Global Macro Trading Journal

On VRX, my gut is telling me sell but the data is saying things aren't as bad as they seem. Not worth >$30 on revised FY2017 but the incessant selling may stop.

IMO, unless EWZ cracks some level say $30, you shouldn't worry about the day to day fluctuations since you are looking out a few years. The data supports your thesis. I can't even short SELIC futures because they are already pricing in a sub 11% rate.
 
jj90 said:
On VRX, my gut is telling me sell but the data is saying things aren't as bad as they seem. Not worth >$30 on revised FY2017 but the incessant selling may stop.

IMO, unless EWZ cracks some level say $30, you shouldn't worry about the day to day fluctuations since you are looking out a few years. The data supports your thesis. I can't even short SELIC futures because they are already pricing in a sub 11% rate.
More...

On VRX, I recall Monish Pabrai talking about one of the refiners that he bought (can't recall if it was TSO or VLO) at $7 and it went to $1 before turning into a 40 bagger or something like that. Also LVS in 2009, VALE and PBR in Brazil recently (and commodity companies in early 2016 in the US). Not saying it is the case here but when markets think a company will go bk, they just keep pilling in that idea and will drive the stock to nothing. Perhaps the time to get in is when a significant catalysts hits and put a stop at the recent low or resonable support area. That way you capture the upside while avoiding the downside. I certaintly got VRX on watch for that (if anything, I'm sure at least will be a good daytrade). But I'm trying to avoid the 'option' like behavior of the stock of dropping 40 cents daily as 'bk decay'. Unless there is positive news, it seems that these bk stocks tend to behave like that, they just decay down by a certain % almost every week. People will decay the value of the company, until something hits, then they reprice it higher

Btw, were you able to access a broker that allowed you to trade SELIC futures?
 
@Daal Yes and no with regards to Brazilian rates. I was and still am willing to jump through the hoops to setup a Brazilian account but when I looked at SELIC and DI(1 day interbank rates) futures, they were already well off the highs in fall '16. The timing needed to be in early '16.

No offense to you, but if Brazil has some sort of double dip(unlikely) I'd be flying down to do some paperwork. Hell, we can even have drinks.

Re:VRX, yes I've seen the "bk decay" before which is why I'm not keen to hold currently. I may hold for 1 more qtr or just say fuck it.
 
jj90 said:
@Daal Yes and no with regards to Brazilian rates. I was and still am willing to jump through the hoops to setup a Brazilian account but when I looked at SELIC and DI(1 day interbank rates) futures, they were already well off the highs in fall '16. The timing needed to be in early '16.

No offense to you, but if Brazil has some sort of double dip(unlikely) I'd be flying down to do some paperwork. Hell, we can even have drinks.

Re:VRX, yes I've seen the "bk decay" before which is why I'm not keen to hold currently. I may hold for 1 more qtr or just say fuck it.
More...
Sure.

That's why I say duration is almost the same as the stock market in Brazil. They tend to move together. Stocks also bottomed in early 2016.
Brazil biggest macro manager (that has a strong track record) is saying in his latest letter that he thinks rates still need to go lower (I agree), he is buying the middle end of the curve, he is also a little bearish in the BRL.

He is also saying he finds opportunities in certain sectors in the stock market, after talking shit about it almost all of last year. I suspected this would happen, in 2009 all the smart players who predicted the crisis were negative in stocks at the bottom only to turn positive years later and pay 50%-100% more for their entries.
You cant trust anyone at bottoms, emotions at too strong to matter. You got to do your analysis and go with it. Ignore everyone else no matter how good their record.
 
I'm now short late 2018 Fed futures. The Dec 2018 contract is pricing in a 1.82% Fed funds by year end 2018. That's 3.6 rate increases (not considering the March, which is pretty much a given at this point). My resonable downside risk should be 2 hikes instead of 3-4, in that case I lose 37bps ($1,480 per contract). My resonable upside risk is the scenario where the Fed says they will front load rate increases to get to a 1% real rate faster to avoid overheating the economy. In that case, there will be perhaps 5-6 hikes after march (There will be 7 meetings with press confereces in that period, so I'm even assuming they will pass some chances). So potential gain ~50bps (2 extra hikes)

But the most likely scenario for me (in my mind) is that the Fed just matches expectations. In that case I lose nothing. So gain is 50bps, most likely risk I lose 0bps and downside risk I lose 37bps. I could lose more if there is a economic downturn or some kind of global risk aversion bout. That's another risk. In some scenarios, they could even cut rates. But also in some other scenarios, they could hike 50bps and I make a windfall, so its a wash. Or is it? I see the risks as being tilted to the upside, so perhaps the chance of a tail 50bps hike is higher than the chance of rate cuts or significant hike delays

I will exit the position if it looks like the economy is tanking or if there is some kind of problem in the world (Or if Trump gets shot or something). I might have to short the S&P, Europe or something just to protect myself if some bearish scenario emerges. That's the thing about being long rates, its like being long the stock market. But I do like stocks now and maybe Fed futures would be a 'cheap' way to buy the stock market

My gut tells me the Oct-Nov-Dec 2018 contracts are the sweet spot (between going too much and not going out enough). By May the French election will be done and the Fed will have clarity on the Trump policies. So they can signal things by June-July 2017, but perhaps they wont want to shock the market too much the first 6-12 months (to avoid a 94 debacle) they wont signal too many hikes, so late 2018 is where the expectations will shift a lot as thats where they will signal rate increases more
 
Last edited:
The Fed's own 'central tendecy' projection for 2018 end is for a Fed funds at 1.9% - 2.6% with a median at 2.1%. Range is 0.9% - 3.4%. 2.1% median vs 1.82% market pricing

So the market offers value if the Fed is right, I think there is a fair amount of 'risk premium' embedded in these contracts that they dont reflect true 'chances' but rather, the fact that people don't want exposure to downside scenarios (global crisis, S&P500 tanks, etc)

I'm taking that chance because if the Tepper scenario exists (and I think it does, even if its not a baseline) and the Fed could 'front load' hikes to get to a 1% real fed funds faster, the true risks lie with a hawkish scenario, not with exposures to risk aversion. The true risk is people under estimating rates after years of complacency and a new catalyst (Trump).

But I am aware of the risks and if things turn for the worse, I will size down or perhaps temporaly hedge by buying 5y T-bond futures
 
In terms of size, if my resonable risk scenario plays out, I lose 0.75%. If my resonable win plays out, I win a little over 1%. I could make or lose more depending on the tails but hopefully my risk management will kick in and I wont lose more than 1%
This is a small bet relative how how I used to play this back in 2008-2011 (I would risk 5-10% without blinking back then) but these days, its tough, these contracts are more efficient. There aren't as much in terms of macro dislocations so I got to stay on the safe side. Plus I can always short more t-bond futures if certain catalysts come up
 
Brazil also tends to get spanked when US yields rise. So, this trade not only protects me against a collapse in Gold, US bonds but also helps with Brazil risk. So its important to take that into account. If I'm wrong, Brazil will do great, so will gold and gold stocks. If I'm right, I will make some profits to help absorb the blow on the other side. I believe both sides have positive expectation (the long rates trade and the Brazil+US bonds+gold position) but they have beneficial correlations (negative). So thats makes it especially attractive to me
 
Brazil could tank on global risk as well (so I would lose on Fed futures and on Brazil bets), so that's my big risk. A Le Pen win or Trump getting killed or something like that. So that's what I need to monitor going forward. Perhaps an idea is the purchase of way OTM puts on indices Spitznagel style in order to decrease this vulnerability
 
Why not just sell the positions that are being 'hedged' by these counter trades? Because that is a recipe to watch something rise 10-100% for years without you. When you go to cash and the thing keeps rising, you tend to just watch instead of getting back in (especially if you got to pay more than what you sold for). But when you put a counter-trade (usually a short), you will treat the trade with care. if its starts to lose money and you don't like the news. you will close it, automatically being 'long' in the other side (the things that were being hedged), thats the ideal situation
It produces a better Sharpe/Sortino and decreases mistakes (at least some of them for me)
 
You must log in or register to reply here.
Back
Top