Tuesday, July 23, 2013

Press Snips

We, here at Archbridge Capital are trying to inform our readers about some of the trades that we take ourselves and to demonstrate our views about the markets. In short we put our money where our mouth is and are quiet otherwise. Obviously, we do not publish all our trades and also do not publish our ideas before we have put on the trades ourselves, as we do need to leave some advantage to our investors and ourselves. We believe that in that spirit we should also update you every once in a while, when we are in the press giving interviews on CNBC, the BBC or Bloomberg.

Below we talk a little about the oil markets and summarize our view that these high gasoline prices are unsustainable, while QE tapering will assist on putting pressure onto the oil complex. This article was also published in "The Oil Drum".

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From Bloomberg News:

Crude Declines before Bernanke Testimony

17th of July 2013

By Grant Smith & Ben Sharples

“People are going to realize that tapering of quantitative easing is on the cards, and there is not going to be an escape from this” said Hakan Kocayusufpasaoglu, chief investment officer at Archbridge Capital AG, a Zug, Switzerland-based hedge fund. “That will probably strengthen the dollar and, although crude has rallied lately on supply issues, it will put pressure on the oil market.”

http://www.bloomberg.com/news/2013-07-16/wti-trades-near-two-day-low-as-chart-shows-unsustainable-gains.html

Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.

Sunday, July 21, 2013

Fast and Furious

This new 'Fast and Furious' series will give a quick overview of current trading themes a la Archbridge Capital, without indulging into the detail of any one idea. For that we refer to our regular notes, which tend to give a more detailed view of a single theme.

A lot of QE talk, but the fact remains that QE tapering is coming, probably by end of this year.

US: We see long equities vs bonds, long US equities vs EM equities (esp. with large current account deficits), long the US$ vs Yen and GBP and overall underweight EMs

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The differing Macro stories that are developing are highly interesting for Trading Opportunities. Let us quickly look at each major region as we see them: USA, Euroland (EU), Japan and the Emerging Markets (EM).

USA:
We see growth in the housing sector and auto sector supportive of second half growth. Some consumer spending pick-up due to the fiscal drag effects beginning to fade in the second half of the year should provide further support. Additionally, we think that better EU growth (leaving the recession behind in the 2nd half of the year) will assist to off-set any slowing from EMs and hence further assist the US recovery. We do not expect QE tapering until earliest in December this year and have confidence that any policy errors (ie early tapering) will be avoided. This results in tapering coinciding with stronger economic growth. Inflationary pressures will be kept at bay and in fact some deflationary pressures may continue to develop due to a) weaker commodity prices due to EM slowdown and b) the depreciating yen but will prove temporary.

EU:

Euroland will come out of its recession in the second half of 2013 and will reach moderate growth rates. This bottoming out period should provide opportunities especially in equity world. One point to note is that the last week has shown strong EU equity performance, while periphery spreads have widened. Monetary stance will probably have to become more stimulative, especially in the UK, as interest rates are correlating too strongly to the US rates.

EM:

Continued slowdown in EM growth. Especially in China via a) an engineered slowdown which reduces credit and avoids an asset bubble b) lower exports c) an attempt to turn the economy to a more domestic consumption driven and less foreign investment driven one. Chinese slowdown is affecting other EMs like Australia who rely on China for her exports.

Japan:

Massive continued monetary easing should assist in keeping bond yields at low levels, while depreciating the yen further and helping equities to rally. Economic growth is being stimulated by BOJ and government policies, but more is needed especially in the arena of structural reforms, which we expect to materialise after the Abe government wins overwhelmingly in the Upper House elections.

THE LONG AND SHORT OF IT:

Bonds: Short

We see the way clear for further bond weakness (albeit slower than we experienced to date) especially in the USA (and with it lower gold prices in the medium term). EU bond yields have so far followed suite and we do not believe that their economies are equipped to handle such a move and expect (the ECB to a small extent) the BoE to increase QE measures in order to prevent further yield appreciation (they have started this process by giving forward guidances for the first time, we believe there is more to come). These measures will inadvertently result to weaken their currencies vis-a-vis the US$ (see below). JGB rates have not followed the rate increases in the rest of the world and we do not expect them to do so going forward, due to massive monetary easing (and recently increased frequency) and agreements that we suspect have been made with major bondholders. This lack of movement in the JGB markets give us more confidence about our Japanese trading opinions below.

Cap on fast rate rises in rest of world:

Rates will not be allowed to rise a huge amount too quickly, especially outside of the USA since a rise of 300 bps with current economic growth would wipe out value worth 30% of japan's GDP (with its entire banking system) and 20% of the UK's GDP. This underlines the notion that if we see rates rise further in the USA then other nations will have to redouble their efforts to keep their rates down. Further QE and much weaker FX rates would become necessary for the above two mentioned countries.

Equities: Long

With unemployment falling in the USA, the economy gaining some momentum again in the second half of the year, while real rates are slowly rising we should see equity markets benefiting the most from this. We expect cyclicals will take the pole position from financials, who have been carrying q2 strength. Continued strength in the US housing market may be taken advantage of via purchasing lumber.

Japanese real rates are set to fall as inflation expectations and inflation picks up while nominal rates are kept at bay by the BOJ and their massive QE policies. We also believe, looking at recent JGB moves that Japan has overcome the initial fear that bondholders would panic out of their holdings of bonds entirely. Instead yields have not risen as in the rest of the world which should allow for further yen weakening and further economic strength. This should translate into substantially stronger equity valuations in Japan. Please also note that more than 50% of Japanese companies are currently debt free. Abe's third arrow includes the reduction of corporate tax in Japan from 40% to approximately 20-25%. And there are a large number of trillions in Mr. and Mrs. Watanabe's cash accounts just waiting to be deployed. A real deployment into equities may have just started, while foreign investors will also continue to allocate funds into the Japanese equities markets, while hedging their Yen exposure.

FX: Long $

Monetary policy differences should be the key driver of FX rates in our current economic structure and here we expect the US$ to be strongest and the Yen to be the weakest, due to monetary policy differentials. While we do expect the UK to push monetary easing further as their yields rise inadvertently and hence weaken the GBP further, perhaps much further. Please note that the UK has substantial problems with investments, which have collapsed since the 2008 crisis and have not recovered. This keeps the UK economy structurally weak, even though private consumption seems to be picking up, but only by increasing debt.The savings ratio in % has collapsed from 8% after the crisis to a mere 4% currently. All of the recent economic strength in the UK is based on this short term driver...

(We have been asked by our readers to comment about the Euro-US$ FX rate and we shall oblige:
ECB policy is still too tight. Tail risks getting priced out due to the ECB's OMT and the establishment of the ESM. Additionally, we see EU growth pick up in the second half of the year which could prove supportive and assist further in pricing out break-up risk. Overall we see Euro-US$ within a range with a small strengthening bias towards the euro in the next months. But closer to QE tapering we see that pendulum switching in favour of the US$.)

In EM world (underweight), we see them trying to weaken their currencies as their export markets (China) are slowing and money that was searching for yield in a liquidity induced world is starting to make its way back to the developed markets like the US. This should have longer term bearish effects on EM currency and bond markets, as well as equity markets. The danger is that this movement becomes more violent over time as a lack of value buyers may result in a 'no bids' scenario...

Tuesday, July 9, 2013

Press Snips

Our Latest Research has been published in the well-known publication "Hedge Fund Insight" and we have reproduced it below.

"Hedge Fund Insight" has also quoted us in one of their own stories.

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Everything that Glitters...A Gold Bear Explains His Position

on July 3, 2013

By Hakan Kocayusufpasaoglu, CIO Archbridge Capital AG

QE reduction is the start of tighter monetary policy in the US. Though we expect this tightening to be slower than the Fed forecasts, we do believe that this is only the beginning.
Gold reacts badly to higher real interest rates and rates will rise for a long while yet.
Any other potential driver for the Gold price is being reduced: safe haven, inflation, speculative interest and opportunity cost.
We are bearish of gold in the long term. (We expect a bounce in the short term due to the market having over-reacted to QE tapering).

http://www.hedgefundinsight.org/everything-that-glitters/

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Hedge Fund Marketing Using the Internet

on June 27, 2013

By Mauro D’Andrea, and Simon Kerr

"Some Hedge Fund Examples

The most easy to execute example is to add images to your website (and your manager letters). All the evidence suggests that your investors will be more engaged if you do.

A much bigger effort would be to add a blog. A blog will increase brand awareness, even in the hedge fund business. For example macro fund Archbridge Capital runs a blog called the Archbridge Capital Journal that attracts 3,000 visitors a month. Access to a blog can be password protected to ensure readers are pre-qualified, if that is required..."

http://www.hedgefundinsight.org/hedge-fund-marketing-using-the-internet/

Thursday, July 4, 2013

Everything that Glitters...

QE reduction is the start of tighter monetary policy in the US. Though we expect this tightening to be slower than the Fed forecasts, we do believe that this is only the beginning.

Gold reacts badly to higher real interest rates and rates will rise for a long while yet.

Any other potential driver for the Gold price is being reduced: safe haven, inflation, speculative interest and opportunity cost.

We are bearish of gold in the long term. (We expect a bounce in the short term due to the market having over-reacted to QE tapering).

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We have talked about Gold a number of times in our reports, let us quickly refresh our memories:

"Since QE is probably not going to be increased in the US it is reasonable to assume that real rates will begin to become positive over time and herewith ending the 10-year gold bull market. We, here at Archbridge Capital do believe that this will indeed occur and that rates will begin rising as we have discussed in "There is treasure in them Treasuries" Apr 4, 2013. We also believe that inflation will not pick up in the foreseeable future and hence we do expect that real rates in the forwards will begin to turn positive as the economies gradually strengthen. We would expect that gold does not see the previous highs in a very long time, perhaps even in this decade." from "Is there Method in the Market Madness?" April 23, 2013.

We have emphasised that gold's main driver is real interest rates and since we believed that interest rates had to rise in the USA we also believed that gold had to weaken as well as the US$ to strengthen. We stated this most explicitly in our report "A love supreme: The US$ is back" May 21, 2013 where we stated in our headline:

"For all the same reasons that the US$ will gain strength we should see pressure on gold".

We have also stressed that QE is a monetary mechanism by which real interest rates are effectively pushed to more and more negative levels, since nominal rates cannot go below zero. This has enable the Fed to create an environment where real interest rates were pushed to extremely negative levels in order to prevent an outright depression after the 2008/09 economic shock. Once this cash injection is being reduced the Fed is in effect raising real interest rates. This will have an ongoing negative impact on gold as we are only at the start of QE tapering. Over time QE will be ended and later the Fed will raise its interest rates - the longer term direction of gold seems clear!

A lot of readers and investors alike have asked us to write in more detail about gold and so we shall. Please note that all graphs below are with the courtesy of "Capital Economics", one of the best research houses available:

Quick recap of the gold story:

Gold has been rising substantially after the 2008 crisis, from around 800$ at the end of 2008 to nearly 2000$ in September 2011. During this time interest rates moved to 0.25% in the US and a massive QE programme was initiated, which grew finally to its current size of 85bn$ per month. With the inflation rate in a range of 1-2% throughout this period we saw real interest rates fall from substantially positive levels into very negative levels. To demonstrate just how negative real rates had become we must translate QE into monetary interest rate levels. This yields nominal rates of around -4.5%! This meant real rates were at a whopping -5.5 - -6%!

However, with QE injections planned to taper off gold has rightly plummeted substantially. In effect monetary policy is being tightened and hence we are seeing an instrument that is highly real interest rate sensitive reacting. The gold price fell from nearly 1700$ at the start of this year down to 1179$ at the end of June and nearly all of that since April 2013. A more than 30% fall since the start of the year.

However, please note that the average gold price in real terms ie. adjusted for US inflation since 1970 is just 730$ (we are still above the average). Also gold was trading around 800$ at the start of the crisis.

AVERAGE REAL GOLD PRICE SINCE 1970

Gold as an inflation hedge:

There is clear evidence of fading fears of inflation, which we can see in the breakeven inflation rates derived from US government bond prices. There are reasons to suspect that deflationary pressures will lurk for a while longer, since wage pressures seem subdued in general in the US, especially since the participation rates has dwindled. People have simply given up looking for jobs and may re-enter the job market once more jobs are available. Deflationary pressures are also being exerted via lower commodity prices worldwide due to a slower growing EM world including China. Additionally, Japan's monetary experiment, and other EM's whose currencies are weakening should drive their currency much lower over time exerting ever lower prices for its goods and services (imported deflation).

GOLD VS US 5 YR INFLATION

BREAKEVEN

Gold as safe haven:

Tail risks are being priced out of the market, with China engineering a gradual slowdown, rather than crashing. The Eurozone is showing signs of stabilisation and is in the midst of a 'bottoming-out' phase, rather than breaking up. Overall the world is in effect a safer place, which we can also see by the low volatility rates that have been prevalent pretty much throughout the year.

GOLD VS SPANISH 5 YR CDS

Gold's opportunity cost:

Talk of QE reduction has caused yields in the US 10-year to rise and with it real interest rates, as discussed above. Also note that the inverse relationship of gold and the US$ will increasingly prevail and assist gold's descent as we have mentioned in previous notes.

GOLD VS US 10 YR REAL YIELD

What next for Gold?

We believe that currently the announced schedule for QE tapering is probably too aggressive and that the end of QE will not be achieved before the end of 2014 at the earliest. The market has more than priced in what we believe to be a more realistic forecast. We cannot see the US economy recovering at the speed that the Fed is forecasting, especially given the Eurozone's longer than expected bottoming out period and China's engineered slowdown via the reduction of credit. Adding to this the EM slowdown story that is in progress and we cannot see the unemployment rate in the US getting reduced fast enough to meet the Fed's target rates, especially since a lot of the fall in unemployment occurred due to a fall in the participation rate. Hence we believe that gold will probably bounce to stronger levels from here in the short term.

GOLD VS US MONETARY BASE

But let us be clear: We believe strongly that the process that is commencing via the tapering of QE is only a starting point and that we are going to see pressure on gold prices for a very long while into the future, until gold becomes as unimportant to the financial community and the world population as it once was before the crises. Hence we do see longer term gold prices reach pre-crisis levels and closer to its longer term average probably by the time the Fed tightens sometime within 2015.

Tuesday, July 2, 2013

ABC ScoreCard

Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited into the positions we advocate.

We have published a number of views/trades in our publications in the last few months (list and results to date below).

Out of the six suggested trades since our last scorecard five have been profitable. One has been stopped, but we had advised exiting most of that trade already (crude oil). We are grateful for that.

Overall the portfolio has been very profitable. Please note that it is the fact that profitable trades are much more profitable in comparison to losing trades that assures the portfolio overall to be profitable.

"There are good trades that make money and bad trades that make money. There are good trades that lose money and bad trades that lose money. Money in the long-run is made from continuously taking the good trades." - Old Trading Adage.

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It is time to lay it bare and go over our recommendations again and see how our recommendations have performed, given that they are published some time after we have put on the recommended trades ourselves.

THE GOOD

Short JPY long Dollars:

We have since last November recommended shorting the Japanese yen against dollars. This trade has worked very well. We had "substantially reduced" our exposure to this trade as we stated in "Take Five" June 3, 2013. due to the sharp rise in interest rates in Japan, which could have derailed the entire process. Subsequently the yen has fallen substantially until recently.

We noticed that while other rates worldwide have risen due to QE tapering the JGB rates have remained rather steady. This for us was an indication to enter into this trade again. We have decided that in the future we will publish such steps under a new and very short note called "Fast and Furious" where we will highlight some changes to existing trades and rationale rather than re-state the entire argument for a given trade. This way our readers can stay better informed and will get more timely information.

Overall we remain bearish of the yen and expect Abe's popularity to gain him the required majority in the House elections in 3 weeks or so time in order to implement real structural change. We also believe that some kind of accord will be achieved between long term bond holders and the central bank, which will substantially reduce the volatility in the JGB rates. With this notion we are happy to be in the short yen trade and expect to see new highs, especially with our stated view of a strengthening US$ ("A love supreme: The US$ is back" May 21, 2013)

Long US$ (trade-weighted and vs EM FX):

We expect that the US$ has indeed entered an up-cycle as the rest of the world is taking the reflation burden more and more on their shoulders, which will give the USA more scope to reduce its massive QE programme within the next 12 months (and now we know that this tapering will begin probably at the end of this year!) and allow the US$ to appreciate even further. For more details please see our published article "A love supreme: The US$ is back" May 21, 2013.

Short US Treasuries:

We recommended in "There is treasure in those Treasuries" Thursday, April 4, 2013 to short longer term US Treasuries for the longer run (12 to 18 months), since we do not believe that negative real yields more than 10-years out are sustainable and that the US economy is recovering (despite the massive fiscal drag the US government has forced upon it...just think what would happen if that drag was removed...). This trade is working well to-date but really should be seen as a much longer term position which will come into full swing after the turn of the year and beyond. As above the tapering schedule outlined by the Fed has and should help this trade further.

Short Gold:

We remain bearish gold for the long run (though that is the consequence of the two above and hence not in our previous scorecard, since it would have, in effect, increased our position due to correlation risk. A lot of our readers have asked us for a more thorough analysis on gold and we will be publishing this in the next few days. We have, however, talked about our bearish view on gold a number of times in our past reports:

"Since QE is probably not going to be increased in the US it is reasonable to assume that real rates will begin to become positive over time and herewith ending the 10-year gold bull market. We, here at Archbridge Capital do believe that this will indeed occur and that rates will begin rising as we have discussed in "There is treasure in them Treasuries" Apr 4, 2013. We also believe that inflation will not pick up in the foreseeable future and hence we do expect that real rates in the forwards will begin to turn positive as the economies gradually strengthen. We would expect that gold does not see the previous highs in a very long time, perhaps even in this decade." from "Is there Method in the Market Madness?" April 23, 2013.

Most explicitly in our report "A love supreme: The US$ is back" May 21, 2013 where we stated in our headline: "For all the same reasons that the US$ will gain strength we should see pressure on gold". Enough said.

Longish US Equities:

We have in "Is there Method in the Market Madness?" April 23, 2013 recommended to be 'longish' the US equities market and that the next equity wind will come a.) from a rotation out of bonds into equities - which has not happened yet, instead we saw money move from cash into equities, the great rotation is yet to come, and we believe it will in due course. b.) from lower input costs due to commodity prices re-aligning themselves to their new marginal cost price. This part is already underway and we are seeing this especially in industrial metals like copper.

We mentioned "longish" equities due to two reasons: 1.) a large margined presence in the equities space via investors which has often signalled exhaustion and 2.) an already large move where the underlying fundamentals are not able to keep up and an overcrowding of this trade - though overcrowding is perhaps a little misleading since hedge fund beta on equities is one of the lowest and there may eventually be a chase for the missed return in equities...we sustain our relatively small exposure to US equities and as described below have added to it.

Together with start of month and start of quarter inflows into equities we should see a strong and quick rally in equities this month. To this effect we have added a little to our long equity positions. Please also note that a normalisation process in longer term interest rates has commenced. A steeper yield curve will help financials and at the same time assist in the workings of the monetary transmission mechanism via more bank lending that will occur, as banks earn more money with a steeper yield curve. This will assist economic growth in the US going forward. History shows us that equity markets react negatively at first to real rate rises but that is swiftly followed by a 5-10% rally...

THE BAD

Short Crude oil outright or via spreads: We recommended shorting crude outright or crude spreads and have done so near 110 US$ for Brent. We then recommended substantially reducing the position while it was trading around 100US$ in "Is there Method in the Market Madness?" Tuesday, April 23, 2013

As we have gone on public record via interviews or publications we do believe that the brent crude price will eventually end up trading below 100US$ but as we had stated we have only a very small position on this view via spreads at the moment. We have since exited the trade completely.

THE UGLY

Not this time and for that we are grateful

Overall, we had a good period with most of our recommendations bearing fruit and making substantial gains, even when published after we had already entered into the trades ourselves ahead of time.