Long the dollar/short EUR?

I think it may be time to short the EUR against the USD again...

-I think Europe will sink into recession more than the US and the authorities there have not officially recommended a Zero interest rate policy... So any moves towards that will "surprise" the markets.

- Also, with news like Ireland, Greece etc. being more likely to default the status of Euro as a single currency may be a bit more under siege....

News Below....

The Irish IMF Rumor: Is A Payment Default Or A EMU Break-Up More Conceivable?

• Ireland was at pains to deny rumours that the IMF is about to walk in. Investors are getting increasingly nervous about the prospect of payment default in the euro area, and this is reflected by an increase in spreads and a weakening euro. The Irish spread has now widened to 184bp, and five-year credit default swaps for Ireland yesterday shot up from 193 to 207bp. Greek CDS are now at 250bp. The notion of a payment default among euro members spooks global investors, and the euro duly fell to $1.31 (Eurointelligence)

Hedge Fund Performance Dec 2008

Index / Sub Strategies		8-Dec	YTD	1 Year
Convertible Arbitrage		-1%	-32%	-3%
Dedicated Short Bias		-2%	15%	15%
Emerging Markets		0%	-30%	-30%
Equity Market Neutral		0%	-40%	-40%
Event Driven		-1%	-18%	-18%
Distressed		-3%	-20%	-20%
Multi-Strategy		0%	-16%	-16%
Risk Arbitrage		2%	-3%	-3%
Fixed Income Arbitrage		-1%	-29%	-29%
Global Macro		1%	-5%	-5%
Long/Short Equity		1%	-20%	-20%
Managed Futures		2%	18%	18%
Multi-Strategy		-2%	-24%	-24%

Risk Aversion still rules money markets funds still getting money!

• It seems hedge funds are not the only industry having money outflow problems... ( $150 billion was withdrawn from hedge funds in December alone). We see money coming out of mutual funds as well.
  
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• The fact that world equity funds are suffering outflows could be bad news for the EM countries- risk aversion means that people continue to withdraw money and are afraid to invest.

• The fresh round of banking troubles can only worsen the situation for small and emerging countries in the short term- lower liquidity means fund withdrawal from their stock and bond markets leaves those emerging markets more subject to shocks and jumps.
  

- The money market funds macro-group (+$127.4 billion) was the only macro-group attracting net flows in December, while stock and mixed-equity funds handed back $27.3 billion and bond fundswitnessed $6.7 billion of net redemptions.

- Large-cap funds (-$5.2 billion) continued to be the flows outcast of the U.S. Diversified Equity (USDE) funds group, while small-cap funds (-$1.0 billion) mitigated outflows better than the other capitalization groups during the month.

- In December the Mixed-Equity Funds macro-group (-$0.4

billion) suffered its fourth consecutive monthly redemption.

The mixed-asset target horizon funds group (+$2.6 billion) just managed to make up for the net redemptions witnessed by the mixed-asset target allocation funds group (-$2.1 billion).

- For the second month in a row the World Equity Funds macro-classification experienced the largest net outflows of Lipper's major equity groups, handing back $15.5 billion.

Happy New Year

Last Year:
So some of my banker friends have become stand up comedians... no really... they have... AND knowingly... as in, these guys intend the world to laugh when they talk ...( the first 6 months of the year when they were saying things and the market was crying...)
That pretty much sums up the year that was... on another note I am very proud of these friends for being creativity and having the desire to pursue other dreams than to structure complicated stuff.

Next Year...

I am a contrarian trader this year as well... still a buyer of gamma/volatility... especially on the 3 month, 6 month front and especially one touch options /wings etc. however, the key idea is to SELL your options when they are worth a lot instead of waiting till expiration date.

Mean Reversion with some downward drift is the theme of the market:
I see that the market has a lot of movement... the last active trading day was a more than 3% movement day.... or an yearly vol of 50% ish...which is a lot. That vol means that roughly an at the money option would cost 12.5% of the notional. However, if you notice, we have been moving in the 750- 950 ish range for a while now; since October 6th we have moved from below 1000 to almost back to 930 now. We have still generated a lot of volatility... how could this be? this can only occur if the market does a lot of mean reversion.... So if you want to trade somewhat contrarian this is the time to do it...

How to trade contrarian?
My view is contrarian with a short bias (i.e. I still do believe that the market is going down overall just not on the same trajectory as most people)... In other words, I buy options when I think they are too cheap, I wait until the market moves in my direction and then I sell the option without trying to exercise it. Interestingly, if I had tried to exercise the options, I would have made $0.00 this year....
A concrete example: I bought Jan 20 expiration 950 strike calls ( on the S&P) when the market had tanked to 815 levels. Then when the market rallied back to 930, I sold my calls. In between, I waited patiently.
Caveats: The waiting can be painful. If the market remains at 815 then I make no money, If the market tanks even more, then I make no money and if the market rises to 930 on Jan 19th , I will still make no money... so select your strikes wisely...
Decay: Naturally, I have to pay the cost of those calls when the market does nothing... that is the decay- the optionality decreases everyday so it can definitely be the case that the market doesn't move and your option decays like a dead horse.

But why might this strategy work? high intraday vol and lots of mean reversion, which you can take advantage of by placing LIMIT orders. Don't run into buy at the market price. In other words, have a view BEFORE hand... put in a price you will be happy to own something at



I think going long the dollar in the next few months may be a smart trade. if wrong , get out of it and wait on the sidelines.

Don't risk more than 5% of your capital on any one trade... especially involving options...Be conservative in these highly volatile times...

Enjoy and Happy New Year!