In judging near-to-intermediate term FI price change one must have a view of economic reality ahead but key is to have a view of the market crowd’s notion of reality ahead and understand the FLAW that exists therein, if any. Thus equipped and assuming one’s insight is correct one can do well as the herd reverses direction, stampeding back from where it came. It is only key to get the timing right so as not to be converted to crow bait.
Recent developments in the UK and the US illustrate this point quite nicely.
We advised late June that traders look for an expansion in the UK term structure, that course-of-least resistance for this spread would remain wider into year end and under no circumstances were traders to look to get short (S-L) this spread. (That advice has performed fairly well, 2-30 out from 270 to 297 or so, 9/14, now back in a tad.) Why? Because of the key FLAW to consensus for this credit; because economists, caught up in the dash for security, badly underestimated economic activity ahead, and, we knew it. Once we had that in hand we had captured price change ahead. Thus, UK Industrial Production, Exports and Employment have blown through consensus. Not strong naturally, simply stronger than most models predicted. Of course we do not want to be accused of cherry picking; a few reads have come in south of consensus; but on the whole, observers were taken in.
For the US we did not see opportunity in real-sector activity ahead vs street consensus as we did in the UK; that is, we did not think St consensus was far off. But the opportunity for this credit hinged on crowd behavior and Fed policy. We and our readers have understood that behind the scenes most policy makers understand they can’t do much, that their role has been reduced to that of cheer leading. But Bernanke and others figure it can’t hurt, and nothing wrong nowadays with making a little fiscal policy when you’ve got nothing much else to do.
Thus, the moment so-called QE3 was announced and the term structure blew out – opportunity knocked, and loudly. We recommended on Sep/14 that traders sell (S-L) this spread that moment, 2-30 then 285 or so, 5-10, 116; last, 268, 107. As we noted then, real sector developments would not support the crowd’s mad dash, “…the US economy just ahead does not justify the much weaker FI prices logged last two days, even given the Fed move. This will dawn on the market crowd in short order.”
It just has, with a little help from the E-Z and China.
In both cases we have used the spread that eclipses most other trading activity – the term structure. Very simple, even boring but with that in hand, one can do wonders for the bottom line, through the galaxy of other instruments available.
Finally, this illustration brings us back to basic rules of behavior in trading in this arena. Avoid complexity like the plague. Make way for the crowd's rush, and then strike as the same are about to go off the cliff. Economists and investors – shouting out, holding hands together in the dark.
Robert Craven
Recent developments in the UK and the US illustrate this point quite nicely.
We advised late June that traders look for an expansion in the UK term structure, that course-of-least resistance for this spread would remain wider into year end and under no circumstances were traders to look to get short (S-L) this spread. (That advice has performed fairly well, 2-30 out from 270 to 297 or so, 9/14, now back in a tad.) Why? Because of the key FLAW to consensus for this credit; because economists, caught up in the dash for security, badly underestimated economic activity ahead, and, we knew it. Once we had that in hand we had captured price change ahead. Thus, UK Industrial Production, Exports and Employment have blown through consensus. Not strong naturally, simply stronger than most models predicted. Of course we do not want to be accused of cherry picking; a few reads have come in south of consensus; but on the whole, observers were taken in.
For the US we did not see opportunity in real-sector activity ahead vs street consensus as we did in the UK; that is, we did not think St consensus was far off. But the opportunity for this credit hinged on crowd behavior and Fed policy. We and our readers have understood that behind the scenes most policy makers understand they can’t do much, that their role has been reduced to that of cheer leading. But Bernanke and others figure it can’t hurt, and nothing wrong nowadays with making a little fiscal policy when you’ve got nothing much else to do.
Thus, the moment so-called QE3 was announced and the term structure blew out – opportunity knocked, and loudly. We recommended on Sep/14 that traders sell (S-L) this spread that moment, 2-30 then 285 or so, 5-10, 116; last, 268, 107. As we noted then, real sector developments would not support the crowd’s mad dash, “…the US economy just ahead does not justify the much weaker FI prices logged last two days, even given the Fed move. This will dawn on the market crowd in short order.”
It just has, with a little help from the E-Z and China.
In both cases we have used the spread that eclipses most other trading activity – the term structure. Very simple, even boring but with that in hand, one can do wonders for the bottom line, through the galaxy of other instruments available.
Finally, this illustration brings us back to basic rules of behavior in trading in this arena. Avoid complexity like the plague. Make way for the crowd's rush, and then strike as the same are about to go off the cliff. Economists and investors – shouting out, holding hands together in the dark.
Robert Craven
No comments:
Post a Comment