Trade ideas...lets see what we can come up with

[DcifrThs]

lets get this thread back on track now that my bet w/ Mr. Now is in losing position by a few cents (still long way till december though)

next idea: long yen vs. dollar...this long term idea i think has reached a very attractive point. first the political issues. shinzo abe's govt has been suffering curruption, defection, suicides as a result of scandals. i believe there is room for constructive improvement on this front (very low conviction due to lack of expertise in this area)

next, we have the increased shareholder activism in a very traditionally pro management culture. the latter culture, however, isn't backed by business provisions since shareholders have the most power in japan than in (im pretty sure) any other country. they can directly vote on boards, executive pay and they have recently started to break away from their stoic following of management.

this makes japanese companies more attractive as shareholders get a bigger say in how they are run and a better opportunity to oust ineffective management. large shareholders have said they will vote to oust managers/boards that fail to reach a return on equity of 8% for any 3 year period.

now onto economics. then yen is at a very low point of about 123 to the dollar. this low yen (and the fact that it has been so low for so long) has contributed to the yen current account surplus and capital account deficit. locals sell the yen to gain higher returns elsewhere in both a carry trade (earning higher risk free rates of return) and as overall investments (in companies & other country's risky assets).

economic investment isn't as large as they can get if real investment in japan responds to the low yen. instead, income transfers jumped 41.7% in april to account for about 3 times the japanese surplus in goods and services. this is partly a direct result of japanese yen weakness (so income in yen terms from foreign investments become larger) and partly a result of the low interest rates available at home (so yield seekers invest elsewhere to gain while the yen stays low and calm). so if real investment in japan increases, the capital account would start to show larger foreign flows into japan. the yen is at a level where these real economic flows are becoming very attractive.

these can overwhelm carry traders & other "hot money."

right now, the market seems to think that the income transfer part of the CA is a small factor & that interest rate differentials are the tradable info. as long as JGBs stay low and the BOJ doesn't push up rates (to try to make sure deflation doesn't again rear its head), the yen will stay low.

it isn't likely to get much lower. in order for this to happen, the BOJ would have to actively start to intervene in the market, or the rate of flows out of japan would have to increase beyond the recent historical rate.

a rate of 125-135 would make real economic investments extremely attractive from a foreign standpoint and make japanese companies even cheaper than they are.

this ties back to the shareholder activism as the companies are less tied to management and shares are held more by hedge fund and foreign investors (this makes comapny takeovers less troublesome & faster so that investors could respond quicker to further drops in the yen).

other aspects of this trade include the fact that japan is a net importer of commodities, the fact that a large part of the current surplus comes from chinese & other asian countries' demand for japanese goods, and the fact that US dollar is fundamentally weak overall but bouyed vs. the yen as a result of higher relative yeilds (though not as much as AUS or NZD).

so i don't think the yen is likely to drop further, and the way these things tend to unwind, it would prove to be extremely profitable and fast. the last time the carry trade unwound, the yen popped from somewhere north of 160 to the dollar, down to 120 or so in VERY short order. a comparable drop would put us at a yen level of 90 vs. the 123 it is currently trading at (different time period obviously but it's an example of how the carry trade can unwind).

now i'm not saying the yen would jump to 90, but even a move to 110, or 105, or 100 would be a very nice profit. the risk here is fairly low as no likely (or even unlikely event) could push the yen much lower. further, even if it DID occur (and yen moved down to 135 or something), fundamental flows would likely see that as huge buying opportunities (depending on the event that caused the drop)

overall, i'd be very bullish the yen right now and i'd put the overall signal at about +80%

so thats it, any thoughts? questions? comments?

thanks,
Barron

[DcifrThs]

Another idea (from reading the economist) is to start thinking about CDX.

this is a crossover credit default swap index (BAA or the credit grade on the boarder between investment grade and junk) in based on North american & emerging mkt companies(though i forget the composition. you can, however, pick a more specific index from the many they have etc.)

in june, spreads blew out a bit to close to 150-200 bps above treasuries. they got as low as 100bps above treasuries before the february mkt hiccup (and they then jumped to over 200).

i have to check but if they've come back down to anywhere near 100bps i'd look to start a short at a signal of -20% to -50% depending on how close to 100bps the index CDSs are trading above treasuries.

for those that aren't 100% clear, a CDS is a derivative that pays when an underlying instidution default's on ints debt. so then economic growth is good or demand for these instruments is high, these spreads tend to come in. when risk aversion increases or when underlying institution (typicaly company) balance sheets are at risk, they should blow out.

this is another one of those things where the upside is huge and the downside is small b/c they can't reasonably be priced below 100bps above treasuries since that is just ludicrous pricing and indicates irrational demand for them (possibly for hedging reasons for certain hedge funds/private equity groups)

so i'd want to short the spreads here at near 100bps above treasuries. the lower the spread the stronger my signal.

Barron

[ifckladyluck]

[ QUOTE ]

for those that aren't 100% clear, a CDS is a derivative that pays when an underlying instidution default's on ints debt. so then economic growth is good or demand for these instruments is high, these spreads tend to come in. when risk aversion increases or when underlying institution (typicaly company) balance sheets are at risk, they should blow out.


[/ QUOTE ]

when times are tough benchmark spreads increase; bidding interest may or may not cancel out this change.

[quant_trader]

Sorry didn't read all your reasoning for gold/silver spread, but isn't a crack spread a better arbitrage strategy. (assuming if the spread still exist) Personally, if I am taking risk premium returns, I would look into premiums provided by futures backwardations. Also, don't forget that yield curve is inverted between 6mo and 2 yr.

[DcifrThs]

[ QUOTE ]
Sorry didn't read all your reasoning for gold/silver spread, but isn't a crack spread a better arbitrage strategy. (assuming if the spread still exist)

[/ QUOTE ]

doesn't that refer to oil vs. heating oil or other products chemically 'cracked' from the initial 'dirty' product?

[ QUOTE ]

Personally, if I am taking risk premium returns, I would look into premiums provided by futures backwardations.

[/ QUOTE ]

i'm not really interested in risk premia. i want to express a specific macro view in the gold/silver futures market for alpha generation purposes.

historically, there have been returns from holding backwardated futures contracts till the next near by and rolling it over. i'm not as well versed in this area though so i don't want to think about that specifically as a macro based trade idea.

if youw ant though, we can discuss your expectations of capturing the 'backwardation premium' into the future and how it relates to different commodities. that'd be an interesting discussion as well, but for trade ideas, i wanna stick with macro views expressed as trades.

[ QUOTE ]
Also, don't forget that yield curve is inverted between 6mo and 2 yr.

[/ QUOTE ]

yes, but that is i think a mistake and there are likely opportunities there as well. haven't outlined those yet here though so that is something i'll think about and get back.

thanks,
Barron

[WindFallProfits]

buy CROX and ICE. these stocks are close to breaking out and if the market continues to rally, these stocks will lead.

[ifckladyluck]

[ QUOTE ]
Sorry didn't read all your reasoning for gold/silver spread, but isn't a crack spread a better arbitrage strategy. (assuming if the spread still exist) Personally, if I am taking risk premium returns, I would look into premiums provided by futures backwardations. Also, don't forget that yield curve is inverted between 6mo and 2 yr.

[/ QUOTE ]

you will lose your stack on the roll. not to mention you probalbyd ont have the cpaital to put on a perfect crack spread (due to underlying notionals)

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
Sorry didn't read all your reasoning for gold/silver spread, but isn't a crack spread a better arbitrage strategy. (assuming if the spread still exist) Personally, if I am taking risk premium returns, I would look into premiums provided by futures backwardations. Also, don't forget that yield curve is inverted between 6mo and 2 yr.

[/ QUOTE ]

you will lose your stack on the roll. not to mention you probalbyd ont have the cpaital to put on a perfect crack spread (due to underlying notionals)

[/ QUOTE ]

forget the "perfect" crack spread for a second.

to execute 1 crack spread you just need the margin on 1 long contract and 1 short contract and the ability to weather a small storm, right?

Barron

[Mr. Now]

Mr. Now respects DcfrThs and values his posts.

Mr. Now wonders out loud if DcfrThs might be willing to do some detailed intermarket analysis on gold, gold shares, the indexes (SP, Dow), the dollar and the long bond.

Wednesday of this week is certainly an interesting day for serious students of intermarket analysis.

[DcifrThs]

[ QUOTE ]
Mr. Now respects DcfrThs and values his posts.

Mr. Now wonders out loud if DcfrThs might be willing to do some detailed intermarket analysis on gold, gold shares, the indexes (SP, Dow), the dollar and the long bond.

Wednesday of this week is certainly an interesting day for serious students of intermarket analysis.

[/ QUOTE ]

:SDFJK:WJKEOPJIPOJFL:WKEJC

mother F*CKER.

i just spent 1 hr responding to this post and forgot about the time and got a "form no longer valid" error...

i can usually hit the back button and get the text back but NOT THIS TIME.

F*CK.

grrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr rrrr.

pissed,
Barron

i might have to rewrite the response tomorrow but i'm too pissed right now.

EDIT2: F*CK still steaming when i think of the work i put into this response, jesus...i even made pretty excel charts (weren't included in my response though) on money supply and evertying F*CK.