Five Hundred Words 12/05/2018

Wednesday, December 5, 2018

Daily Writing

Market Overview

Markets are closed today for a National Day of Mourning in honor of late President George HW Bush.  Markets will reopen on Thursday.

Investors are still reeling from the sudden 3.00% drop in U.S. equities on Tuesday.  There are indications that China is actively looking to cooperate more with the United States, but there is no telling what that means for the markets when we resume trading at 9:30 AM on Thursday.

Little questions I’d like to answer eventually

  • What does an inverted yield curve mean for the broader economy?
  • The price of palladium has exceeded the price of gold for the first time in 16 years. What does this mean?  Why is this important?  Who does this impact most?  What is the use case for palladium?

China and Trump and America and trade wars, etc.

Following President Donald Trump’s open questioning of China’s commitment to reduce tariffs on US imports, China’s ministry of commerce stated publicly that it is committed to a 90-day timeline to address specific items.

Global markets cheered the weekend accord on Monday, only to reverse course Tuesday as doubts emerged over precisely what the world’s two largest economies had agreed on.

There is no good indication of how markets will respond to news that China’s ministry of commerce confirmed their 90-day commitment to purchase US imports and move to reduce or entirely remove tariffs within 90 days of December 1.

Government Bonds (German ones specifically)

The yield on the German 10-year government bond (also known as “the Bund” has fallen to 0.27%.

Why is this important?

When it comes to bonds, price and yield move inversely.  When the price of a bond moves higher, the yield moves lower.  Declining bond yields in the German Bund (or other comparably safe assets such as U.S. Treasuries) indicate that global investors are seeking safer assets to park their money.  For example, if European investors are starting to feel uncertain about European equities, they may choose to rotate their assets into bonds where they know they can find a guaranteed “risk-free” rate of return.

Here’s what we’re thinking: a 0.27% yield in nominal terms is negative in real terms.  Negative real yield means that once the bond matures, the investor will end of losing money.

If global investors can’t buy their domestic bonds and they can’t buy German bunds, then where do they go?

The clear answer is US Treasury Bonds.  At the time of writing, the yield on the US 10-year Treasury Note is 2.91%.  An important thing to note is that the real yield of U.S. Treasuries after taking long-term inflation into account is just 0.97%.  Compared to the negative-yielding German or Japanese Government Bonds (or even gold) a 2.91% yield is pretty darn attractive.

Miscellaneous items

Brexit

There’s still no Brexit deal.   I’m not entirely in tune with the happenings of Brexit (which from what I understand is likely for the better), but it feels like the indecision surrounding Brexit negotiations between the May government and the EU is fueling more anxiety and fear in the market than a hard Brexit would.  I understand that the issue is far more complicated than that, but that’s just how it feels to me.

We will consider a deeper dive into the Brexit narrative at some point, but for now, we’ll leave it here.

Personal Thoughts

Overall this blog is intended to be an exploration of my thinking and analysis of the world over time.  I hope whatever I write here can be informative for others as well.  My approach is to continually ask questions about things I don’t understand clearly, because of this my writing contains unanswered questions.  I hope moving forward I can develop a community of people who possess a learner’s mindset.  Ideally, those who follow my blog are skilled in areas where I am weak so that I can learn as well.  My sincere wish is to contribute to the thinking of others.

Market Data

Resource Commodities

 

December 5, 2018

December 4, 2018

December 3, 2018

November 30, 2018

Gold Spot

1238.00

1230.30

1228.28

1223.90

Silver

14.505

14.355

14.385

14.285

Gold/silver

85.47

84.84

85.29

85.76

Platinum

802.00

806.00

806.00

818.00

Copper

2.7555

2.8075

2.8571

2.824

Crude(WTI)

52.12

53.25

52.97

50.52

Global Government Bond Yields

 

December 5, 2018

December 4, 2018

December 3, 2018

November 30, 2018

US 10 year

2.91%

2.95%

3.02%

3.02%

US 30 Year

3.17%

3.38%

3.38

3.38%

UK

1.31%

1.31%

1.33%

1.36%

Germany

0.27%

0.28%

0.31%

0.31%

Brazil

10.09%

9.95%

9.82%

9.89%

Italy

3.05%

3.15%

3.12%

3.21%

Japan

0.06%

0.06%

0.07%

0.08%

Major U.S. Indexes

 

December 5, 2018

December 4, 2018

December 3, 2018

November 30, 2018

VIX

CLOSED

16.84

16.04

19.18

DOW

CLOSED

257.53

257.80

253.39

S&P 500

CLOSED

278.34

280.38

273.98

NASDAQ

CLOSED

7158.43

7421.77

7296.39

EM USD

CLOSED

1059.93

1054.71

1053.73

Currency Cross Rates

 

December 5, 2018

December 4, 2018

December 3, 2018

November 30, 2018

USD/JPY

113.2100

112.8100

113.590

113.5300

EUR/USD

1.1344

1.1339

1.1334

1.1316

AUD/USD

0.7268

0.7338

0.7369

0.7306

USD/MXN

20.5130

20.356

20.0611

20.226

USD/CNY

6.8545

6.8342

6.8893

6.95557

USD Index

97.08

96.97

97.02

97.20

Tellier Holdings Apprentice Fund

Wednesday, December 5, 2018

Equities

 

Close

P&L (%)

Shares

Average price

Entry date

BRK B

closed

closed

30

209.505

11/30/2018

KO

closed

closed

83

49.65

11/30/2018

MCD

closed

closed

19

187.43

11/30/2018

SNY

closed

closed

60

45.15

11/30/2018

SBUX

closed

closed

38

66.61

11/30/2018

LMT

closed

closed

6

302.45

11/30/2018

MSFT

closed

closed

15

110.28

11/30/2018

TCEHY

closed

closed

23

39.87

11/30/2018

ETFs

 

Close

P&L (%)

Shares

Average price

Entry date

Franklin FTSE China

FLCH

Closed

Closed

50

22.14

11/30/2018

SPDR S&P 500 ETF

SPY

Closed

Closed

15

274.38

11/30/2018

Cash

 

Close

P&L (%)

Position

Average Price

Entry date

EUR/GBP

EUR/GBP

(-0.04%)

10000

0.89177

11/30/2018

 

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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 11/26/2018

Monday, November 26, 2018

Daily Writing

8:37 AM

We are placing greater emphasis on risk management and portfolio construction.  Personally, I perform portfolio evaluations each day to address weaknesses.  I intend to use this blog as a means of keeping track of my work.  Additionally, I can use the blog to publicize my work, progress, and development strategy.

There are many things to learn each day.  I am working to geographically regionalize my framework because I learn best when I can visualize the system I am analyzing.  The world is a complex system which I am hoping to investigate.

This blog is intended to be daily, but I do take time off for holidays and travel days.  I spend my days reading and monitoring data.

I learn by asking questions and seeking the answer.  Sometimes I do not find the solution immediately or at all, but sometimes the question in itself or the process of seeking can be more critical.  This blog contains many questions that remain unanswered.

What is the importance of the gold/silver ratio?  What does it mean when the gold/silver ratio moves higher or lower?

The price of oil continues to fall considerably.  WTI Crude (Jan ’19) has dropped more than 30.00% since its high on October 3, 2018.  What is the cause of falling oil prices?  Despite the decline in price in recent weeks, WTI Crude is up close to 2.82% on the day at the time of writing.

Brazilian 10-year government bond yields have dipped below 10.00% for the first time since May 2018.

We’ve introduced the Mexican 10-year bond yield to our global government bond yield watchlist because we would like to keep a closer eye on the political developments of incoming Mexican President Andrés Manuel López Obrador (AMLO).  We have also introduced the USD/MXN currency cross pair to serve the same function.  AMLO is a socialist who heads the National Regeneration Movement (MORENA). [1]

We continue to emphasize the importance of building out a framework for understanding the flow of capital in the world.

At the end of the week, President Trump and Chinese President Xi Jinping will meet in Buenos Aires as part of the Group of 20 meetings and look for ways to ease tensions.[2]

A scientist in China claims to have created the world’s first genetically edited babies, in a potentially ground-breaking and controversial medical first.[3]  In what other scientific areas is China equally or as advanced?yield_curve_11_26_2018

What are the effects of a flattening yield curve vis-à-vis a steepening yield curve?  Which result is most desirable for the Federal Reserve?

The CBOE volatility index dropped considerably today, finishing at 18.90 after opening at 20.78, a 12.17% decline.

Market Data

Resource Commodities

 

November 26, 2018

November 20, 2018

November 19, 2018

November 16, 2018

November 15, 2018

Gold Spot

1222.80

1224.55

1222.70

1214.50

1203.25

Silver

14.250

14.405

14.340

14.270

14.130

AU/AG Ratio

85.86

NA

NA

NA

NA

Platinum

841.00

847.00

841.00

840.00

833.00

Copper

2.72

2.80

2.80

2.75

2.78

Crude(WTI)

51.91

56.23

55.66

57.82

56.53

Global Government Bond Yields

 

November 26, 2018

November 19, 2018

November 16, 2018

November 15, 2018

November 14, 2018

US 10 year

3.07%

3.04%

3.08%

3.09%

3.15%

US 30 Year

3.38%

3.29%

NA

NA

NA

UK

1.41%

1.39%

1.42%

NA

NA

Germany

0.36%

0.35%

0.36%

0.36%

0.40%

Brazil

9.97%

10.10%

10.15%

10.39%

10.44%

Italy

3.25%

3.60%

3.49%

3.51%

3.48%

Japan

0.08%

0.09%

0.09%

0.10%

0.10%

Major U.S. Indexes

 

November 26, 2018

November 20, 2018

November 19, 2018

November 16, 2018

November 15, 2018

VIX

20.78

20.76

18.78

20.04

20.41

DOW

243.64

250.17

254.13

252.42

250.61

S&P 500

265.80

269.10

273.73

271.74

268.76

NASDAQ

7051.86

NA

7247.87

7247.87

7129.04

Currency Cross Rates

 

November 26, 2018

November 20, 2018

November 19, 2018

November 16, 2018

November 15, 2018

USD/JPY

113.5700

NA

112.8600

112.8300

113.2200

EUR/USD

1.1340

NA

1.1427

1.1415

1.1303

AUD/USD

0.7233

NA

0.7289

0.7332

0.7272

USD/MXN

20.399

NA

NA

NA

NA

CHF/USD

1.0012

NA

1.0033

0.9996

0.9949

USD/CNY

6.9396

NA

6.9427

6.936

6.938

USD Index

96.98

NA

96.39

96.43

97.22

[1] https://en.wikipedia.org/wiki/National_Regeneration_Movement

[2] https://www.wsj.com/articles/u-s-china-trade-fight-risks-fragmenting-global-market-says-beijings-ambassador-to-the-u-s-1543228321

[3] https://www.theguardian.com/science/2018/nov/26/worlds-first-gene-edited-babies-created-in-china-claims-scientist

Image: National Geographic