What a (FOMC) day | lead-lag markets | risk-adjusted returns











While on days with key market events such as this, all correlations spike intensely especially from the moment of the announcement, there are many unique differences between the markets to warrant carefully going through your arsenal of weapons before selecting the best armament for the campaign at hand.

Lead-lag markets; early morning reaction as true direction or head fake; muted caged movement until the explosive 1400 hour; different holding periods; difference in nominal returns from <2%(USDJPY) to >6%(Brent Crude); different sizing in the different markets based on your measurement and judgement of each individual market’s risk/volatility/nominal size/margin requirement/credit available/personal familiarity; path-dependent trade management/maximum adverse excursions of each market; different risk-reward structures…

Which market provided the best risk-adjusted return today?


The training of a stock trader is like a medical education.

The physician has to spend long years learning anatomy, physiology, materia medica and collateral subjects by the dozen.

He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct – and that depends upon the accuracy of his observation – he ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly unforeseen will keep him from scoring 100 percent of bull’s-eyes.

And then, as he gains in experience, he learns not only to do the right thing but to do it instantly, so that many people will think he does it instinctively. It really isn’t automatism. It is that he has diagnosed the case according to his observations of such cases during a period of many years; and, naturally, after he has diagnosed it, he can only treat it in the way that experience has taught him is the proper treatment.”

You can transmit knowledge-that is, your particular collection of card-indexed facts-but not your experience. A man may know what to do and lose money – if he doesn’t do it quickly enough.

Observation, experience, memory and mathematics – these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities – that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass.

A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep track of developments everywhere that are likely to affect or influence the course of the various markets. After years at the game it becomes a habit to keep posted. He acts almost automatically. He acquires the invaluable professional attitude and that enables him to beat the game – at times! This difference between the professional and the amateur or occasional trader cannot be overemphasized. I find, for instance, that memory and mathematics help me very much. Wall Street makes its money on a mathematical basis. I mean, it makes its money by dealing with facts and figures.

When I said that a trader has to keep posted to the minute and that he must take a purely professional attitude toward all markets and all developments, I merely meant to emphasize again that hunches and the mysterious ticker-sense haven’t so very much to do with success.

Of course, it often happens that an experienced trader acts so quickly that he hasn’t time to give all his reasons in advance but nevertheless they are good and sufficient reasons, because they are based on facts collected by him in his years of working and thinking and seeing things from the angle of the professional, to whom everything that comes to his mill is grist.


stock_ticker_tape_machine paying_for_an_education

The_hopeful_ paying_for_an_education



Albert Edwards Says Watch Japanese Yen and Be Very, Very Afraid

The Japanese yen goes into freefall. China’s fragile economy tips over the edge. A wave of profit-crushing deflation comes washing over the U.S. and Europe. Investors panic.

That’s the view of perennial pessimist Albert Edwards. The London-based analyst and his team at investment bank Societe Generale SA have been ranked No. 1 for global strategy in surveys by Thomson Reuters Extel every year since 2007, even with a history of saying unpleasant things that few want to hear.

“My role is to step back from the excessive enthusiasm that builds up in the market, and to just say, ‘This is wrong. This is going to go horribly wrong,’” the 53-year-old said by phone last week.


Falling Yen

The yen fell 5.1 percent against the dollar in September, its worst month since January 2013. That sent it careening through a level of support — basically a line on the dollar-yen price chart — closely watched by currency traders which had put a psychological floor under the yen since 1998, Edwards says.

The yen is now poised for a three-year slide, the first time that’s happened since 1997, the year of Asia’s economic meltdown.

A divergence in U.S. and Japanese monetary policy — with the Federal Reserve slowing stimulus and the Bank of Japan expanding the money supply by record amounts — may have been the main reason for the move. Now that the yen is past a tipping point, the psychology of foreign-exchange traders is likely to take over and turn the currency into a runaway train.

“Now we’re heading to 120, which is the 30-year support,” he said. “You break through that, and you can see it moving to 140, 150 very, very quickly indeed.”

‘Important’ Chart

Edwards found the yen’s price chart so compelling he devoted an entire client note to it last week. He called it: “presenting the most important chart for investors.”

Richard Jerram, the chief economist at Bank of Singapore Ltd. and a long-time Japan watcher, doesn’t buy the argument. A weak yen won’t spur deflation in other parts of the world, he says. Nor would a China crash have a big impact outside of countries like Australia, which supply the larger nation with raw materials.

“Basically, it’s a domestic issue,” Jerram said. “Obviously there’s a growth issue, but I’m not sure it really spreads beyond that.”

Japanese currency forecasters see things differently from Edwards, too. Analysts surveyed by Bloomberg predict the yen will be little changed at 110 by June 30. Only the most bearish estimate, from Ebury Partners, puts the currency at 120.

Like most finance professionals, Edwards hasn’t always had impeccable timing. He’s been telling investors to reduce their holdings in equities for almost 20 years.

Ice Age

In his Ice Age call from the late 1990s, he predicted that deflation would eventually cover the earth, and the resulting bear market wouldn’t end until the S&P 500 index fell to 400. The index is at about 1,950 now.

At the end of 2012, Edwards greeted clients with a holiday missive that said: ‘Expect the new year to bring nothing but disappointment.’’ The U.S benchmark proceeded to gain 30 percent.

When he’s been right, Edwards has been spectacularly right. He made his first big call in 1996, when he was a 35-year-old strategist working for the English investment bank Kleinwort Benson.

While most investors were piling into what they thought was the East Asian economic miracle, Edwards was warning of a regional blowup. He called Malaysia’s policies “Noddynomics,” after the simple-minded title character in a series of British children’s books. Edwards says the witticism cost Kleinwort its Malaysian trading license, but soon enough capital was pouring out of the country.


Where should investors now take shelter as Japan’s monetary expansion threatens to send the world crashing down around us? Ironically, the answer Edwards is giving clients is Japan itself.

“Japan is a place where we can find quite a lot of cheap, deep-value stocks at the moment,” he said. “Just hedge out the currency.”

“Now we’re heading to 120, which is the 30-year support,” he said. “You break through that, and you can see it moving to 140, 150 very, very quickly indeed.”

That was so last week. Will we see 107 before we see 110 again? A trench is now been dug out around the 108.4 level. We might be settling in for a long bruising trench war before we can reach and breach 110 again, not to even mention 120 on.
“Japan is a place where we can find quite a lot of cheap, deep-value stocks at the moment,” he said. “Just hedge out the currency.”

What’s that? Sounds so familiar… Where have I heard this before?

Ahh… Sitting on a plush overstuffed chair in a very posh Hong Kong hotel lounge filled with Chippendale-Georgian-Chinoiserie-styled furniture and listening to the big guy Baran of Symphony FP wax lyrical about finding and unlocking value within the capital structure of Japanese stocks. A meeting/informal interview on the sides of a hedgie conference held in HK.

[I had passed muster with the head trader in their then skeletal Singapore office in the initial rounds, and even managed to get through an impromptu meeting/interview with the partner who was their main quant guy running their models. He was on a quick stopover in Singapore and had only a couple of hours before catching his red-eye flight, so we met over late drinks at the Fullerton Post bar. Between the alcohol, the loud music and the late hours, what I thought would be a casual chat turned into a thrust and parry session. He lobbed questions about market microstructure, market impact models, multifactor models, and I returned as best I could. Apparently I didn’t goof it all up and very quickly, found a plane ticket in my email bound for HK to meet with the big guy himself. But, it wasn’t meant to be…]

Symphony FP (Japan) has been through a long 10 years, and they have tried so many things over the years. I even remembered the Japanese finance newspapers denouncing them as shareholder activists/agitators employing poison pen letters. Looks like they managed to catch a second wind this past couple of years. Good for them.

And a hurrah for Abenomics-Noddynomics.

Nikkei, USDJPY

Nikkei on the left, Yen on the right.
4-hourly charts, going back about a month:



Daily charts, going back about half a year:



The turn is looking fast and swift for the currency leg. Unlike the index, nothing below to catch the fall. Watch out below.

Long Yahoo [based on sum-of-parts or negative stub value arbitrage]

Yahoo_5daychart_ after hours

Yahoo_5daychart_ afterhours

Yahoo’s actual own core business (which generates more than $1 billion a year) is now valued at -$500 million, based on negative stub valuation:
Yahoo Stock Gets Crushed As Alibaba IPOs — Core Business Now Valued At Less Than Zero

Pretty good numbers crunching valuations carried out here, with some event-conditional Yahoo/Softbank/Alibaba scenario-ing, and a useful table with a handy and quick YHOO/BABA price ratio heuristic:
Imma Be a BABA Bull: Yahoo, the Morning After



So. Go YHOO/BABA? (long YHOO/short BABA)
What’s the stock borrow fee like on BABA, and is it even available for short borrowing?

How many “relative value/event arbitrage” traders got killed putting on the long 3Com/short Palm value trade 15 years ago…

Safer to just long YHOO.

[Sum-of-parts or negative stub value arbitrage, 3Com/Palm example:
Negative Stubs – a review of the equity carve-out of Palm from 3Com
“Since stock prices can never fall below zero, a negative stub value is highly unusual.”

Brings back memories of my old series of PalmPilots, from the bulky plasticky IIIc to the sleek metallic Palm V.

Palm IIIc

Palm IIIc

Palm V

Palm V

Long Live Global Macro


The Cult of Loss Aversion: A Call to Rethink Risk in Global Macro Investing

In the wake of a traumatic loss, whether it is financial or personal, it is just human nature to overcompensate to make sure the experience is not repeated. But while that is understandable, it is rarely the best response. And so it has proved for many hedge fund investors over the past few years. While one could argue that each of the investor responses highlighted above has damaged investment performance, this article will focus on one specific issue: the cult of loss aversion in global macro investing.

The result has been a concentration of assets under management (AUM) amongst a few very large funds, many of which fetishize loss avoidance over all other factors in trade selection and risk management. Of course, risk management is an important part of any robust investment process. However, in modern macro investing the cult of loss aversion is becoming counterproductive given the fundamental and market outlook.

These days, most macro managers can be more accurately described as ‘hedged’ than ‘absolutely discretionary return’ investors. When legendary traders such as George Soros or Stanley Druckenmiller were making a name for themselves in the British Pound or Equities (yes, he was long a lot of them) they did not have a “hedge” against those positions because they truly believed in them. Sadly, very few macro managers have this level of conviction these days. They are too worried about taking a loss rather than a making huge profit.

In a world of many independent opportunities and a widely-dispersed asset base, it is completely rational for firms to use tight trade- and portfolio-level stop losses, because with rare exceptions (such as during times of acute market volatility) each stop loss decision has little bearing on the behavior of the market as a whole. Unfortunately, this does not describe the current state of the market.

Thanks to the static monetary policies operating in many major economies, there are relatively few independent investment opportunities with sufficient market liquidity to absorb a thematic allocation from a large global macro fund. As a result, the few such trades that do exist very quickly become over-crowded, particularly by the few large funds that dominate the AUM base of the strategy. Unfortunately, this leads to paranoia and a fear of loss rather than a healthy balance between risk taking and risk management.

When the markets do move, portfolio managers are incentivized to take profits or reduce risk very quickly. Why? Because macro investing has become a game of musical chairs, where investors need to make sure they are not the one caught out when the music stops. Those on the right side of the market, aware that most of the past five years have been characterized by range trading in foreign exchange and fixed income, move to ensure that they do not drawdown their investment gains. Those with losing positions, on the other hand, do not feel able to view markets through a value prism, and instead worry about the possibility of hitting their modest loss thresholds, and thus closing out positions at disadvantageous levels. Consequently, the de facto “macro” time horizon has been compressed into a few hours to a few weeks, leaving relatively few able to capitalize on the thematic gains that have traditionally characterized the strategy.

Although generating a 10%-12% gross return should not be a particularly hard target in an environment where risk parity funds have produced 20%+ annualized gains over the last few years, the current focus on loss avoidance above all else has condemned the macro strategy to a performance that is mediocre at best. If a portfolio manager is unable to weather a 5% drawdown without having his risk allocation cut or eliminated, how is he to participate in the type of trades that generate double digit returns? The answer is he cannot. Unfortunately, what is individually rational (i.e. cutting risk quickly to avoid hitting drawdown limits) has proven to be collectively irrational as the industry careens from stop-loss to stop-loss.

This negative feedback loop has provided even more incentive for investors to allocate elsewhere, and very often to managers dedicated solely to one asset class, including funds that are far less focused on loss aversion or a metric like a Sharpe Ratio. Remember, investors can market returns. They cannot market a Sharpe Ratio.

It is ironic that the macro strategy has lost its way considering the opportunity for out-performance from some of the big themes of the last four years – long Equities (yes that is a macro investment), long Interest Rates, long Credit, and short Volatility – was very large. These were strategies that in previous cycles made big profits for the macro managers who got them right.

They can do so again. That is why the call right now should be to re-think how investors look at risk. What investors should demand from their managers is a return to old-school macro investing, where themes are given time to play out, portfolio turnover is significantly reduced, and more focus is placed on absolute returns at the expense of fetishizing drawdown limitation.

At the very least, investors should take a look at the macro managers that have evolved post the Global Financial Crisis. A new breed of portfolio managers are emerging who are “risk conscious” and use their expertise in derivative products to add both edge and control to concentrated investing. True, their absolute AUM pales in comparison, and certain strategies may have liquidity constraints in terms of scale, but it is becoming easy to identify this group of “risk conscious” managers from those simply focused on loss aversion.

Ahh… The last highlighted and underlined point: my marketing edge in my pitch deck?

Who says Global Macro is dead



5 big figures in just over a month. Long live global macro.

And there may be more breadth for this run yet:
How low will yen go? Depends on the dollar

Some believe 110 is likely, and beyond:
Is USD/JPY Headed For 110?

Or even to infinity:
Our price target for the yen is infinity, says Axel Merk

Others turn up their noses and bad-mouth the currency:
Japan is eating its own capital
But the more important question is: Which has been, and will be, the better trade – the short Yen trade, or the long Nikkei trade?

[Forget about shorting JGBs, even though this is the market at the epicenter of the Abenomics money printing experiment. According to a certain smug HF-er, for us minnows, we ain’t got enough skin in the game to gain convexity exposure on the JGB yield curve. But wonder how that short JGB trade is working out for Kyle Bass and his Hyman Capital, considering that he eschewed the long Nikkei component. Hope he bulked up more on his currency bet:
Bass: …dollar/yen is going to 200… We’ve committed more capital to the currency market, but all of the convexity is in the bond market.

People have been predicting the coming collapse of JGBs for a long time, only to bleed to a slow death by a thousand glacial slow cuts.

花好月圓 Blooming flowers, full moon (but the heart is full and heavy)

The Mid-Autumn’s night of the fullest moon. A time of celebration, reunion, and love. But it’s been a chilly pensive day, and sky overcast and yellowed, moon wanly and balefully lit, night.
The heart is heavy and full.





-张先, 木兰花

Blooming Flowers, Full Moon

Whenever the flowers are in bloom and the moon is full, sad thoughts enter our minds. After the flowers are no longer in bloom and the moon is no longer full, the people begin to disperse. The festive atmosphere departs for the distant cloudy skies, and we are cut off from the past as if from a hazy dream that we cannot recall. The vibrant spring colors of the grass and trees succumb to the chaotic red shadows of fall. As they begin to chirp, the chickens’ songs become melancholy. We wish we could make the long days of spring longer. When we will be able to look up and once again gaze at the full moon?

-Zhang Xian, Magnolia Flowers
(translation taken from the wiktionary page)


One of Mum’s favourite songs from her favourite singer she was always humming and singing in the house.

周璇 – 月圓花好 Zhou Xuan – Full Moon Blooming FLowers (1940s):


浮雲散 明月照人來

清淺池塘 鴛鴦戲水
紅裳翠蓋 並蒂蓮開

雙雙對對 恩恩愛愛
這軟風兒向著 好花吹

Full Moon Blooming Flowers

The drifting clouds disperse, the full moon shines upon the gathering people
The most complete and joyous reunion, is this day and night (mid-autumn’s)

On the clear and shallow pond, the Mandarin ducks (coupled lifelong mates) frolic and play
Adorned with red garments and jade-green parasols, the twin lotus flowers bloom as one

Two-by-two pair-by-pair, tenderness coupled with love
This languid breeze blows towards, the blooming flowers
Tender and sweet love fills the earth









And a more modern rendition:

I hate calling market tops, but…

…Icahn, Soros, Druckenmiller and Zell’s all on my side. And most importantly, a UBS Client Advisor enthused excitedly, while we were sharing a hot jacuzzi tonight, that there’s no froth or bubbles in this current boiling-hot equities rally.

Okay, the encounter is a lot less salacious than it sounds. I was just soaking in the blisteringly hot outdoor jacuzzi in the estate on this slightly-chilly rained-out evening (recently found out that soaking my stiff and sore post-op lower back in hot water before and after my swim+water therapy sessions in the pool, eases the soreness and pain greatly) when this gent lowered himself gingerly into the steaming waters, and we do what us guys do when we find ourselves in close proximity sharing a small space half-naked with our wet bodies: we grunted/acknowledged each other, avoided each others’ eyes, shifted our positions to be as far away as the small space will allow using a divide-and-conquer algorithm, and started to meditate intensely upon the whatever-it-may-be but suddenly interesting object in front of us – for him a leafy tree or bush; for me, an amazingly deep azure blue ceramic tile arrayed into an Alhambra-like interlocking mosaic pattern…



But you can avoid filling in the awkward silence for only so long.

After we made our short introductions, what followed was actually a pretty interesting conversation. This Swiss gent with only the slightest of a Swiss-German accent in his English has been with UBS his entire career, starting with the famed Swiss direct apprenticeship at age 17 with their banks and financial firms, learning the ropes and working their way up through the ranks while obtaining their technical certification along the way. So, a true blue UBS man then. Very useful for me to pump him for some updates on the wealth and asset management scene in recent years, whether the trend towards IAMs (independent asset managers) is real and sustainable, his take and gauge on the popularity of discretionary portfolio mandates and/or managed account structures with clients, and his views of a certain once-gigantic-now-much-reduced-but-still-formidable US competitor. As expected, he took some swipes at Citi, for being silo-like across their functions, especially with client onboarding. (But I’ll reserve my judgement; after all, back in April I was seriously considering taking up an offer from an acquaintance in Citi for a portfolio position there. Thought it might be a good opportunity to see and experience a portfolio management role within the sell-side of the asset management industry, and potentially very useful for my eventual aims and ideas. But, am in a hurry to build my own thing…)

Anyway, as you would more or less expect from a client advisor/relationship manager, he’s a BOOYAH! bull.

Not sure whether he’s channeling Cramer, a previous Bianco, an expansionary Morgan Stanley, or his own cautiously hedged house view. But he was going on exuberantly about how we are still a long way off from the final euphoria stage of this current rally/bubble, and there’s ‘huge amounts of cash still sitting on the sidelines’.
Hmm, I still prefer the cool quantitative analysis of Hussman; though admittedly, what’s the point of being academically rigorous and iconoclastic, but with embarrassing negative returns over 1, 3, 5, and 10 year periods.

And here’s what the collective brain trust of the alternatives/hedge fund industry thinks of the current record S&P 2000 round number:


Icahn, Soros, Druckenmiller, And Now Zell: The Billionaires Are All Quietly Preparing For The Plunge

“The stock market is at an all-time, but economic activity is not at an all-time,” explains billionaire investor Sam Zell to CNBC this morning, adding that, “every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue; and when you got a demand issue it’s hard to imagine the stock market at an all-time high.” Zell said he is being very cautious adding to stocks and cutting some positions because “I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking.” Zell also discussed his view on Obama’s Fed encouraging disparity and on tax inversions, but concludes, rather ominously, “this is the first time I ever remember where having cash isn’t such a terrible thing.” Zell’s calls should not be shocking following George Soros. Stan Druckenmiller, and Carl Icahn’s warnings that there is trouble ahead.

Billionaire 1: Sam Zell

On Stocks and reality…

“People have no place else to put their money, and the stock market is getting more than its share. It’s very likely that something has to give here.”

“I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking,” he said. “If there’s a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market.”

“It’s almost every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue,” he said. “When you got a demand issue it’s hard to imagine the stock market at an all-time high.”

He also lamented about how difficult it is to call a market top. “If you’re wrong on when, that’s a problem.” His answer: “You got to tiptoe … and find the right balance.”

“This is the first time I ever remember where having cash isn’t such a terrible thing, despite the fact that interest rates are as low as they are,” he added.
Billionaire 2: George Soros

Soros has once again increased his total SPY Put to a new record high of $2.2 billion, or nearly double the previous all time high, and a whopping 17% of his total AUM.


“Forgive”, this faux-iambic decasyllabic rubric

Hi. Welcome to this dusty and little
cobwebbed corner of the world wide sandbox;
where over a mote, the smallest tittle,

petulant kids throw sand and shout: “A pox!
A pox on your nose, and your rump to boot!”
A boot to their rumps and no cakes of chocs.

Be it sand in eye, or mouth filled with foot,
our rash words sadly are oft overlooked:
Beware splinters and logs in eyes take root.

Blind to our pride, Charon’s boat ride soon booked,
a one-way ticket to warm climes and sand,
of fire and brimstone, our rumps well-cooked.

Humbled and broken, and with hat in hand,
mumbled sorries – to reconcile we seek.
“Forgive”, the highest virtue in the land,

The earth, and all happiness, to the meek.

(Mostly-iambic decasyllabic rubric in terza rima pattern a la Dante.)

An irreverent limerick in tercet rime-r,
and in irredentistic not-so-iambic pentameter.
First cloddishly posted in this comment hither.

(Above is a 12/16/12 syllabic intro with a purring outer. Ha, I’m losing my edge. Literally.)