Five Hundred Words 12/18/2018

Tuesday, December 18, 2018

Daily Writing

 

 Things I’m thinking about

  • It seems like we could be in a bear market, but what statistics can we use to back up this kind of claim?
  • Xi Jinping speaks on 40th anniversary of reform.[1]
  • What will the world start to look like in the event of a liquidity crisis?

 

Market Observations

Major indexes traded higher at the start of the day.  S&P and NASDAQ are both up 1.00%.  However, the VIX [2], which is a gauge of fear in the market and trades inversely to the market, is only down 1.84% at the time of writing.

US Treasury yields continue to plummet.  The yield on the 10-year Note sits at 2.85% while the yield on the long-dated 30-year Treasury Bill is 3.10%.  WTI crude is down another 2.61% after dropping more than 3.50% yesterday.

The yield on the 10-year Japanese Government Bond (JGB) is threatening to move negative.  The yield on 10-year JGB is now 0.01%.  The Yen has also strengthened over the past few days.  The USD/JPY cross-pair now trades at 112.500, 100 basis points off the highs a few weeks ago.

Despite heavy criticism from President Donald Trump, the Fed still intends to raise interest rates tomorrow (December 19).  There are two key things to note here:

1)       It is not normal for the US President to openly attempt to influence the interest rate policy of the Federal Reserve.  The Fed is intended to exist as an independent body immune from political sway.

2)      It is unusual for the Fed to raise rates in an environment where global growth appears to be slowing

 

China: Forty Years After Economic Reforms

Today Xi Jinping spoke on 40th anniversary of reform.[3]

Why is this significant?

Confidence in Xi, the regime, and the principles of “socialism with Chinese characteristics” are under threat.  Chinese elites are really the only ones aware of this.

China’s leadership tends to be extremely cautious when making any public statements, so whenever a Chinese President makes an address like this, it tends to be big news.

The 40th-anniversary speech is especially significant because Xi Jinping revealed some revisions to his core position on two fronts:

  1. Internal Chinese Communist Party politics and Chinese domestic policy
  2. Foreign policy, especially regarding its stance toward the United States and on-going trade tensions between the two superpowers.

 

Internal Communist Party Politics and Chinese Domestic Policy

Xi Jinping has been transparent in his intention to consolidate both his power as General Secretary of the CCP along with his place in the history of communist China post-1949.  In October of 2017, President Xi eliminated Presidential term limits and pushed to include his own version of Chinese socialism into the official party canon.  Now he’s looking to overtake the legacy of revolutionary hero Deng Xiaoping.  Deng Xiaoping is widely regarded as the father of modern China, as his reforms in the late 1970s and early 1980s are the catalysts behind China’s massive economic expansion over the past forty years.

 

Foreign Policy

Because the 40th anniversary of reform speech is one of Xi’s most high-profile public addresses since his meeting with President Trump at the G20 Summit in Buenos Ares at the beginning of the month, China watchers and analysts are following Xi’s speech closely, seeking clues into potential shifts in China policy.

One thing that’s clear is that China intends to maintain its bottom line regarding its domestic sovereignty.  “No one is in the position to dictate to the Chinese people what should and should not be done,” he said in apparent reference to demands from Washington and other capitals that China undo some of its protectionist economic policies (even as Chinese negotiators have quietly offered concessions).[4]

 

Summarizing China

Our view is that China doesn’t have as much flexibility as it seems.  China is dead-set on a shift toward re-orienting its economy to one based on consumption instead of investment.  This means China would experience substantial growing pains even within an ideal economic climate.

Now, in the face of what could be a severe global economic slowdown, China has no choice but to capitulate to the demands of the Trump administration on trade in the short term.  It’s doing this because it doesn’t want global attention toward the real problem, the fact that China is currently operating on an economic model that is no longer sustainable; namely, a model driven by export-led growth, infrastructure development, and massive imports of raw materials from developed neighbors such as Australia.

Can China fix its domestic problems before the next global slowdown really begins to take hold?  According to my sources in China, the central government is facing a true crisis of confidence.

 

Market Data

Resource Commodities

 

December 18, 2018

December 17, 2018

December 14, 2018

December 13, 2018

Gold Spot

1245.20

1238.10

1241.70

1245.00

Silver

14.65

14.535

14.715

14.720

Platinum

792.00

785.00

794.00

802.00

Copper

2.7040

2.7200

2.7590

2.780

Crude(WTI)

48.64

50.53

51.10

51.41

 

Global Government Bond Yields

 

December 18, 2018

December 17, 2018

December 14, 2018

December 13, 2018

US 10 year

2.85%

2.86%

2.89%

2.91%

US 30 Year

3.10%

3.12%

3.14%

3.16%

UK

1.28%

1.27%

1.24%

1.26%

Germany

0.24%

0.26%

0.25%

0.27%

Brazil

9.67%

9.67%

9.61%

9.86%

Italy

2.93%

2.95%

2.93%

2.93%

Japan

0.01%

0.02%

0.02%

0.05%

 

 

Major U.S. Indices

 

December 18, 2018

December 17, 2018

December 14, 2018

December 13, 2018

VIX

24.68

22.36

21.57

21.00

DOW

237.70

239.86

244.08

245.76

S&P 500

257.19

259.39

262.92

266.45

NASDAQ

6812.51

6864.23

6961.86

7096.00

 

Currency Cross Rates

 

December 18, 2018

December 17, 2018

December 14, 2018

December 13, 2018

USD/JPY

112.500

112.9200

113.2900

113.6700

EUR/USD

1.1369

1.1344

1.1306

1.1355

GBP/USD

1.2650

NA

NA

NA

AUD/USD

0.7175

0.7181

0.7178

0.7223

USD/MXN

20.066

20.223

20.2528

20.069

USD/CNY

6.896

6.905

6.9049

6.878

USD Index

97.02

97.15

97.42

97.15

[2] https://en.wikipedia.org/wiki/VIX

[3] https://www.bloomberg.com/news/videos/2018-12-18/key-takeaways-from-xi-jinping-s-speech-video

[4] https://www.nytimes.com/2018/12/18/world/asia/xi-china-speech-takeaways.html

Advertisements

Five Hundred Words 12/04/2018

Tuesday, December 4, 2018

Daily Writing

9:10 AM

Initial impressions of the day

Yesterday we touched on commodities moving higher.[1]  Intuitively you’d think that the spike in demand for copper and other base metals would be due to the tentative truce between the US and China.  However, we can’t confirm this, and the dramatic downturn we witnessed today could dispel this theory.

What is the real cause of the spike in demand for copper?

Rather than increased optimism over Chinese demand, the bullishness in copper is a direct result of the prospect that a shift to cleaner forms of energy creates new demand for the base metal,[2] which is used in electric car batteries and wind turbines.

2:40 PM

OK so maybe no trade deal

At its lows the Dow Jones Industrial average fell by as much as 800 points, or more than 3.00% on Trump’s sudden wavering views on China.  Now, after a brief period of relative clarity regarding US-China trade tensions, that all went out the window after President Donald Trump tweeted that his team would be “seeing wither or not a REAL deal with China is actually possible” by early March, the next deadline in the talks.  This uncertainty exacerbated fears that the global economy could be slowing.

Many of the events that the market believed would help improve certainty moving into the new year haven’t panned out.  Firstly, there was a widely held belief that mid-term elections on November 6, 2018 would allow the market to price in potential higher budget deficits and adjusted fiscal policy that typically accompanies democratic electoral victory

4:11 PM

OK so maybe the sky is falling

Today was an absolute slaughter in the markets.  The SPY fell 3.20%, the DOW fell more than 800 points at its peak, U.S. 10-year Treasuries dipped below 3.00% before settling at 2.91%.  Tellier Holdings Apprentice Fund fell 4.28% primarily on weakness in financials and banks.  The BLK dividend capture strategy turned out to be a complete disaster.  We’ll end up making $70 from the dividend pay out at the end of the month, but on the day BLK dropped by more than 6.00%, something our risk models placed a 0.10% probability on BLK dropping more than 6.00%.  Over the past five years BLK has only dropped more than 6.00% on two other occasions, once in late January of this year and once previously in 2014.

Reflections on a -4.00% day

Today was supposed to be a calm day. I had my strategy in place for when things went right. However, I had no contingency plan for when things went wrong. I will shrug off today’s poor result, and I will continue to focus on the basics. I will continue to seek permanence. I must remember to move with the overall trend. Only after I determine, the secular trends should I make trade decisions.

I must be honest with myself if I’m going to improve. I will be accountable. Today’s performance was weak because my risk management philosophy was deeply flawed. As soon as BLK began to drop from 434 down to 424, I felt it was highly unlikely to continue moving further. I added to the BLK position 424.80 because I wanted to capture the additional dividend.

By that point, BLK was already trading down roughly. BLK had only fallen more than 3.00% in a day less than 5% of the time over the past five years.

Unfortunately, I failed to take into account the risks posed to the banking sector Given BLK’s historical volatility and past performance, and I felt the downside would be limited as we crossed the ex-dividend date on Thursday, December 6. I did not anticipate a 5.00% drop in the banking sector with minimal warning, especially given the subdued volatility on Monday.

I felt rushed to decide on BLK quicker than I liked because I knew the market would be closed on Wednesday to honor the late President George HW Bush. I felt encouraged to make this move because I used the same strategy to profit on MCD and TLT.  According to my Blackstone, INC. (NYSE: BLK), over the last five years BLK had only experience three drawdowns greater than 5.00%.  Today happened to be the second largest draw down, only after the October 10, 2018 decline from which the broader market has yet to fully recover.

Although my mistake cost me roughly 2.00% of my portfolio today, my risk management in the other areas of my portfolio was quite strong. Defensive stocks such as MCD, KO, and SBUX all did their jobs and held steady, all finishing roughly even on the day perhaps even slightly up.

I still do not have a great understanding of the impact of bond prices on overall rates and the profitability of banks.  From a macro perspective I am working how the market will behave now that the fear of an inverted yield curve is looking to bubble up.

There are still many things to learn, I feel I can take this experience as a learning opportunity.  I am still in the game, and I will strive to improve on my risk management and trading strategy.

 

Citations

https://www.ft.com/content/dc1421ea-f6ea-11e8-af46-2022a0b02a6c

https://www.bloomberg.com/news/articles/2018-12-04/china-s-currency-strengthens-extends-biggest-gain-in-two-years-jp93up4y

 

 

Market Data

Resource Commodities

 

December 4, 2018

December 3, 2018

November 30, 2018

November 29, 2018

Gold Spot

1230.30

1228.28

1223.90

1220.70

Silver

14.355

14.385

14.285

14.285

Gold/silver

84.84

85.29

85.76

85.39

Platinum

806.00

806.00

818.00

822.00

Copper

2.8075

2.8571

2.824

2.7955

Crude (WTI)

53.25

52.97

50.52

51.07

 

Global Government Bond Yields

 

December 4, 2018

December 3, 2018

November 30, 2018

November 29, 2018

US 10 year

2.95%

3.02%

3.02%

3.02%

US 30 Year

3.38%

3.38

3.38%

3.33%

UK

1.31%

1.33%

1.36%

1.34%

Germany

0.28%

0.31%

0.31%

0.32%

Brazil

9.95%

9.82%

9.89%

10.05%

Italy

3.15%

3.12%

3.21%

3.22%

Japan

0.06%

0.07%

0.08%

0.08%

 

 

Major U.S. Indexes

 

December 4, 2018

December 3, 2018

November 30, 2018

November 29, 2018

VIX

16.84

16.04

19.18

NA

DOW

257.53

257.80

253.39

NA

S&P 500

278.34

280.38

273.98

NA

NASDAQ

7158.43

7421.77

7296.39

NA

EM USD

1059.93

1054.71

1053.73

NA

 

Currency Cross Rates

 

December 4, 2018

December 3, 2018

November 30, 2018

November 29, 2018

USD/JPY

112.8100

113.590

113.5300

NA

EUR/USD

1.1339

1.1334

1.1316

NA

AUD/USD

0.7338

0.7369

0.7306

NA

USD/MXN

20.356

20.0611

20.226

NA

USD/CNY

6.8342

6.8893

6.95557

NA

USD Index

96.97

97.02

97.20

NA

 

 

Tellier Holdings Apprentice Fund

Tuesday, December 4, 2018

Equities

 

Close

P&L (%)

Shares

Average price

Entry date

BRK B

210.12

(-1.22%)

30

209.505

11/30/2018

KO

49.58

(-0.18%)

83

49.65

11/30/2018

MCD

185.04

(-0.03%)

19

187.43

11/30/2018

SNY

44.14

(-0.10%)

60

45.15

11/30/2018

SBUX

66.65

(-0.13%)

38

66.61

11/30/2018

LMT

286.73

(-0.24%)

6

302.45

11/30/2018

MSFT

108.52

(-0.20%)

15

110.28

11/30/2018

TCEHY

NA

(-0.08%)

23

39.87

11/30/2018

 

ETFs

 

Close

P&L (%)

Shares

Average price

Entry date

Franklin FTSE CHINA

FLCH

22.25

(-0.09%)

50

22.14

11/30/2018

SPDR S&P 500 ETF

SPY

270.25

(-0.53%)

15

274.38

11/30/2018

 

Cash

 

Close

P&L (%)

Market value

Average price

Entry date

EUR/GBP

0.89196

(-0.04%)

8920

0.89177

11/30/2018

 

 

 

Five Hundred Words 11/27/2018

Tuesday, November 27, 2018

Daily Writing

8:58 AM

Gold remains rangebound hovering around the $1200 spot price.  The price of gold has not moved outside of $1200 to $1235 per ounce since the middle of August.

Oil has started to hold ground at $51.00/barrel.  We found an informative clip assessing the current oil pricing situation.  In the current environment, which countries have the most impact on the price of oil?  Which events or types of events have the most significant impact on the global price of oil?

German bunds move higher, as the yield on the 10-year bund continues to move lower.  How are German and other European equities performing?  What determines the price of German government bonds?  How much impact does the European Central Bank (ECB) policy have on the domestic monetary policy of sovereign European states?

What sorts of things keep the E.U. up at night?  We know for sure that climate change is one of those things.  We know the idea of adopting a common military is also one of those things.

The yield of the 10-year United States Treasury is hovering around the 3.05% mark. We currently hold a significant position in PST, a 2X leveraged bond ETF. What are the bull and bear cases for bonds?

 

Market Data

Resource Commodities

November 27, 2018

November 26, 2018

November 20, 2018

November 19, 2018

November 16, 2018

Gold Spot

1221.60

1222.80

1224.55

1222.70

1214.50

Silver

14.190

14.250

14.405

14.340

14.270

Gold/Silver

85.81

85.86

NA

NA

NA

Platinum

842.00

841.00

847.00

841.00

840.00

Copper

2.73

2.72

2.80

2.80

2.75

Crude(WTI)

51.58

51.91

56.23

55.66

57.82

 

Global Government Bond Yields

November 27, 2018

November 26, 2018

November 19, 2018

November 16, 2018

November 15, 2018

US 10 year

3.07%

3.07%

3.04%

3.08%

3.09%

US 30 Year

3.32%

3.38%

3.29%

NA

NA

UK

1.39%

1.41%

1.39%

1.42%

NA

Germany

0.35%

0.36%

0.35%

0.36%

0.36%

Brazil

10.10%

9.97%

10.10%

10.15%

10.39%

Italy

3.25%

3.25%

3.60%

3.49%

3.51%

Japan

0.08%

0.08%

0.09%

0.09%

0.10%

 

Major U.S. Indexes

November 27, 2018

November 26, 2018

November 20, 2018

November 19, 2018

November 16, 2018

VIX

19.41

20.78

20.76

18.78

20.04

DOW

246.40

243.64

250.17

254.13

252.42

S&P 500

265.76

265.80

269.10

273.73

271.74

NASDAQ

7081.85

7051.86

NA

7247.87

7247.87

 

Currency Cross Rates

November 27, 2018

November 26, 2018

November 20, 2018

November 19, 2018

November 16, 2018

USD/JPY

113.6300

113.5700

NA

112.8600

112.8300

EUR/USD

1.1326

1.1340

NA

1.1427

1.1415

AUD/USD

0.7242

0.7233

NA

0.7289

0.7332

USD/MXN

20.623

20.399

NA

NA

NA

CHF/USD

1.00187

1.0012

NA

1.0033

0.9996

USD/CNY

6.9486

6.9396

NA

6.9427

6.936

USD Index

97.15

96.98

NA

96.39

96.43