LESS RISKS MORE PROFITS?

THEN LOVE STRESS (2015 October

13)
www.littledada.com
Nervy Third Quarter
The last quarter was a tragic tale with many acts. Some US$11 trillion was
wiped out as stock markets were brutalized across Asia, Europe and US.
Commodities accentuated their downward spirals, and funds continued their
flight from emerging promised lands, (nearly US$1 trillion drained away over 13
months till July, much of it from China). For many days, depressive equities
regulated the pulse of different markets, and there was even a brief period when
desperate hands enthroned Euro as a pseudo safe haven currency. In Asia, we
watched the credit sound Singapore dollar being trampled when naysayers
connected dots between China and Malaysia as Singapores top two trade
partners. Later we witnessed how, the mighty US dollar was resuscitated in its
invincibility. We saw how hopes recovered when China injected stimulus funds
into the stock markets, and growing relief that a low Fed rate regime would likely
pervade in the immediate future. Even when most equities started languishing
in ranges, plummeting oil price drew an unwavering trend line as supply
continued to flood the market despite expected decrease in seasonal refinery
demand. Then of course, Glencore and Volkswagen provided the final act for the
curtain call to end the quarter. Indeed through the many rampages, experts and
soothsayers from economists, politicians, analysts, to business leaders and
traders were finally singing the same chorus we were in total crap.
Stress Creates Advantageous Opportunities
So what did the astute, mercurial trader do? He embraced stress. In one of the
most noteworthy third quarters, the world was launched in a clear trajectory on
many fronts, and the stress driven events which evolved created many risk
efficient, profitable trading opportunities.
An example was when China devalued the yuan on Aug 11, and stunned markets
all around. The ensuing mania spurred a massive exodus from Asian currencies
to the relative safety of European dominions. As events unfolded over the next
few days, the Euros fairy tale stability (in recognition of ECBs consistency)
propelled the Euro upwards. During that week, nimble traders longed the Euro
and Sterling but shorted China related currencies such as the Singapore Dollar,
and the equity markets, particularly the unfortunate Hang Seng Index. Following
that short episode, markets were still vexed by uncertainties, and the probability
of a US rate hike diminished markedly. Given that environment, the Euro
naturally climbed as risk averse investors continue to unwind the Euro carry and
reduced short Euro hedges. Again it seemed so natural to long the Euro during
that anxious period of low rate expectations and un-acquitted challenges.
What we saw was stress from significant events drove different markets in
apparent pathways. Market players who were previously pursuing different
agendas became united in one purpose as they bolted for the same exits with
largely the same intent. These created clear sustained momentum in obvious
directions. For a trader, this was a godsend direction bias and strength
permitted smaller stops and faster profit goals. Less risks, more profits. Hence

anxiety over existing portfolios need not eclipse the lucrative opportunities
stressed markets present, instead the trader should take prompt actions to
exploit them.
More recently, the September quarterly close was itself a prominent event.
September was the month liquidity was to return en massed after the summer
siesta. In a way, it was convenient that Glencore and Volkswagen drove the US
and European markets southwards. The downward trepidation in the last weeks
was a necessary prelude to the spike up heralding Septembers window dressing
close. For this year at least, the markets rewarded such an attentive trader.
Next Quarter Dining On A Buffet Of Opportunities
So what happens next? After the dust has settled, investors and traders will
question what has really changed. Will volatility decrease? Has economic
progress turned backwards? Do we have an inverted yield curve? Have the
confusions that punctuated last quarter drawn any meaningful road map for the
next? Are central banks any clearer than they were? Rather than be stressed
over contentious answers perhaps it is more rewarding to focus on what is
going to be served in the most tantalizing quarter of the year.
The final quarter is usually the last opportunity for businesses to energize their
earnings for the financial year. It is buffered with high liquidity, and potentially
profitable opportunities such as October book closure for a large number of
mutual funds, the earnings reporting season, change in seasonal demand for
commodities such as oil, quadruple witching expiration, year-end window
dressing and pressing deadlines for key decisions like the elusive Fed rate hike.
Not on the calendar are unexpected events that will again throw momentum in
biased aims. Startling economic health revelations, and unanticipated
statements by leading figures can provoke searing market responses.
Speculation is rife that Japan and ECB may introduce more easing measures this
quarter, whilst strategic maneuvers in the Middle East may whip up oil prices. In
fact any high tension political drama can sound risk off alarms world-wide.
Of course, we also sleep under an ever descending ceiling of daggers with
receding liquidity in the bond market as financial institutions reduced fixed
income inventories, and with much irony, living in the most debt burdened world
since time immemorial. Combined public and private debt is now 265 percent of
GDP in developed countries (a jump of 36 percent since 2007), and 167 percent
of GDP for emerging economies (China alone owes 235 percent of GDP).
Offshore US denominated debt has reached $9.6 trillion, and approximately 80
percent of the dollar debt in China are of short term nature. Can you imagine
what will happen if the Fed really raises the rate this quarter?
The last quarter promises action galore and stress driven opportunities. A clear
mind and a well-organized roadmap of information will help the nimble trader
find trades with the best risk reward advantage. Will you be stressed or be ready
for desserts? (OK a bit corny but I cant think of anything better for now.)