tag:blogger.com,1999:blog-21308312715441759212024-02-06T23:34:15.202-05:00Uptrending EquityFinding outstanding trades utilizing any asset class or strategyRyan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comBlogger76125tag:blogger.com,1999:blog-2130831271544175921.post-58029218184788820672018-11-05T11:39:00.001-05:002018-11-05T11:39:09.715-05:00Australian housing crash finally comingThis might be your last chance to bet that the Australian central bank will not raise rates as much as the market expects. I'm long IR futures (90-day bills in Australia) betting they'll have to lower rates. I pick up the carry of the backwardation built into the term structure, as well. As of this writing, June 2020 futures trading at 97.80.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-5888743587454905952017-10-27T10:43:00.000-04:002017-10-27T10:54:32.654-04:00Trade leading up to US tax cut billI have several positive expected return trades to put on in advance of the US tax cut bill. Two each that should do great should it pass or fail, with the other two not doing so bad in the other case.<br />
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In case the tax bill passes:<br />
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1) Long AABA, short BABA
should do great.
https://seekingalpha.com/article/4112372-bet-altaba-bet-tax-cuts.<br />
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2) Short some VIX futures right before the plan goes to the floor, as IVs will be bid up before the event, and VIX futures are almost always in contango anyway.<br />
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In case the tax bill fails:<br />
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1) Long US t-bonds should do great, as i think a lot of the recent slide has built in an anticipated tax cut. US Tbonds have been sliding even as European sovereign bonds have been rising, bringing the real yield difference between the regions to multi-decade highs. I think US tbonds are ready for some buy-the-news action here. You could short some German or Italian bonds as a hedge on the noise caused by global growth/inflation expectations.<br />
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2) buy oil MLPs like AMLP today on the breakout in WTI oil above 53, as I think MLPs have been hammered recently on the expectation that the relative tax advantage of an MLP will be negated if taxes are cut for all companies. MLPs should jump if the plan fails, and may even rise slowly if it passes, as a buy-the-news play that already priced in passing in advance. I plan to stick with this position for awhile as long as WTI doesnt break below 51.8. Oil has recently moved to backwardation from contango, which is a bullish term structure. US oil production has plateu'd for now, and sentiment is not longer hugely bullish as it was when OPEC was first cutting. As far as I can gather, sentiment is rather pessimistic, while the trend is now up. Energy stocks have been unloved on a longer timeframe, as well, not just in the last month or two that MLPs in particular have been rocked. https://si.wsj.net/public/resources/images/BN-VS708_Dshot_NS_20171022230625.png<br />
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Good luck!Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-65310780904351399272014-11-10T14:16:00.002-05:002014-11-10T14:18:41.278-05:00HK-Shanghai arb and swiss interest ratesI'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. http://www.bloomberg.com/news/2014-11-10/shanghai-hong-kong-stock-exchange-link-will-start-in-one-week.html. 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.<br />
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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. http://www.bloomberg.com/news/2014-11-10/swiss-franc-cap-tested-as-gold-bugs-push-referendum.html. 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...Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-55596249623582794402014-07-07T14:18:00.001-04:002014-07-07T14:18:12.000-04:00TAXIBought puts in TAXI, which are priced at low IVs. TAXI may go to 0 from Uber's war. http://www.zerohedge.com/news/2014-07-07/uber-launches-war-against-yellow-cabs-cuts-new-york-fares-20-ali-baba-launches-chine.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-10412967403281468742014-03-21T12:17:00.001-04:002014-03-21T12:17:56.671-04:00US crude oil export ban and Russian sanctionsSoros 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.<br />
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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....Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-79342816112431369652014-03-21T12:10:00.000-04:002014-03-21T12:10:03.090-04:00Potential risk to the short Gazprom against russian index tradeGazprom could do a big deal w/ China, which is supposedly close to fruition. http://www.reuters.com/article/2014/03/21/us-ukraine-crisis-russia-insight-idUSBREA2K07S20140321. So I'm out of that trade for now.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-76482190093498014812014-03-07T16:20:00.003-05:002014-03-07T16:20:42.441-05:00Russia/UkraineI'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.<br />
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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.<br />
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Also short the ruble.<br />
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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.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-12712812341047937562014-01-15T12:03:00.001-05:002014-01-15T12:03:26.040-05:00Current state of US refiningNow 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.<br />
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How do you profit from this? Long products such as gasoline, short Brent. Whether exports become unrestricted or not, you should win.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-52167863931106727252013-09-05T14:10:00.002-04:002013-09-05T14:12:10.349-04:00Potash stocks<span style="font-family: inherit;">Supposedly Uralkali insiders dumped their stock holdings w/ the intent of pulling out of the potash cartel. <a href="http://rt.com/business/head-uralkali-detained-belarus-belaruskali-004/">http://rt.com/business/head-uralkali-detained-belarus-belaruskali-004/</a>. 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: <i style="background-color: white; line-height: 21px;">“If the share prices of potash companies are plummeting, this makes it easier for Russians to take over Belarusian producers,”</i><span style="background-color: white; line-height: 21px;"> said Forbrig, a senior program officer at the US German Marshall Fund in Berlin, told Bloomberg. </span></span><br />
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<span style="background-color: white; line-height: 21px;">I'm not sure if the intent is to <i>buyout</i> a Belarusian producer, but you sure can buy back your shares at much cheaper, then make a fresh deal w/ the Belarusians.</span></span><br />
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<span style="background-color: white; line-height: 21px;">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.</span></span>Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-64189172203933123482013-07-22T12:28:00.001-04:002013-07-22T12:28:21.186-04:00FRO is a 5-10 bagger in a year I think<div style="background-color: white; border: 0px; color: #2c2c2c; font-family: Arial; font-size: 13px; margin-bottom: 10px; margin-top: 10px; outline: 0px; padding: 0px; vertical-align: baseline;">
<b style="color: #891c0d;">Catalyst</b></div>
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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.</div>
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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. <a href="http://seekingalpha.com/symbol/fro" style="border: 0px; color: #579fc4; font-style: inherit; margin: 0px; outline: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" title="Frontline Ltd.">FRO</a> 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.</div>
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<b style="color: #891c0d;">Trading considerations, psychology</b></div>
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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.</div>
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I'm also long (<a href="http://seekingalpha.com/symbol/vlccf" style="border: 0px; color: #579fc4; font-style: inherit; margin: 0px; outline: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" title="Knightsbridge Tankers, Limited">VLCCF</a>), (<a href="http://seekingalpha.com/symbol/dht" style="border: 0px; color: #579fc4; font-style: inherit; margin: 0px; outline: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" title="DHT Holdings, Inc.">DHT</a>), and (<a href="http://seekingalpha.com/symbol/drys" style="border: 0px; color: #579fc4; font-style: inherit; margin: 0px; outline: 0px; padding: 0px; text-decoration: none; vertical-align: baseline;" title="DryShips Inc.">DRYS</a>)</div>
Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-15739363099553315462013-02-04T12:26:00.002-05:002013-02-04T12:26:32.249-05:00Hong-Kong REITs and Japanese bondsIt'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.<br />
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For now, I have a high committment swing long running in 0405.hk, 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. 0405.hk looks set to go. I have a lot at this moment.<br />
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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.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-6239183488839709532012-12-27T18:37:00.000-05:002012-12-27T18:37:27.055-05:00Credit spreads and fiscal cliffIf 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.<br />
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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.<br />
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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.<br />
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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.<br />
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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.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-10708219453555965712012-12-27T15:14:00.001-05:002012-12-27T15:14:12.755-05:00Fiscal cliff and deadlineWith the recent news that the House will be reconvening on Sunday, I just find it funny that politicians believe that there's a kind of deadline to make a law by the very end of the year, when investors must make decisions in anticipation of tax rates <i>before then</i>. Long-term gains or losses must be locked in by the end of trading on Monday, not by midnight. If one is trying to move a large position, then trades must be executed over the course of several days before the end of trading Monday. Politicians of course have no clue that they are creating this uncertainty. As for a self-imposed mental deadline of Monday night, I'm not sure who that particular timepoint will affect. Of course businessmen must make decisions in general depending on tax rates, and this uncertainty continues for as long as a deal is pending. For them, no particular date is more important for a deal than another date. So I'm not sure why the House is needed to be rushed back now; the deadline is pretty much already blown for any large investors, and there is no particular deadline for businessmen.<br />
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I have been long numerous small cap former-losers against short large caps and high-dividend stocks pretty much all month (the January effect, which, due to the fiscal cliff, has taken place in December). This has served me somewhat well in December, at least as far as many small caps becoming strong this month. I would like to flip this trade for an un-January-effect trade for January 2013 as long as I can be confident that any deal that will be made will keep taxes higher for many investors. We'll see as the news progresses...Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-2880042568284493092012-11-14T17:51:00.002-05:002012-11-14T17:51:29.973-05:00More fiscal cliff playsI've been making nice plays shorting high dividend funds trading at large premiums to NAV such as PGP, PHK, CFP, any other high-dividend investment firms, and mortgage REITs such as IVR. I remain short all these at the time I'm writing this, but that may or may not change soon. The next sector to get smacked in anticipation of the fiscal cliff could very well be buyout firms, whose 15% carried interest advantage is at risk. They haven't really budged yet. I will start looking to short CG, KKR, BLK, FIG etc in coming days.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-66548817169419209452012-11-09T15:49:00.003-05:002012-11-09T15:49:53.749-05:00Fiscal cliff<br />
If history is any guide for disagreements like this fiscal cliff, nothing will get done until the last 24 hours, then agreements will almost certainly be made before the deadline, or else an agreement will be made to delay the cliff until an agreement is made later. So to the extent the market is worried about it, the market willl generally sell off for 2 mo, then gap up on deadline success. However, I'm not sure whether the market will be very worried about it. I made keep a bearish bias until the deadline nears, however.<br />
Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-48336869797590016902012-11-09T15:47:00.000-05:002012-11-09T15:47:34.484-05:00GasolineSpot gasoline collapsed quickly after my last blog post, and I had to get out for around flat after being up a fair amount. Since then, spot prices stabilized and created another slightly bullish structure as Hurricane Sandy approached NY, so I reentered Sunday night before Sandy hit. Today it's starting to pay out some. No reason to get out yet...Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-42857071585087535062012-10-03T16:50:00.001-04:002012-10-03T16:50:51.953-04:00RBOB gasolineThe spot price of gasoline in NY has been sky-high lately. For this reason, I'm long a bunch of Nov futures at this time, hedged w/ a short in WTI crude. A seasonal drop in gasoline spot prices this time of year isn't enough to eliminate the large backwardation that is the wind behind my back.<br />
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Today petrol inventories were released, which showed a drop for crude and build for gasoline, which temporarily took prices against me. By the end of the day, the spread totally reversed and put me at slightly green. It gives me confidence that the unfavorable move was news-induced.<br />
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With the election approaching, Obama may start freaking out if gasoline prices spike. The first thing I would see him doing is releasing more of the SPR crude inventory, which would only be indirectly bearish for gasoline, but more bearish for WTI, so I feel safe in this trade were this to occur.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-49672053700121625472012-08-21T09:22:00.003-04:002012-08-21T09:24:51.450-04:00Precious metals<span style="font-family: Arial, sans-serif; font-size: 16px;">Gold/silver, platinum are now all about important swing resistance in USD terms. Platinum in particular made a very large move up in the last 3 days. Historically platinum tends to trade at a tidy premium to gold, but has been trading at a discount to gold for awhile now. I bot some platinum futures this morning at around 1507 to join the extra silver I purchased above the break around 28.30 yesterday. I think this obscene strength in platinum is telling me something.</span>
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<span style="font-family: Arial, sans-serif; font-size: 16px;">If I don't get stopped out, I plan on holding these for very large gains for months or years to come. It's about time the macro theme of global currency printing on the backs of low interest rates jumpstarted precious metals for another upleg.</span>Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-88514552483396534052012-08-10T21:08:00.000-04:002012-08-10T21:08:14.337-04:00Big macro trade on impending Australian housing bubble burst<div class="separator" style="clear: both; text-align: center;">
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The current Australian yield curve looks ominous:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4JTfp_1ydZJ-V_9cYvClERLGmb-PeSO0Kpp7M3FWlqHa_6MYZ8w7QPWZ0YvsmmXRNBJWYHcvt285YYsjUoWMkE4tRnUznkRAjOOz6aDcj0L2Kd_6hdB-UEmWxiw6yZxtU5ZGpfjxkvVc/s1600/Australian+yield+curve.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="324" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4JTfp_1ydZJ-V_9cYvClERLGmb-PeSO0Kpp7M3FWlqHa_6MYZ8w7QPWZ0YvsmmXRNBJWYHcvt285YYsjUoWMkE4tRnUznkRAjOOz6aDcj0L2Kd_6hdB-UEmWxiw6yZxtU5ZGpfjxkvVc/s640/Australian+yield+curve.png" width="640" /></a></div>
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The 3-month rate, which isn't displayed on the chart, is also up by 3.5%. According to the liquidity preference theory, the yield curve should almost always uptrending, as shorter-term lenders implicitly retain the option to not re-lend later, while longer-term lenders do not. Therefore, longer-term lenders are compensated more. Borrowing short-term and lending long-term is how banks make money, and how they get into trouble when they suddenly can't borrow short-term to keep funding the long-term debt. In this case, the expectations theory seems to be telling us that the market expects short-term rates to drop in the next couple of years.<br />
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Now why is that? It appears that the Australian housing market, which is widely written about as being overinflated on various fundamental bases, appears to be still in the early stages of a bust similar to what the US has just experienced. Australian government data shows the peak of the experimental all-dwelling price index occurred at the end of 2010, and has been downtrending since. <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6416.0Feature%20Article1Jun%202012?opendocument&tabname=Summary&prodno=6416.0&issue=Jun%202012&num=&view=">http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6416.0Feature%20Article1Jun%202012?opendocument&tabname=Summary&prodno=6416.0&issue=Jun%202012&num=&view=</a>. Since the government only has the incentive to show a continuing price uptrend, the fact that it isn't means that I trust the data is unmanipulated.<br />
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Interestingly, Australian banking and homebuilding equities have barely bounced since the US-led global financial crisis of '08, even though Australian housing prices still bounced strongly after '08, so it appears those markets have already anticipated a future housing bust. So the better trade that remains is the yield curve trade. The market is telling me in the yield curve that it expects the gov't to drop rates. However, the strip of 3-month bill futures going out 3 years is not telling me the same thing. This offers me a risk-free arbitrage, whereby I borrow Australian money for 3 years at 2.7% via a 3-year future (via YT futures traded on the Sydney exchange) and lend money for 3-months at a time at rates varying between 3.5% and 3.1% (via IR futures traded on the Sydney exchange), depending on the particular future expiring between Sept '12 and 3 years from then. I pick up positive carry, all while retaining the option not to re-lend, which the liquidity preference theory would say is backwards. This trade would be purely risk-free in terms of locking in a guaranteed profit as long as I hold to the 3-year maturity. Any marked-to-market losses caused from the arbitrage blowing out further would be perfectly matched by increased positive carry going forward. The problem is that my brokerage doesn't allow me to accept or supply physical delivery of bonds, so I'm forced to roll over any expiring futures. So I can't ever deliver a 3-year bond at a locked-in 2.7% and receive a consecutive series of 90-day bills locked in at higher rates. Instead, I have to count on this kink on the yield curve being unsustainable while rolling over the futures. The nice thing is that this means my upside isn't limited to the 0.4-0.8% yield difference. Instead, the yield curve can revert to a normal uptrend and give me the additional spread usually occurring between the 3-month and 3-year.<br />
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The 3-year rates are decided more strongly by the market, while the short-term 3-month rates are dictated by the Australian central bank. Also, the Australian inflation index is running close to 1%, giving the RBA plenty of scope to lower rates without sparking overinflation. Given this fact, along w/ the other indicators given above indicating the housing market is coming down, I'm guessing the RBA will have to stop fighting reality (<a href="http://globaleconomicanalysis.blogspot.com/2011/08/secretly-broke-in-australia.html">http://globaleconomicanalysis.blogspot.com/2011/08/secretly-broke-in-australia.html</a> and <a href="http://globaleconomicanalysis.blogspot.com/2012/06/laugh-of-day-no-risk-of-housing-bust.html">http://globaleconomicanalysis.blogspot.com/2012/06/laugh-of-day-no-risk-of-housing-bust.html</a>) and short-end rates will have to come down soon. Rather than make an outright bet on dropping short-end rates, I will make the spread trade against the 3-year bond in order to:<br />
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1) reduce day-to-day and intermediate-term volatility, thereby allowing me to increase leverage on the idea, and<br />
2) hedge against the risk that the market on the 3-year rates is wrong in anticipating a housing bust and/or lower future short-term rates.<br />
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Basically, I'm betting that this curve kink is unsustainable. Since, like I wrote earlier, the futures going out a couple years on the 3-mo bills don't even price in a rate drop, I will be placing my bet in that timeframe, and rolling over front-month 3-year futures until the curve appears normal. Some things to look for to ensure the trade should work (besides being green on the trade) is to continue monitoring home price data for continued drops, and to look at the long-end of the curve to see if the 10-year yields start to tip downward even more relative to the front-end, which would be the market anticipating that current conditions are causing long-term disinflation--a kind of market forecast that the CPI won't be spiking anytime soon in spite of whichever monetary or fiscal concoctions Australia formulates.<br />
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Another trade to monitor is the spread between interbank rates (IB futures on the Sydney exchange) and RBA bill rates, which is currently very low. This is similar to the TED spread, but unlike LIBOR, which has been under the microscope lately for being easily maniuplated, the interbank rates in Australia are based on actual market lending rates, rather than hypothetical rates volunteered by the banks. The interbank (IB) rate futures are standardized at 30-day timeframes, so the durations on those don't line up directly with the 3-month RBA bills, but they're close enough in my opinion. I will be getting long the spread down the road if home prices continue falling and bank stocks drop more, causing large losses in the banks and spreading fear among them to loan to each other. To the extent the spread widens contemporaneously with the downslide, I will be riding the trend. However, as a trader, I have no problem arriving late to the party to mop up when it's the most fun! Most smart guys chronically arrive early, and that's why I make money much faster than them.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-11713322265524947912011-07-29T13:00:00.001-04:002011-07-29T13:11:17.773-04:00Trade into the debt ceiling deadline weekendMy trade going into the weekend will be short bonds (TLT), long silver (SLV). Judging by today's price action, these are hedged, since after news of still no-deal going into today, both gold/silver and bonds ripped. The price action appears to be treating gold/silver as "safe havens" in this case. However, gold/silver typically tracks equities somewhat, and any raise on the debt ceiling will be even more dilutive to the USD. So if the market thinks of this aspect to gold/silver instead, it could rip, which is contrary to public opinion of what would happen. Likewise, the price action in bonds today is treating USTs as a "flight to safety." However, if no deal is done, the market could treat this as an additional credit risk, and USTs could actually tank, especially if they officially get their ratings cut.<br />
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So this is the scenario as I see it:<br />
1) No deal: then I lose on bonds (with the potential that the market will actually treat bonds differently on monday than it did today by focusing on credit risk rather than flight to safety factors), win on silver<br />
2) Deal: I win on bonds, lose on silver (with the possibility that I don't actually lose on silver, but that it instead almost tracks equities, which should rip)Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-65532764388987499512011-07-13T17:49:00.000-04:002011-07-13T17:49:30.778-04:00Debt ceiling; UST bond ratingsMoody's follows S&P in putting US bonds on watch negative. However, they state that this is specifically related to any possible inability to raise the debt ceiling.<br />
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I have complete confidence that our gov't will figure out a last second solution for raising the ceiling. That's simply how negotiations go... the vast majority of standoffs get done at the last second. Also, there are so many possible workarounds to avoid default, it's not even funny. So in that sense, I will be looking to make a bet on no-default as we increasingly approach a deadline.<br />
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However, in the longer-term sense, it's interesting to see the market finally start to see the big macro events unfolding... one day, US debt could easily be in the same situation as Greece is now.<br />
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It was very funny listening to Bernanke respond to Ron Paul's question about whether Bernanke considers gold to be money. Bernanke's job is to keep foreigners buying USTs and USDs for as long as possible rather than gold/silver, so obviously he has to deny that gold is money while no doubt knowing the opposite to be true. Bernanke's not an idiot... his position is political.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-38154400817134226552011-07-13T13:19:00.000-04:002011-07-13T13:19:49.239-04:00Gold/silverToday Bernanke got the ball rolling on rumors of QE3, as he knows our economy still doesn't look that hot (driven by continued low housing prices and high home inventory overhang, which will likely keep prices low for awhile). This may spark the next upleg in gold and silver. GDX, a gold miner stock ETF, after diverging below gold, has now been catching back up. This is what Soros had recently replaced his gold holdings with.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-56490689829378104632011-06-21T09:20:00.000-04:002011-06-21T09:20:52.370-04:00Fed announcement tomorrowWith the end of QE2 arriving and Bernanke due to talk tomorrow, I will be going into the meeting w/ positions somewhat at the inverse of several months ago, when the Fed announced what exactly it would be buying for QE2. Instead of being short T-bonds, this time I will be long, as this is exactly the sort of "sell the news" play that tends to screw over every one trying to be logical. The event tomorrow is the perfect opportunity for the big players who want to buy bonds to do so, as all the logical traders will be thinking that this is a sell w/ QE2 coming to a close. I will also be long gold/silver in case any other methods of easing are discussed, and the bonds and gold/silver positions will be hedged w/ a short in the equity market. This is a play on the meeting only--I have not and will continue not to take a position on bonds long term, as the macro drivers are competing; deflationary/deleveraging pressures are offset by worsening credit risk. I remain bullish on gold/silver long-term, as the macro drivers for those haven't changed, and many of the weak hands have been driven out of silver in the recent downmove.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-17351942463445773212011-06-14T15:14:00.000-04:002011-06-14T15:14:39.918-04:00Refining marginsWith what appears to be a bottleneck at Cushing, WTI crude continues diverging bearishly against Brent while the term structure for gasoline remains bullish. Refiners must be making a fortune. Going long refiners against a short XLE or ERX is probably not a bad ideaRyan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.comtag:blogger.com,1999:blog-2130831271544175921.post-27368654489691356932011-05-16T18:00:00.000-04:002011-05-16T18:00:00.383-04:00The best risk/reward market short remains eurodollarsWith the TED spread at only ~24bps and short-term rate expectations sitting on lows, there isn't much lower LIBOR rates can go. <a href="http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND#chart">http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND#chart</a>. In the event of any kind of market panic, eurodollar futures will tank. In the event the equities and/or other markets continue trickling higher, your losses on short eurodollars will be minimal. Of course, this is only an intermediate-term hedge for equities, and cannot be relied upon for tight day-to-day correlation.Ryan Yateshttp://www.blogger.com/profile/04754977993236575388noreply@blogger.com