# Analyze Capital



## AnalyzeCapital (1 April 2011)

Im gonna be posting on this thread of my progress/analysis/business developments of my trading in energy, currencies and indices and other related global macro sectors. Feel free to ask about my views on any markets or anything else.


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## AnalyzeCapital (1 April 2011)

March 31, 2011

Didn't get to follow much of the day. Finishing lots of business work.

*Crude Significantly up going into Friday

*Ireland stress test well within Expectations hence the strong Euro today

*PMI ... reaciton seemed muted?

*GBP was floatdown most of the day but mostly flatish

*Corn was on fire via supply news

*AUD continued its rocket ship move up

*NOK brown support levels quite strongly following dollar weakness

I kept hearing today crude oil prices can't be good for the consumer all day... to be honst there is room to 145 will we see mild effects on the consumer at these levels... but it won't show up for another few months, and will be negligible IMHO if anything.

Im getting a felling in the back of my mind a dollar correction is needed. SPX seems like its hesitating quite a bit at these levels. Will we get a break to the upside?

Probably a lot of this action will be seen with NFP tomorrow. Overall with quad witching this month, window dressing, MENA risk... this month has been wicked wild... getting any "real" solid read probably is BS. Got to go with the flow with these trades and stick them short term. Any rational has been quickly reversed and fipped and flopped. Heres to making money and being right or wrong!


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## skc (1 April 2011)

AnalyzeCapital said:


> Im gonna be posting on this thread of my progress/analysis/business developments of my trading in energy, currencies and indices and other related global macro sectors. Feel free to ask about my views on any markets or anything else.




Welcome to the forum.

Perhaps introduce yourself with some of your own background, what's your trading style, what you are trying to achieve with your trading etc?


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## AnalyzeCapital (1 April 2011)

skc said:


> Welcome to the forum.
> 
> Perhaps introduce yourself with some of your own background, what's your trading style, what you are trying to achieve with your trading etc?




Thanks for the welcome. I trade in the global macro space, primarily in energy and currencies. Also trade other related securities indices, bonds, commos etc… Ideally I am trend following over various time frames.


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## AnalyzeCapital (1 April 2011)

April 1, 2011

London Hours

* Seems End of Asia trading will end up positive for equities; the only downers seem to be Japan and India
* Crude fell from its yesterday highs through Asian trading
* Overall Dollar largely unchanged over night with slight weakness over Asian Trading (overall strength from          previous session)
* European Equity futures point to lower open
* Rumors on cheap Japan having cheap banking loans to the system
* More US Fed speakers talking with Hawkish tone
* Softer China PMI

Bloomberg comes up with more stupid headlines "Australia Boom Pays Men Without Degree More Than Bernanke" , the guy is a semi-public servant what do you expect? Its amazing how compelling this growth story has been. I was really correct on my NZD view on my targets however I didn't expect it to move with the speed that it did so I completely missed out on the action. Also, the effect of the RBA rate decision again had very limited effects over maybe two weeks. Asia fundamental growth is there, or this is all speculation at this point. While OECD growth has been largely inflated the past few years (QE one through infinity, pomo, stimulus, austerity sentiment blah blah blah blah).

Going into NFP within 6 hours I get the feeling these levels have been to hesitant. Expectations of anything less than 125,000 to 145,000 is bad while the bar is set even higher currently. I dunno the effect of missed expectations on this, but I'm leaning towards a dollar correction that will weigh in on crude initially. This will likely carry into early next weak before continuing a dollar weakness trend.

Going forward I'm looking at:

* EUR/USD needs break about 1.425 then 1.428
* Markets looking for rate hikes next week for the EUR/USD to support yields
* GBP/USD continues its weakness within the majors breaks below 1.593 will see <br>accelerated lower prices
* In general large divergences of fundamentals and sentiment (AUD, EUR, USD)
* ISM later today along with EUR employment data and PMI releases

Don't think the Eurozone can handle a rate hike for whatever reason. Fundamentally the region is too weak - essentially what we are seeing is the "buy the rumor sell the fact."

UK econ data is still very fuzzy with mixed reports which has definitely been weighing in on the pair. However, a bullish selling point is that 1.60 still remains a good support.

Again with Australia, it is either a true growth story or spectulation. I think this big move up to 1.03 the latter part of the highs have been speculation. Prices will give back some pips into next week. Overall though, greater than parity has been a good call. Just a matter of time before NZD follows.



To much risk to take leveraged positions today. Trade small today. Today and into next week I expect a reversal in the trends we saw all this week (Equities up, Crude up, Dollar down).


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## AnalyzeCapital (1 April 2011)

In regards to my April First Post

It would be interesting to hear what people think about Australia's economic condition right now. Are people bullish/bearish on the economy? Bullish/Bearish Australian markets/Asia Pacific? Any want to discuss their trades/thesis in these regards?


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## AnalyzeCapital (2 April 2011)

NFP April 1st 2011
It would be funny if today's BLS played an April fools joke on the NFP release. Too bad that won't happen. 

The initial reaction has been dollar strength coming off the hour of the release. Whether or not this is sustainable is still questionable.

NFP numbers coming in at

216,000+
and UE at 8.8%

Not gonna bother to break down the rest of the numbers (you can do that HERE).  Initial equity reaction via futures seems positive. I'm looking for continued dollar strength, S&P500 to stay below 1333 by close and oil to give back gains. 


Analyze Capital LLC


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## kingcarmleo (3 April 2011)

Do you have a twitter that you update with similiar musings? Would like to follow.


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## AnalyzeCapital (6 April 2011)

kingcarmleo said:


> Do you have a twitter that you update with similiar musings? Would like to follow.




Twitter Handle is "AnalyzeCapital"


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## AnalyzeCapital (6 April 2011)

Inflation, Commodity Prices, and Portfolio Diversification via CME education - April 5, 2011
http://www.cmegroup.com/education/f...ity-prices-and-portfolio-diversification.html

http://www.cmegroup.com/education/files/PM132_Education_portfolio_diversification.pdf

Here is an interesting two page article via the CME.

The CME trys to demonstrate using commodities as diversification tool via futures curve can be an effective way to diversify one's portfolio.


* They point out academics claim inverse correlation between stock markets and inflation
* They elaborate further that this is not always the case
        * Demand pull inflation has positive correlations with stock markets in either recessions or bullish economies.         Therefore commodities = bad diversification tool in such periods. 
         * On the other hand Supply Shocks will result in inverse correlations = good diversification tool in such periods (Neg supply shock --> higher commos prices --> negative stock prices via cost push inflation and vice versa)
* Of course the latter point is what they want to stress since negatively correlated assets are ideal for MPT (modern portfolio theory) practitioners for "diversification". 
*  So of course then, as they point out, it is key for the portfolio manager to be able to distinguish between demand pull and cost push inflation. 
*  They way the CME suggest to do this is by looking at the futures curve, a.k.a backwardization and contango. 
*  The CME believes that a contango curve will lead to demand pull inflation and backwardization will lead to cost push inflation. 

I believe the CME of course is trying to conclude that if you are seeing rising inflation and can identify it as cost push inflation via some type of backwardization curve, commodities can make a great diversification asset class. They give a Class III Milk futures example of the year 2003 as a backwardization period and the 2008 crisis as a contango period. **This is a bit off point but the Class III front month from mid 2010 has been one heck of a wild ride! I think its one of the most amusing charts to look at in the past few months. 

I would like to point out from the above:
*  Even though the CME is able to get closer to a better diversification idea with futures than academics has, the picture is still even further more complicated than supposed
*  The importance for dynamic portfolio re-balancing and qualitative measures in MPT practice 

A way to deal with inflation given the current environment (2011 and forward)
1.) Though the CME certainly does have a point, the past year and months have not necessarily behaved in the way the CME has suggested due to the unique nature of the recession markets have come out of. In addition, over longer time frames the CME maybe correct, but when a portfolio manager is faced with high interim volatility like we saw in march 2011, a manager may re-balance a portfolio inefficiently due to the disconnect of what the CME theory suggest and what actually happens or what is portrayed in the media. 

For example this past March I saw brent crude oil spike to 116 - 117; expectations were all about a negative supply shock due to MENA risks. However, brent stayed in contango for most of the month. Had a manager re-balanced according to expectation all diversification effects would have been lost. 

Technically this negative supply shock should lead to cost push inflation and push the curve into backwardization. Either the OPEC increase of production worked REALLY well and fast, or there is a lagged effect of the higher prices ( and we have yet to see backwadization which will lead to a lower stock market). 

Furthermore, even though the past year  firms have seen rising costs, many of the firms are lush with cash and are able to swallow the cost increase without passing it on to the consumer. There have been quite a few negative supply shocks (e.g. corn markets and wheat markets) in the past year. However its very possible, with ample cash, firms are willing to take a short term loss, that a backwardization curve may not filter through to cost push inflation and thus negating any correlations or diversification effects (commodity prices up and stocks down). 

My two examples above of course outline 
qualitative risk where a manager re-balances according to wrong expectations
and possibly reading a futures curve that would lead to a sub-optimal hedge due to unique economic and financial environments
This of course leads me to my second point;

2.)  Perhaps the reason why David Swenson was so successful was in that he was able to understand context and thus appropriately apply the correct qualitative measures to his portfolio re-balancing. The easy part perhaps are the quantitative measures; determine allocations for efficient portfolios, determining institutional investor utility, figuring appropriate risk levels. Perhaps the hard part is being able to effectively incorporate qualitative measure when re-balancing portfolios so that institutional targets and goals are not missed. 

In this respect discretionary managers and traders can truly add value, and where purely investment oriented algorithmic processes lack value. Using inappropriate static models in the wrong context is sure to lead to disasters or undesired results. Traders and discretionary managers are constantly working with thesis, and models, and adjusting views according to context to achieve desired results. Of course this is borderline art and will turn off purely qualitative mindsets. To which I would respond, watch Andrew's Lo presentation on "physics envy" which explains why such thinking is a fallacy. Both qualitative and qualitative processes are very necessary to achieve much more efficient results. 

3.) Currently the Fed expects inflation to be capped at 2% to the end of 2012. In half an hour today, we will hear Bernake speak, and he will most likely speak about the current oil spike as causing transitory effects. A one off effect, which in the long run has close to no importance. I believe those estimates are for headline inflation as well.

That being said, insure you have superior returns vs the rate of inflation. Ideally a manager's returns that far exceeds 2%  annually for the next few years probably won't have to worry about inflation. If a manager is struggling with being able to return 2% annually perhaps it is time to decrease your assets if your AUM growth has been inversely correlated to your returns(or spin off some other fund), work on new scalable models if returns have been stagnant at current AUM, or perhaps inject new human capital into your firm. Worse case scenario you can do what Man Group did and acquire a better firm with a better track record.

Of course the having returns higher than 2% is ideal for Analyze Capital as portfolio management is trading oriented. Positions usually will not exceed more than a few months and have positions within daily time frames and are purposely concentrated. Analyze Capital does not practice traditional portfolio management, but however does use some of it's concepts.  Managers who are stuck with long term core positions such as traditional portfolio managers that practice MPT or funds that require longer time frames may have to worry about the effects of inflation over the long run.  

Overall though, I would say the risk of inflation is going forward is low if anything. Focusing on alpha generation should be enough to negate any effects of inflation. Of course if the exact opposite happens and we get hyper-inflation, putting money into an asset class like gold would be beneficial. The flight to quality would certainly make gold an interesting asset to follow again, and allocate to, in the case of hyper inflation(lately it has been very boring imho). 


PS. of course the CME doesn't care what you use for whatever purpose as long as you use "their" products

Analyze Capital LLC
AnalyzeCapital(at)gmail.com


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## AnalyzeCapital (6 April 2011)

This week I will update less here. I am using this week as a research and reading week. Expectations still are the same:

*Bearish below SPX 1333 (US equities)
*USD dollar strength correction
*oil giving back some of its gains


Analyze Capital LLC


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## AnalyzeCapital (7 April 2011)

Weeks gone completely off expectations. Though it may seem i might have been right but with very wrong timing! So essentially wrong…

SPX closed above 1333 at 1335 yesterday but with a doji-ish formation. low volume weak ranges on the upside perhaps is telling us this is the breaking point

USD weakness is rampant. 100 - 200 up on the majors vs USD from NFP last week. So that was completely wrong.

Crude has breaking VERY strongly above its previous resistance levels. 

taking the rest of the week off...


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## tothemax6 (9 April 2011)

Analyzecapital, how do you gain exposure to commodities (like corn)?


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