By: Brad Thomas and Chris Tell
We live in a surreal world dominated by central bank interference, liquidity driven markets and simultaneous collapsing credit conditions (China) and record bond purchasing (US). As if this wasn't enough, we have the crisis in Ukraine forcing liquidity out of Europe. Over in Japan we're experiencing a body slam to the Nikkei while the Yen strengthens and curiously the bond market has remained unmoved.
This may well be significant since, for those who've been paying attention, when a sell-off in equities occurs it would be typical that as a trader we would get long the bond market expecting capital flows to drive yields down as it flows into the "less risky" government debt. What has happened in Japan is that capital has flowed out of equities but NOT into bonds. Could this be the harbinger of things to come? Positioning to profit from these markets is Brad's bread and butter. With 30 years+ experience in the trading trenches, Brad and our subscribers are well positioned to profit by "trading" the markets. If you want your questions answered by a professional trader shoot them through here and we'll do our best to answer them for you.
On to this weeks questions.
Brad, thank you for your excellent work, the emerging market currencies are on a tear. Will you be getting long any of these and if so where is the best bang for your buck?
Yes emerging currencies have been on a tear as of the last month or so but I think it is only a "working off of an oversold condition" Let's go back a month or so, there was a lot of bearish talk regarding emerging market currencies particularly surrounding the Turkish Lira. Those fundamental problems have not gone away and won't go away for quite sometime. Furthermore, China continues to burn away in the background……nothing has changed. What has also happened over the last month is the cost of long term options has come down significantly. So rather than get bullish on emerging market currencies I see the strength in emerging market currencies over the last month as a great opportunity to open up more bearish positions on emerging market currencies particularly via long term options.
I'd be interested to know your overall long term views on equity markets, bond markets and currency markets. It's probably not a short answer but if you could find the time to discuss these I think it would be very useful.
I look at markets through very different eyes than most. Rather than competing head to head with other analysts via traditional means such as fundamentals etc I look more at how a market is positioned, in particular I try and workout the mystical ratio of strong to weak hands. Suffice to say this - I think that equity markets are by and large not widely held by the general investing public whereas bond markets are. How do I arrive at this conclusion? Well through various means, primarily via surveys of public opinion and sentiment. Here is one example, from Barry Ritholtz
"April 2: Anyone who thinks stock market sentiment is excessive today should speak to the American people. According to a Gallup poll in the first quarter, half of all Americans think putting money into the stock market is a bad idea.
In the 1999-2000 era, 67% of Americans thought putting money into the stock market was a great idea. Only 28% thought it was foolish. Fast-forward to today-more Americans think putting money into the stock market is a bad idea (50%) than think it's a good idea (46%). We might be tempted to call this irrational non-exuberance in light of the performance of the market over the past five years."
So we have a long way to go before the majority of the population think that investing in equity markets is a good thing, until such time equity markets will go higher at the expense of bond markets.
Until next week.
About Brad Thomas
Brad Thomas is the Editor of Capex Asymmetric Trader. Independently wealthy via his skill as a trader, Brad is a practical crowd "behavioralist". First introduced to the stock market in 1985 by a school friend in New Zealand, he has been involved with trading ever since.
He was originally trained as an accountant and mathematician and holds a masters degree. Brad first started working on a commodities trading desk with a Japanese trading house. For 6 years he was mentored by a Japanese national on the art of beating the crowd through understanding crowd psychology and expressing views through the various trading tools. It was during this time Brad developed his own unique way of viewing and trading markets.
Brad then joined a multinational Merchant Bank and for 11 years managed a proprietary fund trading in equity options in both the US and Europe. Brad retired from "corporate trading" in 2007 to manage his own funds and to spend a little more time on having fun outside of beating the crowd.
Brad specializes in looking for deep value situations across asset classes in different countries where dramatic returns can be achieve from relatively little risk.