Wednesday, August 19, 2009

A short story

I'm in cash (other than core holdings for some favourite companies - that I need to review in detail post results)...and have been building a short position. Short XJO through December & March puts with strikes from 4300 to 3700.

The reasons are many...(and these were just the posts that came to mind)...
  • Artificial rally - the rally has been built out of an abundance of liquidity, it doesn't have the strength of the consumer behind it (they are too busy paying down debt, defaulting on their mortgage or worrying about their retirement nest-egg). - (see earlier blog or, for views on the US consumer, Mish regularly covers the data points in detail)
  • China's stockmarket, the world's saviour, has turned (see Kevins market blog)
  • Sentiment is at extremes - measures are contrarian bearish reflecting the speed of the rally that we have enjoyed. (see Trader Narrative, the Technical Take, and Humble Student of the Markets)
  • Quality of the rally has been dubious - the periphery has outperformed, it's a carry trade where equities have been bid up on the back of credit spreads (see Zero Hedge and Crossing Wall Street)
  • Smart money is selling - Insiders are selling as quick as they can - the fundamentals don't support the price (see Financial Sense and Crossing Wall Street). And we can expect the hedge fund pack to follow Einhorn's lead (see Market Folly). If private equity are licking their chops on an exit (I hear that Myers is up for sale if you are keen), then the smart money is of the view that current prices are the best they are going to get.
  • Earnings - have rebounded on the back of cost-cutting and inventory rebuild, that doesn't leave much room for improvement from here without the consumer coming to the party.
  • Technicals are turning down (for example have a look at Afraid to Trade)
  • Renewed mortgage stress - prepare for another round of foreclosures and bank failures (have a peek again at Mish and the Evil Speculator has a good take on how this effects the market and finally don't think it's purely a US phenomenom - see a Fistful of Euros)
  • Finally we haven't had a 'revulsion' phase - a debt infused bull market of epic proportions deserves an equally an equally large bear market which ends when the last punter has given up the ghost.
At its simplest its a view on the mess that the US is in - along with Europe and, to a lesser degree, the rest of us.

Don't get me wrong. I'm expecting the Australian market to outperform. I'm a buyer of commodity stocks into the uncertainty. Owning real assets at the right price will hopefully be the antidote for the money printing that will ultimately take its toll on the USD.

To go out on a limb, this is where I see the Australian market trading...4000 by mid-September and 3700 before this move is done. Be interesting to see how the world looks if we get there...


  1. I've been looking at similar XJO Puts, but have been spoilt by US data and now can't even find my options calculation spreadsheet. Any pointers on where to get good options pricing data in Australia, IV and delta would do for a start.

    Have you though about CFDs or does the upside risk put you off? It so late, what am I even doing up, this probably makes no sense at all.

    I'd be more comfortable shorting the US market than the Australian.

    On another topic any view on GBP/AUD over the next six months. I want to liberate some cash from there and 13 year lows isn't the time I like sell.

  2. oh, forgot what I wanted to say. Good post.

  3. Morning D,
    You are probably still deep in REM land. Serves you right for staying up so late.

    I'll admit I don't have a crackingly good option pricing model. It's on the long list of 'nice to haves'. As a price check, I use a rather clunky but serviceable model available on the ASX website. As I'm not trading delta, I'm okay with running blind on that front. What it does facilitate (in a round about way) is modelling vol. It is far from perfect. Hell, it's a bandaid solution (eg. modelling time decay means changing the expiry date). But as I say, it's on the list of to do's.

    On the CFD front, if I was to trade the physical would prefer to do it through the futures. The costs of carry of a CFD always appear to be prohibitive. But as I say, I'm not paying a close enough eye on the markets to warrant trading the physical.

    AUDGBP (It's all a matter of perspective - but to a washed up AUD currency trader it's always AUDGBP). Fundamentally the UK is as messed up as the US. QE and a wobbly budget deficit will ultimately pull GBP lower. AUD on the other hand is a real asset play. So fundamentals suggest AUD will continue to gain against the GBP. But in the short term, seems like the market has all been shorting GBP. Perhaps it will have a kick up when risk aversion rears its head?