August 29, 2014 (Friday)

Since Inception - June 18

,
2014:
Equity/Futures Account: +3.09%
FX Currency Account: +12.43%

Benchmark: S&P 500: +2.24%









8/29/14 Commentary

Good trades are often those that have multiple catalysts to push prices in the desired direction. But great trades
are those that right or wrong, will move in that direction anyway.

The short euro trade has been the most highly concentrated position since I began this trading simulation. The
divergence in central banks policies (Fed vs. ECB) and the growing divergence in economic data points have
been the main reasons for holding a negative view on the euro against the U.S. dollar since May of this year. And
that as the economic realities become worse, the chances of QE in the Euro zone will increase. On the flipside,
contrasting Fed policy will strengthen the U.S. currency, further fueling the weakness in the Euro.

Government policy is not providing the solution so the burden will only continue to disproportionately fall on
monetary policy to somehow uncover the panacea for Europes woes. In my opinion, the future does not look
bright. I see all of this as part of the larger macro trend that is moving Europe away from the intended goal of
integration.

The sovereign debt crisis in 2011 clearly drew the line between the haves and the have-nots. What is also ironic
about the situation is that the event left both sides bitter. The haves were upset because of the imposed financial
obligation to help those who have less (or those who lied and abused the system) and the side on the receiving
end felt they were being overly punished and bullied by those who have more. Those feelings still continue to burn
and run counter to a longer-term integration process.

Those grievances eventually manifested themselves in domestic politics. All across Europe, parties that have lost
significant ground to their socialist or center-left political adversaries for decades came back to the forefront of
their respective domestic political stages in the first half of this year.

In France, the National Front won the nationwide election for the first time with nearly 25% of the vote, winning
118 council seats on a local level. In the UK, the UK Independence party won 23 seats making it a first time in a
century that neither the Conservative nor the Labour Party won the election. In Finland, the newcomer Finns Party

established itself as a legitimate third-party option after winning 13% of the vote. And the Five Star Movement Party
in Italy scored 21% of the vote just behind the ruling Democratic Party. Even Germany saw newcomers
Alternative Party and a neo-nazi party burst onto the political scene.

The narrative was much the same for Netherland, Hungary, and Greece those who favored leaving the currency
union did extraordinarily well. This laundry list speaks to the political earthquake Europe experienced in its first major
election after the sovereign crisis and to the growing persuasion of the Euroskeptic platform.

Despite what the establishment and spin-doctors in Brussels may say, one could characterize the population as
having one foot over the fence. One final push over and they may never come back. The more radical tools
imposed from Brussels to stave off disintegration may also be the stick that knocks voters to the other side. The
ECBs temptation and decision to further utilize unconventional tools will have similar effects.

It took a great amount of effort in the decades following World War II to convince Europeans of the merits of
European unity and the eventual path toward integration. But in one single swoop, all of that has changed. The
younger generation, which has fleeting ties and experiences to the Great Wars and vague memories of the Iron
Curtain of the Cold War, only knows the failures of the experiment.

The worry is that it may be too late to win back the hearts of voters. A further push for integration in order to save
the union will produce even more backlash and build on the momentum Europskeptic parties have already
displayed in the recent election. But doing nothing will also produce a similar outcome as recession, stagnation,
high youth unemployment (and high unemployment in general) will see anger directed at Brussels. Its a lose-lose
situation.

Great trades are those that, right or wrong, will move in that direction anyway. In the case of the Euro, it will only
head lower.

There is also one other wild card that may push the euro even lower and that is the situation in Ukraine. Further
escalation will punish the strongest European economy, which does the most amount of business with Russia than

anyone else on the continent. And the consequent safety trade will be away from the Euro but into U.S. assets
which is why EUR/USD pair makes the most sense to short.

What makes the Ukraine situation dangerous is what made the First World War dangerous nationalism and the
answer is once again found in history. Ironically, the possession of Ukraine in WWII was fought between Germany
and Russia. When Germany was finally defeated, Stalin subdued all nationalism but that was especially the case in
Ukraine. From ethnic cleansing (Tartar population in Crimea/Ukraine) to sending all dissenters to the eastern corners
of Sibera (never to be seen again).

In other words, the collapse of the Soviet Union made it inevitable that Ukrainian nationalism would reassert itself
like a coiled spring. Ukrainian statehood and nationalism has never been more embraced than it is now since its
independence. Poroshenko is playing a very dangerous game by branding the conflict as a fight for survival and
matching Russias nationalistic war cry with one of Ukraine's own. Initially, I have largely written off the impact of
the conflict as a distraction. However, Poroshenkos rash pursuit of achieving complete military victory in Donetsk
and Luhansk, has made me somewhat fearful as head-on collision of nationalism often produces unfortunate
outcomes.

In order to understand Russias actions, one need to look at what Ukraine historically meant to her. Kiev was in fact
a capital for the early formation of Russian identity. The word Russia derives from the name of the early kingdom,
Kingdom of Rus and its capital of Kiev. Wests condemnation of Russias action in Ukraine only reinforces Russias
long history of suspicion and the narrative of Russia against the world. One must look at the events through the
eyes of a Russian bear that has fought the European coalition time after time again throughout history as the
foreign policy of continental Europe shifted from containing France to containing Russia from 1800s onward.
The most relevant war of them all was the Crimean War in 1853 that Russia lost to a coalition of European
superpowers. Thus, the expulsion of Yanukovych was the earliest reminder of this conflict, the long-standing view
that Russia is being contained and robbed of its possessions.

A lot of analysis that discounts Russias ability to be more of a menace based on potential economic hardship that
Russia may or may not face is essentially discounting the resilience and the loyalty of the Russian people.


Historically, the Russian Bear has been known for its ability to persevere. You might say it's the brutal cold weather
that breeds thicker skin. Who knows? But beyond that, one should also realize that under Putin most Russians have
enjoyed a significant boost in their standard of living. The chaos during the liberalization era under Yeltsin and the
shame/shock Russians felt when their empire suddenly fell were reversed (at least it felt that way) when Putin rose
to power. And for that the Russian people will be far more loyal than what voters in the West would be willing to
tolerate under similar circumstances.

Going back to the main point, the aggressive nature in which Poroshenko is aiming for quick and total victory in
Luhansk and Donetsk has made the situation a dangerous coin-toss with serious ramifications. The more the conflict
turns into a head-on match between two nationalistic forces, the greater chance that it will escalate into a deadly
struggle where only one remains standing. In that case, its another reason to avoid the euro and another reason
to own the U.S. dollar. But since that is the trade I already have on, it has geopolitical insurance (if there is such
thing) built into it.
















Current Positions:

1) Short EUR/USD it has been the most highly concentrated position since I began this trading simulation. The
position has always been large, but it has certainly grown in size with each technical level and data point hurdle
that it cleared that has made me comfortable enough to add more to the trade.

The short EUR/USD trade is one of the few macro trades where all elements of the trade (historical analysis, policy
analysis, economic data, trends/technicals and etc) all line up favorably to be short.

2) Long US 10-Yr Note continuing with the deteriorating Eurozone macro theme, in which the ECB will be
expanding its LTRO for the second time in three years, the difference in yield between the German Bund and a
lack of alternative for global investors has created a force large enough to push U.S. yields lower. If ECB engages in
QE, this trend will continue as yields in the Eurozone will be pressured lower. Also, emerging market central banks
have bought U.S. treasuries in concert to keep their own economies stable by keeping U.S. rates low. And finally,
theres the likelihood that the U.S Federal Reserve will be dovish for a longer period than people expect.

3) Short Gold golds reputation/status as a safe haven asset has suffered in recent years. Ive been bearish when
it broke the major support of $1600 in early 2013 and I believe gold still hasnt proved its purpose or worth.

For one, it fails to be insurance when theres a geopolitical issue. Two, the U.S. dollars ascent on the backdrop of
the declining Euro will continue to be a headwind for gold. Third, gold doesn't yield anything thus in a search-for-
yield environment, gold is not attractive especially if Europe and other parts of the world show signs of deflation.
Fourth, on the other hand, if rates do normalize and Fed policy becomes more hawkish, gold once again wont
have a leg to stand because it doesn't yield anything.

4) Short German DAX (EWG) flipped the position from being long and shorted the DAX as insurance against Putin
(a peace deal where Putin washes his hands clean of Ukraine goes against all that I know about Russian history
and the man I studied in college) and against continuing deterioration in economic conditions in the Eurozone.
The bet is that it is more likely for the DAX to break 9000 than it is likely to hold the line.

5) US Equities (SPY) ???? I wrote a question mark because I don't have the answer, and am rather confused
about risk/reward nature of U.S. equity market. With my mind leaning more on the negative side, I have initiated a
small short position on the S&P 500. But overall, my view on equities as of today is a work-in-progress.

6) Long USD/JPY - it was only a matter of time before the yen moved lower on the backdrop of dollar strength as
well as the divergence in central banks' policies -- they've been in different stages of easing for quite some time
now. The prospect of additional easing seems more likely to combat the continued lukewarm data points in
Japan. Kuroda may be publicly positive and appear to be excited about Japans growth prospects, but inspiring
confidence is part of his job as he is trying to amplify the effect of his policy being downbeat would have the
opposite impact.

It is likely that this move might be the next leg lower for the yen part of the larger macro move that has occurred
since late 2011.


1) Short Euro against U.S. Dollar (Spot)

2) Short Gold (via ETF: GLD)

3) Short equities via S&P 500 (ETF: SPY)

4) Long U.S. treasuries (via ETF: TLT)

5) Short German DAX (via ETF: EWG)

6) Long U.S. Dollar against Yen (Spot)




8/29/14 Platform Snapshot (Optimized for viewing on iPhone, iPad, or Android)





Trading Account Rules:
1) Starting Account Size:
a. Cash equities/futures/option: $10million
b. Forex: $10million

2) For the cash account (non-forex), macro views will be reflected using listed equity indexed ETFs with deep liquidity/volume and
net assets of $1 billion or greater in order to best represent the odds of the strategy being scalable (single-stock, company
specific stocks will not be traded)

3) Most of the speculative positions can also be accurately expressed using futures, but because the volume is more constrained at
different times and because the platform fails to take volume into consideration (hence the trades' impact on the actual price),
the use of futures will be limited. Positions that I deem to be core/longer-term would be better expressed via equities. But for
commodities such as crude oil, silver, copper, etc., they will solely be expressed through the futures contract market due to
contango/decay issues that most commodities ETFs suffer.

4) The overall goal is to identify attractive opportunities with goals of holding the positions for multi-week/month periods.
Importance will always be put on liquidity and risk exposure. Also, being able to realistically liquidate all positions by end of
trading day or vice versa, scale up risk, will be an advantage of the strategy.

5) Daily updates will be simple and short, as youll receive a time-stamped screenshot of the account summary where detailed
positions and P/L will be all within a single image.

6) Leverage for spot currency position will be used sparingly with average position being 2.5x the underlying cash value with
stringent risk management in mind.