economy, with a good expectation that the first hike comes today.

I am not necessarily of the opinion that the market is wrong here, but I think there is a good chance that the BoC does not move today. I bought some March 2011 BAX futures (the Canadian equivalent of the Eurodollar contract) this morning at 98.08. These contracts have already priced in more than 100 basis points of tightenening, so if the BoC does hike, I don't think they go down much. If the BoC doesn't move, they should pop nicely.

In other news, the RBA held off hiking rates at their meeting today.

----------------------------------------------------------------------------------------

update at 9:30 AM on June 1 ...

BoC hiked rates 25 basis points. The Mar2011 BAX contract popped big anyways. Just covered at 98.21 - a nice 13 point profit for a few minutes of work, and a good start to the week.

Canada is swimming in the same shit as the rest of the world. The hikes will stop soon. Remember, the ECB hiked rates and the Fed came very close to hiking rates in the summer of 2008.

The Oz Trade

2010-05-24T10:43:00.005-04:00

View Story of the Year (update 3)

From this point on, The Story of the Year and my resultant purchase of Aussie 90 day bank bill futures will be known as The Oz Trade.

Last week was pretty remarkable. It stared with me making my first purchases of June 2011 and Sept 2011 Aussie 90 day bank bills on Sunday and Monday nights. I was worried about buying into a sharply rising market ... I shouldn't have been. In the days following my purchases these contracts really took off - moving roughly 50 basis points in my favor within 72 hours, before giving back a few points on Friday's 15 minute bullshit rally in the US and the subsequent stock rally last night in Oz.

The question before us is whether this is March 2008 or September 2008. The difference being that even though it was clear things had completely fallen apart in March of 08, it didn't stop stocks, commodities, and economies from doing just fine for a few more months. By September of 08, things stopped being fine. I was short GBP/USD and GBP/JPY for most of 2008, and had a frustrating time of it that spring and summer knowing that things in the UK had fallen off of a cliff, but that it had not yest registered in the currency markets. By fall of 2008, it registered plenty.

It has also occurred to me that I have spent far too much time worrying about this trade. I have no problem trading currencies, but I am much more comfortable dealing with interest rate futures, so I tend to focus on that. However, if my thesis about Oz is correct, than the Australian Dollar is going rapidly towards zero. Instead of spending all of this time trying to figure out a way to buy options on 90 day bill futures, I could have just logged onto IB and shorted the AUD or bought puts on the AUD contract on the CME. I got definite tunnel vision on that one. I will be following the AUD and AUD put options closely now, and expect that I will augment The Oz Trade with some currency positions soon.

AUD vs USD
Keep it simple stupid

For anybody long Aussie bill futures (or short the AUD) here's an inspirational article. Its from an interview with Edward Chancellor. He's from Jeremy Grantham's group and was an early voice warning of credit and housing bubbles in the US and UK. He also wrote the outstanding Devil's Take the Hindmost: A History of Financial Speculation. Here's what he has to say about Australia ...

Housing market will implode, warns Edward Chancellor
By Katherine Jimenez
From: The Australian
May 03, 2010 6:06AM

AUSTRALIA is in the midst of an unsustainable housing bubble that could burst at any time, warns the man who predicted the global credit bust of 2007.

Edward Chancellor, of US investment management firm GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.

Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value - a once in 40-year event. "

If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably," he told The Australian.

He said prices would have to fall by more than a third to reach fair value - although some of this fall would be cushioned by income growth.

He described Australia's banking system as a "cartel" and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.

He attributed Australia's "luck" to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.

"My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom," he said.

"Those are the facts and you can't paper over them.

"In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.

"The problem is the bubble and that hasn't gone away."

A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.

"It's the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse," he said.

Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.

"We would see the Chinese demand for Australian commodities as being potentially vulnerable," Mr Chancellor said.

He said he expected the negative news in Australia to come from "the housing market falling under . . . the sheer weight of its overvaluation and lack of affordablity" and a "terms of trade shock".

Everyone referred to Australia as the lucky country, he said. "I think that's pretty apt."

However, "given the great growth in private sector credit and the vulnerability of the housing market, . . . Australia is not out of the woods. It hasn't even entered the woods." (my emphasis)

--------------------------------------------------------------------

In other news, the widening in the LIBOR/OIS spread has the makings of turning into a serious blowout. When I started buying Eurodollar calls, I figured my upside was 75 basis points - or a quintupling of my money. The move up in LIBOR has seriously challenged this thesis, so I unloaded the rest of my Eurodollar call positions last week in the low 30s. I tripled my money on the trade and I feel very good about the exit.

Story of the Year (update 3)

2010-05-18T22:48:00.006-04:00

View Story of the Year
View Story of the Year (update 1)
View Story of the Year (update 2)

I made my first purchases of Aussie 90 day bank bill futures over the past few days. For anyone who followed my original posts on this subject, you know that what I really wanted to do was buy OTM call options on these futures. It was and is my feeling that expected further rate increases in Oz are about disappear and then morph into rate cuts. These call options (say the June 2011 96 strike) stood to rise anywhere from 5 to 30 fold if the scenario I expect for Australia plays out.

I was successful in locating a broker who had floor access to the SFE, but then found out that there is essentially no volume in the options on this contract. Not wanting to own the futures outright, I put the trade on a shelf, but continued to follow the goings-on in Oz.

Over the past 3 weeks, the market has been "reassessing" its expectations for Australian monetary policy. What were once expectations for another 100 basis points of rate increases have been whittled down to 50, and dropping. I couldn't take watching this trade run away from me any more. Late Sunday night/early Monday morning, I bit the bullet and opened a long position in June 2011 Aussie bank bill futures. On Tuesday morning, I bought a few more contracts, this time the September 2011. Right away I'm up a few points, but really wouldn't mind seeing a 40 point pullback so I can put on a bigger position at lower prices.

Aussie bill futures ... round trip coming!

I'm sure there are others who have seen a trade they were interested in start to run away from them. At some point you have to get in there, if only to stop the pain. That's how I felt. I fully expect the markets to take me to the woodshed over this lack of discipline, but that's ok. I'm looking for a move of several hundred points over the coming months. I'm not going to worry about the next 40.

You can look at my old posts on this subject, but to quickly summarize:

Oz is basically a big mining pit with some lovely cities on the coast
The Oz economy is a major exporter of raw materials to China
The booming Chinese economy has been a large factor in the strong Aussie economy
The RBA has been hiking rates while other industrialized economies continue to sit on very low rates
As the infrastructure and housing manias melt away in China, this will cause the Aussie economy to slow
Oz has its own housing bubble complete with liar loans, no money down loans, idiotic gov't subsidies, and GSEs up to no good
Rate increases in Oz are taking effect as homeowners get squeezed by higher mortgage payments
The market expects further rate increases in Oz. These will not materialize and will instead turn into rate cuts. Aussie 90 day bank bill futures will soar.

As for the recent strong action in the 90 day bill futures, I attribute about half of the move to the collapse in Europe and half to the slowdown in China.

I've got nothing for you

2010-05-17T00:49:00.004-04:00

I wish I had more to say. I don't feel like I have anything terribly insightful to offer over the whole Greek/Euro thing other than to say that the only explanation still left that can explain the actions of our "leaders" on both sides of the Atlantic is that they are sociopaths. That is all. There are a zillion blogs out there that can discuss this in better detail than I. This doesn't mean I don't know all about the situation in excruciating detail. It just means that opinions are like assholes, we've all got 'em.

What I can do is continue to pound away on a trade that has made and will continue to make money. Folks, there are trillions and trillions of dollars of excess debt hanging over the heads of consumers, municipalities, states, and entire countries. Much of it will never and can never be repaid. Never. American money rates will not rise, indeed cannot rise for a very long time. You should set yourself up to profit from this by riding the yield curve - my preferred way is call options on Eurodollars anywhere from 9 months to 18 months out. You could accomplish much the same thing by owning Eurodollars outright, going even further out the curve by buying 5, 10, or 30 year Treasuries, or owning a stock like NLY.

I wouldn't buy or add to any existing position at the moment because the panic over Greece has pushed Eurodollars, Eurodollar calls, and Treasuries way up in the past 3 weeks. Wait for the next $1 trillion package to juice equities higher and Eurodollars lower before jumping into this trade. Take your time - this thing will be going on for years.

End of month housekeeping

2010-05-03T00:55:00.005-04:00

I took advantage of the break in the stock market on Friday to blow out of that POS VXX position at $20.75. A small loss, but a large lesson learned (actually re-learned for about the 100th time) ... making a trade just for the hell of it is a sure way to the poorhouse. I purchased VXX for no other reason other than the fact I was a bit bored after selling off half of my Eurodollar calls. After all, I had more than tripled my money in these calls in the space of a few months. Why not take a slice of those winnings and try to call the top of the stock market by purchasing VXX?

In more important news, my Eurodollar calls remain at about the same levels they were at when I unloaded half of the position. In an interesting twist, the tumult in Europe has widened the LIBOR/OIS spread. Thus, even though the Fed Funds rate remains unchanged, 3 month LIBOR was at around 0.40%, up about 15 basis points from its lows. Should LIBOR remain at these elevated levels, it would reduce the upside in these calls from 75 basis points to 60 basis points. Should LIBOR continue to blow out, these calls could go down in value even if the Fed does not raise rates. I alluded to this possibility in my original description of this trade. At this point, I'm not terribly worried. My bigger worry is that the Fed panics and jacks rates by 50 basis points this fall.

The bottom line is that I feel my thesis since late last year when I started this blog remains the same - the Fed will remain on hold for longer than the market has priced in. 99.00 calls on Dec 10, Mar 11, and Jun 11 contracts remain the best way to play this idea. Having locked in a windfall profit and unloaded half of the position, I'm comfortable sticking the other half in my bottom drawer, taking them out in a few months, and seeing if they have any value.

I'll just put in a little dig at the classic NYT article (Interest Rates Have Nowhere to Go But Up) I mentioned a couple of posts back. By my calculations, the 10 year Treasury rate has gone down by about 20 basis points since that little bit of brilliance was published. I'm not proclaiming victory yet, I just wanted to point it out.

Somewhat out of pocket

2010-04-23T08:20:00.000-04:00

I thank everyone for the emails encouraging me to post more often. There are a couple of reasons I haven't done much lately. First is that I've been busy with business, and the lovely spring weather means a good chunk of my free time is being spent on the golf course. The other reason is that there isn't a whole lot new under the sun. I didn't create this blog to comment on the daily occurrences in the markets or the economy. There are a lot of fantastic sites that do this much better that I ever could (some are listed on the sidebar). As I alluded to in my What's My Edge post, I do a lot of reading and studying and occasionally a decent trade idea pops out. Same with blog posts!

The Time is Getting Near

2010-04-12T09:28:00.001-04:00

According to the NYT, this is their most emailed story of the day ...

Interest Rates Have Nowhere to Go But Up

There are a few money shots in this article, but this quote will do nicely ...

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

I don't know Terry Belton, and I don't want to know him. I expect he's a perfectly fine fellow. However, maybe the NYT wants to call Mr. Belton and offer him a chance to revise and extend those 'magazine cover indicator-like' remarks.

I'm very close to committing a large portion of my liquid net worth on a bet that Mr. Belton will be shown as a complete fool over the next 12 months. Watch this space.

The most exciting returns are to be had from as asset class where those who know it best, love it least.

My Ni**er

2010-04-08T08:21:00.003-04:00

Re: Alan Greenspan

Being Jewish, I feel like I'm allowed to say this ... Won't that old, bureaucratic hebe just go away?

Here's some video of Jim Grant trashing the little bastard. Let's stop the talk about Alan Greenspan being some sort of free markets guy just because he palled around with Ayn Rand back in the day. That old pecker was as statist as they come - he would fit in just fine in the Soviet Politburo.

What's my edge?

2010-03-22T10:33:00.010-04:00

I don't see how you can buy IBM without knowing

what is happening in Malaysian Palm Oil

The quote above is taken from a Jim Rogers interview that I read in the mid-90s that had a huge influence on me. In Rogers, I sensed a man that spent his time learning all he could about history and current conditions. By intelligently combining this knowledge along with a healthy distrust of the credibility of politicians, central bankers, corporate chieftans, and crowd behavior, he was able to gain an edge on the markets.

By 1998, I had made a few dollars in business, and gotten to the point where I could think about taking some time away from the grind. What did I do? Travel the world? Work on my golf game? Buy a place at the beach? No, no, and no. Instead I spent the next 2 years buried in the stacks of Wharton's Lippincott Library with the goal of knowing as much about the world as Jim Rogers.

I opened an account with Lind-Waldock in July of 1999 and began speculating in Eurodollars, TBonds, Muni Bonds, JGBs, and Currencies. I made decent returns almost from the start. By the end of 2003, after 4+ years of an average return in the high double digits, I put my trading records into a neat presentation and began seeking out hedge funds or prop desks that were interested in bringing on some new talent.

I got a few responses to my inquiries, but things never went further. Why? The question I always got was "How do you do it?" or "What is your edge?" I didn't have an answer other than responding that "I am my edge." I don't have a system. I don't know from moving averages or resistance or support. I think stochastics is a really cool word, but I haven't the slightest idea what it means.

My edge is that I sit in a room by myself, talk to very few in the business, and read all that I can - from current events to Life Magazines from the 50s (did you know about the great bond mania of the mid-50s and the subsequent horrid collapse in the late 50s) to accounts of shipwrecks in Australia in the 1600s. From this, an occasional decent idea pops out of my head - maybe once a month, maybe once every six months. Like the leather-assed poker player folding hand after hand until a good one comes along, my edge is that I just won't play until things line up like I want them to. Try using that as your pitch to a prospective investor or employer!

To sum up, my search for a situation where I could apply my talents to a considerably higher account size went nowhere. I closed my trading account in early 2004, coinciding with the pregnancy of my wife (I lost my appetite to take risk). In 2007, I reopened my account (this time with Interactive Brokers). My timing was fortunate. I had a view of the world that happened to match exactly with what transpired. As I mentioned in my profile, I cruised nicely through 2007, and really did well in 2008 - catching some big chunks of the move down in the GBP as well as the collapse in COF (into 2009 on this one). My big idea since mid-09 has been the Eurodollar call options.

I humbly remain - in a room, occasionally at the library - reading, writing, thinking, and waiting for the next decent idea.

Come again?

2010-03-19T13:46:00.003-04:00

I'll certainly give these guys credit for a contrary opinion, but I'll happily take the other side of a bet that Fed Funds will be 1.75% at the end of the year and 5% by year's end in 2011.

RBS sees Fed hiking in September, not June

By Deborah Levine NEW YORK (Market Watch) -- RBS Securities now expects the Federal Reserve to begin raising interest rates in September, pushing back its forecast for a June increase in the central bank's target lending rate. The firm pointed to the Fed's monetary-policy setting committee's reiteration on Tuesday that rates would stay low for an extended period. "Given that 'extended period' is generally interpreted to be six months, the prospects for a June rate hike now look extremely dim," said Michelle Girard, an economist at RBS, in a note Friday. Still, once the Fed starts raising rates, it will be done aggressively -- in half-percentage point increases at the last three meetings of the year, according to RBS. That would take the fed funds rate to 1.75% from a range of zero to 0.25% currently. Rate hikes will continue in 2011, pushing borrowing costs to 5%, the firm said. Economists surveyed by MarketWatch expect, on average, that the first rate hike will come in the first quarter of 2011.

Trade for the New Year (update 5)

2010-03-18T13:39:00.004-04:00

View Trade for the New Year
View Trade for the New Year (update 1)
View Trade for the New Year (update 2)
View Trade for the New Year (update 3)
View Trade for the New Year (update 4)

There isn't much to report since the last post. The value of my Eurodollar calls have gone down by a small bit since I unloaded half of the position. The underlying Eurodollar contracts remain at their highs, while the call options are anywhere from 10%-20% below their highs.

This bit of frustration was one of the reasons I cut back on my position. Options are not the typical way I express an investment idea, so I only know enough about them to get me in trouble. However, the way I see it, in a typical option, as time marches on, the value of the option erodes. With these Eurodollar options, the passage of time ought to actually enhance their value - every day that goes by that the Fed does not raise rates is a good day. Over the past few weeks, the underlying Eurodollars have gone up about 35 basis points, but the value of the options haven't budged. Perhaps someone who knows a bit more about interest rate futures options can educate me.

I have no interest in adding back to my position at this point. I am still of the belief that a "rate hike scare" is coming this Spring. A couple of the reasons:

Census hiring will add several hundred thousand to payrolls over the coming quarter. Between this, seasonal adjustments, the Orwellian birth/death model, and an economy that is treading water, we could see a +500K print on a NFP report this Spring.

A huge chunk of the 2009 stimulus remains to be spent, and will be spent in the months leading up to the midterm election. Kudos to the Obama administration for playing its cards right - in DC its all about W's and L's, and this will help Obama's party in Novemeber. Sadly, like Mexico our government will spend wildly to paper things over and hold the economy together prior to an important election. Like Mexico, we will pay the price aferwards (more on that at another time)

If the Dec 99 calls should return to $0.30, the Mar 99's to $0.20, and the Jun 99's to $0.14, I expect to be adding to my position. If they don't, then I probably won't.

As for my VXX purchase, its down about 8% in 3+ trading sessions since I purchased - always a pleasant experience! Equity markets seem almost eerie right now. No volume and little action until after 3P.M. each day. It feels like were in the movie 2001 and the computers have taken over.

I would recommend a trip over to Victor Niederhoffer's site. Alex Castaldo of his group has been color coding each day in order to present a picutre of equity and bond movements. As I type, March shows exactly one red day (red or blue conveys a down day in stocks). Check out Feburary as well - not a lot of red or blue in the last 2 weeks of that month either

During this straight up period of the last 5 weeks, the DJIA is up nearly 10%, the NASDAQ nearly 15%. Alex, if you're reading, perhaps you could post the movement in equities only during the last hour of trading. My guess - the DJIA would be up 20% and the NAZZ up 30%. I try never to make stock market predictions, and have never taken a position in SP500 futures, but I can't help myself ... the stock market has lost its moorings. I continue to like VXX as a way to play a return to a sawtooth world.

I will add one other point - even as the overall market makes goes straight up and we're led to believe that the economy is improving, I find it noteworthy that my natural resource plays have stalled or turned lower. On the other hand, I own a company like Annaly, which depends upon continued low short term rates, and it is doing great. I've included Annaly's blog in my blogroll. I would also recommend their monthly commentraries. In addition to being a great company, Annaly has one of the best economics sites there is.

Knife catching abilities

2010-03-12T08:18:00.002-05:00

Let's hope I don't get the palm of my hand punctured. Purchased VXX @ 24.10 yesterday. Busy day today. More details over the weekend if I get a chance.

Feeling my bones

2010-03-10T13:18:00.005-05:00

Nothing like cutting back on or eliminating a position to clear the mind. While I still have a substantial position betting that the Fed stay on hold well into 2011, its a lot less substantial than it was a week ago. I'm sitting on nice gains, plenty of cash, and am focused on finding the next great trade (or doubling up on the one I already have).

Byron Wien.

Say the name slowly. Now, say it again. The man has such obvious intelligence. He is so erudite. His delivery is smooth. His contrarian ideas are seemingly brilliant. His pedigree is impeccable. He is a regular on Squawk Box, Bloomberg, and the investment conference circuit.

One problem though ... Wien is completely full of baloney.

I am going to attack Byron Wien here, but its more of an attack on what passes for professional Wall Street investment advice.

A friend passed along to me Wien's latest missive from Blackstone, where Wien is Vice Chairman for Blackstone Advisory Partners. It left me wondering - is it possible for a learned man to write several hundred words and not get even one thing right? Not one?

Let's start with the first sentence:

Everything seemed to go wrong in February.

Come again??? The DJIA was up around 5% in February. The NASDAQ was up around 9%.

Wien then spends a paragraph or two summarizing the conventional wisdom about some recent major news events - all the while phrasing everything as if he's the first person who ever thought about it ...

The Chinese may be pulling back on their Treasury purchases because of dissatisfaction with our position on certain foreign policy issues. They are upset that President Obama met with the Dalai Lama.

Groundbreaking stuff. Thanks.

Next up, a small blurb about the Fed's move to raise the discount rate that ends with this brilliance:

Federal Reserve Chairman Bernanke testified that he expects rates to remain low for a prolonged period but I think he will change his mind if the economy continues to strengthen.

Let me see if I can get my arms around this clearly complicated concept. Are you saying that Bernanke will keep rates low unless the economy strengthens, in which case he will then raise rates? Thanks for that crucial advice. It is greatly appreciated.

Except for one more example, I'm going to stop this exercise before my head explodes. This next one is important because it holds the key to successful speculation (as well as to why Wien and his ilk are horse's asses) ...

Confidence is key to the performance of the financial markets. When investors believe that economic growth can be sustained and the leadership in Washington is strong enough to pass constructive legislation, multiples are likely to expand. When uncertainty pervades the investment environment, investors are less willing to capitalize earnings generously.

Re-read this slowly. Put it to memory. Cut it out and put it on your bulletin board if necessary. You will never find a more wrong thing written. This is a George Costanza moment. If you want to be successful in this business, you must do and think the exact opposite of what Wien has written here. I ask you Byron - what was confidence like in March of 2009? Did investors believe that growth could be sustained in March 2009. Did they believe that leadership in Washington was strong enough to pass constructive legislation in 2009? No. Trouble is, March 2009 turned out to be possibly the greatest buying opportunity of our lifetimes.

As a matter of fact, in March 2010 there is plenty of confidence, investors are at least coming around to the idea that growth can be sustained, and there is far less uncertainty about the investment environment. According to Wien, we should be piling in now. Remember George Constanza - maybe its time to do the opposite.

I promised that would be the last quote, but I can't let Wien's final line pass wtihout comment:

Right now everyone seems to be betting against that view. Perhaps I’m guilty of wishful thinking but I’m not.

In this we see key #1 to being Byron - phrase every single statement you make as somehow going against the crowd. Exactly who is betting against your view, sir? Stocks are up 70% over the past year and have barely had a losing session in a month. The recession has now been declared over as of last summer.

More important is key #2 to being Byron. You see, for all of Wien's talk, his brilliant prose, his impressive rolodex, his omnipotent awareness of world events, the guy never makes a concrete recommendation. He's bullish on the economy, but worries the Chinese may pull the plug. He says Bernanke won't raise rates unless the economy keeps improving, in which case he will raise rates. I could go on, but the fingers tire.

This leads to something I promised myself when I started writing my thoughts on the markets. I will not turn into one of these guys. There are so many commentators, news aggregators, bloggers, etc. out there - many of them brilliant and whom I would not miss a word that they say. Many of them, like Byron Wien, harmful to your financial health. I will never be able to match what they do. What I will do, what I hope makes me different and even the slightest bit interesting to read, is to make my speculative positions an open book. I started this with my first post on the markets, and with my plan to purchase options on Aussie interest rate futures, and continued it when I wrote about getting out of half of my Eurodollar options last week. When I'm ready to fire again, I will let all know about the next big trade.

Back to Business

2010-03-08T12:14:00.009-05:00

I read an interesting article in Saturday's New York Times. The piece, written by Floyd Norris, one of the grand old men of business journalism, was entitled After Jerky Swings, Economy Begins to Look Nice and Boring. This line from an early paragraph captures the theme of the article:

Now, both economic and market indicators have returned

to what Warren G. Harding called “normalcy" ...

I don't want to pick on ol' Floyd here, but if I were teaching a course in successful speculation, this sort of thing would be Exhibit 1. To illustrate, let's go back almost exactly one year and check out Floyd's column of March 3, 2009, Steep Market Drop Highlights Despair Over Rescue Efforts. This ditty from an early paragraph captures the theme of this piece:

Losses cascaded from one market to the next as concern

spread that government efforts had not been enough

to stabilize troubled financial institutions or broader economies. ...

DJIA on March 3, 2009 = 6,763

DJIA on March 5, 2010 = 10,566

Get the point? The news is out. Invest or speculate accordingly.

This is the sort of thing I was writing/ranting about in my previous post, Trade For the New Year (update 4). Successful speculation requires a constant ability to read or hear an unending string of pablum like the above articles and go the other way. I often find it rewarding, both psychically and financially. In other words, Norris' article from this weekend, written after stocks have gone up 15 out of the last 19 trading sessions, and including a quote from Goldman Sachs chief stock pumper, Abby Cohen, is the sort of thing you want to see if you've got a large bet in play that says the economy will weaken.

However, at other times, the press of this sort of conventional wisdom literally overwhelms me to depressive levels. As I stated in the other post, I simply do not have the energy to fight this crap right now. I've got my profits on half of the position (I started with x and the position is now 3.2x). I'm going to read and relax until I get back to the point where I can laugh off this nonsense.

Trade for the New Year (update 4)

2010-03-04T22:32:00.010-05:00

View Trade for the New Year
View Trade for the New Year (update 1)
View Trade for the New Year (update 2)
View Trade for the New Year (update 3)

I sold off half of my Eurodollar calls this week. I probably should just dump them all. Speculation, even when I've got a winner, is a tough business for me. Quite frankly, the biggest reason I did so much selling this week is that I'm plain fucking tired. I'm tired of ignoring or arguing with the constant barrage of follow-the-crowd analysts, mindless pundits, and idiot FOMC hawks telling everyone of the certainty of higher rates. The cacophony of these voices literally overwhelmed me this week. You assholes win for now...

What follows are somewhat more logical reasons for cutting back my exposure to these call options:

The underlying Eurodollars for Dec 10, Mar 11, and Jun 11 all continue to make new highs, but the call options I own on these contracts have stagnated in price

Dec 10 Eurodollars ... higher highs

The whole world has heard Larry Summers' leak that tomorrow's NFP number will be an ugly one due to the February blizzards ... I smell a rat. If the number is weak, I expect the market will have already discounted this and the short end of the curve will sell off. On the other hand, perhaps Summers has learned a lesson from his old boss about leaking bad news - get it out early and make the leak a lot worse than reality. Perhaps the number won't be that bad at all. In either case, I think the short end gets whacked tomorrow.

The hawks on the FOMC, led by Thom Hoenig, are starting to gain some traction. Their mantra is that the Fed should tighten no matter what is going on in the economy. They are simply uncomfortable with the Fed Funds rate at 0%-0.25%. If unemployment flatlines for a few months and stocks and commodities continue to hold their own, I believe they will have the numbers to force a nominal tightening in rates by the middle of the summer. This tightening won't mean much, but would cause a big hurtin' on anybody long a boatload of Eurodollar call options.

Equity and bond prices (both the long end and short end) are both going up. This arrangement cannot last much longer. One of these markets is going to break down. It doesn't look like it will be equities. The stock market is starting to give off that "buy the dip" vibe of the mid to late 90s. There doesn't appear to be a force in the universe strong enough to make stocks go down in a significant manner. I think its the bond market that will diverge from the march higher.

Dec 10 Eurodollars vs DJIA

Something has to give

The plan going forward is to hope for a nice sell-off in Eurodollar futures and options over the coming weeks. At some point, I will take a look at putting back on a full position in these calls. This country remains mired in a deleveraging process that will take years, not quarters to come out of. Interest rates will remain low for way longer than is currently priced in. This doesn't mean that there can't be some nasty sell-offs in the short end of the curve. I think one is coming and I'm going to take my ball (or at least half of my ball) and play elsewhere for a little while.

Story of the Year (update 2)

2010-02-26T02:49:00.001-05:00

View Story of the Year

View Story of the Year (update 1)

I've been terribly busy lately, and unable to find time to write anything. However, I have received a couple of emails and just wanted to give an update on my Aussie 90 day bank bill trade ... there is no trade. The volume on the options I want to purchase is essentially zero. My broker has located a market-maker who stands ready to sell me whatever the hell I want. The only problem is who stands ready to buy them back from me when I want to sell.

The bottom line is that this trade isn't going to happen. I am still a firm believer in the story I laid out in my previous posts on this subject. I just need to find another way of expressing this idea through a trade. I don't think I'll find anything where the risk/reward is so enticing.

Story of the Year (update 1)

2010-02-14T02:02:00.012-05:00

View Story of the Year

The big news on Friday was that the Chinese authorities, in another of a series of small attempts to slow down their bubbly investment boom, raised bank reserve requirements. As I talked about in Story of the Year, I believe there is a significant slowdown coming in China, which will cause difficulties for the highly leveraged Australian economy. The best way to play this will be purchasing calls on Aussie interest rate futures. If currently predicted rate hikes turn into rate cuts, some of these calls will offer payoffs of 10:1 or greater.

As of yet, I have not pulled the trigger on the trade. I am immersing myself as much as possible in the daily news flow out of Austrailia. While the financial crisis and its reverberations continue to dominate the news in the States and Europe, the Aussies are dealing with strong iron ore demand and pricing, a buoyant economy, and a frothy real estate market.

Here are a few articles of interest:

RBA head, in a slap to Greenspan, says raising rates to combat asset inflation is an acceptable policy tool. Property prices in Melbourne up 20% last year.

No worries for the head of BHP. BHP is the planet's largest natural resource company. It essentially IS Australia. If its CEO, Marius Kloppers, is interested in advice from The Sneak Attacker, I would tell him that extrapolating the future from current and recently past conditions is the world's most common mistake. If anyone is put off by purchasing deep out of the money calls on Aussie interest rates, just short BHP instead.

Memo to Kloppers:
Past Performance is no Guarantee of Future Results

These next two fall in the Time Capsule from the US circa 2005 category:

VicUrban is selling properties close to the $1 million range. ($1M Aussie is roughly equal to $880K American). VicUrban is a developer owned by the State of Victoria charged with creating affordable housing - think Fannie Mae if it was allowed in the real estate development business.

No money down - no problem. From the website ... This home loan product allows you to borrow up to 95% of the properties value without the need to demonstrate your 5% deposit as genuine savings (their emphasis and their bad grammer). Translation: its just fine to take a credit card cash advance as your deposit - No Money Down!

This one is about China ... as clear and succinct job of describing the mania as I've seen:

Unsustainable.

Trade for the New Year (update 3)

2010-02-07T00:28:00.006-05:00

View Trade for the New Year

View Trade for the New Year (update 1)

View Trade for the New Year (update 2)

I make two types of trades:

1. A trade that loses money
2. A trade that I make with far too small size.

My Eurodollar options are clearly headed for option #2. The move in prices since the New Year has produced windfall profits and left me banging my head against the wall for not taking a position 10X larger than I did.

If anyone is thinking of initiating a long position in these calls, you've missed the boat. While I believe they have a good deal further to run, the risk/reward is no longer enticing. Take the March 11 99.00 calls, for instance. They are now selling in the low 30s, compared to about 12 when I initiated the position. I still think the Fed does nothing and that these babies go off the board next year at 75. This will be a six-fold gain from my initial position. However, anyone getting into the trade now will realize only a little more than a double - a nice move, but not nearly enough potential reward for the risk you are taking. As much of a grasp as we think we have on the future, the fact remains that it is unknowable. The only way to get a respectable risk/reward would be to go out all of the way to the Dec 11 options. I might very well be doing this myself at some point. However, I'm not yet willing to wager that the Fed stays on hold all the way through 2011. Sorry. If you've missed this trade, or like me, took too small of a position, its too late to do anything about it ... time to start thinking abou the next big thing.

As I laid out in Story of the Year, the next big trade is going to be the crack-up in China, and the best risk/reward way to play this will be purchasing out-of-the-money call options on Australian 90 day interest rate futures. I expect to have an a position initiated by the end of next week.

Story of the Year

2010-02-04T01:40:00.010-05:00

On Tuesday, the Reserve Bank of Australia (RBA) shocked the financial world when it left its policy rate at 3.75%. 20 out of 20 economists surveyed by Bloomberg had expected an increase of 25 basis points to 4.00%. Not even one surveyed economist or institution predicted that there would be no change in rates.

Why does this matter? More than any other major economy, Australia is highly leveraged to the Chinese economy. Australia is a major resource producer. Much of the copper, iron ore, and aluminum that China needs to build empty shopping malls, office parks, skyscrapers, and condos comes from Australia. As the Chinese economy boomed in 2009, it pulled Australia along for the ride - thus allowing the Aussies to exit the global slowdown far ahead of the other major industrialized economies. While other central banks continue to sit on record low interest rates, the RBA has been hiking rates during the 2nd half of 2009, and was expected to continue hiking at the meeting last Tuesday.

The boom in China has helped mask underlying problems in the Aussie economy - all of which will be very familiar to Westerners ... namely, a massive housing bubble egged along by idiotic government subsidies and a highly leveraged consumer.

I am putting together the following thesis:

At the start of 2009, the Chinese began a MASSIVE stimulus program - essentially forcing their banks to "just say yes" to pretty much any loan applicant. This allowed what had simply been a run-of-the-mill unprecedented and unsustainable investment boom to continue at an even greater magnitude throughout 2009 and into 2010.

At the start of 2010, the Chinese are making a number of moves to rein in this stimulus - including raising interest rates and restricting lending.

The Australian economy, pushed along by the 2009 boom in China, will be restrained by the 2010 slowdown in China.

Interest rate markets in Australia have priced in several further rate hikes over the coming 12-18 months. If the Chinese economy slows as I expect, Australia will slow. These interest rate hikes will not materialize.

A slowing Chinese and slowing Australian economy is about the best outcome. More likely is that the insane boom in China becomes a bust, and that Australia experiences a housing/credit bust similar to what the US, UK, Spain, Ireland, ... experienced in 2008/09. Those expected interest rate hikes will not only fail to materialize, they will be transformed into significant interest rate cuts.

Out-of-the-money call options on Australian 90 Day Bank Bills (the Aussie equivalent to Eurodollars) offer the best risk/reward play on this scenario. If I am correct, these could pay off at somewhere between 10 and 20 times my money.

Its possible and maybe even probable that the RBA's failure to hike rates on Tuesday was nothing more than a pause and that rate hikes will continue at their next meeting. However, I am willing to bet that the RBA is more than a bit nervous about the strain higher rates is putting on the highly leveraged Aussie homeowner as well as the coming slowdown/bust in China.

As time permits, I will hash out these ideas with a little more detail. In the meantime, I am familiarizing myself with the Sydney Futures Exchange and making sure my broker is set-up to properly execute these trades for me.

Related links:
Hugh Hendry in China

Massacre at Winged Foot

2010-01-29T11:39:00.013-05:00

View part one of this post

The title of this post does not refer to my experience at Winged Foot, nor to the Phil Mickelson debacle in 2005, but to the classic Dick Schaap book about the 1974 US Open won by Hale Irwin. I must have read this book one hundred times as a kid. Before writing this post, I searched for the book around my house to refresh myself, but couldn't find it - another gem lost over the years.

I started my round at Winged Foot (West) on the 11th hole, a mellow (for Winged Foot) medium length par 4. I had been working on a drill lately and was in that sweet spot where I was striping it nearly every time. The drill was to get in my address position, pre-set my wrist cock, and then simply turn my shoulders to complete the backswing. I had hit thousands of balls on the range this way, and had gotten so comfortable with it that I began actually doing the drill out on the course.

After a 3 hour drive, with no stretching, zero warm-up, and nary a practice swing, I unleash one of these bizarre swings with my driver from the 11th tee of Winged Foot, and pound it 280 right down the middle. I pre-cock swing a PW into the center of the green, and 2 putts later I'm onto the course at Winged Foot with a par.

Winged Foot is a fabulous course and probably the most difficult track I've ever played. Most of the difficulty lies in the green complexes - the most severe I've ever seen. The greens are much smaller than what TV viewing would lead you to expect, all have serious slopes and undulations, and seem to fall off steeply on every side. Thus, even a slight miss of a green leaves you with an uphill chip/pitch to a green sloping away from you. Nearly every greenside bunker lie leaves you well below the surface of the green.

The 12th hole is a super par 5. I remember it as kind of a double-dogleg and a lot longer than what it said on the card - 535 yards from the tips. I was a pretty long hitter in those days and wasn't anywhere near a spot where I could go for it in two ... at this point, I'd like to digress a bit and talk about professional golf for a minute ...

After playing Winged Foot, the next time I saw the course was on TV when it hosted the 1997 PGA Championship. Two things stand out about that tourney. The first was seeing Davis Love (the eventual winner) casually knock it on #12 in two with Driver and a six-iron! The second was the winning score. Love shot 66-71-66-66 for 269, 11 under par ... I'm not a good enough writer to convey the difficulty of this course on a typical Sunday afternoon. I can't even imagine how much harder it gets if you overlay a major championship setup on it. 269 is simply unimaginable.

Philadelphia native Tom Coyne wrote a wonderful book called Paper Tiger about his quest to turn himself from a run-of-the-mill decent club golfer into a Tour professional. Perhaps the book's most brilliant passage begins with Coyne describing the perfect, almost surgically precise divots made by a group of mini-tour players warming up for a competitive round. This leads into Coyne's description of the Pyramid of Golf's Greatness that he is trying to climb - the bottom of the pyramid being the talented club golfer. At each step up the pyramid, Coyne points out the subtle but ultimately wide differences in skill necessary to advance to the next level. Reflecting on the astonishing abilities possesed by the few golfers sitting at the peak of the pyramid, Coyne advises the PGA Tour to amend its slogan from These guys are good to These guys are good. How good? You've got no fucking idea.

269 at Winged Foot? No fucking idea.

Back to my round ...

I pulled my 3rd shot to the 12th green into the deepest greenside bunker I'd ever been in. The flag, maybe 20 feet beyond the lip of the bunker wasn't even close to visible. I opened up my SW, pulled my hands way back behind the ball, and swung as hard as I could, popping the ball nearly straight up in the air and just over the lip of the trap. The next noise I heard was the clank of the ball hitting the flagstick. And then ... clapping. Clapping? I got out of the bunker and made my way back to sea level. There stood a group of members who had just witnessed my brilliant stroke.

It turns out that the final of the Club Championship was being contested on another part of the course. These guys had been out following the action, were headed back to the clubhouse, and just happened to be walking past the 12th green. We exchanged a few pleasantries, I tapped in for my par, and all of us continued on our way.

I completed the rest of the front 9 without incident other than a continued string of excellent shots using my pre-set wrist cock. The most memorable strokes were two beautifully struck 3-irons. The first was a laser beam to about 15 feet on the long par 3 13th (made par). The next was another rope from the 16th fairway to about 6 feet (made the birdie) . By the time I completed the 18th hole, there weren't many folks around the clubhouse. I just walked from 18 green over to the 1st tee and continued my round.

By the time I finished number 9, it was still light but well into the evening, and the place was nearly deserted. I stolled past the clubhouse over to the 10th tee, knocked a 6-iron onto the green, two-putted for par, and walked through the pines right to my car. Off for a shower, a nice dinner, and then a drive the next day with my sister up to Boston and my appointment with The Country Club.

Future post - my round at The Country Club.

Related links:
Part 1 of this post: Back to Back and Belly to Belly

The Beard

2010-01-26T16:10:00.007-05:00

On Friday afternoon, it appeared that Ben Bernanke would be the required sacrifice necessary to atone for the events leading up to the disastrous Massachusetts election the previous Tuesday (disastrous for some, at least). Cowardly Senators, worried about their own political mortality, suddenly began having problems with Chairman Ben.

By Saturday morning, the White House and Senate Leadership had "gotten their minds right" and signaled their strong support for Bernanke's confirmation, thus leaving the vultures looking for the next scalp - probably Tim Geithner who may get served up at this week's hearings on the cover-ups relating to the AIG bailout.

Bernanke has made forecasting error after forecasting error and mistake after mistake for the entirety of his time in public service (probably while he was at Princeton too). He was worried about deflation and talking about dropping money out of helicopters in 2002 when, in fact, we were in the midst of one of the great inflations of all time (inflation is not always confined to the CPI; in the 70's it was CPI inflation, in the 80s, it was junk bond prices, in the 90s, it was internet and telco stocks, in the 00's, it was housing prices and credit - all are the result of too much money in the system). In 2005, he thought the fundamentals justified a 25% increase in housing prices over the previous 2 years. In 2006, he saw no coming problems in housing. In 2007, he thought the bust-up in real estate was no more than a small dip, easily contained. In 2008, he at least acknowledged the crack-up in housing, but didn't think its effects would harm the rest of the economy. More shockingly, he shows zero understanding of his or the Fed's role in the credit and housing bubble. In most businesses that I'm aware of, this kind of track record combined with a failure to acknowledge said screw-ups gets you fired. In government, this gets you promoted to the head of the department and maybe even your picture on the cover of Time Magazine.

Will firing Bernanke make much difference to the economy? Probably not, but that's not the point. Do I have a suitable replacement in mind once Bernanke goes? No, but that's not the point either. The point is that over time, the nature of our Country changes because of the character of our leaders. When we not only do not fire, but actually celebrate the sort of incompetence displayed by Bernanke and other government officials, what right do we have to be upset when their actions continue to harm our society?

The Beard had 100's or even 1,000's of economists at his disposal during his years at the White House and then the Fed, yet has never come close to getting anything right. When confronted with this litany of errors, he orders his cadre of economists and statisticians to prepare him a speech absolving him and his institution of any responsibility. No Harry Truman "buck stops here" from Ben. Instead he sounds like a Soviet commissar, backed by lots of charts and regression analysis, blaming the millions of starvation deaths in the Ukraine in the 30s on bad weather.

There seems little doubt that Bernanke has enough votes to survive. Seeing that he's likely to get at least 30-40% of the Senate voting against him, Ben ought to withdraw his name from consideration. Sadly in DC, its W's and L's that matter, not doing the right thing.

Trade for the New Year (update 2)

2010-01-25T11:26:00.015-05:00

View Trade for the New Year

View Trade for the New Year (update 1)

Weaker economic news combined with a sizable break in the stock market propelled my Eurodollar calls higher over the last 2 weeks. The Dec10 calls I purchased this summer have now tripled in value. The Mar11 calls I purchased at nearly the same time have more than doubled in value. The Jun11 calls I purchased right around the New Year are higher by more than 50%. So far, a very successful trade that threatens to become a monster winner. I will stick by my thesis that our over-indebted economy remains stuck in a delevereging process that will keep growth sluggish and interest rates miniscule for some time. I remain humbly long these calls.

What could change my mind about the economy? Well, last Saturday night in suburban Philadelphia, for one ... my wife and I were bringing the boys (5 yo) to PF Chang's at Plymouth Meeting Mall for dinner with some of the in-laws. Lest anyone get the wrong impression, I hate malls in general, despise Plymouth Meeting Mall in particular, and consider it my life's work to avoid chain/theme restaurants - other than that, it seemed like the plan for a fun time. I could have easily opted out, but I had promised the boys I would take them to the Superhero Store (its really Comics and More, but that's what my kids call it) in the Mall as well as a couple of other guy-type places. Plus, we had received a Chang's gift card for Xmas in 2008 - assuming the card hadn't expired, at least the meal would be free.

On the way down to the Mall, we called to get on the list for a table ... "no problem" they say, its a 2 hour wait! WTF! A 2 hour wait to eat at some horrid chain restaurant on a dreadful mid-winter Saturday night? That's not the kind of recession Grandpa used to talk about.

So we get to the Mall and my wife drops me and the boys off so she can search out another craptacular mall-type place where the family can eat. I give her one instruction - anyplace but California Pizza Kitchen. There are shithole chain restaurants and then there are dogfood factories with bad atmosphere to boot. I got shanghaied into eating at a CPK in Baltimore on Mother's Day in 2009, and it was one of the worst meals of my life.

Say the name of the place slowly - California Pizza Kitchen. Think about that. Why the hell would anybody consider eating at a place with that name? Toss in the fact that we're in Philadelphia - you can't piss in any direction without hitting an outstanding, hole-in-the-wall, family-owned Italian/pizza joint. You live in Scottsdale freaking Arizona? Fine. Go to CPK and chow down on some sort of half-assed, sun-dried pasta type dish.

You can guess what happens next. My wife comes charging into the Superhero Store with the great news that we've got a reservation at CPK in 15 minutes. "Not with me you don't," I tell her. At which point she grabs the kids, throws me the car keys, tells me she hates me, and marches off to get a Pineapple Pizza or whatever the fuck they serve in that joint.

Seeing as I've got an hour plus on my hands, I get in the car and head up the road to Phil's Tavern to watch the hoops game between NC State and my beloved Maryland Terps, suck down a couple of beers, and grab some crab cakes and a plate of their fabulous wings. Phil's is a classic bar/restaurant - great food, great pub atmosphere, and a massive menu with even bigger portions. Located within 5 miles of about half-a-dozen outstanding golf courses, its kind of an unofficial 19th hole. You're pretty much guaranteed to see a bunch of golfers, caddies, and pro shop staff from local clubs any time you're in there.

Phil's was packed as well. Parking was only available in the overflow lot across the street. There was a long line of folks waiting for a table, and the bar area where I was headed was standing room only. Again, this isn't looking like Grandpa's recession. Being a singleton, I was able to grab a bar seat after just a couple of minutes, devour some delicious crab cakes (never got the wings), put away 3 Sierra Nevadas, catch the 2nd half of the Terps game (MD destroyed NCS), and make it back to the mall with plenty of time to pick up the family. Which brings me to part 3 of 'its not Grandpa's recession', the Whole Foods store at Plymouth Meeting Mall.

Since I rarely go the mall, I had never been to that Whole Foods location. There are some aspects of Whole Foods that I like, so still having a few minutes, I decided to check it out. At this point, its now 8 o'clock on Saturday night ... and PACKED. There wasn't a parking space available within several hundred yards of the store's entrance. Peeking from my car through the storefront, I could see the snaking lines at all of the registers.

After getting home and sending the wife and kids off to sleep, I went back downstairs to watch the Duke/Clemson game on ESPN, but couldn't enjoy it - not because the hated Dookies were winning, but because of what I witnessed earlier that night. Is my entire trading thesis wrong? Should I blow out of my Eurodollar position on Monday morning? What kind of poor economy is it where there are 2 hour waits for a table at Chang's, packed crowds at Phil's, and a seething mass of humanity at 8 o'clock on a Saturday night at a supermarket often known as Whole Paycheck?

This illustrates the difficulty of figuring the plight of the economy. Yes, Chang's has a long wait - that's what we can see. What we can't see is whether every set of diners is ordering a couple of less drinks, one less appetizer, skipping desert, and leaving 15% for a tip instead of 20% ... over time a disaster for the owners and staff of the restaurant.

My conclusion ... Saturday night is Saturday night - people still like to go out to eat (or, apparently, grocery shop at Whole Foods). They just spend a hair less - enough to make the difference between robust growth and sluggishness.

As for California Pizza Kitchen, recessions are good for one thing - winnowing out and destroying the crap businesses. I think it was Dan Jenkins who said (or at a minimum stole the line) "what this country needs is a good Depression". Here's to a little less chain-i-zation of America and getting back to patronizing the true entrepreneurs in our own neighborhoods.

Once again, I remain humbly long Eurodollar calls.

Postscript:
I hope that I did not give the impression that I begrudge Phil's Tavern their success in these difficult times. Nothing could be further from the truth. Phil's is a wonderful place. I've been going there for years and the place has been crowded through good times and bad - great atmosphere, lots of local flavor, wonderful service, and delicious food.

Related links:
Trade for the New Year
Trade for the New Year (update 1)
Eurodollar Options at the CME
Phil's Tavern

A note about my early posts

2010-01-21T09:45:00.002-05:00

This blog is about a month old and I have received a few emails about it. I want to thank everyone for reading and for the complimentary comments.

One common thread running through the comments is that folks are interested in better descriptions and more pics of these amazing courses. I will certainly attempt more of that. However, my goal was to spend more time talking about the nature of the clubs and my adventures in sneaking onto them. Also, most of my work was done in the days before digital photography - I never had a camera with me! For those interested in more of a hole by hole account of the finer courses, I would heartily recommend two fantastic sites (I'm sure there are more):

Playing the Top 100 Courses - as opposed to me, this guy actually gets on these courses in a legit fashion. Not having to worry about the Sneak, he takes his time, takes lots of pictures, and provides a great description of the courses. One of my favorite sites.

Golf Club Atlas - a site run by Ran Morrissett and Ben Cowan-Dewar. Individual contributors are allowed to present their own descriptions and pictures of the great courses of the world. These folks really take their time presenting each course. Great stuff for the architecture buff.

As for the financial markets and speculative posts, I've gotten a few emails about that as well. I will post here what I have told all the emailers ... Do not try this at home unless you feel that you have plenty of experience in the futures or options or both markets. You can lose all of your money. Hmmm ... now that I think about it, you can lose all of your money with Citibank ... forget that advice - open up a futures brokerage account and fire away!

Getting kicked off of Merion

2010-01-19T11:58:00.017-05:00

I'm pretty sure Merion played a significant role in why I chose Penn as my college. In 1981, the summer before my Senior year in high school (I grew up in the DC suburbs), the US Open was played at Merion.

ABC had only recently begun 18 hole coverage of the US Open, making it the only golf tourney in the world to get such treatment. Jim Mckay was the anchor, with Dave Marr and Peter Allis providing color, and Bob Rosburg out on the course - Hall of Fame material all around! ABC would always start each telecast with a rousing preview of the days events, narrarated by Jim Mckay. Mckay had such a great, dramatic voice - what a loss not to have him around anymore (as well as Marr and Rossie). Merion and Mckay worked their magic on me that week. I was transfixed by the course, and didn't miss a minute of the coverage.

The preview segment for the final round in 1981 began with a plane/helicopter view of Center City Philadelphia and then traveled straight west out Haverford Avenue a few miles until on top of Merion. As the picture unfolded, Mckay was grandly describing the trek out to the Main Line (this is what the western burbs of Phildelphia are known as). It was at that point that I realized that even though Penn was a city campus, it was literally a 5 or 6 mile straight line west that would lead to the sacred grounds of Merion. The thought got planted - I could go to Penn and just quickly bop out to Merion for a round whenever I felt like it.

As it turned out, I didn't get a chance to play Merion until my junior year at Penn. For whatever reason, the golf team never played there during my first two years, and my parents would not allow me a car at school until my third year. I needed a car ... Rule #1: don't try to sneak on these places by walking up the driveway to the club with your golf bag slung over your shoulder.

Merion (East Course) is truly one of the wonders of the golfing world. The course is built on a small, fairly unremarkable piece of parkland. I can't think of another course that routinely makes the list of the Top 10 or 20 in the world, that sits on such an undramatic property. The architect who gave us Merion was the brilliant Hugh Wilson. Wilson was actually an insurance man who had an interest in architecture. As prep for creating Merion, he traveled across the pond and spent a good deal of time studying the great courses of the British Isles. Sadly, Wilson died a very young man, and left us with only Merion East, Merion West (a short, quirky course with several outstanding holes), and Cobbs Creek (a once outstanding public course just outside the city, raped by overplay and poor maintenance, but making a comeback, I'm told). I'm sure Wilson at least had a hand in a few other Philadelphia area tracks (including Pine Valley), but his legacy basically resides in those 3 courses.

I snuck onto Merion East for the first time on a Monday afternoon just before fall term for my Junior year began. It would be the first of dozens and dozens of times I would play Merion East and Merion West. I just want to talk about the East course in this post. Merion West, located a half mile down the street from the main club, deserves its own post describing the course as well as how I snuck onto it.

Mondays are caddie and staff day at the finer clubs. The club is closed to the members, but caddies and the maintenance crew are allowed to play, thus making Mondays a great time (but absolutely not the only time) to sneak on - its usually no more difficult than pulling your clubs out of the trunk and walking onto the first tee.

However, golf is played 7 days a week, so here is the non-Monday routine for getting on the East Course at Merion:

Arrive in the mid-late afternoon or early evening.

There is only one parking lot. Its sits on low ground, down a slope from the 18th fairway and below the clubhouse.

Take the steps leading up towards the clubhouse. The top step unloads right near the clubhouse and golf locker doors and a very small, rarely used practice putting green - lots of folks milling about, often assistant pro and caddiemaster types whose job it is to recognize and provide tip-top service to each person. In order to avoid a chance at face recognition (or non-recognition!), I would always come off the steps pulling my putter out of the bag and reaching for golf balls from the bag pocket. This is important because the 1st tee is only a few steps away at this point. By pulling the putter and balls out as I am walking, anybody looking at me would assume I am headed to the very large practice putting green that sits on the other side of the first tee, and about 40 yards from the clubhouse - which is just where I am headed.

Enjoy putting, chipping, and a few bunker shots on the fabulous practice green, while waiting for both the first tee and first fairway to be clear - very important, since when I get on the tee I want to be able to hit and get off of it right away. By putting around for anywhere from 10 to 45 minutes, I have now become part of the scenery ... I'm as good as on the course.

Head over to the first tee. By arriving at the first tee from the practice green, I have avoided walking alongside the clubhouse or the porch which sits alongside the first tee. This famous veranda usually has quite a few members enjoying a post-round drink and gazing out at the first tee action on a lovely summer afternoon. I am a back tee player, but make an exception for the 1st at Merion. The entire tee sits along the veranda, but gets very narrow and really close to the porch at the blue tees. Anybody teeing off the tips of number 1 would be standing no more than 8 or 10 feet away from a table of blue bloods throwing back Highballs. Up at the white markers, the tee widens out quite a bit and angles a little away from the porch, thus allowing 10 to 15 yards of distance between me and the members.

Tee it up, hit, and giddy up down the first fairway - all the time keeping in mind John Wooden's advice to "be quick, but don't be in a hurry".

One quirk of Merion is that the great par 3 13th hole comes back below and across the entrance driveway from the clubhouse. You have to walk back across the driveway, across the fairway in front of the 1st tee, and past the large practice green to get to the 14th tee.

Enjoy 18 of the finest holes in the sport.

OK, now back to the title of the thread. Let's not dwell on the many times I've enjoyed Merion. I'd like to share the story of the one time I actually got kicked out of there.

Several years after college, by now completely comfortable at Merion, I played a round on the East course on an overcast, drizzly Monday afternoon. The place was mostly deserted while I played the round and totally empty by the time I finished. I wanted to work on a few swing thoughts, so I drove over to Merion's driving range. The range is located off to the side of the 16th tee - too far to walk to from the clubhouse. I got in my car and drove around the course, parking in the range's lot. Being a Monday, the range was also closed. However, there are usually plenty of unpicked balls out in the range's field, so I headed out there, grabbed a bunch, and started hitting.

A half hour into my practice session, a fellow drove up to the parking lot, got out and started walking over. I guess from a distance he thought he recognized me, because he had a big smile on his face and was in the middle of a, "hey! how ya doing!" when the smile all of a sudden turned into an angry frown, and he said, "who are you?". I quickly recognized this guy as Bill Kittleman, the head pro at Merion. What he was doing at the range on a drizzly Monday afternoon, I have no idea.

Knowing who I was talking to, and KNOWING THAT HE KNEW I wasn't a member, I didn't even think about feigning membership. I just said my name was Steve Burke (fake name I always used) I lived in the neighborhood, I was a member at Philadelphia Country Club, and wanted to hit a few balls without making the drive over to Gladwyne (where Phila CC was). Well ... I've never seen a man's head turn so beet red with anger. Despite the fact that he clearly wanted to either punch me out or call the Lower Merion cops to lock me up, or both, Kittleman kept his cool and just told me to get the hell out of there. As I high-tailed it back to my car, I heard him muttering that he was going to get on the horn to "Tim" (head pro at Phila CC), and let him know about what had just transpired. Amazingly, Kittleman had bought my story of being a member at Philadelphia CC. The bottom line is that I got nailed. Kittleman was furious, but the man was also a gentleman and let me off a lot easier than he had to.

That was the only time I ever got kicked out of Merion and one of very few times I've ever been kicked out of anywhere. However, I did have a run-in with Kittleman a year or two later. More in another post.

Related links:
Phildelphian Jim Finegan's hilarious send-up of Rossie at work from 1982
Ian Andrew's analysis of Hugh Wilson

Back to Back and Belly to Belly - Winged Foot and The Country Club

2010-01-13T10:02:00.011-05:00

Its Labor Day weekend 1991. I was still living near Penn's campus in Philadelphia. My sister, recently graduated from college, was living in an apartment in Greenwich, CT. She was moving up to Cambridge on Labor Day to begin grad school at Harvard, and I was called on to assist. I had never played Winged Foot (short drive from Greenwich) or The Country Club (short drive from Cambridge), so this weekend seemed the time to give one or both a shot.

I drove up towards Greenwich on Sunday afternoon, hitting Westchester County (NY) around 4. I found the town of Mamaroneck, popped into a convenience store and got directions to Winged Foot. Winged Foot is a sprawling club, with 2 broad-shouldered 36 hole tracks. My interest today was in the West Course, on which has been contested numerous major championships.

I parked in the crowded lot (not knowing it at the time, but right alongside the famous 10th on the West ... we'll get back to that). As I mentioned, Winged Foot is a huge place, so I decided to walk around a bit to get my bearings. I was dressed in the typical country club uniform - a crisp polo shirt with logo and chino shorts coming down to just about the knee.

I didn't get 30 feet from my car when one of the members (I presume) walked over to me and barked "no shorts allowed". Yes, there are a few clubs that still don't allow shorts, even in the worst of the summer weather (this was 1991; over the last 20 years, I'm told that Winged Foot as well as many of the other holdouts have changed their policies to allow shorts). I mumbled something to the effect that I was not playing and just there to pick up my father, and slunk away.

On any other Sneak Attacker excursion, this would have been the end of my day. However, I was staying overnight to help my sister with the move the next day. I just happened to have a suitcase in the car with a couple of changes of clothes, including a pair of Chino slacks - same as the shorts, just full length!

I went back to my car, changed into the long pants, and was ready to go. After scoping out the club for awhile, I realized that I had parked my car in the perfect spot. The par 3 10th tee on the West Course is off to the side of the clubhouse, and the hole itself runs away from the clubhouse and the rest of the course. I could pull my clubs out of the back of my car, walk through some pine trees, and essentially be right on the 11th tee. If you click on the picture at the top of this post, you'll get a better view of what the 10th looks like. The area where I parked is just on the other side of that thick grove of pines down the left. The 11th tee, is behind and below the green, and completely invisible to pretty much anyone that isn't right on top of you.

Normally, I have a strict policy about only starting the 1st or 10th tee. I like to sneak on, but I don't like to sneak around, if you get my drift. However, seeing as I wasn't planning on making the trip back to Westchester anytime soon, I made a rare exception.

At this point it was late in the afternoon - its the best time to sneak onto these places, since the morning foursomes are all done. At these types of clubs, walking is still encouraged, and many of the folks that you find on the course at these times are walking and carrying their own bags. You need to fit in when sneaking on - the nail that sticks out gets hammered!

That's enough for now. I'll have more to say about my round on Winged Foot West, my thoughts on the course, and the rest of my road trip in a later post.

Trade for the New Year (update 1)

2010-01-08T16:48:00.013-05:00

Read Trade for the New Year

A great start to the New Year.

The eurodollar contracts in which I own call options (Dec 2010, Mar 2011, June 2011) all reversed the silly price action of the last 2 weeks of 2009, giving nice gains to the options.

June 2011 Eurodollar

Before the New Year ... and after

click on graph for sharper image

The big economic news of the week was today's NFP report which showed a loss of 85K jobs and negative revisions to the previous two months. I don't want to make this blog a discussion of economic reports - suffice it to say that the same government that couldn't flag the Christmas Day bomber will have even less of a clue about determining how many folks are out of work from month to month (check out Jon Stewart's hilarious take on the underwear bomber).

The other important news item was Fed Guv Hoenig's remarks that rates must rise sooner and faster than most believe, ultimately getting to between 3.5% and 4.5%. There is no need to personally attack or argue with this guy - he is simply filling a role. That role being one of the designated hawks on the FOMC - inflation hawk Thomas Hoenig is replacing the departing inflation hawk Jeff Lacker. They need to trot these bad-ass inflation fighting guys out once in awhile to show the markets that the Fed is remaining vigilant on the inflation and bubble watch - a little roadblock to those who would short the dollar or bonds or leverage the carry trade with impunity.

Hoenig's remarks mean little to nothing and do not reflect the thinking of Bernanke or the vast majority of the FOMC (I think there's a pretty good chance they don't reflect Hoenig's thinking either ... if they do, then 'Hoenig's thinking' is an oxymoron).

The Fed is still knee deep in the middle of massive purchases of US Treasuries and MBS. Nobody has any clue what will happen to the markets for these bonds once the Fed stops buying (they say they will stop this Spring). It borders on insanity to believe the Fed will even entertain the thought of a rate hike until they can gauge market reaction to the end of these purchases. This will bring us into the middle of the summer - just a few months before the mid-term elections. Will all those who think the Fed will be raising rates a couple of months before a major election with the official unemployment rate still north of 9% (and the unofficial rate over 15%) please raise their hands?

Fed rate hikes are very close to being off the table for all of 2010.

Allow me a bit more chest thumping ... the resource plays I mentioned in Trade for the New Year were all up strongly this week. Peter Thiel's theory - inflation in the things we need, deflation in the things we own - worked well early in this New Year.

Read Trade for the New Year update 2

My round with Jack pt 2

2010-01-04T22:23:00.002-05:00

Part 1 of the story - hitting on the range with Jack.

Ok. So Jack and 2 others are about to tee off of number 10, just a few steps away from the driving range where I still stood. If I were a member, I wouldn't hesitate to zip over there and ask the guys if they needed a 4th. However, not being a member, the last thing I need is for Jack to fix me with a steely glare, ask "who the hell are you", and wave over the starter/caddie master. I decide instead to try and hook up with them out on the course somewhere. Even if Jack or his son don't recognize me as a member, there isn't a whole lot they can do about it out in the middle of the course.

I let them tee off and start walking to their balls out in the fairway (Steve and his buddy are carrying their own bags, Jack has a caddie). Only then do I shuffle over to the tee. My plan is to keep close behind them in the hope that they will wave me through, at which point I'll casually ask to join up with them.

Since I'm only 1 and they are 3, I find myself waiting for a couple of minutes on every shot. Yet hole after hole passes and they show no sign that they are even aware of my presence, let alone about to wave me up. On about hole 4 or 5 (13 or 14 on the card), I spot my best chance. Its a 190 yard par 3 and the tee of the next hole is just a couple of steps from the green. I figure if I can knock my tee shot on the green and rush up after it, they will still be on the tee hitting their drives and will be unable not to notice me. At worst, Jack himself will ask me to play through. At best ... "That's some nice hitting there buddy, want to join us for a few."

Step 1 of the plan goes perfectly - I sting a 4-iron onto the green about 20 feet from the cup. There's no way they couldn't have heard the ball land on the green, I think. Step 2 goes fine - I get up to the green while they are still on the next tee. I quickly putt out and they are just starting to leave the tee - now not more than 30 feet away from me. Step 3 ... NO STEP 3. Not an invite, not a wave, not even a glance over at me. These guys are in their own world and The Sneak Attacker is not invited in.

Reading the handwriting on the wall, I switch over to another hole. My day with Jack is over - I might as well play some golf instead of having to wait 5 minutes for every shot. Its a pretty lame end to the story, but think of all that went right that day. Not only was Jack even in town, but he was at the club. Not only was he at the club, but he was hitting balls right at the time that I got there. Not only was he hitting balls, but I was able to take the slot next to him and hit balls side by side with the Greatest Golfer Ever (at the time). And I wasn't even a member at the damn club. A good day indeed!

Gulph Mills - no Sneak Attack necessary

2009-12-30T13:44:00.000-05:00

I came up to Philadelphia in the mid-80s to go to college at the University of Pennsylvania. I was good enough to squeak onto the golf team, and Penn's home course was Gulph Mills Golf Club - a 30 to 45 minute drive from campus, depending on the usually horrid Schuykill Expressway traffic.

How to describe Gulph Mills (GM)? First off, its an outstanding, classic old golf course - very challenging and lots of fun to play. The original design was by Donald Ross in 1916. There has clearly been some redesign work. Tom Doak credits nearly every name designer of the first half of the 20th century as having a hand in the course at some point. Many will remember GM for the uphill, camel-shaped 18th hole - a par 5 of no more than 420 yards, and one of the stranger holes I have ever played. No description of GM can be complete without a word on the Club itself ...

Most major metropolitan areas of the country have at least one course and club of great pedigree - good enough to host a US Open. Usually, not far away, there is another course and club of great pedigree - but these clubs are so insular, so WASPy, so Old Moneyish, that they would sooner die rather than have their names in the paper and their courses splashed on TVs and newspapers across the land. On Long Island its Shinnecock which gets the Opens, while its next door neighbor, the National Golf Links of America stays in the background. In Denver, its Cherry Hills vs. Denver Golf Club. In San Francisco, its The Olympic Club vs. San Francisco Golf Club. In DC, its Congressional vs. Columbia or Chevy Chase. In LA, its Riviera vs. LA Country Club. Well, in Philadelphia, its Merion vs. Gulph Mills. This isn't to suggest that the more private clubs are better courses than their more famous counterparts (although I would take SF over Olympic, Denver over Cherry Hills, and Columbia over Congressional, while the National and Shinnecock are a tie). In Philadelphia's case, Merion is clearly the superior course.

Jerry Tarde once described places like GM as having a membership whose average age was dead. As I was writing this post, I searched for GM's website in order to link to it ... GM doesn't have a website.

The head pro at GM in those days was a first class douchebag named Willie Scholl. There were clearly a couple of powerful members at GM who wanted Penn there - and this never sat right with Willie, who absolutely could not stand our presence. I suppose ol' Willie wanted to be the only guy under 60 hanging around there. Willie and I almost came to blows out on the 12th hole one day when he accused me of hitting into a playing lesson he was giving (I never got within 100 yards of them).

Anyways, when you come to play the great courses of Philadelphia, Merion and Pine Valley must be first on your list, and maybe Aronomink second. However, don't forget places like Gulph Mills, or Phladelphia Country Club, or Manufacturer's, or Rolling Green, or Lancaster, or Lehigh. All are pristine examples of golf's golden age of architecture. In other posts, I will have plenty more to say about William Flynn, the designer of most of these masterpieces.

Trade for the New Year

2009-12-29T11:03:00.009-05:00

My theme for the New Year is that short rates are going to stay lower for longer than market participants expect. I don't want to get too deep into a discussion of the reasons right now. Anybody who follows the markets is well aware of the arguments in the inflation and deflation camps, in the stock bull and stock bear camps, in the dollar bull and dollar bear camps. Suffice it to say that I am firmly in the deflation camp, without being too dogmatic about it.

I believe the best risk/reward way to play the rates lower for longer trade is by purchasing call options on Eurodollar futures several quarters out. A call option struck at 99.00 on the June 2011 Eurodollar contract currently trades for $0.13 (the cost of one contract is 13 x $25, or $325). The recently closed Dec 2009 contract just went off the board at around 99.75. Assuming nothing funky happens to Libor, this means that if the Fed does nothing between now and June 2011, the value of that option will be $0.75 (or $1,875/contract). This is a payoff of nearly 6:1 on your money.

I bought a large slug of the Dec 2010 and Mar 2011 calls six months back in the $0.10 to $0.12 range. They more than tripled in price rather quickly and have fallen back down to around $0.17-$0.21 amidst the silly, low-volume market action of the past 2 weeks. I haven't sold any of these calls and will use this move down to add to the position. Being that its 6 months later, I'm adding by buying the June 2011 calls at $0.125 - $0.13.

June 2011 Eurodollar futures during Xmas and New Years' weeks
Big move on no volume

(click on graph for sharper image)

I love this trade! It allows me a great upside if we are in a Japan-like scenario, while being able to define a very small downside. I also happen to be long stocks like MOS, UTS Energy, and BBEP. If I am wrong about the direction of the economy, my options could expire worthless, but these stocks should do very well. If I'm correct, my gains in the Eurodollar options will more than offset any losses in these stocks. There is also the possibility that we get into a scenario as described by Peter Thiel - where the prices of things we need (energy, food) go up and the prices of things we have (houses, stocks) go down. In this sweet spot, my Eurodollar options will march towards $0.75, while the stocks of these resource producers should maintain their prices, or even go higher.

This trade has great value for both the speculator who wants a big score with limited downside, as well as the investor who would like a cheap way to hedge the risk of a slow economy/bear market in stocks.

Its not about being right all the time. Its about how much you make when you are right, and how much you lose when you are wrong. Did I mention that I love this trade?

Read Trade for the New Year update 1
Read Trade for the New Year update 2

My round with Jack

2009-12-26T22:12:00.000-05:00

Its winter break 1984 - sophomore year in college - and I'm visiting my Grandparents in South Florida. It was no secret that Jack Nicklaus was a member at Lost Tree Village GC in North Palm Beach. I figured if Jack was a member there, than it must be a somewhat exclusive club, and a decent course with a decent practice facility - all prerequisites for taking some of my precious time to try and sneak on.

I make the 45 minute drive in my 'rents silver 88 Olds and pull into the parking lot. Yes, youngsters, there was a time in South Florida when every community above a trailer park wasn't gated. In typical sneak attacker fashion, I walk onto the grounds like I've been playing there all my life. I spot the driving range and bring my clubs over. Guess who is on the range warming up to play? ... its the man himself in a golf shirt and tennis shorts. I grab a bag of balls and sidle over to the slot next to Jack.

I start hitting balls, hoping that Jack might have a look at the young 2 handicapper practicing next to him. After a few shots, when it becomes clear Jack has no interest in me, I basically stop hitting balls and just turn around to watch the master hit. Now Jack was 44 at the time and no longer the dominant figure he once was, but he was still destroying the ball. Most of the shots I saw him hit were long irons - I'm assuming a 1 iron. Here are the things that still stick out 25 years later ...

One is the incredible size of Jack's swing arc. The head of the 1 iron was so far away from his body on the backswing that it might have been in a different zip code. At the top of his backswing, Jacks left arm was completely extended and directly above his head. His hands were impossibly high. Jack isn't a terribly tall man, but his hands seemed high enough to touch a regulation basketball rim.

The second thing is the awesome power of the shot itself. Everything that's been written about the height and power of Jack's long irons can't convey what it is like to actually see them. These things were cannon shots that were nearly out of sight by the time they reached their full distance and height. Its hard to imagine the wind having any effect on the shot until the end, when the ball seemed to pause in the air for an instant, before dropping straight down to the earth.

Soon enough Jack was through and headed off to the 10th tee to play a few holes with his son Steve and another fellow who appeared to be a pal of Steve's ... hmmm, just 3 to play - maybe they need a 4th. I figured this might be my shot to play nine with my hero and (and in that pre-Tiger time) the greatest golfer ever.

Later on - playing 9 with Jack