Nimble exit on Silver yday, story names in focus

The house Macro view here is that whilst the Euro area remains fundamentally flawed - and therefore we expect another leg down - immediate technicals remain robust. Money market and short dated liquidity now must find another home in a ZIRP/NIRP environment and corporates are increasingly the targets. This has a read through to all risk assets.

Yesterday, we exited the full Silver position (a legacy from last Thursday when XAGUSD was trading in the mid 26s) in the AM, well ahead of Bernanke's conference. QE 3 is totally off the radar now and Silver is subject to appalling technicals - taking ~80c was the correct call 95 times out of a 100. The probability of near term QE is down into the single digits.  However, we are still happy with the R/R in defending the 26 glass floor and expect to re-enter our position shortly.

In low volume/volatility markets we turn to swing trading single names: idiosyncracies and corporate themes. "The search for another CEDC."

On the agenda: LINE, JAPAF, VXX, VIX and keeping an eye out for downside risk catalysts.

75% flat, up 4.4%  this July.

CEDC rallies

Following on from a recent post (http://jfcapitaluk.blogspot.co.uk/2012/07/active-trading-resumes-silver-cedc.html#more) we have seen some very interesting developments within a short period of time today:

9:54 AM Central European Distribution (CEDC +0.9%) announces that it signed a strategic agreement with Russian firm Standard Corp. and that its CEO has stepped down to be replaced on an interim basis by one of its board members. Shares of CEDC are currently under a trading halt.
(seekingalpha.com/currents/post/405441)

12:11 PM Shares of Central European Distribution (CEDC) come off their trading halt to rack up a cool 28.6% gain off of news of a new distribution agreement in Russia. Extra funds kicked in by Russian Standard as part of the deal will allow the company to retire debt. (http://seekingalpha.com/currents/on-the-move)

Having bought stock in this company at 3c we will be staying long for the foreseeable future, confident in the decision especially after this positive news.

Friday Roundup

NFP was an underwhelming small miss today and didn't trigger much momentum in risk assets. We were positioned well - long Silver, short S&P in order to benefit from a poor number (= QE with initial gut sell off) and clearly this materialised.

Having covered our short, we crystallised around 0.5% profit but Silver (XAGUSD) reversed and traded poorly as the market came to its senses: We are still some way off further easing. Payrolls may have missed consensus but it is still in positive territory.

Attention then turned to EURUSD which has punctured a large support area of 1.2330 and now must hurdle 1.2300 before it plummets through fresh air - next stop 1.2000. I shorted at 1.2332 and mark our position up nearly 0.8%, also performing a neat hedge for our small Silver long.

Have a great weekend. With any luck you outperformed our +2.1% for the week - certainly Tuesday and Thursday were great days for any technical trend follower with other days a bit noisy.

ECB and BoE decision previews

With central bank decisions from the ECB and BoE and supply in France and particularly Spain, markets will have a significant amount of information to digest.

Dreary 4th of July Markets... Downtime Research: Linn Energy

We saw real technical strength in Silver yesterday, a return of consistent and stubborn buying not seen since late May. I was able to add to my position at 27.88 in a scrap, taking the total position to about 1/2 of what I consider to be a moderate conviction size.

Independence Day has brought sideways action, especially prevalent this afternoon as the usual trans-atlantic trend reinforcement has been lacking. For stocks and other risk assets, this is not necessarily a bad thing - a pause in price action can allow a trend to reload, consolidate and continue. I would not want to be short equities just now.

Read on for our new med/high conviction long - perhaps not at the right levels to enter, but nevertheless one I am keeping an eye on: Linn Energy (LINE).

Thursday ECB decision, July Preview

Today we stayed on the sidelines, a specatator to robust asset trading (equities/corp bonds/periph sovs all catching a bid) and some abnormal correlations... Read on.

Active trading Resumes: Silver, CEDC

Thanks for bearing with us. The cogs are turning again and JF is admin 'light'. So we turn back to our mission statement - trades, analysis, discussion.

June sees us up a modest 6% with gains in Silver and a small MTM loss on our CEDC position. Read on for more, including how we will be positioned as markets open tomorrow.

Welcome back! JF hits the ground running with long Silver

As any trader will know, a 2 month hiatus from the markets always has a 3-4 month footprint. As I get back up to speed with the changed technicals and inter-asset correlations across the markets we invest in, watch this space for news on our latest brainchild - a set of twin funds that take similarly themed positions but at different amounts of "risk" or "leverage".

One of our key discoveries from speaking with prospective investors is that there is no one-size-fits all product. Indeed, there tended to be two distinct schools of thought - investors that desired capital preservation and investors that desired capital appreciation. We intend to cater to both camps but without sacrificing the key strategies that make JF Capital successful on an absolute return basis. 

Put simply, whilst we could comfortably create a diverse portfolio of assets for the risk averse investor that would safely return ~4% per year, we feel this model drastically reduces any added value that a money manager can impart. We, alone, should be responsible for the success or failure of a trade.

This philosophy justifies hedging versus a benchmark or currency so that every idea is crysallised down into its purest form - a refined strategy that succeeds exactly under a forecast set of conditions and under nothing else. In this way, successful trading is not dependent on a "bull market" nor does it require "risk-on sentiment".

Having said that, clearly technically motivated trades require the exposure to one market alone and therefore shouldn't be hedged. In other words, if you are speculating on the actions of other traders in a particular market then it is only the price action of that one market alone that should be traded. 

For example, in this period of high volatility, surrounding political risk in Europe, we have been all but on the sidelines as typical trends and correlations have fallen apart. One key exception however, which we have managed to trade profitably, is Silver (XAGUSD).

Our view, voiced in this blog previously, is that Silver has a practical lower bound (around $26) justified by industrial uses, finite supply, aesthetic value and lastly as a safe-heaven (a function of the previous three).

It has been a very profitable strategy to trade this support, buying in size as the price approaches $26 and averaging out up to $30. Volatility has been sufficient that this cycle has repeated several times, however, each repetition brings lower-lows and higher-highs typical of any up-trending security that is exposed to this kind of convexity (confidence in a "floor level" price causes incremental buying pressure).

We continue to hold a large position in Silver as a base, high conviction trade. A key aspect alongside the skewed Risk/Reward is also the protection from inflation and high payoff in a cross-border QE3 scenario.

More on our Macro views later in the week - tomorrow I take stock of the Greek Election and position the JF portfolio as one more piece of the puzzle is revealed.

JF pays down 2.8% to Investors over 2 months

Whether it be a curse or a blessing, JF Capital is again having to close its doors to trade in order to reorganize and recapitalize in the face of strong demand for the 'main fund', which will also undergo rebranding over the next few months.

 

Our final position was harvested in keeping with JF's investment philosophy - averaging-out and taking chips off the table when a trade yields a measured profit and not allowing the archetypal vice of a trader, greed, to interfere in decision making. Evidently our 1.31 EURUSD put expired worthless and thus taking profits when sentiment appears overdone has deftly captured nearly 1 percentage point for the team.

 

Future ideas remain under-wraps currently, save for those already published e.g. our desire to build a Silver position into the lows. It would be disloyal to our new fleet of investors to reveal how we will continue to navigate the ship across the ever turbulent asset markets.

 

Indeed, it is the house view that the worst of the crisis is still to come. Don't be fooled by the relative calmness, European solvency problems are yet to be dented by the current splurge of liquidity.

 

Expect the main fund, and timely blog posts, to relaunch around June.

Greek Debt Swap: Week Round Up

(3rd March to 9th March 2012)

On the 3^rd of February 2012 we were sitting on MTM value on the EURUSD put of 7%, by the 6^th March we were looking at a bid offer of 99/101, this gave way to locking in some profit. As one of our philosophies is playing the average this seemed like a good idea especially as news coming out of Greece was becoming more and more positive.

JF’s thinking lead to options, as previously written, because a positive LTRO followed by a Greek bailout would have lead to a large spike on any EURUSD rate therefore the put option was limiting us to one sided risk.

As we moved to the latter part of last week and it became obvious that the CACs (collective action clauses) will occur and the debt haircut swap will go ahead our option’s value moves closer to 0, reinforcing our profit seize as said above, although the position will still stay open as it seems pointless to close due to the nature of options- it cant get worse. The position therefore makes a total minimum gain of 10.22%, although more would have been nicer we cannot complain.

While all of this was happening JF did some P&L doctoring, or the "P&L mechanic" as our trader called it, using some intra day trades in AUDUSD (sell on 7th), EURUSD (sell on 7^th and 8^th) and XAGUSD, silver in USD, (buy). As Thursday drew to a close XAGUSD was up, see trend lines below for entry and exit positions.

This trend and the other currency trades, as above, meant loses suffered in changes of EURUSD on JF’s put option due to such a positive Greek bailout and with limited affect on bank balance sheets of the haircut and a limited affect on insurance groups (CDS were activated as a credit event was determined) were limited. So in summery an interesting week both for the EZ and JF, watch this space......




Author Details


This report was written by a JF contributor not directly involved in placing any of the trades/actions listed above for the aim of trying to objective. To raise any issues or ask any questions please feel free to get in contact with the team by commenting or emailing JFCapitalUK@gmail.com

Risk performs as Greece stays contained.. We bought Silver

Risk is back ON, thanks to optimistic headlines from "insider sources" on the Greek bond swap deal. Some are even suggesting participation of over 90% in the press, which we find very hard to believe.

Fortunately, we took some profit on our 1.3100 EURUSD put as this option may now prove to be worthless in 2 weeks time when it expires. However- we shall not close the trade, which is still in +ve MTM territory, as we feel the market is in "buy the rumour, sell the fact" mode and shall sell off steeply once CACs are used and the Greek CDS are triggered, perhaps causing a domino effect on some smaller peripheral banks.

It's worth keeping chips on the table to be exposed to this tail risk.

In order to hedge ourselves slightly to the upside, we took a small clip of XAG/USD (Silver) for a number of reasons:

1. Silver has shown strong support to a sell-off and has faired relatively well in risk-off scenarios, which we still believe are down the road. Timing in this type of market is a fools game, we are platonic.
2. We remain bullish on commodities in an inflationary outcome (read "currency war") and always look to buy on dips with Gold and Silver, depending on which looks better value.
3. The white metal has outperformed of late, mostly due to it being "safer" (not a word normally associated with Silver) than Gold in a loss-of-confidence scenario, whereby precious metals lose their safe-haven status. We assign a small probablility to this outcome and therefore it must be considered as the price movement would be violent.
4. In an out-and-out real recovery, Silver, of some industrial usem has a better chance of holding value.

Profit Cystallizes on our EURUSD put. Did you follow?

Our 1.31 EURUSD put, bought for a mere 25pips at 1.345 last Wednesday, is now straddling 100 (99/101 bid/offer) and we take this opportunity to realise some profit as Greek fears begin to creep out of the woodwork. Equity investors spooked themsleves this morning, the cascade of red across screens all day was virutally guaranteed after any meaningufl dip as market agents are acutely aware of how far we've rallied - beyond the June 2011 levels which saw a significantly better (albeit make-believe) economic outlook.
The chart below should help readers to understand our call a little better.

EURUSD, above, is currently the main risk driver in the markets (apart from perhaps AAPL but that's another story entirely), meaning it is watched by every trader everywhere, regardless of what they trade, as an indicator.

It therefore has the 'power' to reverse sentiment and form market tops and bottoms.

Analysis on the pair is a mainstay of our cross-asset forecasting and trade idea generation. Last Wednesday, not only were fundamentals and news-flow pointing to a lower Euro, we also see on the chart signification resistance to a further upside move. These are, in order of importance:

1. The downward sloping trendline (in Red) that has defined the market norm for over 11 months
2. 200-day Moving Average (SMA - in Yellow), an important psychological level for the market
3. The 50% retrace of the move down from 1.425 in October '11

The confluence of these factors led our positioning. Any move up would have been sharp, if however the LTRO 2 had impresed, thus we chose to expose ourselves only in options - limiting our downside.

JF Capital Monthly Report February 2012

Monthly Report February 2012

As another good month and our first quarter come to an end we reflect on what has been an exciting start for JF Capital UK. With, active months, month-on-month returns of over 2% in our 'Beta' stage of testing we look to increase our targets of 2% m-on-m to a slightly more ambitious 3.5%, which we believe is definitely achievable through the increase of our leverage in positions and continued broadening in the JF trader base.

Below is a cumulative NAV (net assets value) of the fund in percentage increase from 27^th January to 3^rd March 2012. Due to data availability issues (teething problems!) we are unable to provide a continuous NAV graph and therefore rely on NAV at the close of trades, in % on month-start.

The first major (stop loss at approx 2% risk) trade this month came on the 27^th Jan with a short on JPY at 76.6 to 76.9. This came at a nice technical level with support in the mid 76s and fundamentals reinforcing this viewpoint, hence our choice for a high level of risk on the table. By 31^st Jan this trades exposure was reduced by a half (1), believing in the trade but sceptical about the timing, leading to a negative P&L on the trade and an YTD NAV of near 0%, this continues until we exited our SPX position, from Jan, at (2).

It is worth pointing out that this point (9^th) we are 1% NAV (actual) MTM, but this is not displayed due to the graph being realised positions only.

As the middle of the month approaches, (3), our JPY short really starts to take hold as USDJPY hits 78.5, with shorts on EURUSD to mitigate wider Dollar risk. This gain is partly realised (4) when the USDJPY and EURUSD positions are reduced by two thirds. Gains occurred due to a BoJ injecting JPY10trn of QE in a helicopter drop of money together with continued threats to control their currency and deliver a sustained level of 1% inflation. These positions are also marked on the graph USDJPY graph below, including the reducing of our position size at 5 or 78 for the USDJPY.

Also (5) the closing of our XAUEUR position, with loses on the EURUSD due to positive news in Greece and gains that out weighed this loss on the XAUUSD, hence the outlier event for cumulative NAV.

On the 29^th Feb with the LTRO2 on the horizon the fund took the view that we will see a drop in the EURUSD and decided to buy a March EURUSD put option at a strike of 1.31 at a cost of 25pips.

As the new month starts our new put option looks inspired, with the NAV on the remainder of our USDJPY position and option at 1%, this former position is closed on the 2^nd at 81.67 up from the original purchase price of 76.xx playing to the strategy of averaging out so as to protect the fund from large losses (and gains) at the peaks and troughs.

It is worth noting that the 1.31 EURUSD put has not been closed but has been added to the chart at its NAV so as to show the value at month end of an increase of 2.305% on the month.

Summary

All in all a good month for this young fund, although the USDJPY position did cause some pain at the beginning of the month the analysis was proved correct. Coupling this with good moves in the gold market and a helpful LTRO we saw a positive end to the month.

Going forward we will hope to continue to be long in gold as a hedge to “global central bank balance sheet exposure” as March continues. In terms of JPY, it would seem unlikely for us to open another position until USDJPY hits the high 70s again. JF hopes to make a move into single stock market as equities continue to rally (FTSE up 6% in 2012).  

In terms of administration we continue to strive to find the most useful platform for our trading, CMC has been useful for our CFD trades and provides a low spread of 0.7, however the poor data feed and lack of options has lead us to explore other options as we move into the future.



Author Details


This report was written by a JF contributor not directly involved in placing any of the trades/actions listed above for the aim of trying to objective. To raise any issues or ask any questions please feel free to get in contact with the team by commenting or emailing JFCapitalUK@gmail.com

TRADE ALERT: After 1 Month+, We Exit USDJPY

It's been emotional.

At 14:19pm GMT we finally sold our most profitable clip of Dollars (USDJPY) back into Yen from which we had bought them. In late January, we paid in the low 76.xx (weighted average) for these USD and, as we sell them on for 81.67 into the market, we consider this trade our most well-measured and skilfully (fortunately) timed one yet.

I expect USDJPY to price north of 84 at some point this year. However, we exit now as technicals are not supportive of our position - the upward sloping trend that has defined the rally is now resistance (not the support we saw in Feb) and particularly Yen-bearish news has failed to break this zone, always a sign that the market is overextended and a correction is imminent.

A decent retracement back to the high 70s will afford us a new entry, otherwise it's goodbye to an old friend!

Thanks for the Alpha,

JF

Trading Update, Is Gold A Bubble

We remain holders of USDJPY and a March EURUSD Put at 1.31. These two positions alone represent a P&L of 1% on NAV and have performed hansomely post LTRO - but more on this later today in our Monthly Report.

Turning to Gold, our exit from this position at 1778 now looks inspired and is both a product of our averaging-in-and-out strategy and our expectation of a sentiment correction (still yet to fully materialise).

But we remain long term buyers of Gold, predominantly as a hedge against the global central bank balance sheet explosion but also as a good capture of European tail risk. Silver, however, may look better on a risk-return basis as its "fundamental" value (based on real industrial and retail demand) is closer to its price than Gold. We assign a non-zero risk to <1000 Gold but a zero risk to a Silver equivalent  <15.

For the sceptics, click to enlarge:

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).