JF Capital est. 2011

In a year where the average hedge fund squandered 3% of assets to unforgiving markets, it has been a pleasure, for some, not to have lost money.

John Paulson, astute and savvy enough to have profited from the CLO saga, has seen nearly half of client capital wiped out and a number of difficult questions asked.

Why should a hedge fund lose in falling markets?
Why is volatility bad for a hedge fund?
Why are we down by far more than an almost any market or index for the year?

The truth behind the appalling industry performance isn't to be found in any of these concerns. Indeed, particularly agile managers have managed to negotiate the year in the black, and others less agile have profited from the flight to cash - buying US Treasuries on 01/01/11 would've netted 1.4%. A handsome return for the laziest possible investment strategy.

For a fund in its infancy, positive returns month on month for 3 months is certainly a good place to start. We intend to build on this early success, remembering the lessons from 2011: without a credible macroeconomic picture and a light footed approach to positions, it is incredibly easy to be entrenched into one view, and be caught out.

Whether it be long and wrong, or more likely in our case, short and sorry, the split second evidence mounts against a position, the only thing to do is close, as per the adage:
"The markets can stay irrational far longer than you can stay solvent."

Mr.Paulson, Mr. Corzine and others fell foul of this simple truism in 2011 and there will be many more lining the financial obituaries in 2012.

JF Capital Fund I returned 9.8% to investors in 2011. Happy New Year.

Filled on WBC short - 20.62

Refer to this post for the the big idea on Aus bank shorts.

Why WestPac (WBC)? They have the most leveraged exposure to the EZ of all Aus & S Korean banks, whilst also having the furthest to fall in share price - based on 2007/8 levels.

We were entered on Wednesday's overnight session based on a limit entry of 20.62. The current (closed) market price is 20.26.

Flat: Positions and P&L

We traded very little this week, merely closing out Gold at 1660 and letting the S&P short run down to 1200 before covering and netting the position into positive P&L.

Opportunities into year-end remain slim. Occasionally we have dabbled into the intraday FX market only to find that the lack of volume and volatility make for weak moves and increased noise. There's no need to waste time and money on this game, we'd rather stay flat and mould a strategy for the New Year, which promises to be at best "eventful".

In the Melting Pot: WBC (WestPac) short, CADTRY long, VXX (Volatility) short until Xmas.

And I can't rule out revisiting the Long Gold / Short S&P trade, now that the basis has widened to near historical highs and technical funding stresses have been eased/unwound.

We Like The Turkey Trade

No, not the the ultimate bull trap that was the "Xmas rally".

I'm talking about shorting the Lira: long USDTRY. Loose fundamentals, nice tail risk exposure. Read on.

Monday Comment

Good Morning. At 07:58 we executed Trade 3 from our trade shortlist. Prices were Gold (XAU/USD) 1690.74 and S&P500 (ES) 1250.73.

See below for our roundup of the weekend's news, focusing on the regions and products we think are the most tradeable this week.

Dull Markets into Volatile Weekend

The market is very quiet today. We're seeing range trading, light volumes and virtually no entry opportunities. With a range of summits and speeches chalked in for the weekend, agents are reluctant to take a view. This is encouraging - the political guessing game has bored the market into submission. Perhaps from now on we'll see less volatility as ministers struggle their way through highly scrutinized sentances.

I'll most likely wait 'til Monday before executing anything from our hot trade list.

While We Wait: 4 New Trades

At JF we continue to re-fund and restructure our back end.

Whilst we finish this process (and stay flat over both ECB and BoE rate decisions this afternoon) here are 4 possible trades over a number of timeframes that we have been mulling over. Do not trade these, they are simply discussion points.

Rally on Rumour, Sell on Summit

Doing the rounds over City Bloomberg's today:

"DAX PERFORMANCE BEFORE AND AFTER ALL 2011 EU RESCUE SUMMITS

• SAVING PLAN FOR GREECE 3 FEB 2010  +2.4% 4 DAYS PRE THE SUMMIT.... -3.1% 4 DAYS POST THE SUMMIT
• GREECE'S FIRST BAILOUT 3 MAY 2010 +0.1% 4 DAYS PRE THE SUMMIT.... -7.3% 4 DAYS POST THE SUMMIT
• PACT FOR THE EURO 11 MARCH 2011 -2.5%% 4 DAYS PRE THE SUMMIT.... -4.6% 4 DAYS POST THE SUMMIT
• PLAN FOR THE TRUE EUROPEAN ECONOMIC GOVT 16 AUG 2011 ... +6.8% 4 DAYS PRE THE SUMMIT.... -8.7% 4 DAYS POST THE SUMMIT
• EU SUMMIT 26 OCT 2011 .. +4.3% 4 DAYS PRE THE SUMMIT.... -3.0% 4 DAYS POST THE SUMMIT"

Interesting. But as with most "dead certs" in the market, it will inveitably fail, just as the penny drops with retail investors.

Gold vs Index Basis Widens Up

The chart above should really speak volumes to even the most unobservant investor.

We expect the FTSE-Gold basis (difference) to narrow - i.e. mean reversion. Limited downside, healthy upside, this would be a no brainer if we could trade. Expect real money back on the table by Wednesday.

P.S. Plenty of other reasons to be long Gold (funds opting for physical delivery, exposure to a number of QEs etc), covered over and over again on this blog, make this trade a runner even in the medium term.

***EDIT*** To those that took this trade: congratulations. The basis has closed up nicely.

Housekeeping, the Week Ahead and Kyle Bass

Behind the light flow of blog posts last week, JF Capital has been restructuring ahead of 2012.

Read on for more details, our take on what is likely to be a defining week for the EZ and an alarmingly insightful feature-length discussion involving Hayman Capital's Kyle Bass.

Christmas came early for the Bulls

"Bernanke laid the perfect trap for you bitchasses. He knew S&P would move on the banks. He didn’t say a word until they made their move. Like the true chess master that he is, he defeated S&P before they started their assault on the US banking system.  In the after hours last night, short sellers went all in, hoping for the worst, expecting tragedy.
Bernanke exacted maximum pain on your bullshit brokerage accounts by dropping the hammer on you “DEFCON 3″ brainless, dickless know nothings–precisely at the time you were caught leaning hardest. Sublime."
 - iBankCoin's "The Fly"

Were we long or short? Read on - if only for the schaden-freude.

SocGen's View on Our Positioning

This week is saturated with uncertainty. Reading the minds of politicians whilst juggling a host of other fundamental variables is a task that will invariably end in tears. You may have to wait for the New Year for our next high conviction trade.

 

However, presented beneath is a passage from SocGen's much anticipated Multi Asset Strategy Guide. It sums up our long standing, appropriately monetized, view on Gold nicely.

 

"A major liquidity crisis should not occur this time, as we think we are on the eve of major QE in the UK, US and (a bit) later on in the EZ." We don't disagree and if there is anything that can send BAC higher it will be the announcement of QE3. Of course, BAC will first drop to a $2-3 handle so question is who has the balance sheet to hold on to the falling knife. The next question is "How big will QE3 be"? Well, according to SocGen, the Fed will preannounce it in the January 2012 FOMC statement, the monetization will last from March 2012 until the end of the year, and will buy a total of $600 billion. We believe the actual LSAP total (not to be confused with the "sterilized" QE3 known as Operation Twist) will be well greater, probably in the $1.5 trillion range as the Fed will finally say "enough" to piecemeal solutions. As to what to do, besides going long some financial stock and hoping it is not the one that is allowed to fail, SocGen has some simple advice: "Buy gold ahead of QE3 as money creation has a strong impact on prices" - in other words just as we suggested yesterday courtesy of the Don Coxe correlation chart. Why gold and not BAC? Because, "Gold is highly sensitive to US QE, as every dollar of QE goes into M0, triggering the debasement of the USD. Gold = $ 8500/Oz: to catch up with the increase in the monetary base since 1920 (as it did in the early 80s). Gold = $1900/Oz: to close the gap with the monetary base increase since July 2007(QE1+QE2)."

 

So go long a bank that may well go bankrupt and return nothing before it at best doubles, or go long a real asset, which will always have value and may quadruple in short notice? The answer seems simple to us...

Thomas Cook: Micro Example of a Macro Problem?

Poor trading conditions have been affecting all companies in all sectors across the UK and the world. This is no different in the holiday industry. As disposable income decreases, and as confidence levels decrease, the amount spent on “luxury” items tends to fall sharply. People therefore save for a rainy day, which just makes the situation even worse; this is however obvious, bad news is contagious. Simply put, Tourism as an industry is considered very cyclical - as measured by a high beta.

+40pt Today on EUStoxx. Market has Rallyed on US Open

To quote this morning's post:

"At 8:46 I went short EuroStoxx (rallyed stupidly early morning) and am sitting on another cash-cow-hedge. Will look to exit later today, maybe trimming Gold once more."

... This light volume rally was indeed very thin and the market nicely sold off into lunch time, with JF picking both the top and the bottom (a little smugness is to be expected) sublimely.

As per the chart below (short pos. opened on red line, closed on green) US open saw bulls return as the SNB (Swiss National Bank) was rumoured to have sold CHF in a devaluation bid. We are always happy to re-enter the markets twice in one day if the opportunity presents, and it did. We sold into the highs as buyers struggled to prop up the price.

JF is short at 2117 on EUStoxx and continues to be long Gold - I decided not to strip our position back further as rumours of QE remained alive.

***EDIT*** Closed the 2117 short at 2095 for +23pts @ 16:42

P&L Repaired, Gold Exposure halved again

As readers should be aware, sentiment this week has been at a post-crunch low.

 

It is one of bizarre uniqueness. Volume is incredibily low yet levels plunge further and further south. Bids are non existent, even offers are scarce, yet market makers are forced to mark their books down to the odd trade or rumour.

 

Gold continues to experience a lot of pain as the correlation with risk assets holds. We believe it may take a fall to 1600 before sizeable buyers begin to build up stocks for the cold winter months. And when we say cold we mean Siberian.

 

At this point Gold may be as futile as a handwarmer. We cut our exposure by another half, limiting total upside to around 3% NAV and further downside to 1%. MTM position is about 0.6% in the red.

 

Fortunately, once again our hedges saved the day. Both EURUSD and EURJPY performed yesterday and allow us to take around 15 points into the lows, repairing virtually all of the Gold profit crater.

 

Overnight we held a naked Gold position. At 8:46 I went short EuroStoxx (rallyed stupidly early morning) and am sitting on another cash-cow-hedge. Will look to exit later today, maybe trimming Gold once more.

Key Comment - 25/11/11

"  Market volume dead as matter of time before Belgium included in SMP. QE seems only option as Merkel rejects Eurobond"

  

Cross Market News 

Asia-Pacific Equities continue to trade in negative territory; risk-off continues: Japan: +0.4%; China: -0.4% . 
China will allow trading of the Australian and Canadian dollars vs Yuan, another step toward its aim of globalizing the Yuan. 
China's sovereign wealth fund - China Investment Corporation (CIC) - may give "indirect" support to Europe through investments without being the nation's main route for any aid, according to the fund's Executive VP Mr Jesse Wang . .
ECB Governing Council member Mr Coene says an additional interest-rate cut by the ECB is probable if current trends continue.
According to Bloomberg, the European Banking Authority (EBA) may ask German lenders to boost their capital levels by more than EUR12bn vs. an original estimate of EUR5.18bn. The EBA will now use prices as of September 30 rather than the June prices which were used for preliminary estimates, so the changes are likely to affect most European banks. German banks have criticised the move saying it increases ongoing uncertainty in financial markets .
Moody's have downgraded Hungary's government bond rating by one level to Ba1 from Baa3; maintaining a "negative" outlook. 
British banks must prepare for the worst-case scenario of a disorderly break up of the euro, according to Mr Bailey of Financial Services Authority (FSA). He noted that while British banks are not heavily exposed to the Eurozone, they must prepare for some countries to exit the single currency – or a complete break up.

Key Comment - 24/11/11

"Market even more illiquid with a false strength as the US holidays. Expect a firm widening as volume comes back on Monday."

 

Cross Market News 

Asia-Pacific Equities: most markets shook off a negative open to edge higher midday Thursday, although Japanese shares remained sharply lower as investors returning from a holiday caught up with European and global developments. The worst-received German bond sale since the euro was created fuelled fears about Europe's worsening debt crisis and the Nikkei 225 index hit its lowest level since April 2009: Nikkei -1.8% .
Standard and Poor's said Japanese Prime Minister Yoshihiko Noda's administration hasn't made progress in tackling the public debt burden, an indication it may be preparing to lower the nation's sovereign grade. "Japan's finances are getting worse and worse every day, every second," Takahira Ogawa, director of sovereign ratings at S&P in Singapore.
UK-based banks are providing strained European lenders shut out of global funding markets with large amounts of financing through privately negotiated asset-swapping deals. The deals are said to involve relatively strong banks, based in Britain providing funds to lenders in countries hit hardest by the eurozone crisis, including Greece, Cyprus, Italy, Ireland, Spain and Portugal. The Financial Services Authority has warned that liquidity swaps may increase the risk of contagion in the financial system, shifting risk on to insurers or pension funds which may be on the other side of the trade.
Europe's plans for treaty changes to enforce fiscal discipline in the eurozone may fall foul of popular anger in Ireland unless the EU creditor states agree to share more of the pain. The Irish government has suddenly complicated the picture by requesting debt relief from as a reward for upholding the integrity of the EU financial system after the Lehman crisis, though there is no explicit linkage between the two issues.

Portugal's Rating Cut To 'Junk' By China's Dagong

 

 

Sent to you by JF via Google Reader:

 

 

Portugal's Rating Cut To 'Junk' By China's Dagong

via ZeroHedge by Tyler Durden on 11/23/11

Arguably the least biased (or perhaps least cognitively dissonant) of the major ratings agencies, China's Dagong has just moved Portugal's rating to junk (BB+) from comfortably investment grade (BBB+) - a 3 notch drop. The rating agency also left the peripheral nation on negative watch. This action follows Monday's Greek downgrade from C to CCC. Is this a ploy for better entry levels when they save the world with their EFSF-buying bazooka? Or more likely a more honest reflection of a debt-laden, slow-growing, austerity-facing nation burdened with inadequate leadership and an inability to control its own fate?

 

 

Things you can do from here:

• Subscribe to ZeroHedge using Google Reader
• Get started using Google Reader to easily keep up with all your favorite sites

 

 

Key Comment - 23/11/11

"  More weakness in European sovereigns as Belgium widens to record levels, throwing Dexia bailout into disarray."   

Cross Market News

• Asia-Pacific Equities down on growing US and China growth concerns: China -0.8%; Hong Kong -2.0%.
• The FT reports that the Federal Reserve will force the biggest US banks to "stress test" their balance sheets against a severe eurozone recession and a US unemployment rate of 13 per cent as part of a wide-ranging exercise.
• The FT reports that Brussels will today propose measures giving it more authority over the national budgets of eurozone states, including a requirement to submit tax and spending plans to European Union authorities before their national parliaments. According to the FT, the proposals would also allow the European Commission, to send fiscal inspectors to eurozone capitals if it decides a country is "experiencing severe difficulties" – even if that country's government has not requested them.  
• German Finance Minister Mr Schaeuble said that the December meeting of the Eurozone (9th December EU Summit) leaders will likely give a clear indication of the amendments to the EU treaty, proposed by Berlin. "There is no alternative" to safeguard the stability of euro, reports quoted him as saying during a discussion on Tuesday.Mr Schaeuble also reaffirmed his opposition to calls for greater role of the European Central Bank in tackling the crisis. "The Central Bank is not there to be used for state financing" the minister was quoted as saying.

Gold Battered and Bruised.. As is this weeks P&L

Yesterday Gold went into free-fall taking our position with it. 

We've tried to emphasize that short term pain is a necessary part of this trade. Given the scale of the European mess, there will be further flight to safety over the next few weeks, months and possibly years. Indeed, the Dollar Index continues to climb as investors buy up Treasuries with zero regard for the failure of the US government to bring its debt under control or even to have a plan to do so.

Yet precious metals remain correlated with risk assets.

To remind readers, this is down to 2 reasons:

1. As markets deteriorate, agents have to sell assets to cover margins. Gold is a common reserve asset for many big players and therefore takes a hit.
2. With Gold's safe haven status in the balance, investors prefer bonds. US, UK & Japanese most commonly. As the main method of trading Gold is in USD, an appreciating dollar causes, all things equal, a fall in the USD price of Gold.

We still believe in this trade. However, as many strong support levels continue to be breached with ease, we admit there is a chance, albeit small, of investors ignoring Gold, in favour of perpetually reliable securities (cash, bonds) as the real restructurings in Europe are forced through.

In short, we are no longer convinced that in a meltdown scenario Gold will rally.

Even if investors eventually  fall back on Gold, the risks involved with taking a position this early in the day are sizeable.

-----------------------------------------------------------------

So here it is:

• We sold half of our Gold position, banking a loss of about 1.5%. This was an extremely painful decision, and ultimately reflects our poor entry timing.
• Our EURUSD position remians, in order to account for the inherent Dollar risk in Gold mentioned earlier in this post.
• We added a hedge in EURJPY, i.e. we are short at 104.05. Firstly, this reflects the house view that the ECB will ultimately print. It also exposes us to flight of capital out of Europe without running the risk of the Fed printing (which would send EURUSD soaring). Finally, we still like the play on Yen strength, covered many times on this blog.

-----------------------------------------------------------------

Trading is incredibly difficult in this environment. Correlations change daily and politicians continue to dominate the newsflow. Hence our overall risk remains very light.

Expect a weaker P&L Report this weekend.

Key Comment - 21/11/11

"  Street is flat and happy to go in either direction. Early client activity likely to define the nervy markets"

Cross Market News 

Asia   Equities are down on lack of progress on the US deficit plan and Chinese Vice Premier's stark warning on global growth: China: -0.4%; Japan: -0.3%; Hong Kong: -2.1% 
Spain's People's Party led by Mariano Rajoy won the majority vote in the weekend's general elections.
Greece: Interim PM Mr Papademos is in Brussels to negotiate release of the Greek bailout funds. EU/IMF have insisted on a written guarantee from each of the coalition partners that they will meet the bailout terms regardless of who wins the Feb'12 elections.
New York Times :  Europe fears a credit squeeze as financial institutions are offloading vast holdings of European government debt, spurning new bond issues by countries such as Spain and Italy, and refusing to renew short-term loans to other European banks .
Bundesbank Pdt. Mr Weidmann on calls for ECB to be lender of last resort: "The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way. These [heavily indebted countries have] deficiencies [which] include a lack of competitiveness, rigid labor markets and the failure to seize opportunities for growth."

We sold EURUSD

So gold has sold through that strongly resisted 1755 level much to our surprise. And it did so with some style.

 

The position has recovered slightly as markets have strengthened slightly today and late yesterday. We knew there would be some pain before the gain. In fact, losing more money is bizarrely exactly what we want... Deteriorating markets signal more and more to the ECB, the Fed and the BoE of the urgency of the task at hand, pushing them towards printing.

 

However, in order to avoid a little of this short term pain we sold a small amount of EURUSD to hedge against an appreciating dollar (as things deteriorate Treasuries are bought, Dollars are bought).

This also gives some more nice exposure to the ECB press.

 

Oh and the Yen trade has finally closed netting around 20 pts. It was worth the wait!

Key Comment - 18/11/11

" Continued bond buying of Spain and Italy gives market brief respite. Expect selling late in the day and into next week."       

Cross Market News 

Asia-Pacific Equities are in the red across the board: Japan: -1.2%; China: -2.0%; Hong Kong: -1.8%; Korea: -2.0%; India: -1.6%; Australia: -1.9%  
Asian investors and central banks have begun to sell German bonds and pull out of the Eurozone altogether for the first time since the debt crisis began, deeming EU leaders incapable of agreeing on any coherent policy. The Telegraph quotes Andrew Roberts as saying: "The question on everybody's mind is whether it is time to get out of Germany... though we are not there yet." Jean-Claude Juncker, Eurogroup chief, fuelled the fire by warning that Germany is no longer a sound credit with debt of 82% of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," 
Eurozone and IMF officials have reportedly discussed the idea of the ECB lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest euro zone sovereigns. This is being seen as "[...] one way of getting around the legal restrictions on the ECB"
A report by Stone & McCarthy (Princeton) shows that overnight deposits at the European Central Bank have been rising since the beginning of June as the debt crisis in Europe continues to intensify. The report cites the rising credit risk profile in interbank markets on fears that counterparties could be exposed to distressed sovereign debt, and this may be forcing banks to reduce risk and accept a lower rate of return on their funds.  
Bank of England's Mr Weale says it is "perfectly possible" that the UK economy is already contracting, and if "things evolve as forecasts suggest", there would be a "very strong case" for adding more stimulus to the economy.

Winning call last night. Now on to today

Our “Big Position” played out extremely well last night. Gold was indeed oversold and this was the first item to go as the market strengthened around fiveish. We sold 2/3rds of ours position at 1767 netting 12 points. At this stage we were very short risk, with a large FTSE short on, and considerably in the red as we saw her tick up to 5520 (our entry was 5491).

This did not spook us. Both in terms of fundamentals (which scream sell) and the technicals (the top end of a ranging market) I assigned about a 20% probability of our stop being hit overnight, expecting a small retrace and perhaps further strength today in which case we would re-evaluate.

At 20:12 we closed our FTSE position at 5482, generating a small profit of 9 pts but given our size this has contributed to about 0.5% NAV. The market sold off, seemingly internalising the day’s horrors in rates and credit. Interestingly at this point the remaining Gold 1/3 was also in profit, indicating that the overall hedged trade was a winner (i.e. we picked the correct combination of assets to produce a return “no-matter-what”). Gold was up, FTSE was down.

Unfortunately, as per, the Yen had barely moved. We are still in the grey (lightly in the black..) showing a couple of points. Today we’re seeing a bit more action though. Having paid about 4bps per night on this trade so far (funding) I’m beginning to doubt it’s sustainability long long term.

Last but not least we got hit again down at 1755 in our fave metal. Repeat after me, the market will always buy here. It’s a no brainer. A put on the idiocy of the political cycle.

So this is where we stand:

Key Comment - 17/11/11

" Set to be yet another mixed day confined to the high volatility trendless trend."                                        

 

Cross Market News 

US crude oil futures jumped back above $ 100. A number of analysts see this as the nail in the coffin of the global economy (similarities to the 2008 slump).
UK consumer confidence fell to a record low in October as Europe's debt crisis and the unemployment outlook worsened. The index dropped to 36 vs. forecast 43 and 45 prior.
A report from the ratings agency Fitch suggests that unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the US banking industry could worsen. 
Nearly all of Germany's public-sector lenders were downgraded by Moody's on Wednesday night after the ratings company said it is less likely that the German government will step in with a bailout. The downgrades, which conclude a review begun in July, affect the senior debt and deposit ratings of 10 German banks, primarily the Landesbanks.
More hints of QE from the BoE yesterday as the dovish Mervyn King forecasts 1.5% CPI in 2 years; however, the cross-atlantic data continue to diverge with the US prices actually deflating this month perhaps opening the door for US QE also.

The Big Position

With the Yen trade having moved into net positive territory, we put our heads together and decided that, in no uncertain terms, no matter how strong the technical factors calling for a USDJPY sell off, we really do not want to be net short dollar risk - i.e. indirectly betting that agents will stop buying treasuries.

 

The house view is that, in time, equities are overdue a sell off. Indeed, credit (a market of "professionals" with little retail activity) has widened substantially further than stocks have fallen. However, with this view we contend the "Law of the Turkey", otherwise known as the hallowed Christmas rally.

 

For this reason we are skeptical about holding an unhedged short position on risk.

 

Our alternative is a 3-asset hedge, with a slight short bias as November may still bring a little more pain.

 

The Big Position:

• Continue to short USDJPY expecting Yen to appreciate.
• Hedge our USD exposure by being short the FTSE @ 5491 (Entry at 15:03) Stop @ 5580.
• Hedge our exposure to Euro QE by being long Gold @ 1760, noting that we also saw an oversell today at around 15:00 - the entry trigger. Stop @ 1690

 

Net/Net we believe we are short risk (hard to be certain with correlations changing daily), with about 4% of NAV max loss and are working towards setting a price target. As always stay tuned.

 

P.S. 4% max loss is about our maximum tolerance vis-a-vis our "Big Position".

Crucial Bond Auctions for the Calendar

Every date is a hurdle for the market. A hurdle with an egg-shell landing.

To be watched closely - for signs of ("illegal") intervention and weakness.

Yen continues to strengthen

In the volatile overnight markets we were filled again at 77.14, with a nice wide stop to prevent a repeat of Tuesday's misfortunes. I have tightened in the stops for today's session and the market has come off nicely.

To recap we are short USDJPY in decent size with a TP @ 76.10 for around 4% NAV and the stop is about 2% NAV in the red.

Here is the motivation, remembering we now expect any intervention at 76 worst-case-scenario. Due to BoJ's losses on this trade (in the $100s of billions)

Trade Recap at the Close

After a very volatile day, with market reversals occurring at least twice on flashes of news and rumour, our FTSE exposure ended up flat.

I closed the call option at a small loss around 3:30pm and later made small profit on a FTSE short as the market overreacted to an inconsequential piece of US economic data (alongside a misconstrued remark from a FED official about further QE).

THe USDJPY hedge remains open having done very little at all today (lesson learned). We believe it still has further to go and would continue to target 76.10

Last Night's / This Morning's Activity

We continue to like the USDJPY short mentioned a while ago, especially as the market has rallyed above 77 recently on dollar strength.

 

On light volumes, the market continued to range trade last night, presenting a limit entry at 77.1 (short).

 

We were filled at 22:46pm at 77.1

We were stopped at 02:24am at 77.4

 

This (guaranteed) stop-loss was put in place as protection against an unlikely BoJ intervention (much more likely at 76 levels) and was intended to be far enough away that the market wouldn't touch it under normal conditions but close enough that our exposure to political (read BoJ) risk was manageable.

 

Then:

 

   !!!!!!!

 

Reuters: "The dollar briefly spiked higher against the yen but later gave back most of its gains. Traders said the move was likely caused by a large-lot flow and stop-loss buying, and was probably not intervention."

Very, very unlucky.

 

Moving swiftly onto this morning, I have sold a call option on the FTSE strike 5520 with an upside of around 1%.

As a hedge I have sold more USDJPY at 76.93. This time stop is @ 77.90 or 2% portfolio risk. Target 76.2 over a number of weeks.

 

Stay tuned.

Key Comment - 15/11/11

" Further weakness expected as European cross-holdings ensure hotbed of contagion. France to join team SMP?"                    

 

Cross Market News 

• China: The IMF sees a "steady build up of financial vulnerabilities" including off-balance sheet lending, a surge in property prices and contingent liabilities from its government- dominated credit allocation model. 
• OAT spread continue to widen as France has roughly double the exposure to Italy than any other sovereign. Currently the weakest link in the Euro chain as no SMP cover.
• Europe's permanent bailout fund, the European Stability Mechanism (ESM), may not be brought forward as planned from its targeted launch in 2013, according to Mr Schaeuble . 
• The European Commission is aiming to curb the freedom of expression of credit rating agencies through suspension of sovereign ratings in "exceptional circumstances". They draft proposals argue that rating agencies could magnify contagious effects through subjective biases and arbitrary downgrades that aren't fully explained and prompt investor over-reactions  (RE: False France Downgrade...) 

Trade - 09:53 Short FTSE @ 5551.8

09:53 Short FTSE

Entry: 5551.8
Stop: 5580

Take: 5510

Exit Timeframe: T+2

This morning we opened with a relief rally as Berlusconi handed over as expected. This has given us a rare moment of strength to add a short position as the EZ situation is set to deteriorate. Added to this, Italian BTP auction was weaker than expected causing the highest cost of debt since 1997 in Milan. Therefore any strength is related to ECB buying, which is currently limited in scope.

We also expect that much of the new issue was dumped on Italian banks, further exacerbating leverage issues and deep sovereign risk.

"Italian banks are too exposed to sovereign risk. Despite a conservative business model centred on commercial banking, Italian bank bonds are sharply underperforming. Italy’s banks own between 5-13% of assets in domestic sovereign debt, a multiple of their market capitalization. Thanks to positive carry on these government debt holdings, they have reported increases in interest margins. But these gains may prove short-lived. Over time, we believe government debt exposure could transfer risk from the sovereign to Italian banks and then to the rest of Europe – with French banks next in line. "

***EDIT 11:18*** Exited at 5512 for +42.8pts, risk ECB intervention into BTPs

Key Comment - 14/11/11

                                

" Reforms to political landscape in EZ allows market to relief rally. Outlook still overcast however."

Cross Market News 

• Asia Equities are rallying on positive news from Europe, strong Japan GDP  (6% QoQ annualised)  and Chinese loan growth data: Japan: +1.2%; China: +1.9 %.
• Italy's Lower House approved the new Budget Law on Saturday; PM Mr Berlusconi's resigned as expected. Mario Monti appointed as the new PM designate. A new government is likely to be formed by the end of the week.
• Italian structural changes contain more reforms than previously thought but every bill needs to be double ratified (Upper & Lower Houses). 
• Russian PM Mr Putin called for the ECB to directly intervene and avoid "a catastrophic collapse of Italy"; warns that the IMF and EFSF do not have sufficient funds to diffuse the crisis at hand.
• Bundesbank has rebuffed calls for the ECB to become the lender of last resort for distressed sovereigns. He argues that such a step would breach Europe's ban on "monetary financing", and 'you' cannot "ensure stability of a monetary union by violating its laws".   
• ECB's Mr Kranjec struck a slightly different tone to the 'Buba' Pdt., saying policy makers are "flexible" and will go "as far as needed" with regard to government-bond purchases.
• According to Reuters, the German government is pushing for a limited amendment to the EU treaty, to allow greater influence over states that bust budget rules and agreed obligations on stability and consolidation. They envisage the amendments to be complete by 2012.
• Italian 5y auction today, ECB expected to buy BTPs this morning to provide positive tone. France still in the spotlight.   

Weekly Roundup

6th - 13th November

Winning Trades/Total: 3/3

Weeky Return (Annualized): 8.26% (426.2%)

Year-to-Date

Winning Trades/Total: 3/3

RoI: 8.26%

Key Comment - 11/11/11

" US on Holiday, market likely to range trade unless significant headline out of Europe. Peripherals recover slightly."                         

 

Cross Market News 

• New political back drop in Greece as "technocrat" L Pap takes the helm. Perhaps we will see more sovereign stability into the end of the year.
• The EC drastically revised down their EU FY'12 GDP growth forecast by 130bp to 0.6%.
• Italy is moving closer to a unity government, coalescing around Mr Monti succeeding Mr Berlusconi. He is backed by main centrist and centre-left parties, and also the outgoing PM.
• The EFSF will issue new short-term bonds with a maturity of three, six and twelve months from next months, according to its Chief, Mr Regling.
• S&P retracted their France downgrade note yesterday; attributed it to a "technical error".
• An FT/Economist Global Business barometer in October shows that fewer than 15% of respondents expected conditions to improve in the next 6 months; 45% were altering their investment decisions, while 22% expect the EMU to break up. Still, less than 2.5% expected a global double-dip recession.
• UK: 10y gilts fell to their lowest yields since the 1950s (yesterday's low = 2.177%).
• The UK government has pledged GBP500m loan pool for small businesses. Mr Prisk, the UK Enterprsie Minister describes the development as "sensible".

This House Believes Gold will Make 2000

At times Gold exhibits a tendancy to vary in-line with market sentiment. This is down to two reasons:

• As risk assets decline (Equities, Euro, Credit etc) margin calls are made and agents are forced to cover their shorts by selling Gold reserves.
• Poor economic and risk outlook can lead to a strong USD as investors switch to Treasuries. A strong USD makes buying Gold expensive to external agents, ceteris paribus, bringing down demand.

We are also all well aware of Gold's safe haven nature whereby the price varies inversely with market sentiment, as investors flee to one of the few securities which is all-but-certain to hold its value throughout inflation, deflation or even depression.

So which is it to be?

Fortunately for JF it doesn't matter.

Case 1: ECB levies taxes on EMU nations through the printing press (inflation). Gold skyrockets on inflation and wealth preservation tendancies.

Case 2: Global Financial Meltdown, worse than 2007/8, flight to Gold is unprecedented and severe.

The only other option is external aid (read China, Russia) which will likely still fall broadly into Case 1 as far as this trade is concerned.

The Trade:

Long Gold @ 1744 (~15:45 10.11.11)

Stop: Key Support level at 1600

We will look to take profit around the 2000 level. Our timeframe is between 2-6 months, wide enough to allow due amount of political hysteria in Europe.

10:47 ***EDIT*** Closed 2/3 of position for  +23 points @ 1767.

15:52 ***EDIT*** Closed final 1/3 of position for +29 points @ 1773.
 - The closer we get to December the more likely the markets will freeze up and give way to an Xmas rally. So strong is the power of the Turkey that this fund believes it may have mistimed this particular trade entry. Stay posted for a re-entry next week if the Italy story deteriorates again (at bargain Gold prices) or perhaps early next year as the post-season market hangover kicks in.

A pertinent analogy

“The generals… announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy.

The ECB has been behaving like the generals. When it announced its programme of government bond buying it made it known to the financial markets (the enemy) that it thoroughly dislikes it and that it will discontinue it as soon as possible. Some members of the Governing Council of the ECB resigned in disgust at the prospect of having to buy bad bonds. Like the army, the ECB has overwhelming (in fact unlimited) firepower but it made it clear that it is not prepared to use the full strength of its money-creating capacity. What is the likely outcome of such a programme? You guessed it. Defeat by the financial markets.”

Key Comment - 10/11/11

"France rips wider as investors seek next victim. EU ministers debate cutting peripherals loose."

 

Cross Market News

• Asia-Pacific Equities down on fears about Europe's debt crisis: Japan -2.9%; Hong Kong -4.5% 
• According to a senior CDU Lawmaker, Angela Merkel's CDU party may adopt a Euro exit clause in their party platform.
          "This motion will go through, I am sure of it," Norbert Barthle, the ranking CDU Member of Parliament's budget committee, said today in a phone interview.
• The Greek government's deal to give the premiership to the speaker of parliament fell through last night, reports the FT. Philippos Petsalnikos was poised to become PM but Papandreou reportedly reintroduced Mr Papademos's candidacy, along with that of Evangelos Venizelos.
• After Italian yields broke 7% yesterday, lawmakers hastened last-ditch budget cuts, vowing to approve a key economic bill by Sunday.

Groundhog Day. Blind US Bulls.

Proof that on the other side of the Atlantic, they either don't understand this crisis or don't want to understand the crisis..

 

 

Groundhog day:

Morning: S&P opens down on awful sentiment out of Europe. Armageddon.

Afternoon: Life is good, lunch was great, where's the nearest rock to sleep under. Marley & Me.

 

 

Italy and Greece: The Boat that Rocked?

Following up on yesterdays article, as Italy moves through the point of no return.....

Markets responded negatively to the news of 10 year Italian bond interest hitting a record 7%, as you might expect. Unfortunately this is merely the beginning. At this point Portugal, Greece and Ireland had to start bail out projects, as a result of an unsustainable debt profile.

"No one wants to lend to a country when that country would use the loan to pay the interest on previous loans - that's throwing good money after bad."


With stats like this is a return to <7% unlikely?

And LCH margins will only make the problem worse, especially when they need to roll over €360bn worth of debt in 2012. If Italy starts to go its going to make Greece look like a drop in the ocean. The Euro currency boat is really starting to list heavily which wave will push it over, or did that happen this morning?

Next trade: France?





Treatment of Italy unfair?

More fireworks this afternoon?

Further to our first winning trade of the day (details below), the bears may well have even more to celebrate as the spread that LCH uses on BTPs (Italian bonds), a benchmark composed of Bunds, OATs and other EMU sovs, hit 450bps.

If  this is sustained throughout the day there will be a margin call from LCH. Blackrock and others (including the ECB) may have to liquidate, and then we will really see some fireworks.

New LCH Margin Requirements

This morning LCH decided to throw its weight around. It rasied margin requirements on Italian debt from 6.25% to 11.25% active from tomorrow.

Our view is that the market is yet to fully internalize this. Indeed if this triggers further sell-off in BTPs, which we believe it will, we could see absolute free-fall in risk.

The trade:

Short FTSE @ 5586.3

Stop: 5608

Take: 5550

Exit Timeframe: 2 days


***EDIT*** Trade closed at 5559.5 at 09.06 GMT +26.8pts