Archbridge Capital Journal

Happy New Year! Welcome 2015!

2014-12-31T13:56:00.000+00:00

Here at Archbridge Capital we had a profitable and fruitful year and Wish to extend our Season's Greetings to all our readers. We look forward to seeing you all in the New Year. May 2015 be an even better year! To Good Trading and a prosperous New Year

FROM ALL OF US AT ARCHBRIDGE CAPITAL

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Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.

Newest Trade Street hot off the press - FOCUS: EQUITIES!

2014-10-13T02:10:00.000+01:00

Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited the positions we advocate.
Overall the portfolio has been very Profitable and for our early readers: for years now!

Archbridge Capital Journal's detailed analysis and rising readership have caused it to be a victim of its own success: We have formed a Joint Venture with FOREKS a leading data provider with a vast and established customer base and will offer our Analysis and Insight in the shape of a Weekly Report and Video properly branded as "TRADE STREET". For Members both report and video will come straight to your mailbox.
In order to update you about any inter-period changes we will send out TRADE STREET FLASH straight to everyone's mail box or via twitter, your choice.

WE ARE ALLOWING YOU FREE ACCESS TO TRADE STREET, WHICH IS CURRENTLY AVAILABLE ONLY FOR OUR INSTITUTIONAL CLIENTS (RETAIL COMING SOON AS CERTAIN TECHNICAL ISSUES ARE PERFECTED.)

WE HAVE UPLOADED THE NEWEST TRADE STREET FOCUSING ON EQUITIES AND COMMODITIES. GIVEN WHAT EQUITIES ARE DOING YOU MAY WANT TO HAVE A LOOK.

Every Sunday evening or Monday morning, just log into the site with the below username and password and you will have access to our newest reports and videos.

http://www.tradestreet.ch/
username: free@tradestreet.ch
password: tradestreet

The Report and Video are first created in English and then translated into Turkish by an experienced team with 15+ years of experience in Trading and a decade of translation experience. We want to assure you obtain the uttmost quality.

For the Turkish Report and Video please click the "TR" button on the top right of the website.

We will continue publishing short Notes and Video clips about the markets, here on Archbridge Capital Journals, but the real meat will be available via Trade Street.

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VITAL AND TEMPORARY: ACCESS (free) TO TRADE STREET FOR OUR LOYAL READERS

2014-10-08T15:09:00.001+01:00

Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited the positions we advocate.
Overall the portfolio has been very Profitable and for our early readers: for years now!

Archbridge Capital Journal's detailed analysis and rising readership have caused it to be a victim of its own success: We have formed a Joint Venture with FOREKS a leading data provider with a vast and established customer base and will offer our Analysis and Insight in the shape of a Weekly Report and Video properly branded as "TRADE STREET". For Members both report and video will come straight to your mailbox.
In order to update you about any inter-period changes we will send out TRADE STREET FLASH straight to everyone's mail box or via twitter, your choice.

WE ARE ALLOWING YOU FREE ACCESS TO TRADE STREET, WHICH IS CURRENTLY AVAILABLE ONLY FOR OUR INSTITUTIONAL CLIENTS (RETAIL COMING SOON AS CERTAIN TECHNICAL ISSUES ARE PERFECTED.)

Every Sunday evening or Monday morning, just log into the site with the below username and password and you will have access to our newest reports and videos.

We will continue publishing short Notes and Video clips about the markets, here on Archbridge Capital Journals, but the real meat will be available via Trade Street.

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Vital Update - Free Trade Street Reports

2014-09-09T14:12:00.002+01:00

Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited the positions we advocate.
Overall the portfolio has been Profitable and for our early readers, very much so!

Archbridge Capital Journal's detailed analysis and rising readership have caused it to be a victim of its own success: We have formed a Joint Venture with FOREKS a leading data provider with a vast and established customer base and will offer our Analysis and Insight in the shape of a Weekly Report and Video properly branded as "TRADE STREET". Both report and video will come straight to your mailbox. In order to update you about any inter-period changes we will send out TRADE STREET FLASH straight to everyone's mail box or via twitter, your choice.

WE ARE ENCLOSING THE LAST TWO WEEKS OF TRADE STREET, WHICH IS CURRENTLY AVAILABLE ONLY FOR OUR INSTITUTIONAL CLIENTS (RETAIL COMING SOON AS CERTAIN TECHNICAL ISSUES ARE PERFECTED. VIDEO QUALITY WILL ALSO IMPROVE.)

http://www.tradestreet.ch/reports.aspx

We will continue publishing short Notes and Video clips about the markets, here on Archbridge Capital Journals, but the real meat will be available via Trade Street.

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Flash Update

2014-08-05T22:41:00.000+01:00

Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited the positions we advocate.

Archbridge Capital Journal's detailed analysis and rising readership have caused it to be a victim of its own success: We have formed a Joint Venture with FOREKS a leading data provider with a vast and established customer base and will offer our Analysis and Insight in the shape of a Weekly Report and Video properly branded as "TRADE STREET".

In April we had explained in TRADE STREET that we had sold the Oct 14 - Nov 14 Gasoline spread short; 2 Units worth. (Sell two Units of the Oct14 and Buy 2 Units of the Nov14 RBOB contract). At the time the spread was trading around 4 and now it is trading around 2. WE RECOMMEND TAKING PROFIT ON THIS TRADE IMMEDIATELY - STRAIGHT AND SIMPLE.

Also please note that our Trailing Stop at 1950, as announced earlier and since then publicised by the press, to exit our long position on the S&P 500 has been triggered and we took our profits on this trade. It seems well timed in retrospect and we are grateful.

We will continue publishing short Notes about the markets, here on Archbridge Capital Journals. Our new publication TRADE STREET is currently only available for our Institutional Readership but will be available for all of us soon!

Overall the portfolio has been Profitable and for our early readers, very much so!

"There are good trades that make money and bad trades that make money. There are good trades that lose money and bad trades that lose money. Money in the long-run is made from continuously taking the good trades." - Old Trading Adage.

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Bloomberg TV: Turkish Lira in detail, the Ukraine crisis and Gold prices

2014-05-16T16:25:00.002+01:00

We, here at Archbridge Capital are trying to inform our readers about some of the trades that we take ourselves and to demonstrate our views about the markets. In short we put our money where our mouth is and are quiet otherwise. Obviously, we do not publish all our trades and also do not publish our ideas before we have put on the trades ourselves, as we do need to leave some advantage to our investors and ourselves.

We believe that in that spirit we should also update you every once in a while, when we are in the press giving interviews on CNBC, the BBC, Hedge Fund Insight, Bloomberg or others. Although we are a Swiss based company, recent interviews have been conducted by our CIO who speaks Turkish amongst other languages.

The below Bloomberg TV interview from March 2014 has some interesting features including an in-depth look at China, the Ukraine, the US equities markets and the US crisis in historical perspective.

Please note that all below interviews are in Turkish.

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The first clip of the Bloomberg Interview dated 12th of May 2014 on our view of the Turkish Lira in detail.

Our first target, as written in Trade Street of 2.10-2.07 has been reached.
We expect longer term Turkish Lira weakening going forward.
Economic fundamentals on both sides of the trade seem to support this view, including imported inflation

The second clip of the 12th of May Bloomberg Interview discusses our take on the Ukraine crisis and our long held view that Russia will not step back on Crimea and that still war will be avoided, even if parts of Eastern Ukraine are annexed.

The third clip of the 12th of May Bloomberg Interview discusses our price perspective on Gold.

Bloomberg TV: Archbridge Views on China, Ukraine and USA

2014-05-14T23:27:00.000+01:00

Please note that all below interviews are in Turkish.

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The first clip of the Bloomberg Interview dated March 2014 includes our take on the Ukraine and that Russia would go to war over Crimea if necessary. Nevertheless, we do not believe that war will break out.

The second clip of the Bloomberg Interview discusses our Views about the future of China.

The third clip of the Bloomberg Interview discusses our historical perspective on the USA and her equity markets.

Press Snips CNBC TV

2014-05-11T21:19:00.000+01:00

The below CNBC TV interview from the 10th of April 2014 has some interesting features including an indepth look at Europe, the Euro, the US equities markets and the US$.

Please note that all below interviews are in Turkish.

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The first clip of the CNBC Interview dated April 2014 includes a detailed analysis of Europe, the ECB and the effects on the Euro.

The second clip of the CNBC Interview dated April 2014 discusses our View about the US economy, her equity markets and the US$.

Press Snips: Archbridge Views on Bloomberg

2014-05-05T20:09:00.000+01:00

We, here at Archbridge Capital are trying to inform our readers about some of the trades that we take ourselves and to demonstrate our views about the markets. In short we put our money where our mouth is and are quiet otherwise. Obviously, we do not publish all our trades and also do not publish our ideas before we have put on the trades ourselves, as we do need to leave some advantage to our investors and ourselves.

We believe that in that spirit we should also update you every once in a while, when we are in the press giving interviews on CNBC, the BBC, Hedge Fund Insight, Bloomberg and others.

The below Bloomberg interview from the 15th of April 2014 includes our views on the Euro, the US$ and on the Turkish Lira. It can also be found on: http://www.bloomberg.com/news/2014-04-15/dollar-poised-for-20-percent-gain-as-u-s-grows-archbridge-says.html

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Dollar Set to Gain 20 Percent as U.S. Grows, Archbridge Says

By Taylan Bilgic - Apr 15, 2014

The dollar may appreciate 20 percent against “pretty much everything else” by the end of next year as the world’s biggest economy gathers steam, Archbridge Capital AG says.

“We’ll see the dollar strengthening from the final quarter of 2014 onward, as short-term U.S. interest rate increases approach,” Hakan Kocayusufpasaoglu, chief investment officer at the Zug, Switzerland-based hedge fund, said in a phone interview yesterday. Archbridge’s successful past trades include shorting the yen versus the dollar in late 2012 and betting last August that the Turkish lira would decline to about 2.20 per dollar from 1.86, Kocayusufpasaoglu said.

U.S. gross domestic product expanded at a 2.6 percent annualized rate in the fourth quarter, data from the Commerce Department in Washington shows. Kocayusufpasaoglu expects the U.S. economy to grow at 3 percent in 2014, compared with an average forecast of 2.7 percent in a Bloomberg survey.

The dollar index, which tracks six major currencies against the greenback, has declined 4.9 percent since May 22, when the then-Federal Reserve chairman Ben S. Bernanke first signaled the U.S. would start cutting its $85 billion in monthly asset purchases. The euro, which accounts for 58 percent of the index, gained about 7 percent against the dollar in the period.

Euro Fall

Archbridge is building a position in the dollar index “little by little” because in the short-term the euro could gain on lack of European Central Bank policy, Kocayusufpasaoglu said.

“The ECB will probably be slow in acting against the threat of deflation,” which would create further upward pressure on its currency, he said. “Euro area exports will have serious issues when the currency hits 1.42 and above per dollar.” Once the ECB acts, the euro will fall to 1.30 per dollar by the end of 2014, he said. That implies depreciation of almost 6 percent from today.

If Turkey’s central bank cuts interest rates there would be “a decent chance” that the lira would depreciate to 2.15 per dollar or lower, Kocayusufpasaoglu said.

Archbridge’s macro fund has returned 2.5 percent so far this year, following 19.3 percent in 2013, according to data compiled by Bloomberg. Archbridge doesn’t disclose assets under management, Kocayusufpasaoglu said.

The Fed, which has been keeping its target rate at between zero and 0.25 percent since 2008, will start to increase it in June or September next year, Kocayusufpasaoglu said.

“The direction is clear and it’s supportive of the dollar,” he said.

"Markets with Archbridge Capital"

2014-04-08T16:51:00.002+01:00

The below article is deemed too important to allow it to get lost in our usual series "Press Snips".

Though this article has been published in the widely read periodical "Hedge Fund Insight" it does describe the reasons for our strong returns last year and our view on commodities, currencies and equities for 2014.
Our previous article was in the top 5 of most read articles of 2013: (http://www.hedgefundinsight.org/top-hedge-fund-stories-of-2013/).
The least one can take out of the below article and others about us in Hedge Fund Insight is that the trading process is research intensive and requires input from various disciplines from economics and statistics to politics and psychology. Finding the trade ('Trade Entry'), 'Risk Management' and 'Portfolio Construction' are the most important factors to consider in making investment decisions.

Remember: It really is all about being the Casino, not the Gambler!

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Gold, the Yen, Upside in Equities and Petroleum Week With Archbridge Capital

on March 4, 2014

In this article Simon Kerr, Publisher of Hedge Fund Insight, has a Q&A session with global macro manager Hakan Kocayusufpasaoglu, CIO of Archbridge Capital.

Hedge Fund Insight: You had a good year in 2013, with your macro fund up over 19%. In which asset classes did you make the most money, and how much leverage did you have to carry to get those returns?

Hakan Kocayusufpasaoglu: Even though our instruments are leveraged since they are exchange traded futures etc., we do not utilise leverage for our portfolio, and we manage our risk very carefully. In fact risk management is the most important part of trading for us and this culture is imprinted into all Archbridge Capital personnel. In terms of asset classes we tend to have differing strategies: Macro trades in one camp and Relative Value trades in the other. Last year 70% of our profits came from Macro trades, like short Treasuries or short the yen vs. different currencies (as discussed in this previous article), including the US$. But in other years Relative Value trades dominate. The mix of both allows us to have a higher return for a given risk level and has helped to keep our Sharpe ratio above 2.3. In terms of asset classes, we have seen last year a proportional allocation between bonds, FX and commodities and equities. By a tiny margin FX and commodities contributed most to our p&l last year.

Hedge Fund Insight: Many macro managers made little from commodities last year. Did you have one dominant view or trade? Which commodities did you make money in?

Hakan Kocayusufpasaoglu: We did have a few prevalent views about commodities last year. The first had to do with gold: Most people look at gold as an inflation or recession hedge but the main driver of gold according to our research of the gold price over last 100 years is real interest rate levels. When real rates turn negative and are expected to remain there for long periods of time it usually creates a gold rally, while the opposite causes the gold price to fall. As we have stated in the media, we believed that QE reduction is in effect a reduction of negative real interest rates and that the gold price would be falling from the highly elevated prices of US$1900/oz. This materialised as we got closer and closer to the Fed’s tapering efforts.

Additional to the gold trade argument was also that tail risks in the world were being priced out which supported downward pressure on gold. We also generated revenues from relative value trades in commodities, like the WTI-Brent trade, where a similar quality crude was trading substantially below the other European crude. The price differential was substantially higher than transportation costs and was caused by logistical issues which over time should be alleviated. The rule is that all logistical issues typically get solved when a large profit potential is involved and so it was with this trade.

Hedge Fund Insight: China is key to world growth yet official GDP data does not tell you much except the level central government would like it to be. How do you assess what the underlying growth or real growth rate is in China?

Hakan Kocayusufpasaoglu: Statistics in China, as you say are not always the best indicator of Chinese economic growth, one has to go a little deeper in order to get the full story for China. We pay attention to things like electricity usage, port activity and lumber usage. Overall we have been of the view that China’s shift from being a foreign investment driven economy to a consumption economy will slow down their overall growth performance and that view seems to bear fruit via the overall statistics and the other proxy indicators for Chinese economic growth going forward.

Hedge Fund Insight: We have just had the Chinese GDP for 4Q 2013. Officially it was at 7.7% y-o-y. What do your measures tell you underlying growth was?

Hakan Kocayusufpasaoglu: Our measures tell us that GDP will be slowing down over the next quarters due to a clear disorientation from investment driven to a consumption driven economy. Our research also informs us that the credit limitations put into place are having an effect on the housing market, which I see finally slowing without a collapse, which so many had feared.

Hedge Fund Insight: There is a debate going on about whether emerging markets are going to return to generating the growth and equity performance that they used to. What are you going to look for to get involved in emerging markets equities in the short or medium term?

Hakan Kocayusufpasaoglu:We have analysed the probabilities of EMs entering a crisis, ie the contagion risk. There are two major issues at work. At first glance when one compares the situation of EMs to those in the previous EM crisis of ’99 for instance, we see that EMs are in a much better position than they were then. They are larger, more powerful and have a stronger underlying economy. EMs are now around 40% of world GDP and will exceed 50% in a few decades. Their GDP per capita is rising steadily and so is their standard of living.However, there is a second worrying issue that is at play this time that is different than in the past. A huge number of US$ has entered into EMs from the developed countries since the 2008/09 crisis, around 4 trillion US$. This money has entered into the EMs taking their credit risk and currency risk. In the past foreign funds entered EMs only taking credit risk, as they invested in $s or hedged their FX risk; whereas now they have entered into the EMs in their local currency making them more sensitive to FX movements in EMS than ever before. Local currency government bonds went from around 600bn$ in 2008 to 2.5tr$ of foreign funds in 2013. The key danger is that foreign investors have big EM FX risk and may run to the exit doors at the same time, finding that the door is too small.

Evaluating both the above points one positive, one negative we have reached the conclusion that some EMs will suffer, but that an overall crisis will probably be avoided this year. That is that EM central banks will realize (some already have) that they have to raise rates more and by doing so have to keep their FX stable at higher levels, so that any depreciation of their currency happens in an orderly fashion. The EMs experiencing strain and difficulty are to our calculations around 10% of world GDP and hence probably too small to affect the path of developed markets in any grave way this year.

Despite our relatively benign outlook we are, however, making investments which should be successful in either scenario. For instance we are bullish the US$ especially when we get closer to short term interest rates rising in the USA at the start or middle of 2015. Any EM crisis will assist this view as the US$ is the main safe haven currency of the world. We also believe that Eurodollar contracts (3-month interest rate contracts in the US) are pricing in rate rises when none will happen. Again an EM crisis will assist this trade.

Hedge Fund Insight:Is there more money to be made being short the Yen this year? Which currency would you take for the long side, and why? If there is money to be made short the Yen, what do you want to see from the markets as a set-up?

Hakan Kocayusufpasaoglu: Please see above for the long US$. The yen will weaken to the 120-125 levels over the next years, but it is the EM contagion risk that is keeping the yen anchored at the moment. If as we believe that gets priced out in the next few months, then the yen will enter another weakening leg. We are still waiting for that moment and watching the yen carefully.

Hedge Fund Insight: Gold seems to be in the process of bottoming. What is your view, and if it is can you make any money from an instrument bottoming rather than going up in price?

Hakan Kocayusufpasaoglu: Gold, like the yen will strengthen if the EM risk talked above materialises, but we are being prudent in limiting ourselves to trades in both macro and relative value that are not binomially dependent on these two scenarios (as described two questions above).

Hedge Fund Insight: In which case, what trades have you got on that will benefit from scenarios other than the ones described above. These trades must be diversifiers relative to the long $/short Yen trade described above. How do you size them in an absolute sense, or relative to the existing positions in your portfolio?

Hakan Kocayusufpasaoglu: We have a number of RV positions that are insulated from the scenarios described. In fact the scenarios above and the resulting trades fall into the Macro trade category. We have for instance some gasoline spread postions and some spread positions in crude (Brent-WTI). These RV trades benefit from very different outcomes and are for the most part insulated from the above mentioned macro scenarios. For instant in gasoline we have seen the US winter gasoline spread widen. Since winter gasoline is easier to produce and can be imported easily, and since we are not seeing very strong demand improvements and refinery utilization is nowhere close to maximum, we expect these winter gasoline spreads to come back into line. Since they are only one or two months apart their volatility is limited and the trade is nicely insulated from other macro events like the ones discussed above.

Hedge Fund Insight: Some developed equity markets may be running into overhead supply. Do you see them that way?

Hakan Kocayusufpasaoglu: We still see upside in the equities markets especially in the US. We believe that on relative valuations, on macro economic projections and on money flow data that the US equity market is still relatively well positioned for further upside. Most people are worried that equities will dive since higher interest rates may mean that equity valuations will be lowered. Though this is ultimately true it is not so at the start of an interest rate rising cycle. In fact during the first 6-9months of a rate cycle equities perform quite well. If we see tapering (i.e. the reduction of easy money by the Fed) as real interest rises, and we use the Taylor Theorem to translate the 10bn$ per month of tapering into interest rate rises then we see that the Fed in effect is raising rates by around 0.7% each month. Tapering can hence be viewed as the start of an interest rate cycle. In effect at the start of this cycle we expect US equities to perform quite well. But as we get closer to the end of the year and tapering is taking its toll on the economy, and people begin to focus on the Fed funds rate rises on the horizon, then equities will begin to correct in our view.

That said, we see each major correction as a longer term opportunity in equities. The reason for this bigger picture view is that we see the 2008-09 crisis as significant as the Great Depression in the 1930s and believe that it was pro-active central bank action that has helped to avert a similar outcome. If the central banks of the world had not reacted in unison (with the Fed as the leader) then we believe we would have had a replay of the 30′s and instead of being called the ‘Great Recession’ the last crises would have probably been called the second ‘Great Depression’. With this background in mind we do expect equities to show strong performances for years to come. Of course they will have corrections and big ones especially when we get closer to the end of tapering and Fed funds rate rises, but in the larger scheme of things we believe we will see a multi-year rally in equities from today.

Hedge Fund Insight: You regularly attend Petroleum Week and indeed went to the last one. What did you get out of it?

Hakan Kocayusufpasaoglu: I have been going to the IP week for nearly two decades and used to go for most of the week and various functions. But these days I go to one or two functions a year and not the entire week. This year I flew in on the Wednesday and left on Thursday. There are a number of functions which bring together a vast array of people from the industry and assist in the exchange of ideas. Since it occurs only once a year it is probably not much of a contributor to our trading nor our strategy formation but does assist in confirming views or raise question marks. Also it assists in seeing old friends, colleagues and working partners whom you may not have seen in a long while, since we are all busy people and often nowadays in different countries.

Hedge Fund Insight: How much of your portfolio could energy trades be? What is the largest they have been?

Hakan Kocayusufpasaoglu: Although we have multiple decades worth of energy trading experience within the company, the vital point for us is not the size of exposure we have to an asset class but the correlation it has to other trades. For instance we may have 3-4 RV trades within energy that are not dependent on the direction of the market at all and completely uncorrelated to any other trades we have in our portfolio. In short it is not the asset class per se, but the correlation of each trade to others that is very important to us.

Typically we will risk between 1-3% of our AUM on any given trade. In other words if we are risking 3% on one trade and have another idea about another trade, but it turns out that the two are correlated quite strongly then we would not take the second trade. All our trades have to fulfill stringent criteria before we engage and one of them is that they are uncorrelated to other trading positions within our portfolio.

Hedge Fund Insight: Can you talk about the Brent-WTI spread trade you have had on?

Hakan Kocayusufpasaoglu: Both Brent and WTI are similar quality crude oils, produced in different locations. WTI is deliverable into Cushing, Oklahoma and is locally produced. Over the last decades WTI used to trade at a premium to Brent by about the transportation costs that it took to move crude from Europe to the USA. However, over the last few years we have seen that due to infrastructure problems the oil stored in Cushing was not able to move to the Guldf Coast nor to the refineries within the US that needed the product. Hence there was a logistical bottleneck which made a large amount of crude oil being accumulated in Cushing and hence drove the price of WTI below Brent. Substantially below Brent; at times more than 20$ below Brent. However, such logistical issues tend to be overcome given time, since a 20$ profit per barrel is an amazingly strong motivator. In fact, oil was delivered on the back of trucks, trains and any transportation that could be procured in order to lock in this vast profit potential. We expect WTI to strengthen towards 4.5$ below Brent, which is roughly the cost of transport of WTI from Cushing to the Gulf Coast.

Hedge Fund Insight: Is the Brent-WTI trade what you would classify as a relative value trade? How do you think of the portfolio construction in terms of relative positions and absolute directional positions?

Hakan Kocayusufpasaoglu: Yes, Brent-WTI would be classified as a relative value trade, since it is in effect the same product in differing geographic areas and the trade is to purchase one while selling the other. Other relative value trades can be across products or across time (time spreads), where one buys one product and sells the other due to some demand-supply disruption that is expected to last only for a small period of time.

When it comes to portfolio construction we are much more concerned with correlation risk, rather than RV trade vs Macro trade risk. Both strategies generate a decent return over time and we are as eager to take advantage of one type as we are of taking the other. It is the market environment that determines which trades are more prevalent at any given moment in time. However, it is vital to us that our trades are not correlated to each other, since then we are in effect putting on the same trade in just larger size. As long as our trades are uncorrelated and fit our risk parameters we are willing to take them whether they are RV trades or Macro trades.

Hedge Fund Insight: Thank you Hakan. I’m beginning to understand how you did so well last year.

Hakan Kocayusufpasaoglu: Thank you for the questions.

Archbridge Capital AG is based in Zug Switzerland.

To contact Archbridge Capital please email: info@archbridge-capital.com

Our widely read research notes are available on our website under ‘Research’ Website: www.archbridge-capital.com

Press Snips CNBC TV

2014-03-18T16:00:00.002+00:00

We believe that in that spirit we should also update you every once in a while, when we are in the press giving interviews on CNBC, the BBC or Bloomberg. Although we are a Swiss based company, recent interviews have been conducted by our CIO who speaks Turkish amongst other languages.

The below CNBC TV interview from the 11th of March 2014 has some interesting features including a viewer question, how we would invest 100k today. Other detailed themes include our view on the Euro, on the Turkish Lira and on Oil. A unique view about China and its risks.

Please note that all below interviews are in Turkish.

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The first clip of the CNBC Interview dated March 2014 includes a detailed analysis of the Euro.

The second clip of the CNBC Interview dated March 2014 discusses our View for the OIL price in 2014.

The third clip of the CNBC Interview dated March 2014 discusses our impressions of China.

The fourth clip of the CNBC Interview dated March 2014 discusses our long term bullish views on US Equities and why there may be a correction in the short term.

The fifth clip of the CNBC Interview dated March 2014 expresses our concern for the TL and Turkish equities.

The final clip of the CNBC Interview dated March 2014 answers the question how we would invest 100k today - and hence discusses some of our current trading positions.

Press Snips CNBC TV

2014-03-16T19:30:00.000+00:00

The below CNBC TV interview from the 21st of Feb 2014 highlights our views on FX trades, European Deflation, Emerging Markets and some ideas for portfolio allocations in 2014.

Please note that all below interviews are in Turkish.

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For the entire interview, which was CNBC Turkey's most watched, please click on the link below.

http://www.cnbce.com/video/yellen--penceli-guvercin--mi

The first clip of the CNBC Interview dated February 2014 highlights which Emerging Markets remain vulnerable and why.

The second clip of the CNBC Interview dated Feb 2014 discusses our View for the TRY-US$ and the Euro in 2014

The third clip of the CNBC Interview dated Feb 2014 discusses our bullish View for both US equities in the long term and the US$ as we approach year-end

The fourth clip of the CNBC Interview dated Feb 2014 discusses our views on Gold, which we view as related in the longer run to real interest rates and risks in the world, focused on the Ukraine.

ABC ScoreCard

2014-03-12T23:41:00.004+00:00

Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited into the positions we advocate.

We have published a number of views/trades in our publications in the last few months (list and results to date below).

Out of the four suggested trades since our last scorecard HALF have been profitable. SINCE INCEPTION (I.E. THE FIRST TIME WE RECOMMENDED THESE TRADES, ALL HAVE BEEN SUBSTANTIALLY PROFITABLE.)

Overall the portfolio has been Neutral since the last ScoreCard. Please note that over time it is the fact that profitable trades are much more profitable in comparison to losing trades that assures the portfolio overall to be profitable.

"There are good trades that make money and bad trades that make money. There are good trades that lose money and bad trades that lose money. Money in the long-run is made from continuously taking the good trades." - Old Trading Adage.

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We shall start 2014 by updating our ScoreCard. Please note that we are recommending changes to our current positions, although our Macro-economic themes remain in place, due to external factors. All trades without exception are profitable since Inception but only half are so since the last ScoreCard back at the end of December 2013.

THE GOOD:

Long US Equities: Positive

This trade has done marginally well since the last scorecard published in December. Though equities in the US will continue on their trajectory we find it prudent to exit this very profitable trade (though it has really not made any substantial returns since the last Scorecard at the end of December, it has nevertheless made substantial sums since we have first put on this trade back in May 2013) due to the uncertainties pertaining to the Ukrainian situation and China's banking system. We have seen the repurcussions of using Copper as collateral in China and are worried that this may not be the end of the liquidation process. This process could result in further defaults in corporate China and though we believe the government will act by either cutting reserve requirements or increasing money supply, we still would like to err on the side of caution.

Long US$ vs EM FX: Positive

The US$ has indeed strengthened against some EM markets, especially those with current account deficits, as predicted back in May in our publication "A love supreme - The US$ is back". However, in essence we have published this trade in earnest in our ScoreCard of September 2013 and it has performed handsomely ever since.The Turkish Lira stands out as the star performer as unexpected yet welcomed political issues have caused the Lira to depreciate quickly above our well publicised 2.20 target against the US$. We will however, exit the trade immidiately above 2.20 TRY/$ as we do believe that unexpected events both within Turkey and abroad could unexpectedly cause very volatile movements. In essence, within Turkey we do expect more political pressure before the local elections at the end of March, but are in no way certain, while abroad the uncertainty over both China and the Ukraine again moves us to the sideline.

THE BAD

Short US Treasuries: Negative

This trade has performed well over time, and we have recommended this trade back in April 2013 in "There is treasure in those Treasuries" (Thursday, April 4, 2013) with a 12-18 months time horizon (in April US 10-year yields were trading around 1.60 vs their current 2.73 level). Since the last ScoreCard at the end of December 2013 this trade has performed quite badly and this may be exacerbated by the Ukrainian and Chinese situation as well as the bad economic data coming out of the USA due to its harsh weather. We are, however, unwilling to cut this overall substantially profitable trade and sit tight.

Short JPY long USD: Negative

Since the last ScoreCard this trade has not performed and fell from around 105 to 102.7 currently. However, we view this trade (which is still substantially profitable since we recommended it first time back in November 2012 and exited briefly in "Take Five" June 3, 2013 and re-entered in July 2013's ScoreCard) as a structural trade where the monetary policy over the next year or more of the USA will be the exact opposite of Japan's. The USA will tighten monetary stimulus further, while Japan will continue to loosen theirs. If what we believe about China's slowdown becomes reality over 2014 we could see Japan doing even more QE than currently planned over this year. We expect to see levels above 115-120 in the US$ JPY trade, though this will take some time. In the meantime we would suggest reducing the position and keeping stops wide and positions moderate.

We are also exploring to short the Yen against other currencies like the GBP and the Euro, and hence constructing a basket against the yen. We will not add to the position due the uncertainties mentioned above and the status of the Yen as a safe haven currency (the reason for which is beyond us, but it is the harsh reality that we must adhere to).

THE UGLY

Not this time and for that we are grateful.

Overall, we had a moderate period with half our recommendations bearing fruit and making gains, even when published after we had already entered into the trades ourselves ahead of time.

Press Snips Bloomberg TV

2014-03-10T20:19:00.004+00:00

We, here at Archbridge Capital are trying to inform our readers about some of the trades that we take ourselves and to demonstrate our views about the markets. In short we put our money where our mouth is and are quiet otherwise. Obviously, we do not publish all our trades and also do not publish our ideas before we have put on the trades ourselves, as we do need to leave some advantage to our investors and ourselves.

The below Bloomberg TV interview published a few days ago highlights our views on: FX trades, Turkish Current Account Deficit, US$ targets, the Euro and some ideas for portfolio allocations in 2014.
Please note that all below interviews are in Turkish.

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The below clip of the Bloomberg Interview dated 14th of February 2014 discusses conditions and likelihood under which the Turkish Lira would be able to avoid further depreciation.

This clip of the Bloomberg Interview dated 14th of February 2014 discusses the path of the Fed funds rate rises and the future of Euro-US$. Overall an expectation that the US$ will strengthen in the second half of 2014.

This clip of the Bloomberg Interview dated 14th of February 2014 discusses the Turkish Lira FX rate and that we see further depreciation versus the US$ though the pace of depreciation is expected to slow as long as the Turkish Central Bank continues raising rates by a few percentage points.

Press Snips CNBC

2014-01-19T23:15:00.004+00:00

We, here at Archbridge Capital are trying to inform our readers about some of the trades that we take ourselves and to demonstrate our views about the markets. In short we put our money where our mouth is and are quiet otherwise. Obviously, we do not publish all our trades and also do not publish our ideas before we have put on the trades ourselves, as we do need to leave some advantage to our investors and ourselves.

The below CNBC TV interview published a few days ago highlights our views on: FX trades, Turkish Current Account Deficit, US$ targets, the Euro and some ideas for portfolio allocations in 2014.

Please note that all below interviews are in Turkish.

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These clips of the CNBC Interview dated 13th of January 2014 discuss our View of the Turkish Market and which factors will impact the future direction of the Turkish Lira.

Real US$ strength is yet to come, Watch this Space!!!

This clip of the CNBC Interview dated 13th of January 2014 discusses our View that Developed Markets will see substantial inflows over 2014 especially from Emerging Markets and which EMs will win/lose. Within EMs countries with low current account deficits, high real rates and a closeness to the USA will be preferred in 2014.

This clip of the CNBC Interview dated 13th of January 2014 discusses our View of the Eur-US$ FX rates within 2014.

This clip of the CNBC Interview dated 13th of January 2014 discusses where Interest Rates should be in Turkey to prevent a further larger depreciation of the Turkish Lira.

This clip of the CNBC Interview dated 13th of January 2014 discusses our View that China will slow down due to reforms, a transformation from an exporting country to a consumer country. We foresee a slowdown, but no crash in 2014.

Merry Christmas and Happy New Year

2013-12-22T23:16:00.001+00:00

Here at Archbridge Capital we had a profitable and fruitful year and Wish to extend our Season's Greetings to all our readers. We look forward to seeing you all in the New Year. May 2014 be an even better year. To Good Trading and a prosperous New Year

FROM ALL OF US AT ARCHBRIDGE CAPITAL

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ABC ScoreCard

2013-12-22T23:11:00.003+00:00

Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited into the positions we advocate.

We have published a number of views/trades in our publications in the last few months (list and results to date below).

Out of the four suggested trades since our last scorecard ALL have been profitable (one has been Neutral).

Overall the portfolio has been profitable. Please note that it is the fact that profitable trades are much more profitable in comparison to losing trades that assures the portfolio overall to be profitable.

"There are good trades that make money and bad trades that make money. There are good trades that lose money and bad trades that lose money. Money in the long-run is made from continuously taking the good trades." - Old Trading Adage.

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We shall end 2013 by updating our Score Card. Please note that we have substantially reduced all our positions before the illiquid Christmas Season, although our Macro-economic themes remain in place. Please find below trades we thought would make money back in the year and what should be done with them going forward. Since September, all recommended trades have made money.

THE GOOD:

Long US Equities: Positive

This trade has done very well since the last scorecard published in September. Equities are increasingly responding to the underlying economic growth and the great rotation is slowly beginning: we are seeing a substantial outflow out of bonds and some of it is finding its way into equities.

Long US$ vs EM FX: Positive

The US$ has indeed strengthened against some EM markets, especially those with current account deficits, as predicted. However, since the last score card the South African Rand has not moved substantially. The Turkish Lira on the other hand has performed handsomely and we suspect this story of EM weakening is not over yet. As a vital guideline we believe this story will only come to a halt when real rates in the EM become substantially positive - and they are far from that especially in Turkey, where further currency pressures are to be expected.

Short US Treasuries: Neutral

This trade has performed well, with tapering now having started and with the markets realising that the US is in a cautious monetary tightening cycle. The Fed is careful not to destroy the recovery that is in place, while being aware that extraordinary measures like its QE programmes cause unwanted risk-taking. Though since the last ScoreCard on September 17th this trade has been neutral we see further profit potential going forward.

Short JPY long USD: Positive

We view this trade as a structural trade where the monetary policy over the next year or more of the USA will be the exact opposite of Japan's. The USA will tighten monetary stimulus further, while Japan will continue to loosen it. If what we believe about China's slowdown becomes reality over 2014 we could see Japan doing even more QE than currently planned over the next year. We expect to see levels above 115-120 in the US$ JPY trade, though this will take some time. In the meantime we would suggest keeping stops wide and positions moderate, since corrections to 93 could occur over this time scale.

THE BAD

Not this time and for that we are grateful.

THE UGLY

Not this time and for that we are grateful.

Overall, we had a solid period with all of our recommendations bearing fruit and making gains, even when published after we had already entered into the trades ourselves ahead of time.

Press Snips CNBC

2013-12-14T14:51:00.002+00:00

The below CNBC TV interview published a while ago highlights our views on FX trades, European Deflation, Emerging Markets and some ideas for portfolio allocations in 2014.

Please note that all below interviews are in Turkish.

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The first clip of the CNBC Interview dated November 2013 discusses our View of Emerging Markets in 2014

The second clip of the CNBC Interview dated November 2013 discusses our View for the TRY-US$ in 2014

The third clip of the CNBC Interview dated November 2013 discusses our View for the Eur-US$ and deflation risks in 2014

The fourth clip of the CNBC Interview dated November 2013 discusses Tapering effects on the markets in 2014

The fifth clip of the CNBC Interview dated November 2013 discusses our View of US equities for 2014

The sixth clip of the CNBC Interview dated November 2013 discusses some protfolio allocation ideas for 2014

Press Snips BLOOMBERG TV

2013-12-07T13:21:00.001+00:00

We believe that in that spirit we should also update you every once in a while, when we are in the press giving interviews on CNBC, the BBC or Bloomberg.

Although we are a Swiss based company, recent interviews have been conducted by our CIO who speaks Turkish amongst other languages.

The below Bloomberg TV interview published a while ago highlights our views on FX trades, European Deflation, Tapering effects and how Yellen's arrival will change the Fed.

Please note that all below interviews are in Turkish.

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The first clip of the Bloomberg Interview discusses tectonic shifts in FX and how to set-up trades

The interview is dated 18th of November 2013.

The second clip of the Bloomberg Interview discusses deflationary pressures in Europe and its effects on exchange rates (FX)

The interview is dated 18th of November 2013.

The third clip of the Bloomberg Interview discusses the tapering time schedule ie when tapering will start and end. It also debates what the market effects of this shall be.

The interview is dated 18th of November 2013.

The fourth clip of the Bloomberg Interview discusses Yellen and her impact on FED policy

The interview is dated 18th of November 2013.

"Is that clear?" - "Crystal, Sir"

2013-11-03T17:52:00.002+00:00

US policy will determine asset price directions in 2014

US $ will gain against EMs with weak current account balances like TRY. US$ will gain against countries with opposing monetary policies like the JPY.

China will slow but not crash affecting China dependent currencies like AUD and some commodities.

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A lot has been made of monetary changes especially in the USA. It is time that we took a closer look at the state of the USA and its potential effects on the rest of the world, since we believe that these changes will dominate investment themes for the foreseeable future.

The first point to make is that easy money is going to be reduced and monetary policy will become tighter, since the US economy will be gathering speed in 2014. When the crisis hit in 2008/9 monetary authorities were faced with the dilemma that interest rates should in face be negative in order to off-set the massive deflationary forces of the great recession. If we put that into a central banker's concept then the Taylor Rule would in fact suggest that interest rates should be negative 4-6% in the USA at the height of the crisis.

Taylor Rule augmented Rate & suggested Rate

However, nominal interest rates cannot become negative and hence monetary authorities needed to find new methods to inject growth into the economy. The chosen method and probably the best possible option available was QE, in other words increasing the money supply within the country in order to increase liquidity within the financial system and in order to persuade banks to increase loans into the economy. Additionally, QE would keep longer term interest rates at lower levels, which again would assist in making credit cheaper and more readily available. This would have the benefit for investment decisions and would push investors to take more risk. Taking risk would in turn become a positive tailwind for the economy as investments, start-ups equity purchases, property purchases and increased consumption would assist to fight the economy's slowdown. This expansionary economic impulse would also benefit the unemployed, as an expanding economy would need more labour.

All of the above have to a certain extent materialised: Unemployment has fallen, economic growth has increased, longer term interest rates have fallen substantially, housing has recovered, bank lending has improved especially to small and medium sized companies, and the equity markets are at an all time high. Combined wealth effects should now also assist consumption to rise over the next 12 months. Overall the US economy is improving substantially even though growth numbers for 2013 do not fully reflect this. This is due to the large amount of fiscal tightening that was imposed by the US government in their infinite wisdom, which has shaved off more than 1.5% of GDP in 2013. It is a credit to the US economy that despite these headwinds (which include a reduction of 0.1% of GDP due to the federal shut-down) growth is positive around 1.5-1.9%. Next year these headwinds should be eliminated for the most part (by the end of Q1 2014), which should enable the US to grow at substantially faster rates approaching 3%.

All of the above indicates that the US will do better over time and that current monetary policy is too lax for the underlying economic growth rates. Looking again at the Taylor Rule, we can see an implied Fed Funds Rate of around 2% without any QE. Given current Fed rates at 0.25% and QE of 5bn$ per month, current implied Fed funds rates are still lingering in deep negative territory. This stimulative environment should assist the US to recover even faster but it poses difficulties to monetary authorities, as asset price inflation has potential to build especially as the output gap becomes smaller and smaller. The Fed is aware of these dangers and has already announced that it will scale back its monetary expansions in 2014, we believe tapering will begin in March 2014 and will be finished in the first half of 2015.

The effects of eliminating QE injections will be profound for the markets both in the US and abroad: We have already seen that the mere talk of reducing QE has resulted in 1) Long term interest rates to rise substantially 2) EMs to suffer an exodus 3) the US$ to reign supreme...what can happen when the actual event occurs...

The key areas of danger for the world economies lie in policy errors, where the Fed reduces QE too quickly and stifles economic growth at home, while capital flees EMs and leaves them with substantially reduced asset prices and lower growth rates. However, we believe that policy errors will not occur as our forecast of US economic strength is substantial and Yellen is more dovish than Bernanke and has a very good grip on economic analysis. Current weak US economic data has to be interpreted in the light of consumer frustrations due to the government shut-down and associated policy uncertainty.

The whole world will not recover at the same fast pace that the USA has set out. In fact our analysis points to the USA being one of the only major DMs that will reduce monetary stimulus. When the crisis began monetary policy was synchronised and every country fought the deflationary forces of the Great Recession by cutting interest rates to negative real rates and increasing credit. This has benefited some countries more than others. Especially EMs had a huge capital inflow of around US$4tr in the last years since 2008-9. This capital will now begin to leave those countries for safer alternatives, FDI will not be the exclusive territory of EMs any longer and this will have profound effects.

The USA has been the liquidity provider to the World for decades and any reductions in the US current account balances have resulted in liquidity reduction which have caused the rest of the world to suffer substantially. During such tightening periods the US$ has been the main beneficiary and hence we are bullish the US$ as a theme for 2014. As our long term readers know, monetary tightening will also affect US treasuries negatively, as well as other real rate dependent assets like gold negatively (see "Gold under the mattress...again? October 9, 2013).

Let us have a quick look against which countries the US$ will win the most. In the EM world countries with large external deficits who have benefited the most from previous capital inflows and have not taken monetary steps to offset the coming liquidity crunch will suffer the most.

Other countries that will take a major FX move against them will be countries that actively expand monetary policy while the US is decreasing theirs. Japan is one such country which requires massive monetary expansion in order to escape the deflationary environment that has been plaguing the country for the last few decades. In short, we are short the Yen and Turkish Lira vs the US$ and intent to remain so for the foreseeable future.

One more country and its influence needs to be quickly explored here: China is one of the most important markets for commodities, as it has become the largest importer for crude oil, consumes about 40% of copper and largest soya consumer on the planet. Its ravishing growth rates over the last decades of 10%+ have caused investors to turn their heads and take note. FDI has in turn sky-rocketed to astronomical numbers, and have become China's single biggest economic growth driver. The 2008 "Great Recession" has caused a nice and uniform monetary response from developed markets and emerging markets: all in unison expanded their money supply and credit growth. China was no exception in that the government decided to increase the gates of credit and poured money into the economy, thereby causing asset prices to inflate and growth rates to be sustained for the most parts, especially property prices.

Now, however, the game is changing, as discussed above FDI is slowing into EMs and finding a new home in DMs. The Chinese authorities are aware of this and are trying to turn the Chinese economy into more of a consumer driven economy. They are doing this by increasing the value of the renminbi, while trying to limit credit expansion. Looking at China's levels of debt we see clearly that debt levels are reaching such extremes that growth rates will begin to decline in the future. (Total debt levels above 200% begin to slowly eat into longer term growth rates.)

We do not see a crash for 2014 since managed economies have an amazing ability to continue propping up their economies for a lot longer than anyone thinks. We have seen this movie in Japan a few decades ago, where the Japanese government continued to keep their 'ghost' banks solvent even when there was no economic reason to do so. The same and more applies to China, since the Chinese government in effect is the sole decision-maker for credit and its expansion. However, we do believe that China will slow down and its growth rates will diminish more next year than the markets expect. It would be easy to see their GDP growth falling by another 1% next year to around 6-7% yoy growth. This would affect China's appetite for some commodities and would also affect exporting countries that are China dependent, like Australia.

Gold under the Mattress...again?

2013-10-09T08:33:00.002+01:00

Physical buying by EMs explains the gold rally of the recent past

Given macroeconomic developments and monetary policy Gold's fundamental direction is down

Any short-term rally due to US Congress wranglings should be faded and seen as opportunities to sell gold

Oil Supply outages are coming back on-line and in 2014 supply should outweigh demand, weighing on the oil prices and time spreads

Oil is especially vulnerable if we believe the Iranian situation will be resolved peacefully, which has more credibility now than ever before

We are shortish of oil and oil spreads but are unwilling to risk a lot on this trade since a single event risk (Iran) has the power to change the landscape substantially

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GOLD

Gold had a very strong rally from the lows it made at the end of June, where it reached below 1200US$. The rally that followed requires explanation since it was a fast rally to prices reaching above 1450US$. Now gold prices have begun to come off again. This truly does require an explanation.

If you dig down into the data, you will find that cumulative gold imports through July surpassed the 26.7 million ounces (831 tonnes) that was imported to China for the whole of 2012.

Gold had its 'golden moment' (excuse the pun) back last year when the prices rallied to near 2000us$. As soon as the Fed signalled a pullback from its monetary stimulus (QE) and the markets began to understand that this would mean an effective rise in real rates and with it a fall in gold prices. The markets were very long gold for the last number of years and hence the metal fell dramatically and quickly. It fell until it reached lows of 1182US$. At the same time funds were fleeing EMs and finding its way back to the strengthening DMs, after a near 4trillion US$ had left them for EMs after the 2008-9 crisis.

EMs ended up with much weaker FX rates, a falling equity market and higher interest rates. Policy responses were relatively muted. Especially, raising interest rates in order to stabilise their faltering FX rates was unpopular, as some EMs were concerned with diminishing their growth rates if they intervene too aggressively. The response from the population was key to lack of policy response from governments. (Central banks excluded, who also supported in the buying of physical gold especially in Russia and Turkey).

The population of these EMs seeing their investments falter and their currencies becoming less valuable with limited policy responses became fearful that an EM crises would develop and bought physical gold in vast quantities. So vast, in fact, that the physical demand for gold began to overshadow financial demand (or lack thereof), the gold curve shifted into a rare backwardation and prices rallied fast and hard.

This kind of panic-induced rally cannot be a longer term driver of financial instruments in the medium to long term and we believe that the Fed by effectively delaying tapering has given the EMs more time to adjust their policy responses and have also eased the panic-buying of physical gold by EMs.

Even the current wranglings of the Congress will have difficulty in creating a sustained rally, since a debt default is unlikely (even a short term technical payment delay would have very little impact on the underlying economy) and the current shut-down should be over before permanent GDP growth numbers are affected. Given that Congress has already agreed a bill that will retro-actively reimburse all payments affected by the shut-down the economic effects should be limited and reversible, unless this wrangling becomes a multi-month event. In such a case real harm to economic growth would be done which could delay Fed tapering beyond end of year or even beyond Q1 next year. We believe such an event as unlikely and see an agreement reached within the next 10 days (even if the agreement is a temporary one.) In sum, we believe that a default will not occur. In essence, this implies that all spikes caused by the current uncertainty represent selling opportunities for gold.

When tapering commences in earnest probably around year-end or latest Q1 2014 the reactions should be more muted and the outflow out of current account deficit EMs more orderly. In short, there is not much to prevent much lower gold prices going forward even though some short-term pressures are holding the glittering metal up at the moment. Perhaps it is time to get the gold from under the mattress...

OIL

Supply Surprise

We wanted to take the opportunity and highlight some of the issues that have caused our oil call for this year to be wrong. Our analysis was based on a fundamental analysis which demonstrated that supply would substantially surpass demand. However, with supply outages in Lybia, Sudan, Iraq and the Iranian embargo have culminated in a supply disruption of more than 2.7 million b/d. This in a market where demand growth is around 1.3-1.5 million b/d per annum. The supply outages added to the around 1.3-1.5 million b/d expected Iranian embargo effect and have meant that additional supply had to be provided by the Saudis of around 1 million b/d in order to balance the market. As a result stocks were not built and prices and time spreads did not fall (and as our longer term readers know, we were stopped out of that trade).

It seems, however, that the landscape may be shifting, that the worst of the supply disruptions may be behind us: For one, Lybian supply has started to come back on-line and it is expected that they will begin to supply more than 750 k b/d of oil shortly, after its supply fell from 1.4mill b/d to 250k b/d. Even more of supply should start coming online from Lybia as problems with the striking fractions there are being overcome.

Let us look at the demand side of the equation: Even if the world economy is slowly recovering, current demand is only around 1.2m b/d and even if next year's demand figures would rise to 1.5mill b/d, supply from increasing oil production from the USA combined with non-Opec supply should be able to cover all of next year's demand increases. (USA supply increases should be around 1million b/d, while non-OPEC supply should reach 500k b/d in 2014). Add to this a potential for the Iranian embargo to end and the other outages to come crawling back and we could have a potent mix for lower prices.

Iran - the Wildcard

If we now see the surprise supply outages come back online, we should have more oil supplied than demanded. The big unknown in all of this, is Iran. If the USA can reach some agreement on a peaceful resolution of the Iranian nuclear programme issue, then the US and EU embargoes of Iranian oil would cease and an additional 1.5million b/d would hit the market. This would in essence swamp the market with oil, even if the Saudis withdraw their additional 1million b/d. Even if the Saudis withdraw enough oil that causes the market's supply to balance demand, it nevertheless means that stocks in the world would be built, and spare capacity would increase, giving the oil markets a larger buffer for unknown oil shocks. This in itself should lower prices and especially reduce the backwardation within the oil curves.

The Fed - a Pleasure delayer

2013-09-29T22:03:00.001+01:00

Objectively the Fed delaying its tapering is a very good thing.

Treasury weakening has been delayed but also more potential weakening in the future granted.

Emerging Markets (EMs) have been given a chance to get their house in order, but many will fail or ignore this opportunity.

EMs with current account deficits that have benefited over the last five years from QE (4trUS$ has flown into EMs in the previous 5 years) are at risk especially those that resist raising interest rates.

We are bearish the TRY vs the US$ and expect to see 2.15-2.20 eventually.

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A lot has been made of the postponement of tapering and we agree that it was a surprise for the markets in general, but we think an objective and strategic evaluation is necessary:

Tapering not having started is in fact a good thing as it reduces the probability of policy errors, thereby assuring that the underlying growth in the USA which we see via a lot of data points and forward looking indicators including a stronger housing sector, a 50% smaller current account deficit, stronger lending by banks especially to medium term enterprises, stronger manufacturing outlook including new orders as well as stronger PMI data. We also have to remember that the USA is currently being exposed to a very high fiscal headwind which approaches 1.5% of GDP for 2013. Given the headwinds will dissipate we expect the US to grow by around 2.5-3% in 2014.

Additionally, we are seeing further international supportive forces for US growth next year including a recovering Europe and the pricing out of tail risks to continue. The main risk of a Chinese slowdown has been averted this year due to yet more credit expansion (micro injections and management) by the centralised government. Although we believe that towards the end of 2014 China's growth rate will slow substantially, we are also aware that centralised governments can micro-manage and support an economy for much longer than people expect and hence we will get concerned about China only in the second half of next year or thereafter, if at all.

To summarise, tapering is assuring that the USA will continue to grow and that the slow anaemic growth rate will increasingly turn into a more sustainable expanding economy, helped by the stronger growth of its main trading partners. Indicators like the dry freight index, which has been quietly ticking up of late and trade volume figures are encouraging for global growth rates going forward.

The upshot of this is that a more gradual rise in the longer term rates in the USA will occur than with immediate tapering, but that the rise in rates will be longer and more sustainable. In fact, if Yellen does become the next Fed Chairwoman then we can expect her to err on the side of caution and allow for rates to stay lower for longer and allow for inflation to exceed its target of 2%. This would mean that inflation expectations would be allowed to rise during this time, and this will help to push longer term rates even higher than they would otherwise have been.

From a trading standpoint this implies that the rally in US Treasuries will actually give opportunities to enter/re-enter the market at phenomenal levels (especially if the debt ceiling turns into a problem next week) and for longer than expected. It will also mean that the target levels may have to be increased way above the 3.5% in the 10 year that we were envisioning. Tapering will occur, if not in October then by latest in Q1 2014. From an economic standpoint this is the better decision, though the Fed's communication skills are another issue for another day.

The above observations will also apply for other instruments that are dependent on real rate changes, like gold (we are still long term bearish of the yellow metal), but more about gold in our next note. Let us first look at what US monetary policy really means for other affected countries, which tend to be EMs. Please note our thanks to Ed Yardeni and Mauldin for their graphical inputs.

THE WIDER EFFECT OF TAPERING

In essence the efforts of communicating that tapering was coming, which began in May and the clear signals it gave to the markets were in essence a warning shot, a wake-up call especially to emerging markets that have large current account deficits, that have benefited the most from hot money inflows during the financial crisis years, where money was leaving the DMs and flowing into EMs. Countries like India and Turkey which fit that bill were under tremendous pressure over the last months and have only found solace in the announcement that tapering would be delayed.

The main point for those emerging markets is that this is an opportunity to get their house in order, to restructure their debt and increase interest rates, in order to firm their currency. This should be done even if that puts some pressure on growth rates, as this would be a gradual and relatively slow, easily digestible policy, which would assist in avoiding large FX moves, and a potential stampede of foreign capital out of those markets.

Some countries, like India seem to have started that process recently, whereas others are insisting that interest rate rises are unnecessary. The latter will see their currency under a lot of pressure going forward as capital has more and more places to be gainfully deployed including the US and EU. Hence EMs with large current account deficits and relatively low (especially the ones with negative real rates like Turkey) interest rates will see their currencies falter while their bond rates will appreciate. This will also not be a good environment for equities nor bonds in those countries. In the specific case of Turkey, it does remind us of days past, when another central bank tried to support its currency via interventions but found they did not have the reserves to do so and gave up in the end. I believe it was George Soros who benefited from that policy miscalculation...

Taking the example of the Turkish Lira, which has appreciated all the way to 1.93 from their 2.08 highs after the 'non-taper' announcement and is now weakening again against the major currencies, even the relatively weak US dollar: One has to ask the question what would change this weakening process over the future and barring drastic rate rises, which the central bank has excluded, only a very weak US$ would come to mind. The catch here is that the US$ is already very weak based on its trade-weighted index and if anything the postponement of tapering has assisted in weakening the US$ to levels that it would not have reached if tapering had commenced. When tapering does commence in earnest and effective real rates begin to rise in the USA before the other DMs we are going to see a strengthening in the US$ which will accerbate any weakening of the $-TRY rates.

From a trading standpoint this implies that we would want to be short of the TRY vs the US$ and increase our position straight after the debt and budget agreements have been struck, since those have the potential to weaken the US$ further in the short term. We expect the TRY to eventually weaken to the 2.15-2.20 levels.

ABC ScoreCard

2013-09-17T19:42:00.000+01:00

Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited into the positions we advocate.

We have published a number of views/trades in our publications in the last few months (list and results to date below).

Out of the six suggested trades since our last scorecard three have been profitable. Two have been stopped, and one has not made nor lost any money.

Overall the portfolio has been profitable. Please note that it is the fact that profitable trades are much more profitable in comparison to losing trades that assures the portfolio overall to be profitable.

"There are good trades that make money and bad trades that make money. There are good trades that lose money and bad trades that lose money. Money in the long-run is made from continuously taking the good trades." - Old Trading Adage.

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We shall start the post-summer season by updating our Score Card and giving our views on the most relevant items on the agenda: Trades we thought would make money back in July and what should be done with them going forward.

THE GOOD:

Long US Equities: Positive

This trade has done very well since the last scorecard published at the start of July. Equities are increasingly responding to the underlying economic growth and the great rotation is slowly beginning: we are seeing a substantial outflow out of bonds and some of it is finding its way into equities. We are still bullish of equities and remain with this trade.

Long US$ vs EM FX: Positive

The US$ has indeed strengthened against some EM markets, especially those with current account deficits, as predicted. However, since the last score card the South African Rand has not moved substantially. The Turkish Lira on the other hand has performed handsomely and we suspect this story of EM weakening is not over yet. As a vital guideline we believe this story will only come to a halt when real rates in the EM become positive - and they are far from that especially in Turkey, where further currency pressures are to be expected. Though we are profitable on this trade we recommend getting out of all positions with EM s in the short term, except for the Turkish Lira.

Short US Treasuries: Positive

This trade has performed well, with tapering around the corner and with the markets realising that the US is in a cautious monetary tightening cycle. The Fed is careful not to destroy the recovery that is in place, while being aware that extraordinary measures like its QE programmes cause unwanted risk-taking and cannot continue forever. "Tapering" will probably start in September, with only a tiny amount being 'tapered'. The expectations in the market are for 10bn$.

Going through the scenarios:

Less tapering will cause a bond rally. Meeting expectations will cause a bond rally, since this amount is fully priced and profit taking would ensue. Exceeding expectations would probably cause a bond sell-off, depending on the amount of excess tapering that indeed takes place. Hence the scenarios would point to a tactical reduction of short bond positions in the short-term, before re-entering this longer term trade again as a structural, potentially multi-year short.

Short JPY long USD: Neutral

Over the summer, since the last scorecard, this trade has not shown any significant performance. There have been two major reasons for this: 1) The Syrian crisis which has now come to a periodic end, without a war. 2) Discussions of the planned increases in the sales tax in Japan. Both have caused the Yen to strengthen over the summer and are now slowly being priced out. The first, is already priced out by now, while the second point will probably be mitigated by a corporate tax decrease in the next months.

US$-JPY was around 99 at the start of July and is currently at similar levels. We view this trade as a structural trade where the monetary policy over the next year or more of the USA will be the exact opposite of Japan's. The USA will tighten monetary stimulus, while Japan will continue to loosen it. If what we believe about China's slowdown becomes reality over 2014 we could see Japan doing even more QE than currently planned over the next year. We expect to see levels above 115-120 in the US$ JPY trade, though this will take some time. In the meantime we would suggest keeping stops wide and positions moderate, since corrections to 93 could occur over this time scale.

THE BAD

Short Gold: Stopped

Since the last scorecard we have seen a spike in gold and were stopped out. The reason for the rise included the Syrian affair and potential war with international involvement. However, the real driver is something we were not counting on: For a long while we have been talking about money flowing out of EM markets and into Developed Markets (DM) due to economic growth rates and interest rises. However, we failed to see that the EM population as a response to their depreciating currency and falling bond and equity markets would begin to hoard gold as a safe haven asset. This has driven up the physical demand for gold substantially and quickly. Though we believe that this phenomena will not last and the main driver of gold ie real interest rates will take over and drive gold prices lower, our stop has been triggered and we adhere to this. Always.

Long US$ (trade-weighted): Stopped

The US$ has performed well against current account deficit EM markets as discussed above but not against its main trading partners. The trade-weighted US$ index has fallen and we recommend getting out of this trade especially because the weightings are heavily in favour of the euro where still tight monetary conditions (and fiscal conditions via austerity) are keeping the euro strong with no reaction from the ECB since economic growth is gaining momentum in Europe.

THE UGLY

Not this time and for that we are grateful.

Overall, we had a solid period with most of our recommendations bearing fruit and making gains, even when published after we had already entered into the trades ourselves ahead of time.

"Into the Mind of a Macro Manager"

2013-08-12T02:39:00.001+01:00

The below article is deemed too important to allow it to get lost in our usual series "Press Snips".

Though this article has been published in the widely read periodical "Hedge Fund Insight" it does indeed describe the investment process for a Macro trade in some detail (while focusing on the JPY).

The least one can take out of the below article is that the process is research intensive and requires input from various disciplines from economics and statistics to politics and psychology. Finding the trade ('Trade Entry'), 'Risk Management' and 'Portfolio Construction' are the most important factors to consider in making investment decisions.

Let me draw your attention also to the fact that all aspects of the trade including exit, position reduction, position increases are determined BEFORE the trade is implemented. In other words the 'excitement' that some investors seek cannot be found here.

It really is all about being the Casino, not the Gambler!

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Into the Mind of a Macro Manager – with Archbridge Capital

on July 30, 2013 · Leave a Comment

http://www.hedgefundinsight.org/into-the-mind-of-a-macro-manager-with-archbridge-capital/

By Hakan Kocayusufpasaoglu, CIO of Archbridge Capital, with an introduction by Simon Kerr

Introduction

Some hedge fund strategies are more difficult to engage with than others. Most investors could understand what equity hedge funds do, but other strategies can be difficult (like volatility arbitrage) or just opaque (like most high end CTAs). Global macro investing, one of the original hedge fund strategies, has a whiff of mystery about it – how do those “Masters of the Universe” read global flows and politics and market dynamics inside one brain? Hedge Fund Insight asked Hakan Kocayusufpasaoglu, CIO of Archbridge Capital, to go through an example of a position from idea generation to implementation. Here is how he develops his trade ideas.

Reading the Global Economy

8.30 am, October 2012, A rainy day in the office. Like everyday it is time to make sense of the vast array of data that is released daily and informs us of the wellbeing of our global economy. Each country’s health matters and has a substantial effect on the financial markets. Like detectives traders evaluate each market in order to understand what discrepancies exist between their view of the world and what the financial markets are pricing; the markets’ view of the world. Questions like: Will the eurozone exit its recession? Is China going to slowdown? Will US economic growth continue? and how will that affect the financial markets? require thorough and ongoing analysis of macroeconomic data. And the analysis starts with every morning.

Our proprietary forward indicators for the US are strong, showing a decent recovery for the US markets. Again budget talks in the news. About time that they agree finally, since we already know they will not let the USA go bankrupt simply because Congress does not agree an increase to the budget numbers.

Hakan H. Kocayusufpasaoglu CIO

Best to fade that part of the newsreel. Bloomberg has plenty of other news stories of interest. Getting back to our daily analysis of the world. Our proprietary and faithful overnight system breaks down the economies of the world into indicators that we like following and also updates our proprietary indicators nightly so that we have our own forward looking guidance and a decent opinion about where we are for each defined economic region in the business cycle. Let us see what 'Inspector Gadget' (yes, our proprietary system has a nickname, which in this case was given because it can do so many things, from relative value analysis to macroeconomic story building) has to say about Euroland. Overall nothing positive to report except that there seems to be a small break-up risk compared to last year. But the overall economy - verdict: recession.

Turning to Japan, hmmm, a more interesting, but pessimistic outlook: disaster! Savings rates are diminished substantially, some months even worse than the USA (and the US consumer is not known for its propensity to save). Trade deficits are occurring frequently in Japan. (Isn't the Japanese economy supposed to survive on exports?) Suzuki is going bankrupt in the USA (ie the US division of Suzuki) citing high Yen levels. With Japan's debt levels at 200+ % - this country will hit a wall. And what happens then? The only viable thing is for the exchange rate to depreciate as it happens with all countries that hit a wall. This is getting interesting especially since the Yen has been made much stronger since the ‘08 crisis and has remained strong till today. This needs further investigation!

The Japanese Situation Commands Attention

Japanese GDP in 2011 was negative, while in 2012 only the first two quarters were strong (and clearly coming from a low base) and the third quarter was near zero growth. And all these real GDP numbers are bolstered up due the rampant deflation that has been plaguing Japan for more than a decade. Deflation nationwide was still around 1%, excluding food and energy.

What a country - with anaemic growth rates, an ageing population which has been propped up for years on government stimulus which has driven countries debt to GDP to above 230% (today more like 250%) - it is impressive if one thinks about it.

In contrast Greece is rolling over and having to be bailed out when their debt to GDP is exceeding 130% of GDP and here we have a country which for years has had deflation, anaemic growth but a strong credit and bond market with a AA- rating all the while having debt levels which would have caused any european country to default! How can this be?

Having analysed countries, including Japan, for over a decade and a half I know that this is due to a uniquely Japanese situation. Around 90% of all issued bonds are in the hands of domestic investors: it is their conservative nature and their ageing population of savers that is enabling such a large debt level to exist without causing the country to default on its debt. Deflation, however harmful to an economy's growth rates, has meant that savers are rewarded and interest rates are kept low. In other words, debt servicing costs are tremendously low for years with the 10 year JGB rate at 0.25% for the last few years and savers getting rewarded in real terms for their savings. Imagine, then, that you are a saver. Why would you care that interest rates are very low if there is no inflation? In fact prices are falling every year, making the real purchasing power of your savings increase however low interest rates are (and nominal rates cannot go below zero).

So overall a very high savings rate has over the last decade or so financed the government’s debt levels, while exports have assured that economic growth, though anaemic has continued to grow and herewith has financed the governments injection programmes and debt levels. However, all of this should imply a relatively weak currency rate. Hmmm, but the yen has been bid up over the years since the 2008/9 crisis as it was considered a safe haven, while also conservative Japanese have repatriated their fortunes to the homeland and away from what they perceived as risky, foreign investments.

For a long while I was playing the thought of shorting the yen against pretty much all other currencies in the world, since at some stage the country had to simply give up. I never did, because for years there was no catalyst, exports were financing economic growth and savings were financing government expenditure and bond issuance. However now, for the first time since the 70's when the Japanese 'wunder' started emerging we are seeing that trade deficits are cropping up consistently, not just one month of data. Exports are suddenly not financing GDP growth anymore. The engine is stalling. At the same time savings rates are diminishing - the other engine is stalling. Japan must be hitting a wall soon. Especially now that the crisis and fear levels are abiding we have to think that the yen will finally weaken...Inspector Gadget you again did your trick, pointing us to the right direction of analysis.

Policy Implications of Macro Analysis

Now it is time to do a little further digging which should take an hour or two of ploughing through the data in a little more detail, now excitedly focusing on Japan. The day has been set: It is Japan research day! Hours feel like seconds, a blink of an eye but we are now confident from a macro-economic standpoint that the Yen will have to weaken, since there are no other choices. The macro economic theme is however only a starting point. Much more needs to be done before we can initiate a trade. But our radar is firmly on Japan.

Next let us explore more and more about the upcoming elections in Japan, they are still a few months away and the markets are not moving yet. In the back of my mind is continuously that these elections could be a catalyst? Perhaps.

After ploughing through the information of the opposing parties and understanding their platforms only one is standing out, one aggressive party proposal which in effect is running on the economy and realises that Japan will not be able to survive unless a ‘full throttle’ approach is implemented. If this party were to be elected, then Japan would be in essence doing what the US has done to wave off a depression in 2008/09 (and quite successfully we might add.).

Calculate the Impact of Policy Change on the Economy

The numbers are being crunched and the numbers are mind-boggling. If Japan were to do this, if this party was to be elected then money would in essence be pumped into the economy in such unprecedented quantities that this would be the single largest monetary experiment of all time, even overshadowing the US experiment (which in essence was not an experiment, since it was a repeat of what was done after the Great Depression, without waiting for the depression to arrive. Bernanke learned well.) But in Japan this strategy would have to be employed to finally get out of a decade long deflation which is slowly but surely killing the economy. If his party came to power then Japan would have a fighting chance, in essence it would be like giving a dying patient electro shocks to bring him back to life. How amazing would that be. Then the Yen would weaken beyond our wildest dreams…could this happen? How likely was it that Abe could get elected? How likely that he would push these reforms and succeed? Glancing out the window into a dark rainy night, was it evening already? All I could think about was Japan.

Yen Debasement

Now that we had structural reasons for the yen to weaken over time, we now had a potential catalyst that could make this happen very quickly and cause the trade to go into the stratosphere. Game on: further analysis now on the likelihood of Abe coming to power.

I remember Abe, he was an unpopular president of Japan for a short while in years past. Well, I guess that means he understands politics and could make things happen. But wasn't he a traditionalist, a conservative? Ah well, perhaps not the best catalyst. But let us wait for the further research on the parties, the inside political track which I will receive this evening via email. Now it is time to let the team in on this exciting new development and see if anyone can find a chip in the armour.

Monetary base/debt ratio differential (US vs Japan) & USD/JPY

The rest of the day passes - I can think of few other things but this research, scenarios swirling through my mind. What if he is the real thing, and if he is, then he can change the Bank of Japan governor, he can in effect implement change immediately. Is his plan to be believed? Finally I get the report - I devour the 50 pages or so in minutes. Or what felt like minutes. It looks as if not only has Abe used his time out of office well in developing his views, but it does look as if he is serious, as if he really does want to implement the largest monetary injection in history and push Japan out of deflation. He could be Japan's economic saviour of sorts. And yes I was right about the appointment time of the BOJ governor which is in the first half of 2013. Well it is only October 2012, so plenty of time for him to get settled, initiate his programme and get the BOJ on board. If the BOJ is unwilling he can change the members of the BOJ to more like-minded people. This could really work.

Now to the last pages with early poll results and demographic responses. It does look as if Abe has hit a chord with the younger population of Japan. Great. But with an ageing population let us see how he tracks there. Hmmm, better than expected but could be stronger. Well he has another few months and being a seasoned politician he could pull this off and win overwhelmingly.

Co-Opting External Expertise

Now with our economic view in place and a decent understanding of the elections it is time to talk to our political consultant, who works for Her Majesty’s civil service. One phone call to schedule an appropriate time and one call to gain all the political insight. Perhaps I am missing something. If only sleep was not required and I could call right now. But it is the middle of the night and I am getting a little tired – looking at the watch I realised I had been working for 16 hours straight! No wonder I feel tired and hungry. Best to hit the hay and get up refreshed and run all systems again. Make sure I have not missed anything, before talking with our political expert.

Scoring the Drivers of the Market

Finally, 8.30 again, I jump onto my seat and open “Inspector Gadget”. This time I am more concerned with the main drivers of FX especially pertinent for JPY vs the US$ – I investigate all correlations and the usual drivers I have selected over the last decade plus years of investigating foreign exchange movements (including interest rate differentials, current account, balance sheet differentials etc etc etc the list is long, I look at all of them and rate them. Then, finally, I focus on our proprietary top 5 driver score list. I do not want to miss anything.) I also look at traditional indicators like Purchasing Power Parity and overvalued/undervalued indicators (even though a currency can stubbornly go against such indicators for very long periods of time) as well as even the big mac index. All point to a similar story: the yen is overvalued by far, that is it is far away from fair value.

I have over the years analysed different country’s economic situations so often that I have developed my own way of looking at a country’s most important factors via my own indicators and in a certain order. That way I can obtain an understanding of a country’s current situation and its forward bias relatively quickly. Inspector Gadget gives this to me by downloading the raw macroeconomic data and presenting it to me in ‘story’ like fashion. I go over the Japan ‘story’ again and come up with the same conclusions I had not missed a thing. So overall the macroeconomic story is pointing to a Japan that without intervention will hit a wall and structurally the yen should start to weaken; but if a newly elected party wanted to kick-start economic growth in Japan they would have to weaken the yen quickly and aggressively, while holding debt service costs low; and perhaps engineering some inflationary expectations and get out of this deflationary rut. Although I have my doubts about being able to engineer sustainable inflation via these policies (since that would require continuous devaluations of 10-15% per annum, since a one-off yen level change would only achieve temporary inflation) it simply does not matter, perhaps ultimate success for Japan may not be possible, but the only way to try was to weaken the yen substantially and continuously.

Monetary Base (Jan 2008=100)

Sources: Thomson Datastream, Federal Reserve and Bank of Japan

A Potential Catalyst

The FX drivers and value analysis are all pointing to a weaker yen. There is a potential catalyst which would mean a much weaker Yen, faster, and driven by immediate monetary action. And the Yen is not moving. Still hanging around the 78-80 range. I cannot wait for the 15.00 telephone conversation to confirm the political side of the trade.

The conversation lasts for an hour and confirms all our assumptions: Abe will win and he will implement his plans. The firmest answers I have heard from our consultant to date. It is the real thing. My excitement is rising. But patience. Now it is time to get the market feel by talking to some large FX traders in the market.

Yep, all traders are non-commital and nobody is hugely positioned. Great!

Back to inspector gadget who will give us the statistics on the Yen futures positions IMM, CFTC – overall no bias confirming what the traders had told me. (This being FX the largest market in the world and mainly done over the counter it is worthwhile getting an idea of positioning from the actual traders, since published stats about positions are not conclusive enough). It is as if the market is still in shock that the Yen is this strong at the moment and cannot get weaker. A phenomena called ‘anchoring’ – a price level is somehow perceived as a ‘normal’ level and people have difficulty in imagining it ever changing again. But we know better don’t we.

Timing the Markets

Now it is time to consult our systems for market timing. These systems consist of 5 different proprietary technical systems, some trend following, some pattern recognition and some swing systems, which make money in their own right over time. These tools for us are used for market timing. Once a conclusive analysis has been conducted, that looks into the macro, flow and drivers of the underlying, market tone, positioning, possible catalyst, volatility levels and option prices we would consult our timing systems, affectionately called ‘Tom and Jerry’ for just that: timing.

Tom & Jerry is not involved in the trade yet. There is still time. The market seems currently uninterested and we seem to be early in our conclusions. Other news and events, position management and trades overshadow the rest of the day.

At night, however, I read only reports about Japan and see differing view points. Smiling at various analysis – how much easier life is since we developed Inspector Gadget, who gives us all the information that we find in any of these reports but in a way that I can easily digest. All at your fingertips. The upshot of all I read: confirming all our assumptions. We are definitely onto something!

Risk Management Begins with Instrument Selection

Now it is time to analyse which instruments to utilise for this trade once the time comes (and the time comes with Tom & Jerry as our guide, since we would only enter in a trade like this when it has already started moving in our favour, with a predetermined stop).

Choice of instrument: Volatility (vol) is low across markets on all FX instruments. If what we are thinking should occur then vol will be getting bid very quickly to higher levels from the current 5% or so. Options seem a good way to go. We look at options and the underlying for our trade and decide on a mix.

We analyse the mix as it would fit into our portfolio: correlations with our other positions, sensitivity analysis and positions sizing. We enter our confidence levels into our matrix and conduct our ‘when to reduce position size’ analysis.

This is a two step process, where we a) stack our arguments and discuss how we have to reduce our positions if each block falls away and b) how much we need to reduce if our risk blocks materialise. This is irrespective of price move, a high level risk analysis (though it must be said that if any of our fears materialise we would expect some price response).

Then we conduct a risk analysis based on price and volatility. We set our stops, we set our trailing stops if the trade should move in our favour and we set our ‘soft’ risk analysis matrix on top. We are set. Ready to put on the trade. But we wait.

Trade Execution and Maintenance

We wait. We wait, each day looking at Tom and Jerry for our entry point. Doing our daily analysis of the macroeconomic world, then the demand-supply analysis of commodities we analyse and relative value trades we follow. We evaluate new data and set our scenarios for what we think will happen next and search for discrepancies across the globe. All the while glancing at the Yen.

Finally, early November the time has arrived, we get signals from Tom and Jerry. The overall Macro story fully intact and even more likely for Abe’s party to win and implement change.

All else is already set, analysed, predetermined and mechanical, we know our risk before we enter and our overall portfolio performance with this additional trade; from now on it is really more mechanical. Our execution trader gets the go-ahead with all relevant parameters: we are now involved.

The seeds have been sown, now it is in fact a mechanical exercise: whenever a risk materialises we mark it in our matrix. If enough items are marked a certain predetermined action will be taken (like increase the position or reduce the position). We move our stops higher in line with the price move and volatility indicators. We continue to ride this position all the way to 103. Then one of our pre-determined risk factors occurs and we mechanically reduce the position by half and finally cut the position. Our entry point at 82. Our exit 102.25. It turns out to be a successful trade!

Being the Casino, Not the Gambler

But many do not turn out the same way. A lot of time and effort is wasted on analysis and more analysis only to wait for the ‘perfect’ timing to only watch your exit stop getting hit within the first weeks of the trade. But since we analyse trades where we risk 1% but make a minimum of 2% if we win the odds are clearly stacked in our favour, especially since we try to pick trades with a better than 50:50 hit rate, which is much harder than people think! Overall our research intensive process assists us in keeping a high ‘hit ratio’ and finding good risk:reward trades of 2:1 or 3:1. Combined with strong risk management and diversification across both asset classes and strategies of relative value and fat tail trades, we manage to achieve our strong statistics to date: a sharpe ratio above 2 and two digit returns with 17% year to date.

Questions are the start of any analysis and many end in further research which proves them wrong, but then there are some, which upon further research stand out as solid trading opportunities, worth investing in. The short Yen trade was one of them.

Archbridge Capital AG is based in Zug Switzerland.

To contact Archbridge Capital please email: info@archbridge-capital.com

Our widely read research notes are available on our website under ‘Research’ Website: www.archbridge-capital.com

Press Snips

2013-07-23T15:43:00.001+01:00

Below we talk a little about the oil markets and summarize our view that these high gasoline prices are unsustainable, while QE tapering will assist on putting pressure onto the oil complex. This article was also published in "The Oil Drum".

----CLICKING ON THE LOGO ABOVE WILL TAKE YOU TO OUR WEBSITE----

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From Bloomberg News:

Crude Declines before Bernanke Testimony

17th of July 2013

By Grant Smith & Ben Sharples

“People are going to realize that tapering of quantitative easing is on the cards, and there is not going to be an escape from this” said Hakan Kocayusufpasaoglu, chief investment officer at Archbridge Capital AG, a Zug, Switzerland-based hedge fund. “That will probably strengthen the dollar and, although crude has rallied lately on supply issues, it will put pressure on the oil market.”

http://www.bloomberg.com/news/2013-07-16/wti-trades-near-two-day-low-as-chart-shows-unsustainable-gains.html