- 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 three have been profitable. Two have been stopped, and one has not made nor lost any money.
- Overall the portfolio has been 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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We shall start the post-summer season by updating our Score Card and giving our views on the most relevant items on the agenda: Trades we thought would make money back in July and what should be done with them going forward.
THE GOOD:
Long US Equities: Positive
This trade has done very well since the last scorecard published at the start of July. Equities are increasingly responding to the underlying economic growth and the great rotation is slowly beginning: we are seeing a substantial outflow out of bonds and some of it is finding its way into equities. We are still bullish of equities and remain with this trade.
.GIF)
.GIF)
Long US$ vs EM FX: Positive
The US$ has indeed strengthened against some EM markets, especially those with current account deficits, as predicted. However, since the last score card the South African Rand has not moved substantially. The Turkish Lira on the other hand has performed handsomely and we suspect this story of EM weakening is not over yet. As a vital guideline we believe this story will only come to a halt when real rates in the EM become positive - and they are far from that especially in Turkey, where further currency pressures are to be expected. Though we are profitable on this trade we recommend getting out of all positions with EM s in the short term, except for the Turkish Lira.
Short US Treasuries: Positive
This trade has performed well, with tapering around the corner and with the markets realising that the US is in a cautious monetary tightening cycle. The Fed is careful not to destroy the recovery that is in place, while being aware that extraordinary measures like its QE programmes cause unwanted risk-taking and cannot continue forever. "Tapering" will probably start in September, with only a tiny amount being 'tapered'. The expectations in the market are for 10bn$.
Going through the scenarios:
Less tapering will cause a bond rally. Meeting expectations will cause a bond rally, since this amount is fully priced and profit taking would ensue. Exceeding expectations would probably cause a bond sell-off, depending on the amount of excess tapering that indeed takes place. Hence the scenarios would point to a tactical reduction of short bond positions in the short-term, before re-entering this longer term trade again as a structural, potentially multi-year short.
Short JPY long USD: Neutral
Over the summer, since the last scorecard, this trade has not shown any significant performance. There have been two major reasons for this: 1) The Syrian crisis which has now come to a periodic end, without a war. 2) Discussions of the planned increases in the sales tax in Japan. Both have caused the Yen to strengthen over the summer and are now slowly being priced out. The first, is already priced out by now, while the second point will probably be mitigated by a corporate tax decrease in the next months.
US$-JPY was around 99 at the start of July and is currently at similar levels. We view this trade as a structural trade where the monetary policy over the next year or more of the USA will be the exact opposite of Japan's. The USA will tighten monetary stimulus, while Japan will continue to loosen it. If what we believe about China's slowdown becomes reality over 2014 we could see Japan doing even more QE than currently planned over the next year. We expect to see levels above 115-120 in the US$ JPY trade, though this will take some time. In the meantime we would suggest keeping stops wide and positions moderate, since corrections to 93 could occur over this time scale.
THE BAD
Short Gold: Stopped
Since the last scorecard we have seen a spike in gold and were stopped out. The reason for the rise included the Syrian affair and potential war with international involvement. However, the real driver is something we were not counting on: For a long while we have been talking about money flowing out of EM markets and into Developed Markets (DM) due to economic growth rates and interest rises. However, we failed to see that the EM population as a response to their depreciating currency and falling bond and equity markets would begin to hoard gold as a safe haven asset. This has driven up the physical demand for gold substantially and quickly. Though we believe that this phenomena will not last and the main driver of gold ie real interest rates will take over and drive gold prices lower, our stop has been triggered and we adhere to this. Always.
Long US$ (trade-weighted): Stopped
The US$ has performed well against current account deficit EM markets as discussed above but not against its main trading partners. The trade-weighted US$ index has fallen and we recommend getting out of this trade especially because the weightings are heavily in favour of the euro where still tight monetary conditions (and fiscal conditions via austerity) are keeping the euro strong with no reaction from the ECB since economic growth is gaining momentum in Europe.
THE UGLY
Not this time and for that we are grateful.
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