Greece, the IMF Trojan Horse and the 67-year-old Worker from Aaschen

Weekend is (generally) the perfect time to disconnect from the markets, to spend some time with family, friends and… to read tons of finance books, articles and magazines (I hope my wife won’t read this, otherwise I will need to make public apologies too…). Last Saturday, this is what I got in my mail box:

- One DVD from lovefilm.com, a DVD rental in the UK that sends you by post movies from your online selection. It reminds me that I was proposed a while ago to put some money in that company when it was seeking for investors, I just didn’t and the then small start-up has now a turn over of hundreds of millions… Ahh there are so many ways to make a small fortune but that's so difficult to just find ONE! No regret: the (sad) truth is I don’t know a thing about Venture Capital, neither about Capital Markets but at least I pretend to.

- The last release of “Bloomberg Markets”, their magazine. The cover says “the Richest Hedge funds – Top-ranked manager David Tepper returned 117% with bank stocks”. Pfff, this magazine is of no interest unless you want to see adverts for the latest Rolls-Royce, Aston Martin, the latest $40,000-watch that provides a better time, how to get the latest technical indicator developed by a Japanese guy with 25 centuries of experience based on 153 signals on your charts or found out whether David Tepper prefers vanilla or strawberries ice cream. Just put it on the pile of the unread “Bloomberg Markets”, all with their plastic wrap: to be recycled… I’ve asked recently to stop the home deliveries but I understood it takes several weeks…

- The latest release of “The Economist”, more interesting (actually maybe I find it more interesting because I ordered it…). One of the leaders this week is about Greece and the Euro-zone and follows last week’s articles that started showing a pretty Bearish view on the situation around. The point they have been raising since the “PIIGS” hits the news headlines is that the best solution would be an IMF intervention. I guess that for a lot of Europeans, the thing with an IMF intervention is not only the humiliation that the Euro-zone would then face (this said as I write, Greece 5Y CDS trades at around 360 bps while the ones on Mexico or Brazil trades around 130 bps showing the markets price less risk in the “Emerging” countries than in the old and “Developed” Europe, so where’s the pride?) but more the consequences of letting the American Trojan horse enters into the Hellenic republic : we all know what happened to Troy once they let it in … What an irony of History it would be : the revenge of Troy!

Other solutions (including the proposed rescue plan) that would keep the IMF Horse out of the European walls, would require the other Euro-zone countries, particularly Germany, to serve as a “deep pocket” for the whole region. As the Economist reports :“Germans wonder why a 67-year-old worker from Aachen must cough up so that an Athenian can retire early at 54”. Well, I’d say the answer is … for the sake of Growth, German Growth... What’s the interest to be in the Euro for Germany? And for Greece? On the one hand, for the latest, before things went bad, the main reason I can see is to get an access to cheap credit, which was used extensively… What about the reasons today? Well, I think the Hellenic Republic is losing progressively all the advantages to be in. On the other hand, the Euro has been providing Germany with a huge advantage: a weak currency (thanks to countries like Greece) that made it very competitive, boosting the exports and at the same time guaranteed that the fellow Euro countries but still competitors were not able to reduce the gap by depreciating their currency… I believe that for Germany, the Euro is worth defending at (almost) all cost and its weakness is a blessing: its strength in 2009 just killed German growth and the country lost its #1 exporter rank. Considering the single currency like a kind of average of the members “currencies”, weak countries in the union are necessary to maintain it weak. I think the 67-year-old worker from Aachen should do an additional effort, come on Man! After all, he, then a 47-year-old worker from Aachen, was already asked for a “sacrifice” in 1990 with the reunification of Germany when East Mark was exchanged for DeutscheMark at parity (for the first 4000 Marks then 2:1 after Chancellor Kohl won his “battle” against the Bundesbank), that’s just a question of habit…

Now let us leave these higher considerations to economists, central bankers, finance ministers and politics and come back to more materialistic thoughts about trading: The Economist is probably right, most of the gloomy articles about Europe are probably right, EVERYBODY is certainly right: things will probably go worse in Europe, Greece and others PIIGS after, there will be probably wave of downgrades, defaults, further stress on the Euro itself and tears … Consequently, we’re probably not so far from to the time to go back LONG. The question is to what extent all the bad news have been discounted in the markets so far? For me, The Economist giving a strong view and taking position may be the start of a contrarian signal. Now, as you know, I’ve been short the European stock index and have profited from most of the fall from end of January on strength and momentum arguments and those are still valid. I know this kind of moves can spend time before they reverse. I know as well that playing the reversal is the most dangerous (and expensive) game of trading. Patience, Fellow Traders, Patience...

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Put our Precious where Soros' Mouth is

Goldum’s Precious metal hits once again the news headlines:

- Firstly, as it was reported this week that George Soros (the palindrome, not me…) more than doubled his Gold position at the end of last year, by 3.7m shares to 6.2m of the SPDR ETF, plus is long of 11,000 call options and increased his stake in the gold producer Yamaha Gold. I’ve seen some debates among the journalists, notably on FT Alphaville, whether he puts his money where his mouth is or not as the old chap declared at the World Economic forum in Davos end of Jan. that the Gold was the “ultimate bubble”. I’d say that as far as I understand it (it’s not that easy… try to read this), Soros uses his “Theory of Reflexivity” precisely to profit from the Bubbles and Busts, so to me no contradiction in Soros’ mouth between long position and bubble, quite the opposite.

- Secondly, as it hit an historical high on Feb. 17th. Wait, an historical high? Yep, a high (as I write) in EUR at 827.88. This said, I find amusing to speak about historical data comparing an 11-year old currency to a metal that has always existed.

- Thirdly, as the IMF announced that very same day that it plans to sell “shortly” 191 tons (remainder of the 13% set out in September). That weighted on the market and Gold dropped more than $14 in a couple of hours further to the announcement.

I’d tend to agree with JS Mineset Trader Dan’s opinion on the timing of the IMF announcement in a deliberate effort to bring the price down and stem the increasing bullish sentiment that showed up lately. China missed the purchase of 200 tons last year one-upped by India (remember?), there’s likely still a strong bid from it along with other (Asian) Central banks and I like the argument that the IMF would definitely love to sell its 191 tons one-shot. I’m happy with this explanation.

The link between Soros and the IMF is they both fully appreciate the impact on the markets their rhetoric can have and try to use it for their purpose. The famous investor seems definitely much better at that game (would it mean he wants to purchase more at a lower price?) than the organization : as I write, one day after the announcement the price is heading back to where it was before it. It looks like nobody bought the story but people bought Gold instead, as I did below the 1100 mark... 

If you are following this blog, you should know how Bullish I am on the precious metal in the long term and that I’ve been heavily long for a while (since the bottom actually ;))) and that I spend my time waiting for opportunities to put on more. My purchase today could seem slightly impulsive as I’ve not been talking about it here or in the forums for a while, but actually it’s not (that much…). I’ve been meaning to put on more for some time as in the medium term, in addition to my same old usual arguments on gold, I think the dollar weakness will resume and the thing is the EUR role as an alternate currency faded dramatically with the recent pressure... The IMF story probably triggered my purchase sooner than expected as in the short term I think the strength of the USD could have still some room (technical reasons) and I may have jumped the gun in the execution but I just couldn’t resist to the opportunity offered by the IMF. Thanks for the dip guys.

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A Strong Urge to Buy ? Sell !!!

I have a theory : I believe our human nature leads us to make the wrong trading decisions for all the trades that follow a first one initiating a position, on one side or the other. When our initial position shows a loss, we'd like to double it, average down ("When you're in trouble, double"), when it shows a gain, we'd like to cut it and take a small profit ("You can't go broke banking a profit"). It means, for those who like me try to profit from the markets by "cutting the losses short and letting the profits run", that we naturally tend to buy when we should sell and sell when we should buy. I've adapted my trading accordingly : but for the first trade where I take a position, everytime I really want to buy, I sell and in a similar way, a strong urge to sell triggers a purchase...

The direct consequence of this is that my positions often end up with a loss or a limited gain and a few big (and too rare) winners will offset them and make my year profitable. When I'm inspired (or lucky...) enough to have a long winning streak, it can lead to outstanding profits while a losing streak is quite common. As discussed in a previous post, it's not the only way to be profitable trading (the trick is to have a positive expectancy) but it's just the most difficult... There would be no glory to get rich using the easy way, right ??? ;)

The short DJ Eurostoxx 50 (SX5E) position I started discussing in my previous post is a quite good example of this trading technique. The position was initiated on Jan 21st (first orange circle on the chart below), after Obama announced his plan to curb propr trading and technically motivated by a break of the channel that held the index since the beginning of the March 09 rally. But I've told you about this already, just scroll down if you missed that part. What I haven't mentioned is how I applied to the trades that followed the principle I described above.

- After I initiated my position, the index went in the right direction as fear in the Euro area started creeping in, with a gap down on Jan 22nd. "Cool, it shows some profits" I thought. On Jan. 26th, it rallied a bit : "Oh sh... my profits are fading and I should take them now before they vanish totally", I had a strong urge to buy so... I sold more.

- Well done! The index drop consequently two days later, on Jan. 28th as Portugal was put outlook neg... At the end of the day, my profit started to be decent and as I felt like to take it... I sold more

- On Feb. 3rd, the market had partially recovered  from the drop above and my latest trade showed a loss... "If it keeps on rallying, I will end up with a loss, would be a shame particularly that I was right in my short position and enter before the turmoil..." and inevitably I wanted to buy so... inevitably I sold more... and then the markets drop dramatically, the index more than 10% below its value when I started shorting it. The 200-SMA broke. If you need to rely one single Technical Indicator, it's the 200-SMA. "The bulls live above the 200-SMA and the bears below".

- On Feb. 9th, Well... you've listened too much to the same story already : I sold more

Now you have a rough idea of the way I try to let the profits run and build a pyramid on my gains. The "cut the loss short" part is much easier : I know I'm not able to cut a loss on my own, it's just impossible to me (this said, I did it recently on a short cable position and have just missed the move down...) so I rely on very strict stop-loss rules. Generally, my stops are trailed manually and often computed as a multiple of the Average True Range (ATR) that gives an idea of the volatility : I just don't want to be thrown out of my position because of the market noise... Back to my SX5E position, most of it has been stopped yesterday night (the green circle) as the Dow jumped and the Eurostoxx came back above its 200-SMA. I switched back from net short to net long... maybe temporarily, maybe not... we'll see but to me the technical landscape is still pretty bearish.

A final comment for the Options traders with Investment Banks reading this : the way I put on and get out of the positions is reminiscent to the way an option would be replicated in a standard Black-Scholes approach. OK, I'm replicating here a put to some extent. I know that buying the option would ensure that I have the discipline to add on my winners and remove on my losers and that I avoid these permanent conflicts versus myself, but the only thing is I want to avoid giving you fees for your delta hedges guys ;) OK, I'm kidding... I should consider trading back options, that were my first financial love...

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Equities: from "Bear and Long" to "Bull and Short"

I’ve had lately a tendency to mix up my personal views on the markets and the side I take on my trades. Last year, I started the year pretty bearish on the stock markets and ended making money on the long side. Another example is when at the end of the past year, I was pretty bullish on the EURUSD and ended making money being short. Well, I can’t complain and the situation could be worse: I could be right in my views and lose money… And today, in the very same way, while I’m bullish on the equities market, I’m finding myself short equities…

The rationale for my trading in divergence with my views is firstly that I fully understand that “the market can be irrational longer than you can stay solvent” as Keynes put it. Don’t fight the market Nic, if it wants to go up or down, it’s going there whatever the economic reality is, whatever the news, bad or good, are and more importantly whatever you or me can think. And in such a framework, technical and chart analysis could give some clue of where the market wants to go and I lately tend to rely on them more than usually. Secondly, it looks like the way the things have unfolded for one year or so has showed a few instances of this divergence between market and economic reality: last year the markets enjoyed the strongest rally in years while the economic news remained bad, the unemployment in the US doubled, it doesn’t look like the massive money pumped in the Economy did flow to the consumers and the fundamental causes that threw us in the Recession haven’t been fixed. Notably we still don’t have any clue regarding the final outcome of the delinquencies and defaults on US residential mortgages and their impact on the toxic assets they back.

It’s never easy to identify precisely what moves markets, but the main reasons given by the analysts for the correction seen in January is the tightening of China policies and the threat of further measures, Obama’s plan to curb speculation in the banks and finally pressure on the European PIIGS (Portugal Italy Ireland Greece and Spain). To a large extent, the first two reasons show some confidence from who I called previously the “Sheriffs”, governments and central bankers world-wide, that the recovery could sustain with less support. I believe that Chinese move is part of a sane process and initiatives to limit the overheating of an Economy couldn’t be that bad. As I wrote in my previous post, I don’t think Obama’s proposal will change anything to the risks taken by the banks. But to me, the tensions in Europe could weight more on the Bearish side of the market balance. The weakness of the PIIGS and the discrepancies between the members are not really new, but we could see soon the very first test of the single currency and more than the sovereign risk that, I believe, remains limited, I think the potential role of the EUR as an alternative currency to the dollar has lately taken a hit. The name of the game has not changed: Long the best, short the worst. I switched most of my stock holdings lately to Asia and as I felt some pressure on the markets end of January, I’ve partially hedged for the time being these holdings with a short Eurostoxx 50 (SX5E).

Long time no trade the equity market, about 6 months or so as I've enjoyed the rally. As detailed in a previous post, I only trade occasionally equity indices and mainly on the short side while I’m most of the time, say all the time, long though equity mutual funds: I don’t know a thing about stock picking or individual names and I prefer delegate this to other guys paying them management fees and hoping they do “alpha” particularly when I short the benchmarks.
I’ve already explained why to trade the short side, I've chosen the Eurostoxx 50, the main European index, now a bit more about my rationale to initiate a short position and start building the hedge of the long I’ve been keeping “naked” for a while.
Firstly, a kind of feeling about the market sentiment: it seemed to me we were in the kind of situation when despite of relatively good news, the markets felt like going South. I could notice this notably after Goldman’s earning announcement, an outstanding +60% positive surprise and the falling S&P 500 at the same moment as Obama made his proposal to limit banks prop trading that day, Jan 21st. A correction of the rally initiated in March 09 or at least a consolidation, is due one day or the other and the time for that correction might be now.

Secondly, some technical and chart analysis arguments finished convincing me.
On the chart above shows the daily DJ Eurostoxx 50 for the last 180 days:

- The red channel that contained the price action since its bottom in March 09 seems to be broken on Jan 20th with almost a black marubozu candle (wide black candle with no shadow). The price was finally held by the 50-SMA that day.

- The 50-SMA broke the very next day on Jan 21st as Goldman earnings and Obama’s proposal were hitting the headlines. I initiated my first short position that day, slightly below 2900 (first orange circle on the chart) and my position enjoyed almost fully the black marubozu that showed up. A marubozu is definitely one of the most powerful single candle pattern that I know, when there are 2 in a row … (3 and here you get the famous three-soldier pattern)

- The third day opened with a gap down and we saw a good move down, but at the end of the day, we had a doji (open=close) reflecting hesitation. That could signal the end of a trend but here I think that there was too much strength down to reverse.
- Seeing there a quite bearish landscape, I added on my short on Jan 26th (second orange circle) The day ended with a white marubozu, going slightly against my position but I had at that stage a decent profit to afford this.
- On Jan 28th, with the negative outlook given to Portugal, the SX5E printed again a black marubozu, stopped by a Fib retracement (23.6% from peak-to-through starting March last year to the top in Jan this year). I added once more to the short at the end of the day (third orange circle)

As I write, the last short has been put on at the very bottom :( and what is to be monitored at that stage is the way the market will recover from this last slump: my personal experience shows that generally the market recovers from a powerful move down with a powerful move up. Hesitation and failure to recover shortly after the slump often indicates the move down will ultimately resume. One thing that is to me mildly bullish is the RSI print that touched the oversold level and rebounded back (blue circle in the RSI panel below): I like, at the opposite of what generally is said, to sell when oversold (and buy when overbought) as these status indicate powerful strength in one direction, but it can touch the oversold level and rebound towards the other side, it shows there’s not strength enough and that's what could happen here. After Jan 28th, the market printed 3 white candles that started engulfing the black marubozu. The engulfment should it be confirmed in the next couple of days is pretty bullish as it “cancels” the previous move down, but I’d say the overall environment remain bearish in the short term, say days-weeks

Finally, the 3-day winning streak stopped in Europe as I write and the EURUSD dropped from 1.40 to 1.39 in a couple of hours earlier today. I might be right on this one… ooops sorry I meant I might make money.

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