torsdag den 21. juni 2007

Time to turn once again..... ???

There is something rotten in the State of Denmark - the fixed income market and the stocks market play along known lines, but the fx market seems to be in its own world. Carry-trading has barely moved despite a few more hikes from central banks with "funding currencies" - Taiwan and Sweden!

ABX making new lows yet again, T-bonds threathen to hit old lows and DAX took it on the chin, but.. AUD, NZD, GBP are bid.

My present background themes are:

1. REAL RATES correction will continue. The lack of risk premium in the long-end needs further adjustments. Whether this comes from inflation premium or risk premium really doesn't matter but I did read with some considerable interest the latest Duke University/CFO survey:

Capital spending seen down 1.5% (5.2% vs 6.7%)
Advertising down 0.7% (2.7% vs 3.4%)
Employment down 1.2% (0.4% vs 1.6%)
Wages up 0.5% (4.2% vs 3.2%)
Health care costs +0.7%(7.3% vs 6.5%)
Prices(CFO's own products) +0.6% (2.3 vs 1.7%)

So....spending is seen down, expenses down, and salary/wages cost through the roof.. dis-inflation ? Hardly.....

2. SOVEREIGN WEALTH FUNDS - there are now several multi billions funds - all of them looking to moves funds from fixed income to equity, private equity and commodities....Ipact? Much higher yield ....

3. SAVING SURPLUS CHANGES - Goldman did nice piece last week on how Middle East saving surplus may have peaked. This has been one of the biggest contributors to yield compression in credit and low volatility overall. This will be slow, GS, conclude but could be major.

The above themes leaves me with:

Propensity to be short fixed income, short equity and negative carry or in other words totally contrarian to recent themes and in direct conflict with EVERY single investment banks which tells me to take more more and more risk....

I have to say I find it amazing the amount of carry-trading strategies being introduces right now after a 14% move!!! Greed !!!! Yes...

My smart friends, and let's face, pretty much anyone is smarter than me, keeps telling me the credit cycle bubble in the US market should not have any impact on world growth and risk overall...

Well, again, when everything correlates, as it does right now, just look at how every single hedge fund in the world correlates with r-square of > .80 with SPX and carry ? Then certainly it matters, if nothing else for the very reason that loses in credit markets will have to be covered from the carry-trading profit.

Macro hedge fund returns and inverted 1 y. JPY VOL... hmmmm...

ALL positions are tied up in today's hedge funds - Carry trading in fx, works in tandem with credit spreads, all financed by selling in-the-money USD put vs EMG to pick up decay, vol sell off and spot moves.

Fortunately I can not sell options in my fund - a restriction I take with a good spirit as long life taught me that selling small deltas is like picking dimes in front of steam roller, eventually you will stumble ....and ........ :-)

Well enough from the old man..

Strategy presently:


Took back all markets, bought some 1450 S&P puts for fun, also long DAX puts..
Was short GS and BSC ... took them back......still fancy short financials..

Foreign Exchange:

Short EURCHF, short EURUSD, short AUDUSD, long EURCZK, short EURNOK.

Fixed Income:

Was short Gilts - took them back, now long EURIBOR December.


Was short Crude took it back.

Performance: +60 bp for month (Going nowhere!)

Nice eve


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