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Thomas MacLeod
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I am an individual investor managing my retirement funds and investment funds of other high net worth individuals from Queenstown, New Zealand. I recently retired from a merchant bank in New York, where I ran a macro proprietary trading portfolio for 10 years. I achieved a compound 30% return... More
My company:
Glenorchy Capital
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  • The Option Market Suggests the Smart Money is Getting Long the Euro

    While the press of popular opinion would have us believe that the Euro is going materially lower, the behaviour of the option market suggests that the Euro may well have already bottomed. Risk reversals have begun to diverge from the behaviour in the price of the Euro.

    EURUSD 25 Delta 3 Month Risk Reversal (intraday)


    EUR Spot (intraday)


     What is a risk reversal? Well in essence it is the difference in price of like for like (same strike and exp) calls and puts. Generally it is expressed as the difference between 25 delta (OTM) 3 months to expiry calls and puts (see here for a more detailed explanation).

    Over the years we have generally found that “smart” or “informed” money tends to show up first in the options market which is why we tend to scrutinize the behaviour of risk reversals. Sure no system is fool proof but little things like risk reversals can give you that vital edge, which in the competitive world of currency trading, is vital.

    But what about the behaviour of the CDS market for PIG nation’s debt? Yes the behaviour of the option market for the Euro and the bonds/CDS market for PIGs nations is diametrically opposed. On the one hand the CDS market is suggesting that a solution will not be found to Greece’s problems (and perhaps PIGs as a group), on the other hand the options market for the Euro is suggesting that either; it will be no big deal if Greece does default or that a deal will be acted on (as opposed to agreed) to save Greece from defaulting.

    At the end of the day a trader has got to make a call, and that is exactly what we are doing, buying OTM calls on the Euro 3 months to exp. Within the next 3 months the Eurozone would have either blown apart (and if it does goodness knows how much the Euro will fall), or a solution will be found and acted upon, the Eurozone will be saved, and the Euro will be trading materially above 1.40. Why not buy puts as well? Because as the risk reversal suggests, calls are very cheap relative to puts, and given the record level of short selling in the Euro it won’t take much to cause a short covering rally propelling the Euro significantly higher. Furthermore, the level of short selling suggests that anyone who could get short the Euro (long USDs) has already done so........and making a habit of being long the world’s most crowded trades is the quickest way to the poor house! Of course we could be wrong in which case we will be limited to the cost of the short dated calls.....and we are certainly not betting the house on the resolve of the Germans to keep the Euro together!

    Disclosure: Long Call Options on FXE
    Tags: FXE
    Apr 15 6:19 AM | Link | Comment!
  • Where Would John Templeton Be Looking for Value Now?
    It we had to identify our investment style with an investment great it would be John Templeton. While Soros and Buffett continue to steal the limelight and many try to model themselves on what they did or at least are currently doing, few realize that it is exceptionally difficult for the average investor with limited means to replicate what they did. However, few pay attention to the investment style or process of John Templeton. A process which, with diligence and perseverance, can be repeated by the average investor....provided of course they do not act like the average investor.

    Templeton's investing style can be summed up as looking for value investments, what he called "bargain hunting,"by searching out such targets in many countries instead of just one. Templeton's investing mantra was "search for companies around the world that offered low prices and an excellent long-term outlook."

    As a value-contrarian investor, Templeton believed that the best bargains were in stocks that were completely neglected - those that other investors were not even studying.
    Perhaps the two quotes emanating from Templeton which act as the basis for our investment process are:

    "Invest at the point of maximum pessimism." 

    "If you want to have a better performance than the crowd, you must do things differently from the crowd."

    Well enough with guiding philosophy, now down to business - where in the world would Templeton be looking for bargains? Well geographically where is the point of maximum pessimism? Well you certainly don't have to be anyone special to work that one out - we would say that it is the Greek stock market. With a median price to book ratio for the largest 100 stocks being a mere 0.65x it is a dead giveaway that stocks listed on the Athens stock exchange are the world stock market's unwanted children. Sure Greece has its problems but you cannot tell us that every Greek stock is toxic waste as the market would have us believe. Furthermore, with such cheap fundamental values one cannot tell us that the crisis isn't already priced into Greek stocks perhaps twice over!

    It seems that the whole Greek stock market is priced for bankruptcy. Granted there will be casualties but those stocks who have low gearing levels and generate considerable cashflows from exports are likely to not only survive but thrive in the years to come as Greece gradually gets it finances in order. Don't write the Greeks off, a crisis is a necessary ingredient for fundamental change.

    The FTSE/ASE 20 Index

    For the average investor identifying individual bargains may well be beyond reasonable expectations, but fear not. There is an ETF that trades on the Paris bourse which tracks the Athens Composite, its code is GRE. Buffet wasn't joking when he said that the average investor should put their money into an index fund i.e. they should forget about being stock pickers!

    Disclosure: Long Greek Equity Futures
    Apr 13 3:32 AM | Link | 1 Comment
  • Shipping

    Apr 08 3:12 AM | Link | Comment!
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