LTRO Preview: SKEW

The LTRO 2 is the iPad 3 of the financial markets. Everyone thinks they have an inside scoop, everyone has an opinion and everyone is pinning their hopes on a good release.

 

But what exactly is a "good release"? We have reached a few conclusions.

 

1. Given the vast differences in opinion in the market, we cannot place a consensus on any data point other than that between EUR400bn and EUR550bn is likely the "goldilocks" level and would be moderately bullish for risk.

 

2. A result of conclusion 1. is that we cannot position directionally outright.

 

3. However, this is not to say that we anticipate a simple binomial event. Indeed, we believe there to be significant skew in expectation, dragging us into a moderately bearish stance as all technicals and "canaries in the coal mine" point to a thin market that can be catalysed easily to the downside.

 

Taking 1.,2. and 3. into account we have bought EURUSD puts, strike 1.31, at a cost of a meagre 25pips reflecting our view that an outlying number in either direction is not priced into volatility and could trigger a domino sell off.

 

Paying heed to the upside, we have kept this cost to a minimum and assign a 20% p(success) with an average of a 200pip gain.

 

E(trade) = 0.2*200 - 0.8*25 = +20pips

John Embry on Gold

John Embry, the chief investment strategist at Sprott Asset Management, talks, in this reprinted interview with Matterhorn Asset Management, about the motives and the means of certain interests to prevent a free gold market; tells the reason why the gold price will remain high; shows the opportunities in silver; and explains: “Gold is about the furthest thing from a bubble that I can think of."


Read on for more.

Trade Flash: We bought more XAUUSD

Long 1 Unit XAUUSD (Gold in USD holding now 3 Units) at spike down to 1707,  essentially transferring more of our weight to XAUEUR from EURUSD as volatility surrounding the Greek bailout/election dominates price action.

This positioning is also consistent with our flagship strategy of (re-)averaging into a sizeable Gold holding having already profited considerably during the "inflation bull market" of Jan '12. We remain convinced that in a global currency war (read fiat money print) commodities are the most likely to benefit.. Indeed precious metals are proven stores of value in the new "paranormal" market environment.

 We expect also to build up an XAG (Silver) position so as to be more hedged from the more idiosyncratic yellow-metal phenomena, such as the ETF and futures market technicals.

Trade Flash: Partial Exit of USDJPY EURUSD and Gold

Exited 2/3rds USDJPY at an average of 78.46... +156pips average (having waited for the further move at on US time)
Exited 2/3rd EURUSD at an average of 1.3098... +88pips average

Exited 1/3rd XAUUSD (Gold) at an average of 1733 +6 points average

 

We did not expect all of these trades to make money, such is the business of hedging. This unnerves us as USDJPY has begun to correlate with risk assets (rationale being that the Dollar is more exposed to Europe, the only driver of risk in these markets, than the Yen), not an eventuality we had prepared for ab initia.

 

Still, we sit on a net position of long XAUEUR and long USDJPY - something we are very comfortable with since not only are our friends in Japan finally throwing their weight around with decent size and conviction, but also the EUR is looking particularly rich as conditions in Greece worsen daily. We are well overdue a pullback, however shortlived.

I would also recommend a tight stop on the EURUSD - any news of Greek EMU exit could well rip this to the upside as investors finally shake off the shackles.

BoJ injects JPY10trn - our NAV only jumps by 0.5%

The market reaction to last nights announcement of massive Yen QE is absolutely absurd. A meagre +40pips on the USDJPY prices in only a fraction of the 10trn + commitment to 1% sustained inflation.  

 

Plus, it's not as if these are idle threats. If the past is any indication of the future, the BoJ will likely follow these indications to the letter and buy any amount of JGBs. Indeed - in setting such a clear cut goal as inflation targting, the Ministers' hands are tied not only in writing but also by the stubborn Japanese culture that has seen the Bank fight the market over the last decade. We finally add the BoJ to the list of countless central banks that are in the process of performing unprecented money printing - swelling in size and crowding out private markets in the process.

 

Having undergone considerable pain in this short JPY trade, first initiated on 27th Jan, it is tempting to take off the entire position now and bank the gains. However, we shall patiently wait for the US open today and expect the full move to become apparent. If not, a pullback may be on the cards as strong resistance at 78.20 is felt.

 

We remain short of EURUSD and long of XAUUSD (Gold).

Sold EURUSD at 1.3204 to Hedge The Big Greek Problem

Having exited our S&P hedge earlier this week, our positioning would have been totally derailed by this "shock" rejection of the bailout package from the Greek LAOS were it not for our trusty USDJPY long, posting more gains as Japan comes to terms with its rapidly imploding economy.

Gold has pulled back and we have added to our position at 1705. As the post title describes, we shorted some EURUSD after the main move down to 1.32 to mitigate further risk out of Europe and this has proven wise as raging riots in Athens have caused the Euro to depreciate to a low of 1.3157 vs USD.

The rumour mill among traders is rife with many believing that this could well be the catalyst we described yesterday to snap the market back a few notches.

Pull out the garden scissors, protect your precious assets with something skewed and juicy.

LTRO support.. But we approach Major Technical Resistance? Market Ahead of Itself?

Feast your eyes on these two charts. On the left hand side, we have the S&P - tiptoeing up to July's high of 1356.48. On the right, the FTSE 100, already in a strong resistance show from 2007-2010 downtrend as indicated by the sloping TL.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Both of these represent an obvious market turning-point. One that, in most situations, would be grounds for a bet on reversal and risk-off catalyst. However, we have a well bid market, with inflationary support from the LTRO and early year technicals (real money accounts sitting on piles of cash and lagging behind the index) that are set to continue at least until the 28th of Feb (by now this date should be etched in every trader's head as the date of the 2nd LTRO).

 

We believe the market is ahead of itself. The path of least resistance from 01/01/2012 was a light rally into late Feb followed by a sell off as the hangover begins.

 

But pushing past 2011 highs will require more than a drifting market. One large shock in either direction and we will see a rebalancing and re-normalisation of price action as finally the low-volatility zombie market is forced to make real decisions.

 

For JF, however, the current trend suits (over 1% MTM up on the month already), a quite pleasant position to be in, but one that will need to be adjusted at some point in the next few weeks.

The Death of Market Volume

 

The market in its current state - grinding higher on lower and lower volume - feels exactly like a very tightly wound spring, where each additional turn takes double the amount of effort and takes just one slip to unleash.

 

We exited our S&P short (at a slight profit), favouring a European index short in the future as the decouping trend remains defiant and we will see more downside on the CAC for example.

 

Gold is appreciating in USD and USD is appreciating in Yen - an odd state of affairs but we're not complaining!

 

Our key 2012 trade has always been long XAU/JPY and this is seems to be coming round after a week or so of melancholic action.

Summary of Today's Trades in Bullets

• Buy 2 Units of XAUUSD (Gold/USD) @ avg. price of 1739.
• Sell 1 Unit of USDJPY @ 76.731
• Short 1 Units of S&P @1341.78, Sell another @ 1349.5 SL  @  1358

Net we are Long XAU/JPY, Long USDJPY, Short S&P/JPY - NetNet we are short Yen and ready to take the pain!

Markets push on higher in thin volume as everyone waits for the turn...

"Slow-motion" would be one way to describe price action in equities and FX at the moment.

 

Q3-4 2011 was defined by record volatility and headline risk. Q1 sees us stuck in 1st gear, grinding higher and higher with most market observers in disbelief at the sheer persistence of this technical trend in the face of largely unchanging EZ fundamentals. Free money for Momo funds and trend chasers - and we can only blame ourselves for expecting an imminent correction every week for the last 3 or 4.

We weren't alone in this belief. Whilst the Feb LTRO was (and is) expected to support the market in the short term, it defies logic that the long end (5yr+) of sovereign bonds and coroporate credit should also rally as hard. Considerable bets have been made that the LTRO is not a simple "kick-the-can" policy that will stare out economies into growing, but a real game-changer.

But most depressing is the unbelievable tear in Gold, which we called and were positioned for - unfortunately in not enough size as we took further fund injections. Our gains here are offset by our losses in JPY as the USD has weakened into the risk asset highs.

 

 

The turn will not only afford us more Gold but also support our flagging JPY trade - not low enough to cause intervention but not high enough to be pain-free. Testing times..

As the JPY simmers, the next CB play is the CHF

Given that the SNB has repeatedly, and catagorically, stated that it will continue to defend the 1.2000 level on EURCHF our next "Central Bank alert" (and matching trade) looks set to be triggered.

As this is a pure play on intervention, it would be wise to wait for the pair to edge closer to ground-zero - fundamentals of safe-haven and interest rate policy virtually guarantee this. However, with such strong verbal commitment from the SNB, we may have to wait a considerable while.

We remain an observer only at this stage.