Dear readers
It has struck me that many of the terms I use are complete jargon ( blah blah) to a lot of people. In addition to market commentary, I am going to answer questions about any financial term/finance questions that you have. I will also suggest books/other resources for further reading.
PLEASE SUBMIT ANY QUESTION THAT YOU HAVE IN THE COMMENTS SECTION.
Here are a couple I will address:
1) What is an option and when and why should I use it?
2) What is the benefit of buying a stock vs. a bond and in which economic climate should I do what?.....
3) What does a "risk reversal" mean?
4) Your questions...
Friday, July 25, 2008
Tuesday, July 15, 2008
The stampede
Panic Abounds
1) USDJPY falls from 106 levels to 104 levels
2) VIX climbs to 29 from 26-27 and
3) S&P 500 is poised to break 1200 to the downside just before the financial report their earnings.
Should be interesting to see what happens now since this seems to be a market moving down with no news just expectations of bad things to come. If expectations continue to change like this, we may even have a positive bounce when earnings are actually released
So far anyone who had gotten short financials based on my recommendations Friday, is probably doing well. ...
USDZAR: I was asked my views on the South African Rand. Here is what I know
a) The spot trader on my desk used to hate trading the rand :)... it has jumps. For instance notice the rand vol is 20% in chart 2 while most currency vols are 10-15%.
b) It used to follow the EURUSD and is now diverged a bit as you can see in chart 1. this may seem like an opportunity to get long ZAR, esp. with the gold production
c) I think some cheap punt like a 1m Reverse Knock Out on top of a short USDZAR position may work.
d) For this trade (short USDZAR) I would set my stops quite conservatively like around 8.25 or something around those levels. If it hits that get out of the trade....and make sure you have an automated stop since with a jump it may get to much worse levels before you can stop
chart1 red line = USDEUR and blue line = ZARUSD
chart 2 blue line = USDZAR annualized volatility
SORRY ABOUT THE CRAPPY PICTURES. I WILL FIGURE OUT HOW TO DO THEM BETTER NEXT TIME.... BUT YOU CAN CLICK ON THEM TO GET BETTER RESOLUTION
Monday, July 14, 2008
Hope vs. Reason - get long skew and tails
Was just pondering the question of why most macroeconomists employed by investment banks continue to give positive news during downturns and how most forecasts of recessions' extent and time of ending are flawed.
Since the beginning of this mortgage mess, most analysts continue to say things like financial stock has bottomed out etc. or the worst is behind us...Interestingly, the earnings expectations for , say, S&P 500 continue to decline. For instance:
*Q2 2008 estimates have been marked down significantly- around 12-15%
*Q3 2008 and Q4 2008 earning estimates have only been lowered by 2-4%
I won't be shocked if Q3 and Q4 turn out to be worse than expected and stock prices fall! In my mind there are two reasons for such behavior
1) People are unable to see an "unexpected negative shock"- tautological but that's the point! I think this is the climate of unexpected NEGATIVE shocks and they will continue to occur
2) People talk their book- most investors are long and want this to end. Thus they talk about what they HOPE rather than what will happen..
View and Trade Ideas (horizon is 3 months unless specified otherwise)
1) Stocks:Short financial sectors and Short US, UK stock markets in general. Long Bonds for now.
2) skew, tails and vol: I like being long vol, skew and tails. When VIX < 25 great opportunity to buy 3m/6m vol.
Trade: I like being long vega and long gamma via 3m 10/25 delta puts and short the 10 delta/25 delta calls. i.e. buy the downside risk reversals. Exposed to skew and wings. They shall be valuable.
Why:In a range bound but drifting downwards market the risk reversal is not a bad way to get long stuff. you can sell out your position in times of panic and make decent money.
3) International: Long Brazil and Australian stock market and short China and India markets.
Trade:AUDUSD. That has been a steady train! Expect resistance around parity. So I like 3m call spread 0.97/1.0 strikes
4) Hurricane payoffs: Long Gold and Long Oil (hope for a hurricane payoff). Again, Risk Reversals are a decent way to do this.
5) Watching short GBP and EUR vs. USD. Not convinced time is now but time is coming to get long the dollar
Since the beginning of this mortgage mess, most analysts continue to say things like financial stock has bottomed out etc. or the worst is behind us...Interestingly, the earnings expectations for , say, S&P 500 continue to decline. For instance:
*Q2 2008 estimates have been marked down significantly- around 12-15%
*Q3 2008 and Q4 2008 earning estimates have only been lowered by 2-4%
I won't be shocked if Q3 and Q4 turn out to be worse than expected and stock prices fall! In my mind there are two reasons for such behavior
1) People are unable to see an "unexpected negative shock"- tautological but that's the point! I think this is the climate of unexpected NEGATIVE shocks and they will continue to occur
2) People talk their book- most investors are long and want this to end. Thus they talk about what they HOPE rather than what will happen..
View and Trade Ideas (horizon is 3 months unless specified otherwise)
1) Stocks:Short financial sectors and Short US, UK stock markets in general. Long Bonds for now.
2) skew, tails and vol: I like being long vol, skew and tails. When VIX < 25 great opportunity to buy 3m/6m vol.
Trade: I like being long vega and long gamma via 3m 10/25 delta puts and short the 10 delta/25 delta calls. i.e. buy the downside risk reversals. Exposed to skew and wings. They shall be valuable.
Why:In a range bound but drifting downwards market the risk reversal is not a bad way to get long stuff. you can sell out your position in times of panic and make decent money.
3) International: Long Brazil and Australian stock market and short China and India markets.
Trade:AUDUSD. That has been a steady train! Expect resistance around parity. So I like 3m call spread 0.97/1.0 strikes
4) Hurricane payoffs: Long Gold and Long Oil (hope for a hurricane payoff). Again, Risk Reversals are a decent way to do this.
5) Watching short GBP and EUR vs. USD. Not convinced time is now but time is coming to get long the dollar
Sunday, July 13, 2008
Market Panic July 11th
Below is a post I sent as an email to various friends in the middle of the day on Friday, the 11th of July 2008. I am posting it here for fun and completeness.
I stand by my predictions.. this time I will beat my chest a bit more since I had talked about these on my blog
1) S&P going to 1100 and Dow going to 10K before 3 months are up. I think it will bounce back though in the short term- i.e. the next week. This is a classic case of everybody collectively putting their heads in sand and then realizing it was a bad strategy as they get hit. I think overall we are going DOWN... Right now everyone is panicking but Bernanke and Co. will resuce us again the market will bounce back a bit and then go down slowly again.
2) It is interesting that today is Friday which is BAD for a market meltdown starting early in the day since there is enough time to panic and NO one wants to go home long ! As yahoo finance says- Investors have little reason to shop for bargains Friday because many financial companies are reporting results next week and are expected to announce another round of big write-downs. I say- Thus today could be a full fledged panic and this time I am talking REAL panic. FNM and FRE are central to America. This is not an I Bank failing ....
3) I expect home prices to fall severely actually across the global markets.
4) SHORT TERM: Govt. is caught on the wrong foot I think. They have to come out and say they will save fannie and freddie but they don't want to totally SAVE it either! There is a limit to what they can save. I think though that the two days weekend will give the govt a chance to say something reassuring on MONDAY or over the weekend most likely. I also expect politicians to say something and put pressure to save FNM and FRE. This is Mr. Bernanke's worst case scenario or approaching that anyway...So far he has done well I think but he must stay up at night thinking INFLATION....
5) Long Term This is going to severely dent any confidence the average investor has left. I won't be shocked to see people buying bonds and pension funds getting out of the stock market in larger quantities. I expect HFs to get long vol quickly. So Vol will spike, esp. as everyone and their mom will buy puts.
6) Beginning of the bigger recession coming...Many credit card companies, Home Equity companies are going to have a very hard time.
7) Indicators- VIX is at 29. I expect VIX to go to 35-40. You can check the bid/ask spreads on FNM and FRE on Etrade or whatever. It is awesome... the bid/ask is wider than the price!!!
1) I am trying to buy FNM and FRE at 3.1 and 2.1 dollars. DO NOT pay more than 5 at any rate. it is a cheap punt for s**ts and giggles.
2) Short Goldman stock - too high at current levels. Buy some puts on it.
3) 5) Inflation will be the BIG deal- in the US, UK, China, India. Buy some Gold calls but the train has left the station a bit so wait for the bounce back in the stock market and fall in Gold. Inflation is coming. You can sell some puts on Gold or buy call spreads - but the bid/ask will kill you...still worth a shot if you think inflation is going to be as bad as I think it will be.
4) Oil is going to $175 before the year is over. Esp. if a hurricane comes. No speculators are not at fault... :)
5) Would short the dollar againt NZD and AUD and JPY
6) Long AUD, CAD and Oil producers all commodity producers for the next 1 year. After that short....
7) Short Indian and Chinese stock market- long Brazilian and Russian stock markets.
8) short credit card companies ( yes STILL bearish them. Their losses will come to head in about 4-6 more months and their defaults will climb. Until then they will hide it.)
Enjoy the mayhem... it is sad but educational
I stand by my predictions.. this time I will beat my chest a bit more since I had talked about these on my blog
1) S&P going to 1100 and Dow going to 10K before 3 months are up. I think it will bounce back though in the short term- i.e. the next week. This is a classic case of everybody collectively putting their heads in sand and then realizing it was a bad strategy as they get hit. I think overall we are going DOWN... Right now everyone is panicking but Bernanke and Co. will resuce us again the market will bounce back a bit and then go down slowly again.
2) It is interesting that today is Friday which is BAD for a market meltdown starting early in the day since there is enough time to panic and NO one wants to go home long ! As yahoo finance says- Investors have little reason to shop for bargains Friday because many financial companies are reporting results next week and are expected to announce another round of big write-downs. I say- Thus today could be a full fledged panic and this time I am talking REAL panic. FNM and FRE are central to America. This is not an I Bank failing ....
3) I expect home prices to fall severely actually across the global markets.
5) Long Term This is going to severely dent any confidence the average investor has left. I won't be shocked to see people buying bonds and pension funds getting out of the stock market in larger quantities. I expect HFs to get long vol quickly. So Vol will spike, esp. as everyone and their mom will buy puts.
6) Beginning of the bigger recession coming...Many credit card companies, Home Equity companies are going to have a very hard time.
the Awesome thing is that USDBRL- brazilian real is APPRECIATING against the dollar. I still like being long BRL! Right now USDBRL is at 1.6-1.7 levels. Typically in times of crises it goes to 2.5. Turkish Lira is going to hell in a handbasket.
Cheap PuntTrade Ideas:1) I am trying to buy FNM and FRE at 3.1 and 2.1 dollars. DO NOT pay more than 5 at any rate. it is a cheap punt for s**ts and giggles.
2) Short Goldman stock - too high at current levels. Buy some puts on it.
4) Oil is going to $175 before the year is over. Esp. if a hurricane comes. No speculators are not at fault... :)
5) Would short the dollar againt NZD and AUD and JPY
6) Long AUD, CAD and Oil producers all commodity producers for the next 1 year. After that short....
7) Short Indian and Chinese stock market- long Brazilian and Russian stock markets.
8) short credit card companies ( yes STILL bearish them. Their losses will come to head in about 4-6 more months and their defaults will climb. Until then they will hide it.)
Enjoy the mayhem... it is sad but educational
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