Trades, Ideas, Discussion

Nimble exit on Silver yday, story names in focus

2012-07-18T14:38:00.001+01:00

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

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

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

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

75% flat, up 4.4% this July.

CEDC rallies

2012-07-09T18:57:00.001+01:00

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

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

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

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

Friday Roundup

2012-07-06T16:35:00.001+01:00

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

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

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

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

ECB and BoE decision previews

2012-07-05T10:29:00.001+01:00

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

Following last week's changes to ECB collateral eligibility that affect ABS (which is in itself credit easing), it is likely that the ECB will be able to cut rates today in line with expectations. The reason for not moving in June was simply not to take the pressure off EU leaders to get a deal of some type done. The Summit result was a step in the right direction as far as the ECB are concerned, and has been broadly applauded by Draghi already.

As such, the ECB can now react to the recessionary conditions and lower inflation risks knowing also that a failure to ease would undermine the improvement seen post Summit. We expect the ECB to ease by 25bp on the refi rate, but we think there is scope for a 50bp easing too. At the margins the probability of a 50bp easing has risen given that the ABS collateral easing was offset, as far as ECB balance sheet risks are concerned, with a tighter framework for government guaranteed bonds which should please the Bundesbank, if such a thing is possible. The deposit rate should also be cut to perhaps 10bp or so, rather than zero, to keep money markets functioning.

The prospect of much lower EONIA rates rests on a deposit rate cut, and while this is highly feasible, the arguments for and against boil down to technical factors in keeping money market funds and OTC markets functioning rather than macroeconomic factors.

Is another LTRO on the cards today?Collateral changes announced over the past two weeks could suggest that something is brewing at the ECB with regards to non-standard measures. As highlighted earlier, the ECB should reward the summit with easing, but another LTRO would in our view be a step too far at this juncture because:

It would take significant pressure off European policymakers where the moral hazard risk is still material; basically a view that politicians need a foot on the throat to get on with required reforms;
Bank liquidity needs are covered for this year, meaning that the bank funding argument is not strong yet;
One of the positive steps taken at the summit was to weaken the sovereigns-banks nexus and another LTRO would make markets more sceptical medium term about the effectiveness of that policy action;
The transmission mechanism remains dysfunctional and the weak credit demand makes the argument for further liquidity for lending even less compelling; and
Results of the next Bank Lending Survey will be seen at the end of this month, so there is something of an information vacuum on the size of the malfunctioning within the transmission mechanism.

Long Silver, Long CEDC no hedge in place - as risk bullish as we've been in all of 2012 so far.

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

2012-07-04T14:39:00.002+01:00

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

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

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

Investment Highlights

Near zero prospect spend, R&D related to existing assetsLinn generates the vast majority of its income from mature wells and fields. Their advantage here comes from a relatively comfortable cash position, far better than most rivals who are being forced to dispose of assets as inventory (oil, nat gas) prices plummet. Indeed, it must also be mentioned that they employ around 50 staff to oversee asset integration constantly, so there is considerable pressure to uphold this turnover.
Linn employ a proprietary engineering (fracking) method.
These details are clearly beyond the scope of a stock summary. In the Granite/Akota wash Stratigraphy Linn has completed wells in 6 seperate zone. This has efficiency implications of up to 20% on, for example, their new acquisition of BP's Kansas Hugoton Field for $1.2bn
The only Oil & Gas company to be >100% hedged to product priceDepending on your view, this could be seen as a positive or a negative. For me, it is a very bold and encouraging step to declare: "we will take a Nat Gas price of $4 and still be profitable". Fixed prices also allow predictability of cash flows, lower liability costs. For Linn, the most profitable outcome is actually a $0 oil/gas price - would allow them to soak up more assets as stress cripples other big, established firms.

Here is the last 2 years price action.

Watch this space.

Thursday ECB decision, July Preview

2012-07-02T17:05:00.002+01:00

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

The ECB rate decision on Thursday has clearly dominated the days action with EURUSD down around 80pips and equities up around 1% generically - a strange twist given that these markets tend to trade in tandem. A cut in rates is therefore priced in: risk positive, currency negative. We expect today's correlation 'regime' to break down tomorrow as markets recalibrate.

Silver has also rallied against the EURUSD - abnormal as a stronger USD tends to dampen support for dollar assets. A similar explanation to the above persists here: a cut in rates leads to cheap money that precious metals will inveitably soak up to some extent.

July Preview:

1 July: Cyprus becomes EU President. Cyprus will resume the six-month rotating presidency of the EU.
4 July: Merkel to meet Monti in Rome.
5 July: ECB Governing Council meeting, followed by interest rate announcement and news conference. We expect a 25bp policy interest rate cut. The ECB may be reluctant to cut the deposit rate to zero. With easier collateral rules already announced on 22 June and the next Bank Lending Survey not due until 2 July, the policy moves on 5 July could be restricted to the cut in interest rates.
5 July: Spain auction. Bonds.
9-10 July: Eurogroup/ECOFIN finance ministers meeting. 9 July is to be the start date for ESM, successor to EFSF. This is also the date on which the Eurogroup is to formally approve the MoU on Spanish bank recapitalisation aid. Additionally, we might get more clarity on the interest rate charge that will come with the capital injection and on the duration of the loan.
10 July: Greece auction. Bills.
12 July: Italy auction. Bills.
13 July: Italy auction. Bonds.
17 July: Spain auction. Bills.
17 July: Greece auction. Bills.
19 July: Spain auction. Bonds.
24 July: Spain auction. Bills.
25 July: ECB lending survey. The ECB is due to publish its third lending survey of the year on Wednesday 25 July. The survey could provide the ECB with a key piece of evidence to justify additional 3Y LTROs — if lending standards tighten again, another liquidity push may be necessary to avert a harsher credit crunch. The ECB plans to publish one more lending survey this year, on 31 October.
26 July: Italy auction. Bonds.
27 July: Italy auction. Bills.
30 July: Italy auction. Bonds.

Active trading Resumes: Silver, CEDC

2012-07-01T15:44:00.000+01:00

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

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

Promises are never thin on the ground with EU Summits, but rarely does the market believe them. Thursday/Friday deviated from the usual "Buy the rumour, Sell the fact" truism in that we did actually get a nice big policy-driven rally. For us, the key difference was a very subtle regime shift: Germany has agreed to let Spain be another "exception" (like Greece) to the rules and as a result, it is now more and more inbedded in the European psyche that German unsterilized bailouts will always be a fail-safe backstop.

In short, Merkel appears to have saved the day for Spanish banks with ESM cash underpinned by, at best, moderately punitive conditions.

SILVER
Clearly, our base case scenario for gains in Silver has materialised. Exposure to inflationary policy was one of the key drivers behind this high conviction long and the market has seen the ESM decision as just that. XAGUSD (Silver in USD) increased by 7% approximately from a low 26 handle to the high 27s.

We averaged in to our position down to 26.12 with an aggregate mean of 26.84, losing a few trades to stops as Silver plummeted - the speculating market was heavily net long above 28 and we saw a textbook 'squeeze and puke'. The technicals were firmly against us early last week and we downsized appropriately, noting also that Gold was still some way off its equivalent support level.
Hinsight is 20x20 - prudence should not be regretted.

Profits were taken after the news in decent size and we are left about 1/3 long Silver with unrealised profits of 2-3% MTM.

CEDC
We bought stock in this company at 3c with half of our allowable capital for a single name - we will buy more if the price creeps lower to our stop level of 1.90c (allowing for a possible round number bounce at 2c). The position is hedged vs S&P (post a comment for more details).

Trade rationale here is very simple indeed, it reflects our push for convex R/Rs:

The bonds popped 5pts on Monday after the "strategic alliance" with Russian
Standard was announced, easing immediate liquidity concerns. We expect further
upside as real money reassess the name and other banks turn credit positive.

Further Catalysts
- Management inadequacies have dogged this name in the last few years. The
addition of Roustam Tariko is a major positive given his success in developing
Russian standard into the number one premium vodka brand (50% mkt share).
- RS could own 28% of CEDC equity. Also, RS has a right of first refusal on
any proposed transfer >25% of stock owned by William Carey. Credit +ve as
may signal an eventual resignation of Carey and RS' appetite for more stock in
the co.

Much of the immediate strength in the name has arisen from the easing of
liquidity concerns as RS has injected cash to repay the 2013 convert. The only
players have been fast money (short covering) and the street (fading the rally).

Welcome back! JF hits the ground running with long Silver

2012-06-17T22:34:00.000+01:00

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

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

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

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

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

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

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

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

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

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

JF pays down 2.8% to Investors over 2 months

2012-03-22T17:13:00.001+00:00

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

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

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

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

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

Greek Debt Swap: Week Round Up

2012-03-14T13:02:00.000+00:00

(3rd March to 9th March 2012)

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

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

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

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

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

Author Details

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

Risk performs as Greece stays contained.. We bought Silver

2012-03-08T16:13:00.002+00:00

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

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

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

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

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

Profit Cystallizes on our EURUSD put. Did you follow?

2012-03-06T16:30:00.002+00:00

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

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

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

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

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

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

JF Capital Monthly Report February 2012

2012-03-04T21:46:00.000+00:00

Monthly Report February 2012

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

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

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

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

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

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

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

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

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

Summary

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

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

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

Author Details

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

TRADE ALERT: After 1 Month+, We Exit USDJPY

2012-03-02T14:40:00.002+00:00

It's been emotional.

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

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

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

Thanks for the Alpha,

JF

Trading Update, Is Gold A Bubble

2012-03-02T10:36:00.001+00:00

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

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

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

For the sceptics, click to enlarge:

LTRO Preview: SKEW

2012-02-29T10:13:00.002+00:00

The LTRO 2 is the iPad 3 of the financial markets. Everyone thinks they have an inside scoop, everyone has an opinion and everyone is pinning their hopes on a good release.

But what exactly is a "good release"? We have reached a few conclusions.

1. Given the vast differences in opinion in the market, we cannot place a consensus on any data point other than that between EUR400bn and EUR550bn is likely the "goldilocks" level and would be moderately bullish for risk.

2. A result of conclusion 1. is that we cannot position directionally outright.

3. However, this is not to say that we anticipate a simple binomial event. Indeed, we believe there to be significant skew in expectation, dragging us into a moderately bearish stance as all technicals and "canaries in the coal mine" point to a thin market that can be catalysed easily to the downside.

Taking 1.,2. and 3. into account we have bought EURUSD puts, strike 1.31, at a cost of a meagre 25pips reflecting our view that an outlying number in either direction is not priced into volatility and could trigger a domino sell off.

Paying heed to the upside, we have kept this cost to a minimum and assign a 20% p(success) with an average of a 200pip gain.

E(trade) = 0.2*200 - 0.8*25 = +20pips

John Embry on Gold

2012-02-17T15:38:00.005+00:00

John Embry, the chief investment strategist at Sprott Asset Management, talks, in this reprinted interview with Matterhorn Asset Management, about the motives and the means of certain interests to prevent a free gold market; tells the reason why the gold price will remain high; shows the opportunities in silver; and explains: “Gold is about the furthest thing from a bubble that I can think of."

Read on for more.

What has the evidence been that the gold market isn’t a free market?
John Embry: Our report which was written 7 ½ years ago revealed all sorts of chicanery in the gold market and we only used evidence which could be corroborated. Considerable additional evidence has piled up subsequently but two smoking guns are the repetitive counter intuitive price action and evidence of widespread clandestine leasing of western central bank gold.
Who are the ones that don’t like a free gold market and which objectives do they have in mind by preventing a free gold market?
John Embry: The western governments, their central banks and the allied bullion banks are the culprits. They view gold as a mortal enemy of the fiat currency system. Gold has been real money for centuries and every paper money system in history has ultimately collapsed. This drives them to continuously denigrate and manipulate gold.
Through which tools is the gold price “managed“?
John Embry: The worst damage occurs in the so-called paper gold market where derivatives, naked shorting, vicious margin hikes, etc. are employed to fleece the long side who don’t have as deep pockets. In addition, the western central banks have supplied the physical gold necessary to effect the plan through their leasing.
Recently, I was told by a former chairman of the Federal Reserve, Paul A. Volcker, that to his best knowledge “the U.S. has not intervened in the gold market for more than 40 years.“ (2) Do you think Mr. Volcker has the truth on his side?
John Embry: Mr. Volcker admitted that the U.S. had made a mistake by not intervening at one point in the gold market some 40 years, so to think that nothing has happened subsequently is extremely naïve. Technically he might be correct in the sense that swaps could have been employed and the intervention using U.S. gold could have been conducted by another party. Recently retired Fed Governor Kevin Warsh acknowledged U.S. gold swaps in correspondence with GATA just last year. (3)
Furthermore, Mr. Volcker seemed to suggest that central banks have some interest in the price of gold because of its effect on the currency markets. (4) What kind of relationship does exist between gold and the currency markets which are much bigger than the gold market?
John Embry: Very simple. Gold is a currency. Arguably it is the ultimate currency and the central bankers are acutely aware of this fact. Gold’s role as currency is once again coming to the fore and the central bankers hate that fact.
Are gold swap arrangements between central banks a) important for the “management“ of the gold price, and b) do they represent a means of intervention in the gold market?
John Embry: They are most certainly important because it allows central bankers to technically tell the truth because it is always another central bank that is utilizing the swapped gold to intervene in the market. It is a subterfuge.
Do you think the Western central banks have as much gold as they claim they have?
John Embry: I strongly suspect that they have materially less than they try to represent. The IMF permits a one line entry on their balance sheets which aggregates physical gold with gold receivables. That’s ridiculous and it is done to deceive analysts. For example, if the Americans had the 8,161 tonnes that they say they have, they would be delighted to submit to an outside audit and shut their detractors up. However, they stonewall all requests.
With its “QE to infinity“ program: would you say the Fed has exposed itself in a way as a hardcore goldbug entity?
John Embry: I believe they are fully aware of the extent to which they are debasing their money. We, the public, have to be the hardcore gold bugs to protect our wealth from their depredations.
It seems as if more and more gold is moving towards certain central banks and not away from them. Is this a solid assurance that the gold price will remain high?
John Embry: I believe so. The eastern central banks (China, Russia, et al) have accumulated a lot of dollars and realize they are at risk. Ergo, they buy gold. At the same time, I think the western central banks have run their inventories down to levels beyond which they won’t go. Thus, I think central banks collective gold buying will have a salutary impact on the price going forward.
In the event of another market meltdown, which seems rather likely, do you expect a sell-off in gold?
John Embry: There could be a minor sell-off just because there are so many algorhythyms influencing the market. It would be short lived because big money in the world now knows they need gold for protection.
Gold is in a bull market for ten years now. So an increasing number of people say it is in a bubble. Why would you say, in Gershwin’s words, “it ain’t necessarily so“?
John Embry: Gold’s price is directly related to the constant debasement of the currencies in which it is denominated. The creation of new paper money is dwarfing the amount of gold available. Gold is about the furthest thing from a bubble that I can think of.
What do you think in particular about Warren Buffett’s constant “Gold is in a bubble, I go for stocks“ talk? Does he serve here as an influential opinion maker in a specific role because he gets a lot of public attention? In other words: is he a fool or does he only act like a fool? (5)
John Embry: Warren Buffet sold out a long time ago. It’s too bad because he was a great stock picker once. Now he owns insurance companies, Wells Fargo and was a buyer of Goldman Sachs and G.E. in the global financial crisis. He is a member of the American establishment and has a lot to lose. He should have listened to his father Howard Buffett who was a U.S. Congressman and a true “hard money” advocate.
In your view, gold will gain in importance as a monetary asset in the years ahead, likely regaining an official role in the world’s financial system. Why do you think so?
John Embry: I think that the current financial system, as we know it, will be totally destroyed, probably sooner rather than later. The next system will require gold backing to have any legitimacy. This has happened many times in history.
The mining stocks both in gold and silver seem to me extremely undervalued. Do you agree?
John Embry: They are indeed, and they are being heavily manipulated by the same entities active in suppressing the gold price. In addition, many nefarious hedge funds now are active on the short side. The U.S. financial scene has become a total cesspool.
Are there key levels in the XAU and HUI that one should pay attention to as starting points of a mining stock rally?
John Embry: I tend to pay more attention to the HUI because it is the pure gold index. When the HUI takes out the 555 level with gusto, I think we are away to the races. However, this level is being aggressively defended by the bad guys. A higher gold price (through $2000 per oz.) will rectify this issue.
Why are you at Sprott Asset MGMT so very bullish related to silver?
John Embry: We think the supply-demand equation is ultimately better than even that of gold. New industrial and medical uses are exploding and because silver is “poor man’s gold,” investment demand for silver will go crazy when gold gets priced out of the average citizen’s capacity to buy. Given the small size of the market and very limited inventory, the price should go ballistic.
For your physical silver ETF you want to re-acquire physical silver in a big way. Do you think you could be pioneers (for other fund managers) in direct engagement with mines through direct and forward transactions, instead of going to the Comex? You certainly don’t want to “whoop” the silver price by your own buying, correct?
John Embry: I think that is a potential avenue particularly when the supply-demand equation gets progressively tighter in the future.
Is the silver market also subject of surreptitious interventions?
John Embry: Without question. In many ways it may be worse because it is a smaller market and J.P. Morgan Chase’s activities have been egregious. The fact that the CFTC has been investigating this for nearly four years without resolution is one of the great jokes of all time.
What is your information: to which extent the US silver ETFs are short and how many stocks of those have been used for covering future short contracts?
John Embry: I believe that they are but I can’t provide any information on the extent. When the very same organizations that have manipulated the market for years act as custodians for the ETF’s, it would be wise to be wary.
One highly interesting issue for me personally is the point in time when the Middle East countries will no longer sell their oil and natural gas for paper money. When do you think they will be paid for it with precious metals?
John Embry: I suspect this whole phenomenon could occur very quickly. When confidence in paper money is lost and I think we are rapidly approaching that moment, something like that would undoubtedly come to pass.
How do you think about the conflict around Iran viewed from a perspective of the petrodollar?
John Embry: The whole Iranian issue is very disturbing and I think the U.S ‘s motives might have more to do with the petrodollar than Iran’s nuclear ambitions.
One final question. IF the financial system goes under, one can expect massive supply shortfalls and disruptions in goods and services, particularly in the energy sector. Would you recommend to our readers to take precautions for such a scenario instead of hoping for the best outcome of the global financial crisis?
John Embry: Unfortunately yes. I am a great believer in cognitive dissonance. Most individuals don’t want to face the truth, particularly if it is very unpleasant. Those that do not suffer from this condition should take precautions because the world situation is presently very dangerous

Trade Flash: We bought more XAUUSD

2012-02-16T18:34:00.000+00:00

Long 1 Unit XAUUSD (Gold in USD holding now 3 Units) at spike down to 1707, essentially transferring more of our weight to XAUEUR from EURUSD as volatility surrounding the Greek bailout/election dominates price action.

This positioning is also consistent with our flagship strategy of (re-)averaging into a sizeable Gold holding having already profited considerably during the "inflation bull market" of Jan '12. We remain convinced that in a global currency war (read fiat money print) commodities are the most likely to benefit.. Indeed precious metals are proven stores of value in the new "paranormal" market environment.

We expect also to build up an XAG (Silver) position so as to be more hedged from the more idiosyncratic yellow-metal phenomena, such as the ETF and futures market technicals.

Trade Flash: Partial Exit of USDJPY EURUSD and Gold

2012-02-15T16:25:00.002+00:00

Exited 2/3rds USDJPY at an average of 78.46... +156pips average (having waited for the further move at on US time)
Exited 2/3rd EURUSD at an average of 1.3098... +88pips average

Exited 1/3rd XAUUSD (Gold) at an average of 1733 +6 points average

We did not expect all of these trades to make money, such is the business of hedging. This unnerves us as USDJPY has begun to correlate with risk assets (rationale being that the Dollar is more exposed to Europe, the only driver of risk in these markets, than the Yen), not an eventuality we had prepared for ab initia.

Still, we sit on a net position of long XAUEUR and long USDJPY - something we are very comfortable with since not only are our friends in Japan finally throwing their weight around with decent size and conviction, but also the EUR is looking particularly rich as conditions in Greece worsen daily. We are well overdue a pullback, however shortlived.

I would also recommend a tight stop on the EURUSD - any news of Greek EMU exit could well rip this to the upside as investors finally shake off the shackles.

BoJ injects JPY10trn - our NAV only jumps by 0.5%

2012-02-14T10:39:00.002+00:00

The market reaction to last nights announcement of massive Yen QE is absolutely absurd. A meagre +40pips on the USDJPY prices in only a fraction of the 10trn + commitment to 1% sustained inflation.

Plus, it's not as if these are idle threats. If the past is any indication of the future, the BoJ will likely follow these indications to the letter and buy any amount of JGBs. Indeed - in setting such a clear cut goal as inflation targting, the Ministers' hands are tied not only in writing but also by the stubborn Japanese culture that has seen the Bank fight the market over the last decade. We finally add the BoJ to the list of countless central banks that are in the process of performing unprecented money printing - swelling in size and crowding out private markets in the process.

Having undergone considerable pain in this short JPY trade, first initiated on 27th Jan, it is tempting to take off the entire position now and bank the gains. However, we shall patiently wait for the US open today and expect the full move to become apparent. If not, a pullback may be on the cards as strong resistance at 78.20 is felt.

We remain short of EURUSD and long of XAUUSD (Gold).

Sold EURUSD at 1.3204 to Hedge The Big Greek Problem

2012-02-10T16:56:00.001+00:00

Having exited our S&P hedge earlier this week, our positioning would have been totally derailed by this "shock" rejection of the bailout package from the Greek LAOS were it not for our trusty USDJPY long, posting more gains as Japan comes to terms with its rapidly imploding economy.

Gold has pulled back and we have added to our position at 1705. As the post title describes, we shorted some EURUSD after the main move down to 1.32 to mitigate further risk out of Europe and this has proven wise as raging riots in Athens have caused the Euro to depreciate to a low of 1.3157 vs USD.

The rumour mill among traders is rife with many believing that this could well be the catalyst we described yesterday to snap the market back a few notches.

Pull out the garden scissors, protect your precious assets with something skewed and juicy.

LTRO support.. But we approach Major Technical Resistance? Market Ahead of Itself?

2012-02-09T16:45:00.000+00:00

Feast your eyes on these two charts. On the left hand side, we have the S&P - tiptoeing up to July's high of 1356.48. On the right, the FTSE 100, already in a strong resistance show from 2007-2010 downtrend as indicated by the sloping TL.

Both of these represent an obvious market turning-point. One that, in most situations, would be grounds for a bet on reversal and risk-off catalyst. However, we have a well bid market, with inflationary support from the LTRO and early year technicals (real money accounts sitting on piles of cash and lagging behind the index) that are set to continue at least until the 28th of Feb (by now this date should be etched in every trader's head as the date of the 2nd LTRO).

We believe the market is ahead of itself. The path of least resistance from 01/01/2012 was a light rally into late Feb followed by a sell off as the hangover begins.

But pushing past 2011 highs will require more than a drifting market. One large shock in either direction and we will see a rebalancing and re-normalisation of price action as finally the low-volatility zombie market is forced to make real decisions.

For JF, however, the current trend suits (over 1% MTM up on the month already), a quite pleasant position to be in, but one that will need to be adjusted at some point in the next few weeks.

The Death of Market Volume

2012-02-07T15:58:00.000+00:00

The market in its current state - grinding higher on lower and lower volume - feels exactly like a very tightly wound spring, where each additional turn takes double the amount of effort and takes just one slip to unleash.

We exited our S&P short (at a slight profit), favouring a European index short in the future as the decouping trend remains defiant and we will see more downside on the CAC for example.

Gold is appreciating in USD and USD is appreciating in Yen - an odd state of affairs but we're not complaining!

Our key 2012 trade has always been long XAU/JPY and this is seems to be coming round after a week or so of melancholic action.

Summary of Today's Trades in Bullets

2012-02-03T17:08:00.000+00:00

Buy 2 Units of XAUUSD (Gold/USD) @ avg. price of 1739.
Sell 1 Unit of USDJPY @ 76.731
Short 1 Units of S&P @1341.78, Sell another @ 1349.5 SL @ 1358

Net we are Long XAU/JPY, Long USDJPY, Short S&P/JPY - NetNet we are short Yen and ready to take the pain!

Markets push on higher in thin volume as everyone waits for the turn...

2012-02-03T11:03:00.002+00:00

"Slow-motion" would be one way to describe price action in equities and FX at the moment.

Q3-4 2011 was defined by record volatility and headline risk. Q1 sees us stuck in 1st gear, grinding higher and higher with most market observers in disbelief at the sheer persistence of this technical trend in the face of largely unchanging EZ fundamentals. Free money for Momo funds and trend chasers - and we can only blame ourselves for expecting an imminent correction every week for the last 3 or 4.

We weren't alone in this belief. Whilst the Feb LTRO was (and is) expected to support the market in the short term, it defies logic that the long end (5yr+) of sovereign bonds and coroporate credit should also rally as hard. Considerable bets have been made that the LTRO is not a simple "kick-the-can" policy that will stare out economies into growing, but a real game-changer.

But most depressing is the unbelievable tear in Gold, which we called and were positioned for - unfortunately in not enough size as we took further fund injections. Our gains here are offset by our losses in JPY as the USD has weakened into the risk asset highs.

The turn will not only afford us more Gold but also support our flagging JPY trade - not low enough to cause intervention but not high enough to be pain-free. Testing times..