Gold Swap

Disclosure: I have liked gold since 2007 and still do. Does not mean I have any position in it right now.


http://online.wsj.com/article/SB10001424052748704178004575351421947803404.html?mod=googlenews_wsj



The article notes that some central banks (we do not know which countries) have entered into a gold swap with BIS (Bank of International Settlements – think of it as a central bank of central banks) to the tune of 346 tons of gold. The article seems to imply that it is to be interpreted as central banks unloading gold from their reserves.

Gold swap is a contract where one party grants temporary ownership of physical gold to another party in exchange for paper currencies WITH EXPLICIT AGREEMENT TO RETURN THE CURRENCIES FOR THE GOLD IN THE FUTURE. So there really isn’t any change of ownership taking place here. I believe the physical gold isn’t even moved - it’s just the theoretical title that is transferred. BIS isn’t allowed to sell that gold because although they’re in custody of the gold they are obligated to return it.

Here is what I gather is gold swap description from IMF: Gold swaps are typically undertaken when the cash-taking monetary authority has need of foreign exchange but does not wish to sell outright its gold holdings. NOTE: there is no selling of anything by anyone. Gold swap is NOT gold sale.

I reckon the fear is being stirred over the reason the central banks engaged in the swap. Are central banks unable to raise money? Are things that dire? If the central banks cannot return the money then would BIS flood the market with gold?

Well, I reckon above concerns are not impossible but highly unlikely. It seems people’s nerves are frayed with all the market jitters. IF central banks really are in rough enough shape that they cannot meet this obligation then there is something terrible going on and if anything gold is likely to rise in flight to safety.

Is this news behind gold’s recent “plunge?” Well, gold is 5% off recent high as the article states. I think I would call that a normal price action in a volatile market.

What the H is Going On Today?

It gives me no comfort to see a widespread rally like today on no news (if anything it’s to the negative side with lower than expected ISM-services the only positive econ data point i see is strong retal sales out of switzerland hardly a major heartwarmer).

I think gold is the only thing down today. stocks up, energy up, grains up, metals up, softs up. Curiously enough the "flight to safety assets" - treasuries and yen are also up.

One possible driver is the impending IPO by China Ag Bank which is supposedly 20x oversubscribed (altho it seems to me like all these ipo oversubscription numbers are usually a pile of you know what). It looks like though majority of those buying into IPO are sovereign wealth funds – Singapore and Middle Eastern in particular – as well as state owned Chinese companies like China Life and PetroChina. I would be more comfortable if private asset managers were buying into it. The IPO is scheduled to take place in Shanghai tomorrow and will be a huge market mover tomorrow. I believe H-share listing is on the 17th.

We have seen short term rebounds following steep selloffs before.

A Major Turning Point or a Natural Deceleration?

Returning from a long hiatus. There were some network connectivity issues that were recently resolved. As usual I welcome feedbacks and comments.


Goldman has its own leading economic indicator (GLI). Let’s never mind for the moment whether these guys are right or not – we all know often these are wrong. But it could be a data point in “triangulating” a view when multiple indicators start pointing in the same direction.

ECRI – a pretty well respected third party economic researcher – recently showed a very sharp reversal in its leading indicator. Goldman had been a HUGE bull so reversal here is notable:

• While the peak in the headline reading was clearly in March, the headline remains at a very high level. But monthly momentum has also fallen further, to 0.19%mom from last month’s revised 0.23%mom, but remains consistent with continued moderate growth in the industrial cycle.
• We have highlighted for some time now that the GLI is pointing to some slowing in industrial momentum, although from extremely high levels, a message that our improved GLI shows more clearly.
• In any recovery, the acceleration phase inevitable ends and our forecasts show some slowing in growth into 2010H2, though to healthy levels. Although our US forecast is still firmly below consensus, our global forecast does not envisage a sharp slowdown. That said, it will be critical to watch whether the current slowdown in momentum remains moderate in the months to come.


Now – if we buy into the validity of their leading index, how do the assets perform when the GLI is in decline?

No surprise equities underperform, bonds outperform, vol rises and credit spreads widen. Among equities cyclical and EM underperform particularly so.
Commodities as a group underperforms with the impact most severely felt at industrial metals and precious metals least affected.
In FX arena, the impact is less clear. GBP, SEK and NOK appears to be more “cyclical” than the others and CHF the least cyclical.

I definitely agree that deceleration is only natural and we are by no means in a dire straits. What concerns me though are withdrawal of stimulus and continuing weakness in consumption.

On the other hand, Morgan Stanley lays down a firmer view that current skepticism is way overblown. That this market looks exactly like 1998:


• The recent performance of both equities and bonds is worrying; however, we continue to believe that we are currently witnessing a stock market event rather than a real economic event. Our economists are confident that the global economy will not double-dip and we agree with them. In short, we think this is more like 1998 (when an EM-led sovereign debt crisis and LTCM-inspired financial crisis caused a huge growth scare) than 2008. If we are right in this assumption, then Exhibits 1-3 suggest that both equities and bond yields can fall further in the short term before rebounding strongly thereafter. Timing short-term moves in these markets is tricky at best; however we do expect equities to be meaningfully higher by year-end.





My points of disagreement with MS are following:

1. Always dangerous to just look at charts and say – this looks like what happened before so maybe the future unfolds just like this.
2. Back in 1998 unemployment was at 4.5% - it’s 10% today.
3. Back in 1998 Fed Funds rate was at 5.5% and it was immediately lowered to 4.75% as the LTCM crisis unfolded. There is no room to play with interest rate at this point.

So basically I dont buy into the argument that today’s anything like 1998.

On another note, Goldman says that investors are becoming increasingly bearish:

• Clients are uniformly bearish, led by the macro community. Deflation now ranks much higher as an investor concern than inflation, which until just a week ago was still viewed as the greater risk. Concerns articulated by various investors included the prospect of a relapse in US housing; weak job formation leading to further slowdown in consumer spending; and legislative and regulatory uncertainty that eroded CEO confidence and curbed capital spending plans. Ten-year Treasury yields slipped below 3% and 5-year implied inflation currently equals just 0.25%.

That “uniformly bearish” part concerns me (myself being in the bear camp) because that many people are usually not correct in calling market turns.



Looking ahead I see further deceleration in economic momentum – which is not necessarily an abnormal or a bad news. How the markets would respond to such news is the key. I still believe double-dip recession is unlikely in 2010, but until that prospect becomes clear (probably another couples month for the stabilizing pattern to show in data) risk is to the downside.

I would advocate taking some exposure off on a short term rally. Perhaps the stock market heads higher going into the earnings season and sells off once it begins.

Confused

I have been really scratching my head the past week or two trying to figure out just what in the hiell is going on in the world.

I have not been a believer in the economic recovery story all along (and missed out on some huge PL as risk got put back on) but at least April, May, June (a little less so) and July had a clear theme - risk got bid up. During the process the underlying economic data, at first a mix of horrible and merely bad news, became progressively and steadily less bad. OK, so I think the rally is overdone but I see the logic.

But since mid-August I am seeing some confusing signs in the market which only became worse just lately. In short, I don't have a clue what is happening.

Economic data has been better and better, but the news that would have propelled the markets back in July is having no impact at all. This morning I show up to work with the stock markets down all around the world despite some pretty good PMI numbers all around stocks and commodities were broadly down. Is the re-stocking of inventory story fully baked into asset prices now? Appeared that way. Even a solid China PMI couldnt lift up copper. Then the market looked like it was back on bull run when US PMI and existing home sales came out. I am not sure which news mattered more but they were both positive surprises.

Fast forward 3 hours here we are with risky assets getting destroyed all around with no particular bad news. Did the final week of August mark the turning point for this bear market rally?

In commodities, I had been bearish since the WTI broke 75. I split my risk budget 50/50 between outright short and a steepener (short the timespread). The directional short has worked out well but the spread has gone nowhere. Looking to shift out of short and into the spread bet as risk/reward is better there I think. I am looking to ride Nat Gas down to two bucks and then hop out. Out of lead but keeping short ally.

In FX, I am getting hurt on long scandis. Long JPY and short NZD are helping to buffer the losses on but not quite enough.

Have no bets on equities or rates at this point. But maybe not for long.

Correlation Breakdown?

It seems to me like for a while assets were moving in a lockstep: If stocks up -> oil up, copper up, credit up, EM up, commodity currencies up, treasuries down, USD down. If stocks down then oil down, copper down, credit down, EM down, commodity currencies down, treasuries up, USD up. You could look at the change in SPX and pretty much read what's going on everywhere else.

Thee past couple days I have been seeing a breakdown in this correlation structure. First of all, stock market seems to be going nowhere on what appears to be pretty good news - certainly something that would have powered the index higher 2%+ back in July. Flattish SPX, down oil (though that's likely because of the DOE number), tsys slightly up, USD up huge.

Are things not as simple as risk on/off anymore? Of course two days do not make for any discernible pattern - and with the stock market more or less flat it's hard to tell if there is even anything really unusual there. But I am wondering if this is a sign of a shift in dynamics.

SNB Needs to Fess Up

That what they really want is for CHF to depreciate by 30%.

Goldman says:

Released: Tuesday, August 25, 2009

Jordan reiterates: no need to change monetary stance

In a speech, his second speech today, SNB board member Jordan stressed again - after an interview on August 18th with the same message - that there was no need for the SNB to change its monetary policy stance. While acknowledging that "also for the Swiss economy indicators are signaling a turn for the better", "dis-inflationary tendencies are still dominating".

More specifically Jordan said that the time for a change in monetary policy has not come. There is "no necessity to act". In fact, the SNB will continue its "very expansionary monetary policy".

The SNB will hold its next quarterly meeting on September 17th.

Is This Good or Bad?

Courtesy of DB research.

It's All Clear Now

I think I am gonna put a fist through my monitor if I see another headline that reads like this.

A Call Option on Commodities Regulation

I am sure we all have been hearing a lot about the move to curtail speculative trading in the commodity markets. I thoight this was an interesting article. Whether one thinks speculators are net positive/negative for the market and the society (I personally think ETFs should be outlawed but let professional speculators speculate) I think it is likely that passage of speculative restriction would at least send the price down temporarily. Could I make money off this?

I thought perhaps I could buy some OTM puts on WTI. Turns out these options are still way too diamn expensive due to volatility and time value. Then I extended my analysis: who gets hurt if such rules get enacted? Can I buy some OTM puts on CME (who owns NYMEX where WTI is traded)? Well, these options are still too diamn expensive. What then - how about shorting CME and hedge out the equity beta portion by going long another exchange stock with minimal exposure to commodities? NYX perhaps?

The two stocks are very highly correlated so it seems to me like the equity sensitivity portion can be hedged. NYX seems to have higher dividends than CME which is good. Must look into how much commodities contribute to CME's earnings.

Though I wonder : is NYX gonna get hammered if that whole HFT thing gets busted up by the gubment?

Switzerland -- Add to My Axis of Evil

CHF up 1% today - biggest upward mover against USD among G10 - despite their central banker said they will continue intervening in the currency market to prevent further appreciation of CHF. They seem to be scared shietless that Swiss economy is in tolilet, and seem more eager than US or Europe to provide whatever assistance need to get things humming. The SNB says they have no plans to alter its policy of intervening to prevent any appreciation of the Swiss franc, providing generous liquidity to the banking sector and purchasing corporate and covered bonds.

Getting smacked on my short on CHF. Thankfully long NOK and JPY, short GBP and NZD doing well.

Crude Timespread - Gittin' Tight

crude timespread tightening hard on today's DOE number.

Do I want to short this sumbeetch? Technically the spread ain't all that tight. I would like to see it pull in another 50cents or so to give more room for error. Fundamentally, I fail to see any reason for strength. distillate stock is way high. And gasoline while it has nearly reached the end of consumption season hasn't budged much. Unlikely refineries would rush to buy more crude even though crack spread remains ok still.

A-shares -- a Leading Indicator for Copper?

1. It is postulated that Shanghai A-shares are now the leading indicator for the world economy. Or at least the world seems to think and react that way. This is because the world believes that China is the growth engine that will power us all out of recession. Any hiccup in China seems to be felt around the world in most major asset classes – especially in commodities and stocks.

2. It is also postulated that industrial metals have taken on a very financial assets-like nature (especially as of late) due to excess Chinese liquidity turning many there into speculators in the booming metals market. correlation between the two assets are at the highest point in a while.






3. If you believe that copper and A-shares have the same underlying drivers (speculative fervor of the chinese public and accommodative financial policy), then it’s worth a look at current price action where the A-shares have been sharply down. Call me crazy but it seems to me like copper has the tendency to trail the A-shares on big moves.

4. So, given the recent big fall in A-shares give us a tradeable signal? Obviously, it all comes down to getting the direction of risk right. If the A-shares go on a sustained drop then I would think every risky asset in the world would follow. BUT if you have a mandate to trade copper the A-shares could provide a useful turning signal.

DISCLAIMER: I obviously do not spell out all the details of my research and will intentionally leave out some crucial stuff. Also, it is quite possible that I might already have established a position in any trade idea I discuss here.

It is All About Timing Now

Some very large swings last Friday, yesterday and today. This has been a difficult time to trade with correlations all going to either +1 or -1. It has been a while where I can look at price change of just 1 currency, commodity, bond future (US), or an equity index and can tell how everything else would be doing.

With the green shoots rally running out of steam and Q2 earnings (or more like heavily adjusted operating earnings with bucket loads of one time charges and cost cuts) out of the way investors are looking for direction - risk on or off?

In a way I am getting tired of reading up and studying fundamentals when none of the shiet seems to matter. I was able to find some decent relative value trades earlier on but those trades are becoming harder and harder to find.

Timing trades is really all about the ability to withstand mark-to-market losses, so it's crucial that you work for the boss who can tolerate some short term roller coaster ride. I can afford to put on longer term trades in my personal account and just added to my equity short position earlier today.

Spank'd

The markets are getting whipped harder than Bruno at a swinger's party.

Thankfully my commodity positions are up. Currencies are not doing so well except long Yen - the scandis are killing me.

Personally I think this is the beginning of a big retracement. But then I made this call about 3 or 4 times already since April. Thankfully I didn't act on those gut feeling those times. I have more conviction though this time because my dad called me last week to ask what stocks to buy. He is the perfect contrarian indicator. hope he doesn't die on me soon. Be well pops-

What do you guys think? What are good trades to put on now - not last Friday? My firm overall isn't as well positioned if this downslide continues. Hope it doesn't folk up my bonus.

Could Someone Please Tell Me

Is it time to short?

Another V Theory

Here is a new one on the V-shaped recovery that I heard (bloomberg):

Instead of a so-called New Normal of subdued growth, the U.S. may be heading for a robust recovery. The worst recession since the 1930s has created a reservoir of demand that will buoy the economy, say a growing number of economists led by James Glassman at JPMorgan Chase & Co., former Federal Reserve Governor Laurence Meyer and Stephen Stanley at RBS Securities Inc.

“Whenever we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly,” said Glassman, a senior economist at JPMorgan in New York. Glassman and his colleagues this month
said forecasts of 3 percent to 4 percent growth in coming quarters may be too low given “pent-up” consumer demand.

It would be nice if "pent-up" demand would get you what you like. Kinda hard to buy stuff if you have no money. I am overall bearish longer term because I do not see where the money would come from. Basically US economy has been built on mirage of value creation and easy credit since about 1998. I don't see why anyone thinks things should go back to 2006 level.

Gone Shopping-

Americans aren't shopping, but guess who are - them Chinese folks.

Am catching up on all the major econ news from this week and got to read deeper into the Chinese data from earlier in the week. I don't put much faith in their official data. Hiell, it's hard enough to figure out what US numbers are saying and how they're put through the sausage maker, data released by Chinese government?

One thing that has surprised me about China is the continuing strength in consumption. Granted that they come from much a lower base and do not have anywhere near the room to cut back as they do in OECD, I am surprised the reduction in exports hasn't trickled down to hurt consumption and retail sales.

One explanation might be (from Bloomberg):

``This [retails sales number] is encouraging,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``But it's too early to say whether it can be sustained, because part of the increase was supported by the stock market.''


Households are switching money from bank deposits to the share market.

``I make about 5,000 yuan a month investing in stocks,'' said Peng Li, 25, a student eating at the food court of the Mix C Shopping Mall in Shenzhen. ``I spend most of my money on eating and shopping with friends.''

I am probably not the only person thinking shiet might hit the fan over there. People using an asset bubble as an ATM for spending? I have seen this movie before. When is the billion dollar question. I ain't shorting yet.

Lack of Confidence

US consumers not feeling all that upbeat according to the latest UoM survey. Is that really a surprise to anyone? Every data point says there ain't no hiring and wage is dropping a stone tied to an even bigger stone.

Is it time to go long WMT and short consumer discretionary again? Made some decent money last year on that bet.

Huge risk reversal on the news. Thank god I somehow timed the long Yen bet. But still punched hard in the face by long AUD and NOK. Short Kiwi not serving as a hedge. What in the hiell is the deal with the NZD???

Takin' a Day Off-

NOK, the greatest currency known to mankind, takes a day off today.

But thank the lord I went long JPY in a big way two days ago.

Who knows what the hiell is going to unfold next week... one battle at a time.

Why in the folk did I short Kiwi...

I Ain't Afraid of No Inflation!

At least not in 2009.

No big surprise in CPI. 0% MoM and -2% YoY for headline. Ex-energy and food 0.1% MoM and 1.5% YoY. Main surprise for me was fall in food prices despite generally higher prices as observed in commodity markers. Maybe lower labor costs accounts for downward surprises. Apparel prices climbed despite all the sales I see everywhere. I recently ordered 5 Lacoste polos from their webstore but returned them all. I already have a few and I ain't buyin' nothin' that I don't have no need fo'-

Going long inflation seems to be a very crowded bet thats is getting more crowded. People thinking too simplistically - following scenarios that generally unfold in emerging countries. I would be seriously looking at putting on some anti-inflation trade later this year to early next year.

Is There a Play Here? - LME Copper Curve

What's up with the LME copper in backwardation?



When the copper inventory is going up?



LME warrant cancellations are going nowhere:




Comex copper curve looks way different:


Time to short the timespread in LME copper? My guess is the backwardation might be caused by long only money and trend followers jumping in?

For Your Weekend Entertainment

I highly recommend Harsh Times. If you thought Christian Bale was an insane mofo based on his outburst on the Terminator set, then you obviously never saw this hidden gem from 2005. Bale plays a former Army Ranger who tries to get his life back together upon his return to LA from Afghanistan, and shiet just goes very, very wrong from there. It flows and feels a lot like Training Day which was another amazing movie.

Coppin' all that copper

Very well put by the DB research team:

LME metals were strong again, with copper and nickel posting fresh 2009 highs. We believe the positive tone of the US Fed has boosted investors’ confidence, while base metals were little affected by an unexpected fall in US July retail sales
and disappointing job data. We think Chinese demand has been the most important force driving metal prices this year. In fact, we find that since the beginning of the year, the correlation between the LME copper price and the Shanghai Composite Index is 89% compared to an average of 30% between 2006 and 2008. We also think China’s importing appetite is also a major factor. Our “back of the envelope” calculations reveal an extraordinary stockpile. Given our forecast China will consume 6066Kt of refined copper and will produce 4072Kt, we estimate an import requirement of 1994Kt. In the first seven months of the year, China has imported around 2100Kt, meaning the country has already covered its required tonnage. When annualized at current levels, China will import roughly 4200Kt in 2009, leaving a surplus of 2200Kt. If realized,~30% of next year’s requirement will be covered meaning China has essentially brought forward future import demand meaning imports in 2010 could be vastly reduced. During a recent field trip, our metals and mining analyst Julian Zhu found a variety of producers and smelters who have nothing to do with copper but are hoarding the metal as a result of excess liquidity in the economy. We believe that as new RMB lending decreases, such speculative activity will be reduced

Nemo had talked about this in one of his postings on Macro Man. I think copper short is a good trade but I think it would be 100% correlated to the stock market, and there is no interesting trade to be done with the curve given the boring shape. How can I play this?

Git Your Rubber On-

Consider these condom for your feet. Just a thin layer of rubber to protect the bottom of your feet and toes while allowing you to feel the surface almost as if you are barefoot.

I bought these bad boys last week and have been wearing them to gym daily. Instantly I noticed that normally I stomp too hard my heels when I walk with regular shoes on. These VFFs (Vibram FiveFingers) force me to walk more softly on the balls of my feet. I found them particularly good doing balance workouts like kettlebell. Hope these help with my plantar fasciitis.

Consumers refuse to consume

Or maybe they cannot because credit card companies are kicking them out. Either way retail sales numbers came in as a big disappointment. The most worrisome aspect is that ex-auto and gas continues to fall. People are losing jobs, getting their salaries cut, credit card companies are kicking them out and banks refuse to make loans. Oh yeah, and they lost 40% of their savings in the stock market last year. If you also own a house then you really are seriously FOLKED.

How can US rebound if consumers refuse to spend? Even more importantly for traders: can China rebound if US consumers don't consume?

Where will CHF go from here?

So CHF has been my biggest short position since July. The bad news is that it has been appreciating against the Dallah. The good news is that it hasn't gone up as much as the other currencies I am long against the Dallah.

Swiss producer and import prices data came out for July. Long story short prices are falling and disinflationary pressure is mounting (but that seems to be the case everywhere in the world). rate hike not anywhere in sight (but that is also the case pretty much everywhere in the world).

SNB had stated that stronger CHF would be undesirable given its fragile, trade-dependent economy, but it seems unlikely that SNB would actively intervene.

For the foreseeable future I think CHF would just remain a very low beta currency.

BTW, I am net short CHF versus EUR but in my portfolio I trade everything against USD for simplicity sake.

Norway - the greatest country of all time

Norwegian Krone - the greatest currency of all time

NOK rockets up more than 2% today on Norges Bank's unexpectedly hawkish statement and improved economic optimism. They seem to think the Norwegian economy is doing just fine especially compared to the Eurozone.

I have made some decent money in NOK during the past couple months.

I bet the market turns the other way tomorrow and give back at least half today's return.

In the FX space, today was another typical day of S&P500 up - DXY down. I am long the high beta currencies against the low beta ones while maintaining low risk level.

Fed - does anyone care?

The way things are rockin' along, the Fed better just keep its mouth shut and not spill something stupid.

Unsurprisingly, the statement took a more upbeat tone on the economy.

I don't think the Fed would hike interest rate up until unemployment definitely starts to fall. Fed-led security purchasing program looks like it's on pause for the time being.

Oil? I don't see no fundamentals at play here

DOE released oil inventory numbers today and it is bearish all around with inventories in crude, gasoline and distillates all up substantially. As of now crude is hanging in there but refined products are down - despite a pretty big rally in stocks and USD taking further pounding.

How the hell is crude at $70 when demand is just not there? keep in mind that crude was around 25 bucks as of end of 1999 when the economy was booming. Has EM demand increased that much (maybe it has)? Because as you see below, US demand hasn't gone anywhere (although this probably isn't the best measure of inventory as implied demand is backed out from inventory changess).



And inventory is still sky high:


People say industrial production/manufacturing is rebounding but distillate inventory keeps piling on.




Now, it is entirely possible that distillate buildup was due to refiners taking advantage of very generous crack spread lately. To me, interesting trades are to be made in cracks. I have no idea whether oil should be at 60,70 or 80. Personally I am inclined to short but don't want to get caught on a wrong side of a directional trade in this market.

gasoline crack: