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Shane Jocelyn, CFA's  Instablog

Shane Jocelyn, CFA
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Shane has previously proposed economic reforms in the Irish parliament to President Mary McAleese. This was complemented after being selected by the Irish Department of Foreign Affairs and Trade to to provide clear actionable, concise and well structured recommendations on regulatory, and... More
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  • Back Testing Treasuries - Faltering Economy or Flaming Opportunity?
    We have had a rocky few months but perhaps the most dramatic moves have occurred in a flight to safety. Both Bunds and US Treasuries have rallied without stop. Two year treasuries are yielding 0.61% while the Ten Year has broken down through 3%. The last time that the Ten Year was at this level, the S&P 500 was below 900. So what does this price action mean for equities, and the future health of the economy?

    Logically, treasuries are in essence a measurement of risk. They are the safest assets you can hold, as you are banking on the credit risk of the US government. The ultimate question is whether this mass risk aversion is justified?! Treasuries act as a barometer for inflation/deflation as the market moves into anticipation of what lies ahead in the second half of the year. The current rate of inflation stands at 2%. Therefore, with regards to the Two Year, there is a 1.4% relative loss.

    So with all the bearish risk adverse signals, the underlying cyclical results can be interpreted differently. Although fears of capital depreciation have all but subsided, equities are suddenly very attractive – big caps such as Pfizer are suddenly yielding 5% more than your bank account. Oil spills aside, sustainable big caps are regarded as attractive as a long term holding. 

    For the American consumer, a sliding housing market would welcome nothing better ten year treasuries below 3% compared with 4% in April. Lower mortgage rates may not be as clearly recognized as stimulus tax credits but still bear some encouragement. 70/100 bips on a $250,000 mortgage over 25 years equates to $43,750 in the long term – higher than then the initial $8,000 credit. If only first time buyers had longer term rates in mind and understood the interpretation of the yield curve!

    Closing this analysis, it seems to me that the market has swung to an extreme. Participants have not factored in the greatest risk of all which is the risk of not making money while others profit. Fear is beating greed but the pendulum should come back to an equilibrium, which I believe means a sell off for treasuries as fund managers seek yield in other asset classes. Investors have historically embraced risk when there is no light at the end of the tunnel for saving accounts. To abbreviate this, data below has back tested similar scenarios when the two year treasury has yielded historical lows and the results are directly correlated with a positive aftermath for risk assets. 



    Disclosure: No positions
    Tags: PFE, TBT, TLT
    Jul 08 7:04 AM | Link | Comment!
  • Research in Motion - Going Long Volatility in the Stock
     Investment idea

    Reasarch in Motion (RIMM) is scheduled to report earnings after the close. Historically, RIMM has always moved on earnings releases both to the upside and to the downside. A lot of emphasis and pressure has been pent up partly due to the mounting ideology that RIMM is going to be wiped out by the advancing army of I-phones. On top of this, Google launched two new operating mobile systems yesterday in what was dubbed “D day”. These two factors as well as the current market nerves suggest that this evening’s earnings release will be used as a gauge for the future success of RIMM and hence, be closely watched by investors/fund managers alike (perhaps with a strong reaction in stock price?).

    I have not been counting the amount of people who have Blackberry’s and am not sure what the earnings are going to curtail. So I don’t know exactly what direction the stock is going to go but I do know it is likely to move. Therefore, going long volatility ON THE ACTUAL STOCK feels particularity attractive for the short term. The strategy payoff is below. The light blue line is your payoff if you sell four days from now. The dark blue line is if you wait until option expiration (22 days).

    Strategy Payoff

    Although this may sound good in writing, we have to ask ourselves if there is any value in the trade because if you believe in efficient market hypothesis, then there is never an undervalued opportunity in the present timeframe – only fair valued deals which change accordingly. We can look at historical differences though and below is 10 day volatility charted over two years. Current 10D historical volatility is at 49.56% while implied volatility is at 53.73%. Both these values are relatively low using historical values which decreases the cost of the trade. 

    Two Year 10 Day Historical Volatility

    Disclosure: No positions at the time of writing
    Jun 24 11:11 AM | Link | Comment!
  • Will sovereign debt in developed nations spur capital to emerging markets?

    Excuse the generic writing but exploding media, investor and public interest in the current sovereign health of developed nations is on the tip of everyone’s tongues. I find it an interesting observation that there has been a macro divergence in public sector balance sheets. This divergence refers to developed countries such as the US, who have been the global leaders with respect to technology, GDP capacity and industrial innovation of the last century. We are now witnessing this success transform into a sinking ship of debt while selected developing countries bask in surplus and ponder capital allocation to maintain their trending advance towards social and economic enhancement.

    So is there a case for a developing continent such as Africa to be outlined as an improved investor landscape due to their public financial health? There is of course a lot more to an attractive investment environment than public sector finances but in more ways than one, the public sector can be a representation of the fundamental aspects of the country in question.

    The biggest issue to determine macro fundamentals is the front running demographics which is a daunting issue for governments seeking to boost output. Taking Europe as an example, by 2050, 50% of the population will be over the age of 50. Compare this with India which has a current average age of 26 while in Uganda, 50% of the population under the age of 14 (versus 20% in the US). How can you increase output with aged workforce approaching or actually in retirement?

    Demographics and related data

    I recently had lunch with the head of strategy and development at the Nigerian Stock Exchange. He started work there five years ago. Explaining the financial infrastructure when he arrived, there was low liquidity with trading restricted to equities only. I thought that this was akin to the way in which the Dow Jones operated at the beginning of the 1900’s. After five years, options and futures are about to be introduced while a number of REITS have been successfully launched. Exchange Traded Funds have been appeasing and corporate bonds are beginning to find buyers. So in five years, the Nigerian Stock Exchange has developed the technology and products that took the US 75 years to create and implement.

    So how can a high taxed default ridden developed world keep pace with the flexibility that emerging markets have with their finances!? There may still be a long way to go before the current dominating countries get overtaken by relative GDP but as investors we should be considering value for investment return and current growth models are all pointing towards developing economies. 

    Disclosure: No positions at the time of writing
    Jun 24 9:40 AM | Link | Comment!
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