Smart Beta for dummies

I’ve been meaning to do a longer, more educational piece for a while but sadly the joy’s of having an infant have given your author very little free time to sit and write. But I figured better to get something out and perhaps let the community fill in the blanks and oversights I missed. After introducing the concept of smart beta I will give some market based observations which may be of more interest to the typical MM reader who knows this stuff already, but I get the feeling there are many readers who are not full time finance professionals and would like some educational content. Anyways here goes.

Smart Beta, what is it?

The term beta, when applied to financial markets, usually describes a stock’s relationship with the overall stock market. This is usually expressed as “beta to the market” but could also be “oil beta” or beta to anything else. Wikipedia/Investopedia have a good theoretical and practical discussions of beta, but I am assuming most here have heard of the term.

Smart beta takes the concept of beta and augments it, saying there are many other “factors” out there besides the market that have a relationship with the movements of a stock. For instance, it is well documented by the god father of efficient markets, Eugene Fama, that company size and value are informative in determining a stock’s predicted return, though only after much obvious evidence was thrown at him. Anyways as most normal people expect, a stock’s future return is based on a number of factors, some of which are easy to explain and some of which are more idiosyncratic or company specific.

Popular factors include: Beta, Value, Price momentum, Quality, Growth and Volatility, but there can as many factors as you want, as long as you have the data. Quant funds typically play factors on a market neutral basis, meaning they rank all stocks on a factor, say earnings growth, and then to obtain the earnings growth risk premium by taking the top 20% of stocks less the lowest 20% (market neutral) and that result is called the factor premium, which is typically calculated on a monthly basis. If you have access to a Bloomy you can do this yourself with FTST, seen below:


While many quant shops determine a factor’s return on a market neutral basis (after adjusting for other factors and sometimes sector weightings) but on the flip side many “style” investors are long only a factor, including many actively managed mutual funds. If you own a “value” mutual fund, try and see if you can find a value index (Russell Value) and compare the two, especially as it relates to their outperformance vs the S&P 500. Often you will find that “value” funds tend to outperform at the same time. If this is the case, then you might want to re-think if your active manager is really providing much “alpha” or only beta to the Value factor.



Rise of ETFs, Quant Funds, Indexed Money

Listed above are just some of the secular trends that have embraced smart beta/factor investing and given their force in the markets I think its fair to say that factor investing is only going to increase, at least until there is a negative shock to disrupt those secular trends. Indeed many traditional stock pickers already complain of the rise of the machines and have been unable to adapt to the rise of this type of investing as its consequences have been far reaching.

Why should I care about smart beta and factor investing?

From the individual investor point of view, the rise of smart beta is very powerful as new factor ETF’s allow anyone to play the market from the angles the pro’s use. The problem is that smart beta investing is still very new to most investors and they may be unaware of how quick and big the moves can be when factor positions get over crowded.

For example, at the start of 2016 we had a climactic sell off in value stocks. Yes it was Oil and High yield that really led the market, but if you owned any value stock,  chances are that it got killed as well, even if the oil or high yield exposure was not very obvious. Think QUALCOMM. Also financials tend to be the “value” sector because they often have the lowest PE ratios in an index, and they were also killed (but had obvious high yield and oil related exposures).

As oil prices bottomed, value stocks started to perform strongly. And post Brexit they were very strong, as global growth improved. Indeed the “value” factor often performs best at the early part of an economic cycle. Given that global growth was so slow heading into 2016, its no surprise that value started to outperform as growth bottomed. Market ping pong.

In the same way that some traders try to trade the business cycle with different sectors (buy cyclical sectors at the early part of a cycle and buy defensive non-cyclical towards the end of one) today’s traders can also implement the trade with “smart beta” or factor ETF’s if they choose to do so. 

While trying to beat the market via sector timing or smart beta timing is no easier than trying to beat the market outright, there is still a lot of information investors can gain from seeing what factors performance is. We can see what is working in the market and try to generate a thesis for what the market is telling us. When value is outperforming along with cyclical sectors, its usually a good sign that we are still in the early stages of a business cycle rebound. When factors like quality or growth are outperforming, along with traditional non cyclical industries, it usually means that we are in the latter stage of a business cycle. To me these are the two biggest pieces of information you get.

Momentum, the dumb factor

For whatever reason, and there are many logical ones, momentum is a documented fact of financial markets. By simply looking at a stock’s price momentum (ie its price change over some historical period, usually 9M to a year) one can better estimate its future returns. Why a stocks historical returns should matter to its future, and how this effect can have existed for many many years is another discussion. But the fact that momentum is commonly used in markets is the main point I want to make. Indeed CTA’s base much of their models on momentum and lots of quant funds have it in their models because it works so darn well.

The problem with momentum is that it works until it doesn’t; as its prone to sharp reversals. Momentum trades tend to work like carry trades, they eat like birds, but shit like cows, as I read once.
Implications for Today’s markets

Current Factor Trends

As mentioned, post Feb and March lows in 2016, commodities, EM, high yield, small caps and value stocks all outperformed. This was a the typically play book trade at the start of a cyclical recovery, even though there was no recession and we were more than seven years into a bull market. As with all market moves, it ebbed and flowed, with commodities initially leading, along with high yield and then only later with financials after the Trump election. Still good with the cyclical play.

It is my view that many commodities are over bought, (though oil not so much, again a post for another day) and that the Chinese stimulus of 2016 along with their capacity reductions was the main reason for the uplift in most commodity prices to what are now unjustifiably high levels. Even if commodity prices don’t fall, I don’t think base commodities like Steel or Iron Ore will rise much from here. This is the first sign that the cyclical economic growth story is a short cycle. Small cap outperformance is also dubious given their high PE ratios and rising inflation and interest rates. They could outperform but I think the market is in a “show me” mode. Value stocks have already started to underperform generally, as seen below, though the trend is not very clear to me that they will underperform.


(PS anyone know of a good market neutral growth index? Anyways, Russell 1000 Growth Index is the big leader this year)

What I do think could be a catalyst for the markets is the financials. When the financial sector starts to underperform, because they start to miss earnings or Le Pen gets elected or just some other sector start to do better, there could be some serious selling pressure and knock the market off guard even if financials turn out to be a great buy at current prices for the next 2 years (I guess its possible, you never know). I feel like many financials are simply trading on momentum at this point. Enjoy it while it lasts.

The main point of this post has been to illuminate the role smart beta plays specifically in equity markets and try to explain to the novice financial market participant of what sort of things they should pay attention to. If all of this was new to you, then perhaps you will enjoy this little throw back as well. 




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johno
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March 13, 2017 at 12:56 AM ×

Nice post, abee, and congratulations on the infant (I have one here too so understand the distraction). So "smart beta" is a marketing gimmick for factor investing. OK!

Was looking at how the forward prices in EURCZK backed up despite recent inflation data. Wondering whether it's an opportunity. Seems the big issue here is that FX reserves have increased 24.1b euros in just the first two months of this year. Most of that will have been speculative flows. So, we now have a situation where a country with very modest macro balances has a huge speculative overhang. Even if the currency is some 5% over-valued, as some estimate, how long will it take for such an enormous overhang to get worked out? I mean, that's like 14% of GDP, and specs were long CZK before the beginning of this year. Meanwhile, it's silly season in NOK (I'd say 4% under-valued now) and 6-month net foreign buying was like 1.5% of GDP. Unless the Czech central bank accommodates unwinds, could we have a perverse situation where EURCZK actually appreciates when the floor is abandoned?

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SRX
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March 13, 2017 at 11:42 AM ×

Value also works until it doesn't. Ask anyone trading low frequency quant in Aug 2007 when GS Global Alpha shit their pants...

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IPA
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March 13, 2017 at 2:00 PM ×

abee, agree on commodities and financials being ahead of themselves here. A healthy pullback is needed.

Looking for US 10-yr yield reversal at 2.75%

http://imgur.com/ZTuOBXC

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johno
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March 13, 2017 at 3:25 PM ×

I don't know about selling commodities here. I need to do the work myself, but my guess is Louis Gave has done the work on lags to Chinese stimulus, and that informs his call for the Chinese growth/inflation impulse only fading this summer. Interesting interview with him on macrovoices.com, though a bit dated (Feb 21).

Bought midcurve 15y15y payer swaption spread. Further BoE QE is politically unacceptable, though I think for the trade to really work, it'll take ECB QE tapering to come into view. The rate really fell when ECB QE came into view, so maybe a symmetrical response to tapering. Can also look at how long rates sold off after Bernanke signaled tapering in 2013. Interesting payoff profile.

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abee crombie
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March 13, 2017 at 4:29 PM ×

Good point SRX, back then I think most PM's hadnt a clue about the risks of leveraged market neutral funds. Since then factor investing has grown in size. Neither are necessarily a bad evolution of the market, but many systematic investors have stop losses. When they start cascading together thats when you have problems. 1987, 2011 etc

Vol selling, risk parity and factor funds are my pick for the next round of irrational stop loss selling. But who knows when that happens ..

thanks for the link Johno, always enjoy gavekal

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Nico G
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March 13, 2017 at 4:43 PM ×

http://www.marketwatch.com/story/crash-guru-warns-the-dow-could-plunge-to-14800-and-todays-a-date-to-watch-2017-03-13?siteid=rss&rss=1

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March 13, 2017 at 10:59 PM ×

Great post. I'm not sure I agree with "Momentum trades tend to work like carry trades, they eat like birds, but shit like cows, as I read once." My understanding is that CTAs (and trend-following strategies generally) have positive skew and are essentially long vol, while carry trades are generally negative skew and short vol.

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washedup
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March 13, 2017 at 11:25 PM ×

@Nico I have just one question - if this guy is as good as the article says he is, why TF is he sitting around penning articles in the first place instead of lolling on his yatch on the riviera? The track record is what it is, but I would hazard a guess his long term skill is about as good as that of a mildly successful astrologer. Wish it were that easy (as you well know!).

@William on 'CTA's are generally long vol', they are actually short deep strike puts in that their signals move too slowly to get out in the event of a very quick selloff - plus, they currently happen to be very short VIX futures, but thats a different story.

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IPA
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March 14, 2017 at 5:34 AM ×

Where is my Ryan vs Trump fight? I am buying an open-dated ticket. Healthcare plan is DOA. Watch Trump lean heavy on Ryan. Probably his best chance to KO the youthful and agile speaker when his face is egged. Blow #1 on healthcare delivered. Blow #2 to be delivered on BAT. Ryan will swing back with zero support for the president when the chickens come home to roost on futile wiretapping allegations, and more importantly, Russian connections. This will make Frazier vs Ali look like a walk in the park. Buy your tix, folks! History to be made. What a travesty and self-destruction. Dems are sitting back and watching the show in pure disbelief, I bet. No immediate replacement of either plan from the president. Let's play a few more rounds of golf. Let's also get a couple of new sets of pens while we are at it. What a chance for dems to come back from a total annihilation. Gasoline is cheap now, they'll acquire enough of it to be poured on a burning fire just in time.

REITs are starting to bounce. They may be sniffing a possible reversal in treasuries. Forget the blind VIX. Just as we threw all other fear gauges away over the years, it will prove to be unreliable. Just watch the bond market on Wed.

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Celeriac1972
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March 14, 2017 at 9:42 AM ×

FT has an interesting article today by Michael McKenzie. It quotes John Brady from RJ O'Brien: "What the bond market may be missing is that the Fed is no longer driving the car. Trump and Congress are driving"

The article makes the case that bond markets are too complacent with respect to the possibility of accelerated tightening, and suggests that may be shaken if Wednesdays dot-plot shows higher projections.

Have we really got to a place characterised by complacency in both bond and equity markets? Can both be right (or wrong)? There's a McKinsey style 2x2 in here somewhere:

1. Equity markets right / bond market wrong: Animal spirits prevail and accelerated economic growth shows quickly in earnings and rates
2. Equity markets wrong / bond market right: Trump trade / reflation runs into quicksand and disappoints. Base rate still at 1.35 in Jan 18
3. Equity markets wrong / bond markets wrong: Economic activity / earnings disappoint, but rates are driven higher by ....?
4. Equity markets right / bond market right: Animal spirits prevail, but the excitement of a 3% yield caps the need for further rate rises?

Looking at these:

1 vs 2 is the classic dilemma on which we are all used to taking views/sides. Gundlach "wake me up at 4%" etc
3 seems least plausible. Could rates rise for some reason in the absence of animal spirits / economic growth...?
Is 4 possible / plausible? Really?

Very interested to hear thoughts on this....

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washedup
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March 14, 2017 at 1:15 PM ×

@celeriac1972 - fwiw 3. is my base-case in the medium to long term. I think we are past the point that asset valuations have anything to do with fundamentals, its just that participants are biased and trained to think that disconnect only works one way.
The near term is harder to call - i think we may keep gyrating between 1. and 2. for a few more months.

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Nemo
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March 14, 2017 at 2:36 PM ×

@celeriac1972 - (3) is just inflationary depression, is it not?

Consult your nearest gold bug for details

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IPA
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March 14, 2017 at 3:23 PM ×

An absolute exodus in airlines last 24 hrs. Those who are short, not a bad place to cover some and move stops to breakeven. Storm will pass, there will be a bounce to short more. I think it's safe to say everyone knows Q1 is destroyed.

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abee crombie
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March 14, 2017 at 3:24 PM ×

@ Celeric. Yes very interesting thoughts and ones that have kept many out of the equity markets for the past several years. I think it must be stressed that there are many factors besides economic growth that influence both equities and bonds. as well there is not a single equity market or bond market. Sure US equities have been flying, but the trend in non US equities over the past 5 years is not nearly as stellar.

As for bonds/rates, I think the 2/5 year may be where you want to play for a pure view of Fed rates/growth. 10 year compression of term premium has more to do with QE foreign demand etc than growth, IMO

Nemo is back? Big fan of your posts back in the day

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johno
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March 14, 2017 at 5:45 PM ×

Clereric, #3 is stagflation. Wouldn't rule it out, though last time we had it was the 70s when energy prices were in a huge bull market. There's some question around the inflation process and how it works ... can we get a stagflation without cost-push pressure from commodities? It looks to me like oil is capped for the indefinite future.

One theory for how we see higher inflation is a) China keeps yuan steady through capital controls and b) the dammed up money in China pushes up their inflation rate which then gets exported through goods prices to rest-of-world.

I don't think Trump/Congress are driving much, besides retail sentiment in US equities. They could have a huge depending on their dollar/trade policies. If they implement BAT or reciprocal taxes (and Tepper made a compelling argument on CNBC for why phased BAT/taxes could actually benefit retailer margins), then the dollar goes higher and you can say bye-bye to the EM rally. Besides the hit to trade, such taxes would push up the dollar, and Louis Gave made a really interesting point in that webcast I noted: historically, investors only pile into EM equities if they have confidence that EMFX is going to be steady or better against the USD (because the FX component is usually make-or-break for EM equity returns).

IPA, I'm not sure Trump is going to turn on Ryan. So far, rather than using the CBO estimate of insured to beat on him, he's gone out and discredited the CBO.

My guess is the SEP projections have to go up tomorrow for the USD to move higher, otherwise it'll go back into correction mode. No view. I'm still on the fence about rates.

Used yesterday to right-size my EURNOK. Still think it's high, and interesting for fresh money shorts, but I need to keep position sizes sensible. Also, who knows where oil bottoms. Maybe mid-40's near-term.

US equities are just a terrible buy. In the cases where you win, foreign equities will do better, IMO. Arguably we are seeing the last wall of worry crumble with all the Trump-driven retail buying, but I don't know when it'll have run its course. It really f's me off to think that people are under-saving assuming equities are magically going to make them huge returns for just sitting on their behinds (and in a world where their capital is not special, but the biggest over-supplied commodity), and when the next recession crashes that fallacy, they'll just come and massively hike taxes on johno. But hey, if one wants justice, best to live in a book, and seeing that I want to live in this world, just have to get over it ;)


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Nico G
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March 14, 2017 at 7:04 PM ×

washed - you are just jealous when that fellow countryman with horrible style is published in MW while you still freelance here at MM

you are just a https://www.youtube.com/watch?v=1hzdn_f4ua0

otherwise you are right, as usual (i am talking both shit and my Proust-sized book)

while waiting for triple whammy tomorrow FED/DEBT CEILING/WILDERS ELECTION

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thud
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March 14, 2017 at 7:40 PM ×

abee, great post on smart beta. One of the more recent CFA journals had an article entitled "Will You Factor Deliver..." that looked at common strategies reconciled against transaction costs. Additionally, Research Affiliates appears to have come out guns blazing against arbitrarily picking your favorite factor-driven ETFs and hoping for the best. Not that this will prevent the next round of irrational stop-loss selling, but an interesting counterpoint to AQR's party line (among others) nonetheless.

johno, thoughts on Norges Bank's decision this week? Where does that play into your thesis? Not a FX guy, so I appreciate the brain trust here when it comes to that space.

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IPA
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March 14, 2017 at 8:45 PM ×

johno, you strike me as a highly analytical thinker. Let's think together. You know well it's not about CBO. It's about factions inside the republican party, special interests, running reelection platforms for 2018, etc. And you probably also know well that Trump is as much of a republican as the US equities are cheap right now. Once he figures out (if not already) that he is caught between the fighting career politicians who are keeping him away from reelection of his own (because nothing gets done) he will put on his Apprentice hat and start whacking away at them indiscriminately (as he did during his anauguration speech). So with Trump saying "I will let the house lead on Obamacare repeal and replace", and later blessing the deal because he simply has none to offer himself (thus having an egg on his face too as the whole thing gets shredded to pieces), and now dismissing the CBO, and later would inevitably blame the deal on the house reps and the speaker for the failure, as he himself NEVER takes a blame for a single thing he is involved in. We are one or two steps away from that. Check out his tweets about jobs, the only thing going for him right now, which is not even his achievement at this moment, as we both know. No tax cuts = no new jobs. No healthcare deal = no tax cuts = no new jobs. Not that tax cuts would really guarantee new jobs (but in his mind anyway).
Not imposing my views though :)

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johno
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March 14, 2017 at 9:41 PM ×

IPA, Trump may eventually try to make Ryan a fall guy, but for now, he's the only guy with a chance of getting anything done for him legislatively. The senate seems to be the biggest bunch of do-nothings Trump has to contend with.

thud, not much brains to trust here, if it's me you're referring to ;) The Norges Bank has been a tough bank to call in the past and I don't have great insight into them. What I do see is that economic data has been strong and beating expectations, their housing market is over-heated, you still have the OPEC production cut protecting downside, Norway has (and uses its) fiscal space (also protecting economic downside), the latest CPI data isn't as bad as it looks, the bank signaled a likely end to its easing cycle back in September, and to the extent that they look abroad, they'll see central banks all over the world are moving towards tightening (Fed obviously, BoJ is stealth tapering, ECB tapered by another name and are now weakening their forward guidance, the Chinese have tightened). I doubt the NB gets more dovish against that fact pattern, but it's possible some people's expectations may be disappointed. I assume there's been some position clearing lately and this is a currency that has a nice fit to Brent and real rate differentials (so arguably inflation coming down faster than expected but not causing the NB to cut could be seen positively).

All that said, I've not traded this well. I had a stale position that I'd taken profit on sitting on the books and wasn't quick to cut it as things turned. Then added to the position too soon leaving no room to add at nice levels without running over my limits. I did go beyond limits by adding Friday, but since reduced because I feel like a schmuck when I wager too big. Nothing worse than violating risk limits .. if you lose, it psychologically knocks you out of the game for a while and there's an opportunity cost to that (and if you win, then it emboldens you to play with fire again and eventually you get burned, so in my book, there's really no winning when betting too big). But that's me. To each his own style.

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IPA
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March 14, 2017 at 10:37 PM ×

johno, the healthcare bill will never see the senate floor in its current version. It's DOA.

I counted endless stories going into the close about airlines being hit hard by the storm today. As the great one said: "Skate to where the puck is going, not where it has been". Out 1/2 of JETS with stops moved to b/e on the rest. Don't be greedy, let those who think they found a nut to chew on break their teeth, let them retrace a bit. Still holding on to my entire core IYT short.

abee, I read an interesting take on AMZN today where it discussed how it now holds number one spot with 16% of online apparel sales to millenials. I was moved to think what a genius group of folks works there taking the brick-and-mortar biz away until I got to the part where it said that AMZN is currently designing its own workout apparel line, soon to be sold on its website. WHAT?!! Enough said :)

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Nico G
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March 14, 2017 at 11:16 PM ×

so

Trump meets Washington reality and Fed will hike a second time in a row tomorrow. That Trump rally was based on what? hopium. i've entered animal spirits in my own short campaign. 300 ES lots, so i am not sure to have any objectivity left at all. My posts are starting to resemble Amp's when he forgets his pills

anyway - is it not the best short opportunity of your trading history? blow off wave 5 Trump rally followed by monetary and parliamentary rudesse at home, a potential conflict with China, and the same old shit in Europe that never can be counted on to take the expansion relay. In 2017 you either go big or go home completely broke.

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IPA
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March 15, 2017 at 1:53 AM ×

Nico G, I could not take that position to bed. You really must have balls of steel. I hope it works for you!

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Nico G
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March 15, 2017 at 3:26 PM ×

Gross perspective

https://www.janus.com/insights/bill-gross-investment-outlook

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Nico G
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March 15, 2017 at 4:44 PM ×

one Treasury anomaly

http://www.econmatters.com/2017/03/the-mystery-of-treasurys-disappearing.html?utm_source=dlvr.it&utm_medium=facebook

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Harry H
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March 15, 2017 at 6:57 PM ×

Nico said "In 2017 you either go big or go home completely broke"

Looking at these bullish spooz post-rate hike, it seems liek our friend Nico is gonna be going home completely broke :))

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hipper
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March 15, 2017 at 7:53 PM ×

Look at that front end, curve even slightly steepening now. I just think short end was relatively heavily sold off beforehand and now bought a bit on the news, it will all average out over coming days or weeks. I fully expect curve to continue flattening on further hike expectations and most stuff happening today to reverse in coming weeks. XLF not really buying this illogical rally on EM, commodities, gold or SPX.

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IPA
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March 15, 2017 at 8:21 PM ×

Harry H, you simply need to leave Nico G alone. Don't ever kick the man when he is down! Rejoice quietly and go read what Paul Tudor Jones said about what happens the moment you feel good about yourself as a trader. Can't believe I expect you to read.

Obviously everyone here has a screen and can see what went up and down after the decision. Don't even want to talk about that. But one important thing I took away from the presser was Yellen's take on the sentiment rise. She said while Fed duly noted the rise in sentiment it has not really resulted in improved spending by businesses, she said "they are in a wait and see mode". We also know that consumers have not hit the accelerator pedal on spending either. So here is what I think, Fed is preempting the fiscal stimuluis. I simply have no doubt in my mind! This is going to end badly if the stimulus is a no go or much smaller than expected, but it's a party time today.

I am empty handed on TLT, XLE, XOP and OIH calls, simply did not get to my entry level prior to takeoff, darn! Not chasing, will wait for a pullback, like fib, etc.

Agree with @hipper on flattening of yield curve, want to add to my KRE short, but ok with what I got here if it just pukes lower, looking to break below 50 dsma here. Staying nimble, not believing much here. Bonds/equities going up in tandem nirvana may end very quickly, IMO.

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Harry H
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March 15, 2017 at 8:33 PM ×

So spooz up about 25pts today (mostly due to rate hike). Our friend Nico is short 300cts at $50/pt, so has lost -$375k today... oops.

On the bright side, Nico's been shorting spooz since Trumps election (about SPX 2100) so that puts him circa -$4.3 million offside, on that basis I guess -$375k is chump change.

Let this be a lesson in how not to do it. Unless of course you like blowing your entire net worth on a stupid gamble :))

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Nico G
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March 15, 2017 at 8:39 PM ×

if i can psychologically hold this position i can easily tolerate the impetuous MM youth

frankly i would have never ever expected equities to rally in a year of 4 rate hikes, after rallying on 8 years of rate cuts. Those riding long need to know they are absolutely not brilliant, but lucky on a blow off phase that essentially lures young and mom n pops buyers, and liquidates agonising bears. No more logic, no more fundamentals, pure emotions play, Amen

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Harry H
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March 15, 2017 at 8:39 PM ×

On a positive note, Leftback's prediction about JBTFD in bonds came true. As did mine about JBTFD in stocks.

The amateur brigade here might consider listening & learning from us aforementioned...

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Nico G
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March 15, 2017 at 8:40 PM ×

the Fly puts it with his usual gusto

"When you come to realize, finally, that all of your years of study and experience mean nothing in a battlefield filled with fucking retards smashing in each other’s skulls in with their shields, you will find a sort of peace. For two decades, I curated my skills, read innumerable books, expanded my money management business to enjoy 1%er type wealth — only to later find out most of everything that I learned was meaningless horseshit."

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johno
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March 15, 2017 at 8:46 PM ×

The Fed was more-or-less as I expected but not with enough conviction to bet on the shakeout that would entail. Did buy EURUSD afterwards and added CAC futures the moment the 19 seats hit the tape. 19 seats for Freedom Party, that is. Polls were 24 a week ago and 20 just before the election. Probably going to see markets more comfortable that Le Pen won't win.

Fingers crossed for Turkey and Norway central banks tomorrow. It's all about the Late Liquidity Lending Rate. Median forecast is +75bps. After today's Fed one has to worry the CBT pushes its luck and stays on hold.

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IPA
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March 15, 2017 at 10:41 PM ×

I bet Peter Navarro believes that the world rests on three whales. He even has the names already carved out for them (in the article below). Does Frau Merkel like to eat seafood? We'll find out on Friday.

https://www.bloomberg.com/politics/articles/2017-03-15/u-s-sees-mexico-as-part-of-regional-powerhouse-navarro-says

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abee crombie
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March 16, 2017 at 2:30 AM ×

Nico spooz are their own market. Buy some calls IMO, just so you can sleep. Its not expensive and its saved a few traders before...

IPA, yeah AMZN likes to try many ideas. Some work, some dont. Not sure how much business they are really going to take with private label clothes. even if they hire designers, fashion is a tough brand business. But yes retail is in a world of pain right now. Agree that something in the economy isnt right for that to be happening. And restaurants performing poorly as well for while. So everyone is at home, buying online and eating home made food.
http://www.restaurant.org/News-Research/Research/RPI

I still think AZO and ORLY are massive shorts. I cant see why amazon cant take that business. Those companies earn really good margins for what it is. They dont have prime locations.

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abee crombie
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March 16, 2017 at 2:30 AM ×

https://www.bloomberg.com/news/articles/2017-03-15/steve-cohen-said-to-eye-computers-to-model-top-traders-thinking

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Nico G
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March 16, 2017 at 3:15 AM ×

buy some calls now? rrreally. This is far more insulting than being mocked by Harriette & Co. Let us make a friendly OTC paper trade together Abee. I am SELLING you all the 2400 April calls you can take, today, at 15.75. Markets are frankly boring so ill enjoy monitoring this

this lower high built into March expiry is probably the greatest short of the year. I am sleeping very well, i managed to bring average entry from 2228 to 2300.

Stay focused, because FOMC days are always scheduled before massive expiry to maximise squeeze, last December cycle being an example to boot.

If we do not see 2300 in the next 2 months, i agree to be stoned by the MM board and Torquemada'es as an Heretic



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IPA
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March 16, 2017 at 4:58 AM ×

Nico G, the board (well, most of it) wants you to make a killing so we could visit you in your new house in HI. I am sure Harry H won't be invited :)

I still think that US 10-yr has another small leg up to 2.75% +/- a few bps before it reverses. Yes, most would say today was the reversal. I say, just a pullback before the final push up there. It is not a major call for me so I am just going to sit and wait until it hits that level to go long TLT. Sticking to my chart.

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March 16, 2017 at 6:48 AM ×

SPX -> expiry week momentum from covered call-writer covering / rolls / hedgers' deltas disappearing ... No certainties in these markets, but statistical-suffering is a touch likelier until Fri a.m. SPX expiry

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Nico G
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March 16, 2017 at 7:43 AM ×

everyone is invited

by the way i recommend to the board the last book of Eisinger:

The Chickenshit Club - The Justice Department and Its Failure to Prosecute White-Collar Criminals

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Harry H
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March 16, 2017 at 9:33 AM ×

Spooz up another 10pts or so from yesterday, Nico down another $150k or so...

Nico, what's all this nonsense about your new average price being 2300?? That doesn't match your previous posts here. Anyway let's face it, we're not surprised. No-one is actually believing you selling 300+ contracts of spooz into a parabolic move... this is the realm of fantasist traders operating out of their mom's basement.

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abee crombie
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March 16, 2017 at 10:05 AM ×

Nico sell me sept or oct calls. Im a big fan of yours no need to shoot the messenger. Didnt soros reverse his short in 98. Blow off moves are tough to play.

Im beginning to think it may be 2018 b4 markets turn. Im pretty flat. Like biotech, oil, japan and india. And gold but hard to say with that one. Id rather short momo stocks vs spx. Ipa you are making me think about trimming my long held investment in cni.

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Nico G
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March 16, 2017 at 10:59 AM ×

i wrote a 'friendly' trade im big fan of yours too. Now enough of that gay Miami shit :D

90% of the time markets print a short term high the Thursday before expiry, for our friends with short term timeframe

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johno
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March 16, 2017 at 12:38 PM ×

Agree with abee, I'd rather be a buyer of those calls. Retail money has been flowing in and how long that continues, I don't know. I'd rather be long an option on the unknown than short it, especially with everyone here agreeing volatility is priced too low.

Well, Norges Bank surprised, extending its slight easing bias for longer. At first, I took off 2/3 of my position but then put back on and will sit tight. I'm guessing it's in the price but we'll see.

CBT (Turkey) gave the market what it was looking for, which is nice for my now closer-to-the-money options. Hopefully between that and Fed it can sustain a rally, but uncertainty around the referendum may hold it back. Not sure what is the better outcome there. Any views on how markets take yes versus no outcome?

Seems I bought the wrong market on the Dutch headlines yesterday. Would have thought France would have outperformed -- wrong.

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IPA
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March 16, 2017 at 5:31 PM ×

BATman (err... Bannon) vs Cohn. Let the Apprentice Era begin! I say half of the cabinet will be gone by Trump's mid-term. That is if he himself is not gone by then :)

http://www.foxbusiness.com/politics/2017/03/15/cohn-vs-bannon-feud-escalating-over-trumps-tax-economic-policy.html

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johno
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March 16, 2017 at 6:08 PM ×

Did you see the WSJ about Bannon's defining moment? In a nutshell, the guy is pissed his Dad sold his AT&T shares in 2008. Was watching too much CNBC and lost his nerve. So lame.

Re oil, I have a question: what is the break-even on the marginal US shale that will balance the market in 2018? We see the break-even analyses showing lower and lower #s, but the refutation is they're drilling the best-of-the-best, that service prices will have to go way up to support higher production levels, etc.. Anyone have a strong view on this? I think this is the key question. If we have (for purposes of the next few years) infinite oil to drill at break-evens in the 30s and 40s, then the OPEC cuts will be futile, no? I wonder to what extent this is about supporting the market until the Saudi Aramco IPO gets off ...

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JohnL
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March 16, 2017 at 6:45 PM ×

JohnO Bloomberg had a nice piece on this

https://www.bloomberg.com/news/articles/2017-03-14/oil-at-40-no-problem-as-u-s-drillers-snub-opec-with-hedges

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Nico G
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March 16, 2017 at 9:39 PM ×

johno

France has much much bigger issues than tiny efficient NL

Wilders was never expected to take over anyway, det deplorable would never muster a majority around him BUT his progress from last election to this one is undeniable so it still feeds the populist theme

IPA

read the details of Trumpcare in the plane today and it was appalling. As far as FT analysis can be deemed right. They botched it, left every smart possibilty out, they are now damned if the bill passes, and damned if it doesnt. All the while they are licking Saud's ass like everyone before them as if the US couldnt live without those guys. It is incredibly disappointing, what a bunch of morons. LIberal friends said 'you wait and see' after elections, i dared to be naive, hoped but they were right it's a disaster.

Meanwhile under BBB leverage is highest since 2005. If they manage to deleverage that house of cards without accident, i'll bow to their mastery and accept a hefty loss.

As per oil imho we're still in a bear market. When they can erase months of flag in one week it's bear market price action

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Unknown
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March 16, 2017 at 10:02 PM ×

Johno break even analysis of oil doesn't work when you make infinite capital available to a bunch of liars. Breakevens depends on many costs (service providers, ultimate expected recovery, acreage cost, cleanup costs). Operating costs were suppressed and are on the op. Eur is massively exaggerated. Acreage cost is batshit crazy. Water pumping cost going up for many. I don't believe breakeven is genuinely sub 55-60 in Permian and that's without return of capital. The space should trade at 3x ebitda instead of trades at 20x. Massive bubble like the entire market. We near a proper bear to purge this shit.

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johno
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March 16, 2017 at 10:12 PM ×

I take a different view on the Dutch election. The main takeaway is that polls are not way off in Continental Europe. I also note that Trump and Brexit results were within polling margins of error. Le Pen beating Macron is not. Put that all together and I think there's a good case to fade Le Pen risk.

Was having a nice afternoon until the Nowotny headlines hit. I'd closed my position in EURUSD from the other day but have EUR as a short leg to NOK and small SEK. Praet has already, in response to Nowotny's interview, said there's a "strong logic" to the forward guidance of QE ending first and then rate hikes, but EURUSD keeps going higher. Anyway, I guess this adds color to why Draghi was non-committal about at the forward guidance at the last presser. A bit surprised it's worth 65 pips.

Update on the idea of currency manipulators dependent on US security backing off intervention ... UBS did a report showing that Korea and Taiwan have still been at it this year. So, so far, no confirmation of that thesis.



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johno
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March 16, 2017 at 10:23 PM ×

Ha! Unknown at 10:02pm, I hear you. Once upon a time I was an event-driven equity guy and was very active in certain re-organization situations. Met plenty of E&P managements then and concluded they were all liars. They'll say anything to anyone to get money to drill some holes.

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abee crombie
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March 16, 2017 at 11:21 PM ×

Johno, most of the us drillers from my vantage point, can ramp up and down drilling operations pretty quick, especially if they have a core plan, in order to keep acerage, delinate plays etc. Sub 40 most of the marginal goes away, imo. But i doubt we even get there. Oil is a global market. Yes US is a low cost and growing producer. But rest of the world isnt. Thats not changing anytime soon, in fact getting worse. Oh and oil demand is still very strong. (Though who know know much was chonese spr etc) ....this is a decent time to buy oil, imo. Pair it with a short in high yield if u are worried.

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IPA
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March 17, 2017 at 4:38 AM ×

abee, I want stories like this to bring the oil down, and most importantly, XLE, XOP, and OIH so I can buy them already. Patience...

https://m.investing.com/news/commodities-news/halfway-into-2017's-oil-supply-cut,-asia-remains-awash-with-fuel-466862

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checkmate
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March 17, 2017 at 9:58 AM ×

Looks like Trump and indeed the UK can actually spell Infrastructure ,but have no idea as to how they might actually go about investing in it. So much for all the hype.
Mind you they probably will be paying 3 billion or so to Mexican labourers to build 'the wall' from the Mexican side. Very stimulative if you're Mexican !

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March 17, 2017 at 1:21 PM ×

We interrupt this service for a public announcement.

Since the Trump victory a new sentiment indicator has evolved. It's called the "libtard inversion momentum indicator" sponsored by the ivy league universities and several press journals with an unknown quantum amount of free advertising cash to throw after bad money.
The more they bitch , the more the S&P500 rises!

Anyway, that's me forever, I'm in trading at the desk in prep for the journey alongside the cossacks and the mongolians.

That's a big chow from me!

https://www.youtube.com/watch?v=37exbXiSIps

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eruditetroll
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March 17, 2017 at 2:33 PM ×

Hi everybody,

This is my first id-associated comment. You may call me "ET." :)

I had actually written a comment on Tuesday, but chickened out on posting it, because I thought it might get a harsh reception. Here it is:

"Nico,

Some free advice that will probably save you 100K [actually, it would have saved more than that]. Cover your entire ES position, and re-establish it near the close tomorrow. All of the net market gains over the past twenty years have been associated with Federal Reserve meetings, and there is no reason to hold a big short position on announcement day. Most of the time, it will go against you."

I have a modest long position put on just for the Fed meeting, so I am not holding the other side of what Nico has, but I do have one position on a similar level of insanity. I am short 250 VIX futures. Yes, I know that trade is living on borrowed time, but I just don't have the patience Nico does. I had my own epiphany about fighting the market when I knew I was right in 2008. I held a huge long position in Fed Funds futures. I knew they were going to but cutting to zero, but all of sudden, the market starting pricing in rate hikes. I guess everyone believed the "contained" gibberish emanating from certain influential individuals. Anyway, at one point, the position was down about 700K, before the market finally realized what was going on. I ended up making three times that, but afterwards asked myself "Why the bleep didn't you just get rid of the position, and get back in - at a better level - when the market finally wakes up?" Since then, I have been much better at cutting loose positions when there is a high level of ignorance in the market. :) It seems the market is disconnected from reality far more often now than in times past.

I wanted to share another story, which will remove me from the perceived multitudes of twelve year-olds. This is where I learned that, since marktes spend more time going up, making money shorting equities requires better timing than being long. In 1987, personal computers were just starting to make inroads into the corporate world, and a colleague of mine was convinced that this trend would be very bad for DEC (Digital Equipment, at the time the second largest computer company in the world, and the largest employer in the state of Massachusetts, other than the state government). The share price history is still available on Bloomberg under its original ticker. Anyway, he started shorting it in January of that year in the $100s, but his timing was not particularly good - the stock went up more than forty percent that month. He was resolute, and kept adding to his position into the $160s, but another surge in early August took the price from $165 to as high as $184.375 in a week. At that point, he finally threw in the towel. Those near my age bracket certainly remember what happened next, and twelve year-old readers can probably guess. DEC reached an interim high of $198.25 on August 25th - the day of the bull market peak, and topped that for just one day at $199.50 on October 6th. It fell to $130.00 in less than two weeks - on the day of the crash, and to $110.00 a week later. After that, it began to fall in a relatively narrow channel, bottoming at $18.25 in April, 1994. Compaq acquired DEC in 1998.

So Nico, I have no doubt that your short position will eventually do very well, but I am still going to wait a bit before putting on something similar - and with some luck, get a better entry price than you did. :)

At the risk of appearing even more clueless in the future, I am going to guess that the market tops shortly after Le Pen loses. That will remove a major worry, and spark a rally after which there will truly be no one left to buy.

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abee crombie
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March 17, 2017 at 4:44 PM ×

for Nico and the bears

http://cornerstonemacro.com/wp-content/uploads/2017/03/20170314_STR_RiskOff.mp4

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Nico G
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March 17, 2017 at 7:16 PM ×

interesting post ET

it all looks clearer in the rearview mirror - 'why not get rid of the position and enter at a better price'? because of opportunity cost

it can be a personal choice but i'd rather lose big against adverse market, and end up making 3x like in your example, than MISSING an amazing trade on an overstretched market waiting for an optimal entry

in other words id rather be too early than left out - to give you a recent example i almost lost my mind when i hesitated on January 4th 2016 gap down, thinking i'd get a better entry at gap close on historically an always strong first trading of the year

guess what? i missed a 10% down move. I almost lost my mind. The next month i was buying 1800 spoos hoping it will go back up and that it was not that big bear market resuming. It was incredibly stupid but it worked with the inner conviction that the `fed would not let the market destroy itself before the Clinton election

fast forward today, you know animal spirits are in place, and you know Fed is raising non stop. I was mocked after FOMC meeting by folks who were saying 'one and done' again. I was right on the fed agenda but WRONG on the market resilience. It is impossible to know when/where the Trump rally tops

there is a risk of a -4% gap anytime. Would you ET, short a 4% gap hole? i don't think so

meaning, by waiting (rationally) for a better entry to short, you will probably be left out of the game when it drops like a stone. Then again, in hindsight you'd go shoulda woulda shorted that -4% gap it was the final signal\

guess what? noone will. Also because the BTF -5% dip has always worked those last n years

what does it mean? it means that the market will dump just like this, and gap down never retraced hence never shorted

it can happen on Monday. It can happen after 2500. Or 2600. I am in a challenging position, with a 2300 average. But mentally i feel privileged to have made up my mind and paid to play.

this is the whole trading psychology in a nutshell. You prefer optimal entries, with the risk of missing an obvious exuberant top. I prefer to jump in early, knowingly, just to be there. The 2030 Trump globex reaction low will be revisited. Noone can tell why.

As abee said, most folks think it happens in 2018 not before. I personally dont think the market will be that cute, that long

happy week end !

PS: your pre FOMC trade didnt pay much. This market is exhausted.

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johno
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March 17, 2017 at 9:15 PM ×

ET, your post is most welcome. The discussion will benefit from a thoughtful contributor (which you clearly are) who's short 250 VIX futures here. Hope to see you posting here in the future.

abee, thanks for that link. Always interested to see what Trahan is thinking.

Week ended up OK. Added to -EURNOK on those (IMO) misinterpreted Nowotny comments then cut back position to comfortable size this afternoon (Euribor futures would have been a cleaner expression that worked but I've been a little monomaniacal about the EURNOK cross). Took off my small -EURSEK too.

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Up_Side Down
admin
March 17, 2017 at 9:49 PM ×

ET, yours was a most welcome and refreshing post, not because I fully align with your POV (if anything I lean to NG's but with less conviction than either of you hold) but it is so good to read a credible alternative line of thought from an investor disclosing their positions. Between Yourself and NG sits precisely my dilemma - to time or not to time that is the question and with what carry cost.

I'm favouring lower carry cost, lower potential return for exactly the reasons played out here, most valuable contribution, thanks.

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MacroWatcher
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March 17, 2017 at 10:14 PM ×

johno , agree with you on the market misinterpreting Nowotny comments , even more if you consider Praet's reply. I had the euribor flattener on already and added to the position today. I feel the same way people were praying for the monster of deflation to go away at the beginning of last year, they are now singing praises to inflation only for it to fade soon. The US is a different story , especially if they continue to talk the dollar down. Also, just structurally , given the gap between productivity growth ( which I fail to see any reason why it could go up , at least in the medium term) and wage growth , US inflation can keep at the 2% level pretty easily I think. Much easier to fade the reflation trade via Europe imo, unsure about the timing elsewhere. I really enjoyed Gave's interview shared here, which only added to my concerns on timing the fade.
On to other ideas, I like being long the peso even more now after breaking it the 200dma and added to the position after Navarro's comments. Also added a bit of exposure to Irish real estate , the demand/supply imbalance is crazy and the population inflow due to Brexit only adds conviction to the idea.
On the spooz, I must confess I've been buying the dip but it's pretty obvious to me that expected returns are very low at this point. Retail investors buying at these levels will end up very disappointed , I just don't know when so I'm trying to add exposure elsewhere.

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IPA
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March 17, 2017 at 10:31 PM ×

Despite Merkel/Trump saying the meeting went well, I say that judging by their body language and the tense tone of the meeting, it went sour at some point. No handshakes during the photo op and not too many smiles. Maybe Trump was afraid to touch Merkel after Bush's shoulder rub? I could be dramatizing, but still...

If the newly crafted NAFTA, and I will go ahead and name it "The Three Whales" agreement, goes through using Navarro's North America against the rest of the world structure, I will step on the US technology short button with my both feet. They will stand to lose the most in sales due to new EU, China, and Japan tariffs, as those three whales would retaliate the instant they realize that North American market is off limits to them. Let the trade wars begin! I am not short tech yet.

Nico G, Ryan's healthcare bill is being patched right now to gain more R votes in the House. Trump claims that 85% of house Rs are on board after the slight tweaking. Or maybe he was simply retweeting the Fox News headline, just like the wiretapping claim? Shouldn't they be getting their news from him and not the other way around? LOL Anyway, at 85% being on board you still got 17 votes to gain before you get to majority (as no Ds will ever vote yes). That does not sound like a bill bound for passage at all. I think that even if the House narrowly gets it passed, Senate will turn it down. So how do we trade it if it's passed? If the bill is passed with single high to low mid teens million Americans losing coverage and Medicaid phased out of the Fed funding you short the hospitals/med facilities and healthcare reits into oblivion, imo. States would revolt and losses would mount as uncovered folks would visit the hospitals which can't turn them away. Happened before...

Had to wait until the close to post this one (been fooled a few times before), but are you guys checking out XTN? First close below the mid BB on weekly here since Jun 2016. I continue to believe that it is trading the March of 2015 scenario. I have been talking about this for a while here, ad nauseam. That close below the moving avg back in March of 2015 precipitated a 30% 10-month decline. I would be happy with a half of that, considering my positioning in transports. I seriously doubt that many players are expecting this kind of decline right now.

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IPA
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March 18, 2017 at 3:41 AM ×

My apologies, I misread the Trump retweet of Fox News. "GOP agrees on over 85% of the healthcare bill". In any case, he did say later in the day that more and more Rs are coming on board. Some of them are saying "not so". From what I am reading right now it was a work requirement addition for Medicaid recipients. This is BS, I don't see this bill passing in the House. I truly think we may have a TARP moment setting up. You better be at your screens when the House votes on this thing.

http://www.huffingtonpost.com/entry/conservatives-war-gop-health-care-bill_us_58cc477ae4b0be71dcf4d3f7

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IPA
admin
March 19, 2017 at 5:05 PM ×

The next Fed Chairman?

https://www.minneapolisfed.org/news-and-events/messages/why-i-dissented

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washedup
admin
March 19, 2017 at 7:29 PM ×

@IPA of course - an ex goldman guy who wants to take operation ZeroVix to its logical denouement would be perfect for the job - or is it something in the water in Minneapolis? I recall every syllable out of kocherlakota's mouth was a coo too.

I kind of laughed at
" The key question is, will a market correction trigger economic instability? It will cause pain for investors, but the likelihood of a correction triggering a financial crisis is low."

Really? surely the 'chump' from the financial crisis would have a better sense of how the world works than that?

I do agree with him that balance sheet normalization would have a been a better direction to go in than to 'freeze' a mountain of bank reserves and gift the large banks a bunch of dough via IOER - what a sham.

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Nico G
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March 19, 2017 at 7:47 PM ×

washed

"every syllable out of kocherlakota's mouth was a coo too"

MM quote of the year! i read every post of yours with a big fat Public Enemy beat, a compilation is warranted

on a Gallic note, i thought France would be the safest country in the world until election day. Because any new attack would have le Pen elected. But they can't even manage that, a nasty airport attack shook that false sense of security just days after French police boss declared 'the state of emergency could be safely lifted'. What an utter moron

French are going to vote with fear in their gut. Make no mistake French vote is the biggest story of 2017

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adamantic
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March 20, 2017 at 2:40 AM ×

Oil still seems like a good risk off proxy to S&P.

Decent roll yield on USO as well.

http://www.fraziscapitalpartners.com/pdf/FrazisFebruary17.pdf

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Nico G
admin
March 20, 2017 at 6:57 AM ×

New Zealand sold off big

i'm sensing a glorious post FOMC post expiry glorious gap MOnday

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Jens
admin
March 20, 2017 at 9:21 AM ×

MacroWatcher: interesting comment. I have some of your trades on as well. I like ER flattener a lot and fully agree Nowotny comments have been misinterpreted (in any case, he said himself in the interview that although there's various ways accommodation could be taken away, now is not yet the time to do so). I had a pretty chunky position already (mainly ERM7 vs Z7, some H8 as well), so didn't add unfortunately.

Question: how do you see this trade play out in case of a Le Pen win? I'm actually very worried the ER curve might perversely steepen on this (possibly by a lot) on anticipated fra/eonia widening. I'd prefer to play this in a cleaner way, but I can't trade eonia swaps and there is obviously zero liquidity in eaonia futures sadly.

Fully agree on Irish real estate as well. What's your favorite vehicle for putting this on? I'm actually in the process of buying some physical RE in Dublin right now, but that's more a long-term investment than trade of course.

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Eddie
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March 20, 2017 at 1:13 PM ×

Despite Merkel/Trump saying the meeting went well, I say that judging by their body language and the tense tone of the meeting, it went sour at some point.

According to German fake news outlets Trump refused to shake hands, even after a couple of requests. Doesn't sound like they were hugging and kissing each other imho.

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IPA
admin
March 20, 2017 at 3:03 PM ×

Eddie, that was vintage Trump. Let's see what happens when Xi Jinping visits him for a round of golf. I say Trump will not be as friendly as he was with Abe. Chinese leader may be preparing really hard, and I don't mean his golf skills. He may arrive with a long list of trade war consequences. Trump may exude disgust. $#!+ may get real fast.

http://ca.reuters.com/article/businessNews/idCAKBN16R0PW-OCABS

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abee crombie
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March 20, 2017 at 3:10 PM ×

https://www.bloomberg.com/news/videos/2017-03-20/the-market-divergence-of-volatility-and-uncertainty-video

from the og, MM

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MacroWatcher
admin
March 20, 2017 at 3:31 PM ×

Jens, good point , it also worries me but for example, when Le Pen odds rallied strongly late january into late february there was no such steepening effect. Gaining some points is very different from winning though. The EUONIA/EURIBOR widening would impact our spread negatively if the term structure widens less on the short-end than on the long-end and I think that at least initially ST risk will rise more. I see LT implications of a LePen as very nuanced(unclear what she could really do) whereas on the ST panic would likely ensue.

Regarding Irish real estate , I'm doing it through cairn homes. They have good financing, good management and a clear path to profit from the imbalance. I like the idea , my only issue with it is carrying too much stock specific risk as I didn't found any other good ways to express the view.

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Nico G
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March 20, 2017 at 4:17 PM ×

if le Pen wins expect EURUSD to smash parity, into 0.90

if she doesn't 1.15+ is in the cards. i don't trade FX volat but butterflies would fare nicely

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abee crombie
admin
March 20, 2017 at 6:24 PM ×

Jens kennedy wilson REIT i think has some nice Irish exposure...

IPA, this HC vote on Thursday, you think it will happen during trading hours? Any idea? Looking to buy some weekly options tom or wed

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Leftback
admin
March 20, 2017 at 6:30 PM ×

Curve flattening predictions are looking good as US5y dipped below 2.00% today. Those of us who are long the belly as well as the long end will be the major beneficiaries when the really big squeeze arrives. Lack of any coherent expansionary fiscal policy, plus monetary tightening and fading of transitory inflation drivers means that Treasury shorts will eventually be first disappointed and then eviscerated.

The trigger? Anyone's guess what the media will decide ex post facto, but there is plenty to choose from in the US debt ceiling, Greek debt due in July, European bank balance sheets in poor shape, US profit recession or we are just about out of over-hyped US survey data indicating faster growth. It's likely time for another sobering dose of reality.

Note that in many of the Japanese recessions since 1990, the curve flattened but didn't invert. The US YC may still invert if we enter a recession, but it doesn't have to at these low rates, in a slowing economy we can just cram down the long end so that the curve runs from 50 to 100 bps. We'll see how Dame Janet responds to that, yes we all know the answer.

A 1% 10y is impossible - [b/c it's going to 3% right?] ;-). Of course they said that in Japan once upon a time as well. Just as in 2008, "things that can't happen", did, we should be careful about those events to which we assign very low probability.

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johno
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March 20, 2017 at 7:44 PM ×

Guess I'll be the one to ring on the bell on CNY. Broke the range against the CFETS basket. Remarkably, Asian FX is all rallying despite it.

I wonder whether the dollar smile theory holds if global growth starts disappointing. The US forward curve has the most hikes priced in and last week's Fed suggests it will take an awful lot for it to steepen beyond 75 bps/year. So upside seems limited, and there's plenty of downside relative to rest-of-the-world, if we assume USD is just going to follow rate differentials.

BAT or broad tariffs could see the USD adjust higher, but the odds for the former perhaps take a step down if Ryan can't get this House vote on Thursday.

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IPA
admin
March 20, 2017 at 8:42 PM ×

abee, no time was given yet. I am checking on House's site a couple of times a day. As soos as I see it I'll post it here. Important to note that senate is absolutely adamant about this bill not going through in its current version, the votes math is simply not there at all. Also, over the weekend, many hospital CEOs and individual states have expressed a major concern about reduced insurance coverage and Medicaid funding. I see that AHA even launched an ad campaign. Senators are going to hear from constituents, will be scared to own this mess and will probably kill this bill, imo.

Are you checking out the blood bath in retail today? Apparels are being absolutely shot to death across the board. WMT acquired a small online clothing retailer (for approx $70M). Big freaking deal. Gotta be something else. Grocery, dept stores, mall retailers, discounters, all down between 2-5%. Nuts! Is it BAT? I can't find a single thing to pinpoint this on. You?? The only thing I can think of is that G20 communique possibly introduced a new protectionism worry into the market leading to some new BAT worries.

Watching two important stocks reporting toworrow: LEN and FDX. Homebuilders and transports are a bit worried here.

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IPA
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March 20, 2017 at 9:37 PM ×

abee, here you go, this just out. Narrowing it down some - "Thursday evening". For those who want to keep a tally, 31 guys and one gal oppose on R's side. I wonder how many quiet Nays are out there simply not willing to be called to the WH and meet with Trump on this?

http://www.vox.com/policy-and-politics/2017/3/20/14927252/house-republicans-ahca-obamacare-repeal-oppose

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Jens
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March 21, 2017 at 11:17 AM ×

MacroWatcher: Indeed, so far the ER flattener has been well-behaved, but I think that if Le Pen actually wins all bets would be off. Would agree that short-end euribor/eonia should widen most, but unclear where the exact inflection point would lie. Could be around late dec'17 / early '18, which is about the earliest time she could realistically accomplish her Frexit plans. My flattener is in the very front-end, mainly M7-Z7 actually (I have a strong view ECB won't go in 2017, but not so sure about 2018), so that might actually steepen on a Le Pen win. I've put on some USD fra/ois widener as a hedge (which i think makes sense anyways) so hopefully I'll be fine, but aiming to reduce size a bit before election all the same.

MacroWatcher & Abee: thanks for Irish RE suggestions, will look into these.

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johno
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March 21, 2017 at 3:49 PM ×

Anyone getting nervous about the USD? Bought some 2M USD put JPY call spreads in Asian hours (some Le Pen risk premium in the lower strike helps the payoff profile). Political hurdles right in front of us which may challenge the fiscal narrative and US rates pricing hikes pretty aggressively IMO. USD does look cheap to rate differentials, though the relationship has been slipping lately. So far, resisting adding EUR exposure but took down -EURNOK as I'm nervous about face-ripper in EUR and a risk-off episode here.

Are BTPs a short? At the current 60b pace, ECB will hit the 33% issuer limits in Q3 '18. How does ECB get around that? Or do they have to taper and rely on other programs (OMT/ESM) in case Italy widens out? If so, when do they step in? 10Y Portugal is at 4.2% and hasn't triggered OMT. And looking at the 10Y 2Y forwards (when tapering should be done) on the Portugal and Italy sovereign curves, rates are 5.35% and 3.01%, so lots of upside to Italian rates from here, no? When to short? The day after Macron wins?

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johno
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March 21, 2017 at 3:53 PM ×

I make the Portugal comparison, by the way, because 1) they also have a crazy debt load and 2) due to the old SMP, the ECB has already had to slow down its purchases, so it's more of a market price than in BTPs.

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IPA
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March 21, 2017 at 4:49 PM ×

Look at the volume on KRE. Exodus en masse.

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abee crombie
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March 21, 2017 at 5:09 PM ×

Ipa thanks. Xrt is breaking lower and the usual suspects are leading lower. This trade has gotta start having some broader implications. Retail employs lots of ppl.

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johno
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March 21, 2017 at 5:11 PM ×

I've got this terrible itch about the USD right now.

Looking at EURUSD. My model has it close to fair, maybe slightly rich. Also, a more recent post-election regression on the 10Y UST-bund spread has it a bit rich. You all know my arguments on US rates from above. Le Pen is not going to win. Dutch election where Wilders didn't under-poll and didn't late-surge (rather, he faded), and last night's debate add conviction to the call. The Obamacare repeal/replace test of Trump's efficacy is right in front of us. If he fails, chances of BAT or reciprocal taxes goes down, which takes down some USD face-ripper risk but maybe heightens odds of Trump resorting to tariffs instead of taxes to achieve trade aims. We also potentially get a risk-off at the same time, and EUR is everyone's favorite funding currency. In a risk-on environment, and with Le Pen looking less likely to win, you probably have some capital that wants to play the European economic cycle, which is EUR bullish too. If EUR breaks 1.085-ish, I'm guessing technical guys are going to get all excited too.

Biggest hang-ups with the EUR are 1) it's going to blow up eventually (next recession when Italy needs an ESM deal and the Italians tell the EU to f-off?) and 2) core inflation is going nowhere. Wages, even in Germany, are going nowhere. I would argue that the situation is more similar in the US than some would like to believe, however (looking at ECI and average weekly earnings).

I'm still cautious of EMFX where my dollar shorts are all expressed via options. The CNY continues to slide against the CFETS basket, having broken through the low that held since August. And there's the risk that, one way or other, Trump is going to play the protectionist card. One the pluses column for EMFX is the Chinese National Congress which should keep the impulse from turning too negative before this summer.

Bought some EURUSD.

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IPA
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March 21, 2017 at 6:56 PM ×

Under the hood this car looks even worse. Some KRE components are down crazy 7-8%. You start wondering what this means: no tax cut, no Dodd-Frank repeal, flattening yield curve, higher rates stifling new loan demand, all of the above? And of course, I realize that this could just be a pullback from unsustainable levels. Taking half off, stops go to b/e on the rest. Largest volume ever.

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Nico G
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March 21, 2017 at 7:25 PM ×

no dodd frank repeal increasingly unlikely

banks tanking

dat Trump trade is gonna unwind fast

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Rossco
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March 21, 2017 at 11:06 PM ×

Well done for sticking with it Nico. I haven't commented on your posts because I know what it feels like to be offside for a while and having to second guess yourself. No one needs strangers telling them how to do it better !

Ive been waiting for what seems like ever and ended up selling on a stop at 51 and hoping to double that with a bounce to mid 50's
The stop is circa 90 I think but am firmly of the view that it will be NDQ and R2K where the better trading opportunities are

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March 22, 2017 at 12:40 AM × This comment has been removed by the author.
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IPA
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March 22, 2017 at 1:58 AM ×

Rossco, agree with you but my entry is where your stop is :) I am looking to play NQ at 5380-5400. Enough touches in that zone, enough memory. Stop above the high. Very low risk and enormous reward. I am of the view that a possible U.S. trade war with EU/Asia kills Nasdaq.

Why and how would NQ get up there? I think that market may temporarily celebrate the House possibly passing the healthcare bill if Trump/Ryan dream team shoves it down Freedom Caucus' throat. What many do not realize is that Senate is a total no go, not even close, and the senators opposing the bill are not fans of Trump at all.

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koolbong
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March 22, 2017 at 4:30 AM ×

@johno.... nice trade with the USDJPY puts... couldn't possibly have gotten the timing more bang on!...
I like EUR higher... have liked it for a while, and been wondering why you've been bearish EURNOK.. more with oil dynamics looking fairly weak... but then I don't know enough about the Emerging Europe currencies to comment really... (ok, NOK is not EE, so you kind of get the idea..!!)...

at a broader level, I am inclined to think the lower USDEm trade has run it's course for now... China is acting all funny with the basket again, and few people seem to be paying attention to them... it's like 'deja vu all over again' when 2016Q2 saw the biggest stealth depreciation in the basket... that and the fact that we're looking at a classical equity driven risk-off for the first time in a long while generally makes me reluctant to be long Em currencies here...

at some stage I'd want to get back into the long Em trade, but I'd think that's a few pctage points away... as the venerable Mr. Buffet says... what is smart at one price, can be stupid at another....

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