Wednesday, April 13, 2011

Still long VLO

Gasoline futures are in a nice backwardation, which is bullish, and WTI crude is at this point still in a slight contango, which is overall somewhat neutral.  Given this, there's no reason to fade the new highs in refining margins.  Not bullish on the overall market, but I'm still long VLO w/ market shorts to hedge.  It's at 28 as I write this.  I originally bought the breakout at 20, as you can go back in my blog to confirm.

Monday, April 4, 2011

TED spread interesting

If inflation is actually picking up at all, as may be finally be the case as indicated in my post, then a yield-curve flattener trade may present a pretty good risk/reward setup at this point.  Rather than bet directly on short-term rates to increase, a bet on rising 3-month LIBOR rates against decreasing 10 or 30-year rates may be more appropriate, given the ludicrously low rates that banks are able to receive right now.  Technically, if you duration-weight each side of the trade equally, you are indifferent to inflation.  A flattening yield curve should occur before a major bear market occurs, however.  I believe this trade presents a much better risk/reward than attempting to short equities in general, and the timing is more appropriate at this time, as the Fed thus far has denied any near-term possibility of raising rates for awhile now.  So the timing is ripe to catch people by surprise on the short-end.  By betting on increasing LIBOR instead of fed funds rates, as well, then you are hedging a net long equities portfolio even better against crisis scenarios.  To the extent rates on the long-end may rise more than the short-end rises, this would indicate runaway inflation beyond what the Fed is lifting rates to match, which I believe is possible only once housing comes out of its bottom, which can happen only once housing inventories dry up.  In that scenario, equities should rise even more than inflation.  So if you're long equities with a yield curve flattening trade to hedge downside, you should be in good shape.  Of course, I like to get in trades when the trade is trending my way, and this one isn't quite yet.  So I'd be light in the trade at this point.

Short GE futures (betting on short-end LIBOR rates to rise)
Long ZN (10-year) or ZB (30-year) futures (betting on rates on the long-end to drop).  Better yet, short TBT to pick up extra decay from the leveraged ETF.
Make sure you size appropriately to duration weight it.

Because gold/silver perform better when carry charges (interest rates) are low, increased interest rates may dampen their rise.  Therefore, this yield curve flattener may be a good hedge for a long gold/silver trendfollowing long hold.