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Esoteric Insights for October 2013 (sample)

Global trading ideas for analysts and portfolio managers from Esoteric Insights. For more information and to sign up for a trial subscription, visit http://www.esotericinsights.com

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Esoteric Insights for October 2013 (sample)

  1. 1. The Esoteric Report           Published  by,  Nariman  Point,  LLC   Monday  October  14th,  2013   Nariman  Point,  LLC   1  
  2. 2. Global  Briefing   •  SCll  no  resoluCon  on  the  U.S.  Government  shutdown  and  debt  ceiling   debates,  but  a  plan  should  pass  within  the  next  48  hours.     –  PrioriCzaCon  of  payments  is  technically  a  default  but  a  8  week  debt  ceiling   raise  is  the  most  likely  outcome.  “Nudging  the  can  down  the  road”  in  the   worlds  of  a  TV  commentator.  ExpecCng  markets  to  rally  strongly  on  a  deal;   however,  it  could  fade    just    as  quickly  a  la  the  “no  taper”  announcement  rally   last  month.   •  China  makes  another  round  of  comments  on  the  US’s  posiCon  as  global   reserve  currency.     –  Chinese  inflaCon  rose  3.1%  YoY,  exports  fell  .3%  YoY.     •  German  officials  cite  US  as  posing  a  larger  risk  to  Global  Markets  than  EU   or  Emerging  Markets.     –  Angela  Merkel  sCll  has  not  obtained  her  coaliCon  government.     –  Talks  of  EU  banking  Union  conCnue  laterally  with  no  REAL  progress.     Nariman  Point,  LLC     2  
  3. 3. Global  Briefing   •  ECB  begins  discussions  on  European  bank  recapitalizaCon.     –  Bank  stress  tests  next  year  may  reveal  substanCal  losses  presently  kept  out  of   view  from  the  invesCng  public.     –  The  IMF  states:  “Nobody  knows  the  true  scale  of  poten6al  losses  at  Europe's   banks,  but  the  Interna6onal  Monetary  Fund  hinted  at  the  enormity  of  the   problem  this  month,  saying  that  Spanish  and  Italian  banks  face  230  billion   euros  ($310  billion)  of  losses  alone  on  credit  to  companies  in  the  next  two   years.”   –  Depositors,  share  holders  and  bond  holders  will  be  expected  to  bare  the  first   losses  if  Germany  and  Finland  get  their  way,  while  Spain  and  Italy  will  push  for   access  to  ECB  bailout  funds.  The  quesCon  becomes  how  will  the  losses  be   broken  down  and  how  long  will  it  take  to  agree  on  such  a  plan?     •  German  courts  will  determine  the  legality  of  the  Outright  Monetary   TransacCons  (OMT)  later  this  month.     –  This  policy  tool  allows  the  ECB  to  suppress  borrowing  costs  for  European   naCons.     Nariman  Point,  LLC   3  
  4. 4. Global  Briefing   –  The  most  likely  outcome  is  that  German  courts  rule  that  OMT  is  condiConally   legal.  CondiConal  on  what?  We  will  find  out.  Since  OMT  was  announced   European  volaClity  receded  significantly.     10Y  BTP  Yield  since  OMT  Announcement   7.5   7   6.5   6   5.5   5   4.5   4   Nariman  Point,  LLC   10/2/13   9/2/13   8/2/13   7/2/13   6/2/13   5/2/13   4/2/13   3/2/13   2/2/13   1/2/13   12/2/12   11/2/12   10/2/12   9/2/12   8/2/12   7/2/12   6/2/12   5/2/12   4/2/12   3/2/12   2/2/12   3   1/2/12   3.5   4  
  5. 5. The  Euro  is  on  Fire:  Why?   •  The  Euro  has  been  on  a  tear  over  the  past  8  months  due  to  an  increasing   current  account  (CA)  surplus  as  well  as  USD  weakness.     –  European  officials  are  poinCng  to  the  Euro’s  8-­‐month  high  as  proof  of  a   European  recovery  but  this  may  not  be  the  case.     –  The  largest  contributor  to  the  Euro’s  strength  has  been  Germany’s   contribuCon  to  the  current  account  surplus.   •  Germany  makes  up  approx.  67%  of  the  total  Eurozone’s  CA  surplus.     –  Total  EU  CA  =  363B  USD;  Germany  CA  =241B  USD   –  In  2012,  Germany  =  104%  of  EU’s  CA  surplus.     •  Germany’s  largest  trading  partner  is  the  rest  of  Europe;  CA  surplus  implies   Germany  not  purchasing  goods  and  services  from  the  periphery.   –  Italy,  Spain,  Portugal  and  Greece  will  not  be  able  to  address  their  employment   issues  unless  Germany  increases  consumpCon  of  goods  produced  in  the   periphery.  The  data  suggests  that  this  is  not  happening.       Nariman  Point,  LLC   5  
  6. 6. 0   -­‐5   -­‐10   Nariman  Point,  LLC   4/1/2013   12/1/2012   8/1/2012   4/1/2012   12/1/2011   8/1/2011   4/1/2011   12/1/2010   8/1/2010   4/1/2010   12/1/2009   8/1/2009   4/1/2009   12/1/2008   8/1/2008   4/1/2008   12/1/2007   8/1/2007   4/1/2007   12/1/2006   8/1/2006   4/1/2006   12/1/2005   8/1/2005   4/1/2005   12/1/2004   8/1/2004   4/1/2004   12/1/2003   EU  Current  Accounts   Current  Account  %  of  GDP   2003-­‐2013   10   5   Portugal   Spain   Greece   Italy   Ireland   Germany   EU   -­‐15   -­‐20   Source:  Nariman  Point,  LLC   6  
  7. 7. Emerging  Markets:  Taper   •  Taper  in  2013  does  not  seem  likely  given  the  Government  shutdown  and   debt  ceiling  debates,  especially  given  a  new  debt  ceiling  deadline  of  Jan  7.     –  This  would  be  posiCve  for  currencies  and  equiCes  of  countries  with  large   current  account  deficits  who  need  to  borrow  money  to  plug  their  spending   gap.  No  taper  means  financing  costs  will  remain  low…for  now.     US10Y  Yield   20   15   10   12/1/12   2/1/11   4/1/09   6/1/07   8/1/05   10/1/03   2/1/00   4/1/98   6/1/96   12/1/01   Nariman  Point,  LLC   8/1/94   10/1/92   12/1/90   2/1/89   4/1/87   6/1/85   8/1/83   10/1/81   2/1/78   12/1/79   4/1/76   6/1/74   8/1/72   12/1/68   10/1/70   0   2/1/67   5   4/1/65   •  If  the  US  10  Year  conCnues  to  rally  past  2.7%,  this  could  be  bullish  for  the  Indian  Rupee  and  other  large  CA   deficit  countries  like  Turkey.  While  these  are  not  necessarily  reasons  to  invest  in  a  country  for  the  long  haul,   this  is  certainly  a  logical  way  to  play  lower  U.S.  rates  with  greater  upside  than  simply  buying  bonds  outright.   TUR  (Turkish  ETF)  has  outperformed  the  TLT  (20  year  US  Bond  ETF)  since  the  “no  taper”  announcement.   Genng  long  US  10Y+  bonds  has  generated  approximately  3%  returns  post  the  Fed  announcement,  where  as   TUR  is  up  over  20%.     6/1/63   •  7  
  8. 8. 0   -­‐2   -­‐4   -­‐6   Nariman  Point,  LLC   3/1/2013   11/1/2012   7/1/2012   3/1/2012   11/1/2011   7/1/2011   3/1/2011   11/1/2010   7/1/2010   3/1/2010   11/1/2009   7/1/2009   3/1/2009   11/1/2008   7/1/2008   3/1/2008   11/1/2007   7/1/2007   3/1/2007   11/1/2006   7/1/2006   3/1/2006   11/1/2005   7/1/2005   3/1/2005   11/1/2004   7/1/2004   3/1/2004   11/1/2003   7/1/2003   3/1/2003   EM  Current  Account   Current  Account  as  %  of  GDP   2003-­‐2013   6   4   2   Indonesia   Brazil   India   South  Africa   Turkey   -­‐8   -­‐10   -­‐12   8  
  9. 9. EM  Currencies   •  Large  budget  and  CA  deficits  in  EM  counCes  like  India  have  led  to   significant  currency  declines,  but  have  rallied  sharply  since  the  “no  taper”   announcement.       INR  SPOT   No  Taper   70   68   66   64   62   60   58   56   54   52   50   Nariman  Point,  LLC   9  
  10. 10. EM  Benefits  from  No  Taper   TUR  vs.  TLT     %  Change  from  2012-­‐2013   40.00%   30.00%   20.00%   TUR   10.00%   TLT   0.00%   9/24/12   10/24/12   11/24/12   12/24/12   1/24/13   2/24/13   3/24/13   4/24/13   5/24/13   6/24/13   7/24/13   8/24/13   9/24/13   -­‐10.00%   -­‐20.00%   No  Taper   Nariman  Point,  LLC   10  
  11. 11. Alpha  GeneraCon:  Trading  US  Fear   •  We  closed  a  short  VXX  posiCon  on  Thursday  aqer  iniCaCng  the  trade  on   Tuesday.     –  Purchased  11/16/13  $16  Puts  for  approximately  $1.40,  sold  $2.10.     •  Implied  vol  was  trading  north  of  70  with  realized  in  the  50s  suggesCng  that  the  market  was  overdoing  the   probability  of  U.S.  Default.     11/16  $16  VXX  Put   3.5   3   2.5   2   Nariman  Point,  LLC   10/11/13  0:00   10/10/13  0:00   10/9/13  0:00   10/8/13  0:00   10/7/13  0:00   10/6/13  0:00   10/5/13  0:00   10/4/13  0:00   10/3/13  0:00   10/2/13  0:00   10/1/13  0:00   9/30/13  0:00   9/29/13  0:00   9/28/13  0:00   9/27/13  0:00   9/26/13  0:00   9/25/13  0:00   9/24/13  0:00   9/23/13  0:00   9/22/13  0:00   9/21/13  0:00   9/20/13  0:00   9/19/13  0:00   9/18/13  0:00   9/17/13  0:00   1   9/16/13  0:00   1.5   11  
  12. 12. Overblown  Fear  of  U.S.  Default   1M  T-­‐Bill  Yield   U.S.  CDS  Curve   0.4   70   0.35   60   0.3   0.25   50   0.2   40   0.15   30   0.1   20   0.05   0   4/15/13   -­‐0.05   10   5/15/13   6/15/13   7/15/13   8/15/13   9/15/13   0   6M   1Y   2Y   3Y   4Y   5Y   7Y   10Y   The  CDS  curve  has  inverted  due  to  largely  unfounded  risks  of  a  U.S.  default.  This   creates  an  opportunity  to  bet  on  curve  normalizaCon  similarly  to  the  summer  of  2011   during  the  last  debt-­‐ceiling  related  inversion.     Nariman  Point,  LLC   12  
  13. 13. Alpha  GeneraCon:  Debt  Deal  Trade   90   80   70   60   50   40   30   20   10   0   6M   5Y   6m5Y  Spread   30   20   10   Bps   The  last  Cme  the  curve  was  inverted   and  6m  CDS  spread  traded  to  a   premium  over  the  5Y  was  the  last  debt   ceiling  debate  in  2011.       In  order  to  match  duraCons,  one   needs  to  sell  roughly  6.8x  the  6m  than   the  5Y.       In  2011,  the  spread  normalized    by   roughly  40bps  and  now  the  inversion   is  more  pronounced  senng  a  trade  up   for  an  even  larger  potenCal  gain.   Bps   6m  vs.  5Y  US  CDS   0   -­‐10   -­‐20   -­‐30   -­‐40   Nariman  Point,  LLC   13  
  14. 14. Alpha  GeneraCon   •  ConCnue  to  be  bullish  on  U.S.  10Y   –  CPI  remains  low,  government  shut  down  will  shave  approximately  .5%  from   Q4  GDP  growth  (although  this  should  be  made  up  in  Q1  according  to  Goldman   Sachs  research  report),  U.S.  earnings  disappointment  risk,  no  2013  taper.     –  Probability  of  U.S.  default  is  infinitely  less  than  risk  factors  menConed  above.     –  Those  who  are  somewhat  worried  of  a  disrupCon  in  the  U.S.  Bond  market  may   be  interested  in  diversifying  into  Mexican  and  South  Korean  Bonds.     •  •  •  •  Mexico  has  a  slight  -­‐1.45%  current  account  deficit  relaCve  to  the  over  5%  CA  deficits  of  other  EM.     South  Korea  has  over  a  5%  CA  surplus.     Both  countries  weathered  the  EM  volaClity  throughout  the  year.     Although  very  high  correlaCons  (see  next  slide)  to  U.S.  Government  bonds,  in  a  tail-­‐risk  even  these  bonds  may   outperform  simply  due  to  a  lack  of  safe  haven  assets  in  the  developed  word.  Asia’s  former  safe  haven  asset,   the  JGB,  is  a  death  trap;  Bonds  of  Eurozone  are  too  risky;  Other  developed  naCons  are  simply  not  as  auracCve.       Nariman  Point,  LLC   14  
  15. 15. AlternaCve  to  U.S.  Treasuries   US,  Mexico,  Korean  Govt  Yields  (%)   2008-­‐2013   12   2008-­‐2013   Correla6on   Current  Bond   Dura6on   10   US:MEX   81.81%   MEX:KOR   92.74%   US:KOR   86.25%   US   8.6   MEX   7.07   KOR   8.31   8   US10Y   6   MEX10Y   KOR10Y   4   2   0   10/15/08   10/15/09   10/15/10   10/15/11   10/15/12   Nariman  Point,  LLC   15  
  16. 16. Similar  Credit  Risks   Korea  vs.  Mexico  5Y  CDS  Spread   800   700   600   Bps   500   KOREA  CDS  USD  SR  5Y  Corp   400   MEX  CDS  USD  SR  5Y  Corp   300   200   100   0   1/6/06   1/6/07   1/6/08   1/6/09   1/6/10   1/6/11   1/6/12   Nariman  Point,  LLC   1/6/13   16  
  17. 17. Recap   •  US  equiCes  seem  vulnerable  to  a  melt-­‐up/down  depending  poliCcal   rhetoric  and  earnings  season  (downside  risk  on  earnings).     •  The  Fed  Taper,  German  ElecCon,  Syria,    Italian  poliCcal  risks  subsided  and     lower  gas  prices  are  all  bullish  signals;  however  markets  are  not  soaring.   One  the  same  token,  the  government  has  shut-­‐down  for  14  days  and  the   U.S.  is  approaching  the  debt  ceiling  and  the  markets  have  not  collapsed.   The  U.S.  does  not  “run  out  of  money”  on  Thursday  it  only  cannot  borrow   any  more.  There  is  sCll  some,  $30B  in  reserve  +  tax  receipts  leq  so  a  U.S.   default  would  be  highly  unlikely.         Nariman  Point,  LLC   17  
  18. 18. SubscripCon   •  SubscripCon  to  The  Esoteric  Report  is  $225.00  USD  per  month.     •  Please  e-­‐mail  info@narimanpointgroup.com   Nariman  Point,  LLC   18  

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