Monday, November 10, 2014

HK-Shanghai arb and swiss interest rates

I've been sitting in H-shares that are highly discounted to their A-share counterparts for half a year now, ever since the link w/ Shanghai was announced.  Finally got huge good news.  My longs advanced huge and my shorts that are trading at slight premiums to the A-share counterparts even went down, too.  I'm lucky that the H-shares seem to be converging more towards the A-shares than vice versa.  If it had appeared to be the other way around, then I wouldn't be in this trade so heavily.  But most of my positions have doubles or better to go to close the gap w/ the A-shares.

I've been watching the CHF.EUR peg a long time since it seems the SNB is holding the CHF at an artificially low level for a long time.  This hasn't sparked any significant Swiss inflation to date, though.  However, there is an interesing referendum coming up.  The referendum is supposedly unlikely to pass, but speculative flows are obviously coming into the CHF for now, and the IVs on options for the CHF.EUR are spiking.  My thinking is that the SNB may depress interest rates in order to stymie inflows, even if the referendum doesn't end up passing, especially since inflation doesn't appear to be a threat there.  So I entered a large position in the 3-mo Euro Swiss Franc interest rate futures betting on the rates to go negative.  I haven't yet read anywhere about action being taken in this market as a bet on this upcoming event, which I like.  The risk in case I'm wrong seems minimal.  I will consider bets on the EUR.CHF and gold in the future as the date arrives...

Monday, July 7, 2014


Bought puts in TAXI, which are priced at low IVs.  TAXI may go to 0 from Uber's war.

Friday, March 21, 2014

US crude oil export ban and Russian sanctions

Soros today suggested that releasing from the SPR would be the best way to sanction Russia, if sanctioning Russia were really what we wanted to do.  But that Putin would likely retaliate, leading to escalating lose-lose scenarios.  But what about just lifting the crude export ban?  That would raise WTI prices, and also drop other worldwide prices, including Russia's, slightly.  That change would be obviously sustainable, something that would hit Putin without having an inherent timer before conditions revert, as releasing from the SPR would do.  Removing the export ban could simply be framed as beneficial to our own interests (which it is) without ever needing to mention that it hurts Russia's.  That would be a great way to avoid escalating tit-for-tat activity, although it precludes Obama from being able to come across as a tough guy to the American people, which is something he badly would like to do since his approval ratings have been falling.

In sum, while lifting the export ban obviously would be a boon for our economy, something which is often lost on government authorities, the added bonus that it would hurt Russia might serve as a catalyst for them doing so.  I'm watching the WTI-Brent spread closely....

Potential risk to the short Gazprom against russian index trade

Gazprom could do a big deal w/ China, which is supposedly close to fruition.  So I'm out of that trade for now.

Friday, March 7, 2014


I've been keeping busy trading nat gas in the US, coffee/sugar based on the Brasilian drought, corn starting a nice trend looks like, and various stocks like FNMA, which has been ripping.  Been a good few months.

W/r/t Ukraine, gazprom has long been on my hit list as headed to 0 probably eventually, but this Ukrainian conflict should accelerate the issue.  Short gazprom large, long the russian index (RSX is one ETF) smaller to hedge everyday fluctuations.

Also short the ruble.

JGBs have been a pain in the butt, but they appear to be setting up another short setup again w/ the yen dropping more the last few days and JGBs unable to go up for a few weeks.  Will look to buy puts on them again soon.

Wednesday, January 15, 2014

Current state of US refining

Now the US has figured out how to get domestically produced crude out of the mid-Continent and all the way to the coast, but regulations restrict the export of crude, refiners are converting it as fast as possible to products, which are then legally exportable.  Refiner utilization is nearly maxed out in the dead of winter.  Come busier months, something will have to give.  Either refiners will completely max out 100%, causing crack spread to spike, or crude exports will have to be allowed, increasing the price of domestic crude and disincentivizing refiners to gobble through feedstock.

How do you profit from this?  Long products such as gasoline, short Brent.  Whether exports become unrestricted or not, you should win.

Thursday, September 5, 2013

Potash stocks

Supposedly Uralkali insiders dumped their stock holdings w/ the intent of pulling out of the potash cartel.  Since insider trading isn't illegal in Russia, as long as you party in the same places Putin does, and since it makes no sense for either party to break up a cartel long-term, I believe the analyst cited in the article more or less hits the nail on the head when he writes: “If the share prices of potash companies are plummeting, this makes it easier for Russians to take over Belarusian producers,” said Forbrig, a senior program officer at the US German Marshall Fund in Berlin, told Bloomberg. 

I'm not sure if the intent is to buyout a Belarusian producer, but you sure can buy back your shares at much cheaper, then make a fresh deal w/ the Belarusians.

Looking at the chart of Uralkali, you can plainly see that the stock sold off hard a week before the breakup of the cartel was announced, so I like that the price action confirms the story.  Now I'm just looking for evidence that insiders have/are buying back again at lower prices.  I got confirmation today w/ an upside breakout in Uralkali, so I'm buying up POT and IPI in hopes that a renewed deal is made soon.  I'm just playing the chart and I don't mean to risk more than below support areas in the stocks.

Monday, July 22, 2013

FRO is a 5-10 bagger in a year I think

The WTI-Brent spread has narrowed very quickly lately, and the two are now more or less equal. Years ago WTI used to trade very tightly w/ Brent, but the increased supply of Bakken and Canadian oil sands oil created a bottleneck at Cushing, so Cushing oil has been cheaper than Brent for a couple years now until basically now. Crude prices right on the Gulf of Mexico were juxtaposed between the price at Cushing and other international prices. It appears the supply constraints in getting US oil to the Gulf have been resolved as evidenced by the price narrowing, and more pipelines are due to come online later this year, as well, which should guarantee WTI doesn't drop to a steep international discount again.
Because of the glut of cheap Gulf of Mexico oil, there was no need to charter VLCC (oil tankers) to bring world crude supplies to US refineries, which are the best in the world. FRO is the pure play in this space. FRO has languished during this time, and is now priced for extrapolation into near-bankruptcy. Now that the old oil price relationships have returned, there is suddenly now a need to charter oil tankers again. It takes time to build ships, and the supply overhang of ships for the past several years should now be quickly taken up. VLCC rates have jumped in the past couple weeks, and I forsee them jumping far more as long as Brent doesn't jump back to a big premium again. Rates dont have to return to anywhere close the 200-300K/day rates of '08 for a severe inflection in equity pricing to take place as the stock gets repriced for extrapolation as a sustainable profit-making enterprise.
Trading considerations, psychology
I'm not one to pick bottoms, but I believe this is a bottom in FRO, and it can go much, much higher. A way to hedge this would be to short WTI against Brent. The idea isn't to expect any gain on the hedge, but if for some reason the spread widens back to where it was, then the small gains on the oil spreads should offset the small losses on FRO, while if the spread stays around where it is now, or WTI goes to a premium to Brent, then the small losses on the oil spread should be overwhelmed by the massive gains on FRO Another trade on this narrowing theme is to be long Dec '14 and Dec '15 WTI against short Brent futures at the same expirations because WTI is still discounted to Brent by ~$7-8/brl at those expirations, a trade which I have on as well, but FRO has much more explosive potential. I'm long and I'M NOT GOING TO TAKE A SMALL GAIN. I would not be surprised to see a 5-10 bagger on this within a year. I will not burden you w/ fancy financial projections at this time, as there is no point until the VLCC rates stabilize at a new equilibrium. Suffice it to say that any sustainable increase over the breakeven rate of 25K/day will bring about a rapid rise in the price of FRO. The short interest for FRO currently stands at ~10M shares. Perhaps that's from capital structure arbers who are long debt and have been winning. Either way, it is time for them to cover. This stock is too small to be on the radar of many funds. The higher it goes, the more buyers will come in.
I'm also long (VLCCF), (DHT), and (DRYS)

Monday, February 4, 2013

Hong-Kong REITs and Japanese bonds

It's been a good couple months for me, mostly made in small-cap land.  The fiscal cliff deal ended up not increasing carried interest or taxes on dividend more than 5%, so I immediately exited all high-dividend shorts and flipped some long on Jan 2.

For now, I have a high committment swing long running in, a REIT w/ property in China.  With Hong Kong having to hold the peg at 7.75, HKDs have again been flooding into HK, which should contribute to the property bubble, and may spark a fresh bubble in H-shares.  Numerous H-share REITs w/ property in either HK or mainland China have had very clean breakouts. looks set to go.  I have a lot at this moment.

I also just entered a short in JGB Japanese 10-year gov't notes.  There have been doomsayers in these for years, but the deflationary circumstances have kept yield down.  I hate picking tops (bottoms in yields), but there's a decent chart setup here, and the prime minister's actions to spark more inflation have killed the yen, so perhaps JGBs will make a delayed move to follow.  Note that JGBs have already sold off in USD terms b/c the yen has been killed, but I'm looking for the yields to rise at this point too.  I still have my stop loss set relatively tight on this in case I'm wrong.

Thursday, December 27, 2012

Credit spreads and fiscal cliff

If tax rates increase, as is expected, the post-tax cost of equity will rise and the post-tax cost of debt will drop, everything else kept equal.  With regard to debt in particular, this means that corporations will issue less equity and more debt going forward, and they accept higher yields on the debt that is issued.  In addition, investors will demand higher yields b/c they would otherwise see less yield post-tax.  These effects will be amplified with higher-yield debt since the effect is a % of current yield.  Thus, I expect credit spreads to widen, w/ junk bonds underperforming investment-grade.  The benefit of structuring the short junk bonds position as a pair against investment-grade instead of naked or against something else is that the long investment-grade position hedges out much of the impact on junk-bond prices that I dont wish to bet on, such as general risk appetite or in/outflows to/from corporates in general.  I am using the ETFs JNK and LQD to put on the trade, and I'm taking a larger position in LQD than JNK b/c JNK's "beta" is larger.

This trade would have worked briefly in early Nov when the market was also panicking out of numerous high-dividend equity stocks.  Bond spreads have tightened and high-dividend stocks have bounced for the most part ever since until the last couple days.  My bet is that the market has been ignoring the potential effects of the fiscal cliff for too many weeks with respect to these trade categories.  Particularly w/ respect to bond risk spreads, I believe that the risk of a large tightening is limited even should politicians come to an agreement to restrict tax increases even somewhat, so I plan on taking this particular position through any upcoming political meetings, votes, decision-making sessions, etc.

In addition, the cliff will bring about a weakened economy, so this should also contribute towards widening spreads.  Of course, this trade has negative carry, so I don't want to hold too long, but perhaps several weeks or months would be appropriate to allow the markets sufficient time to price in economic deterioration and changes in post-tax cost of debt.  This might be a kind of delayed sleeper trade that works later than the other fiscal-cliff-type trades and wont work until corporate CFOs start actually raising more capital and the bond folks start seeing bond issuance suddenly spike and think of this trade.

I had written earlier about looking to short private equity firms due to risk that their carried interest benefits will be cut.  However, I neglected at that time to consider that they'll have far more buyout opportunities opened to them due to the fact that companies would be able to handle higher debt leverage ratios with the imminent reduction in cost of debt.  That could be a good reason why many buyout firms have outperformed lately.

Muni bonds have sold off in the last couple weeks ever since they became a target for a tax loophole elimination--namely, that rich investors will have to start paying taxes on muni dividends.  While that change to muni bonds is drastic, this is the same kind of consequence that should take place on a subtler scale to credit spreads.