In no particular order, grouped by asset class:
NB: this is probably the hardest quarterly trade ideas list so far this year, stemming from the lack of clarity regarding near term macro direction. Obviously, if Greece blows up, all bets are off. I aimed for brevity – readers are welcome to challenge or question any of the ideas.
Stay Short S&P Variance Swaps
- Implied Vol remains too high. 2yr realized vol is 16.1% and 1yr realized is 13.9% vs 1y variance swap at 25% and 9m variance swap at 24.1%. As the US is not going into a recession, this remains a good risk reward bet.
- Model estimates suggest that the VIX can decline below 14.
Long Dax vs IBEX, equal Euro weighted
- Relative growth differential is not adequately priced in. Austerity measures in the periphery will have a bigger impact on growth than expected, and growth will be weaker for longer than expected.
- Germany will be less affected by higher rates / lower credit than Spain
Long Nasdaq 100 vs S&P, equal dollar weighted
- Relative growth differential is not adequately priced in. On a forward basis, the Nasdaq is very cheap vs the S&P.
- Nasdaq Index earnings continue to grow faster than S&P earnings
- Long term trend has been upward for 5 years and looks set to continue after a pause:
Buy US 10-year Future August 125+/126/127 Call Tree for flat
- Cheap bet that yields are not far from a floor. High print from the rolling 10y future over the past 12m is 128.
- Matures on 7/22
Sell 5y Treasury Future
- Net supply set to turn sharply bearish. (See comments from 6/24)
- Data surprises set to revert to the mean
- Insufficient Term Premium in the curve. There are different ways to measure this, but the first Fed hike is now priced for Nov 2012.
Sell USDCNY 12m Fwd
- The NDF has rallied over the past month based on fears of a hard landing in China. Only a 1.2% appreciation is now priced in for the next 12m, the smallest amount since last May/June:
- While I agree that China’s economy is in an investment bubble, it is not yet at the tipping point when the government is losing control. Sufficient liquidity can yet be unleashed to offset hard landing risks, so the slowdown is unlikely to be bad enough for China to devalue. This is probably a story for the next global recession.
- Going into a presidential election year in the US, there will likely be increased political pressure on China for the appreciation to continue
- Proxy on US 3yr swaps. As yields can’t get much lower, USDJPY probably has limited downside.
- Higher relative 2yr real yields is also positive:
Q2 Trades Recap:
Trades are assumed to be initiated at the close of 3/21 with zero transaction costs.
- Short S&P Variance Swaps: Sold vol at 26.4 vs realized of 12.3. Net profit of 14.1 vol pts over the past 3 months.
- Long EEM vs EAFE, proxied by EEM and EFA: Net profit of 3%.
- AUD 3s10s Flattener: after being profitable over most of the quarter, this week’s sell off in AUD rates drove this trade to a 6bp loss
- Short Dec11 Short Sterling: BoE did not hike, and now people are talking about another round of QE. 42bp loss
- Long US 5yr Future: I sent out recommendations to take profit in early April. Profit of 1pt + 4/32nds
- Long EURUSD: Profit of 1%, although it was up almost 5% at one point
- Long CAD puts: I didn’t specify strikes and maturity, but pretty much any combination would’ve resulted in a loss
- Long NZDUSD: Profit of 11%
Success Rate: 63%.
Eh. In retrospect, I should’ve avoided the CAD puts and remembered to recommend taking profits on the AUD flattener.