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Abraxas

Abraxas
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  • The rescue of Spain's banks will cause the country's budget deficit to hit 7.4% this year, above its 6.3% target, the government said yesterday. Authorities reckon Spain could require €40B of its EU credit line after stress tests showed the sector needs €53.75B. Spain's debt-to-GDP ratio will rise to 85.3% in 2012 - above a previous forecast of 80% - and 90.5% in 2013. [View news story]
    At around 40% of GDP, before the current crisis hit GDP and the government revenue stream so hard, the Spanish deficit was lower that most other European nations. Like Greece's deficit, it has gone up substantially due to the recession bringing GDP contraction and diminished tax revenue and not, as some think, due to more spending.

    Greece has cut its spending massively, and yet, five consecutive years of negative GDP growth have made its economy smaller. Thus, the deficit being measured as a percentage of GDP has ballooned. That is why is can be so harmful to only look at it from a percentage basis and impose draconian austerity measures, as the Germans so insisted, which harm the economy and make matters worse.

    Beyond reasonable and serious austerity measures, what these countries need is real growth. Once they achieve it, the deficits will come back down again.
    Oct 1 06:06 AM | Likes Like |Link to Comment
  • The rescue of Spain's banks will cause the country's budget deficit to hit 7.4% this year, above its 6.3% target, the government said yesterday. Authorities reckon Spain could require €40B of its EU credit line after stress tests showed the sector needs €53.75B. Spain's debt-to-GDP ratio will rise to 85.3% in 2012 - above a previous forecast of 80% - and 90.5% in 2013. [View news story]
    "They are still spending more than they take in, and want those on the tax roles to pay for their folly."

    That is absolutely incorrect. The deficit move has nothing to do with spending. It has to do with the fact that the money needed for the banks, even if it comes from the ECB, counts against the Spanish government deficit because it goes through the system.

    That is why there is work being done so that the ECB can, in future, give the banks the money they may need directly, without to have it go though the various countries.

    That is one of the obvious disadvantages of the way the EU is structured today, compared to a fully sovereign country like the US that can flush the banking system or the housing market with liquidity directly without increasing the US deficit.
    Sep 30 01:02 PM | Likes Like |Link to Comment
  • At Long Last, Sustained Signs Of A Housing Rebound - And An ETF To Play It [View article]
    If you want housing exposure, there is no reason not to use housing and homebuilders ETFs. After all there are options on them so you can get the exposure you desire and use the option strategies all the same.
    Sep 30 12:53 PM | Likes Like |Link to Comment
  • Keep An Eye On Ecopetrol For A Shorting Opportunity [View article]
    Thank you, once again.
    Sep 29 08:01 AM | Likes Like |Link to Comment
  • At Long Last, Sustained Signs Of A Housing Rebound - And An ETF To Play It [View article]
    Good post.

    I prefer XHB over ITB because is much, but much more, liquid and because long dated options are available on it and using options is the cheapest and safest way to profit from a potential move.

    I was going to mention that in spite of their differences their performance is also highly correlated, which means they are, for all practical purposes, interchangeable, but you mentioned this yourself in the very last sentence.

    Which begs the question: Why do you prefer ITB over XHB?
    Sep 28 04:55 PM | Likes Like |Link to Comment
  • Slow Growth Is Not Necessarily Bad News [View article]
    True, but it was the original 2007-2008 solvency problem in the US that triggered the liquidity problem in the US and Europe.
    Sep 28 02:48 PM | Likes Like |Link to Comment
  • Keep An Eye On Ecopetrol For A Shorting Opportunity [View article]
    Thank you for the note. Very much appreciated.

    What do you consider the impact of the expansion of the Cartagena refinery will be?
    Sep 27 05:16 PM | Likes Like |Link to Comment
  • Keep An Eye On Ecopetrol For A Shorting Opportunity [View article]
    If Ecopetrol were a financial company or even a regular company your analysis, which is solely based upon the correlation between share price and internal financial numbers today, would make sense. Being that Ecopetrol is a petroleum and gas exploration and commercialization company, the analysis has major fatal flows.

    One may short a petroleum company if it is badly run, which Ecopetrol is not, or if the analysis shows that the company's exploration efforts and investments will come up short and hence, that future revenues and profits may be impaired while the share price fails to reflect this. You make not mention whatsoever of Ecopetrol real business, of its expected discoveries and production flow, nor of their future revenue impact. Is Ecopetrol behind in any or all of these factors? If so, by how much? And, has the marketplace failed to account for this?

    I am all for shorting. I think it is a valuable and important tool and it may well be that Ecopetrol is a great short. Nevertheless, shorting the stock of a petroleum company without the most basic information amounts to blind gambling. Worse, shorting it based on the basis provided by you is even worse, as it gives the investor a very dangerous sense of security, which could easily backfire.
    Sep 25 12:36 PM | Likes Like |Link to Comment
  • Facebook (FB) slides 4.4% to $21.85 premarket following a Barron's cover story suggesting the shares could be deemed expensive even at $15. [View news story]
    "Ban short selling"... seriously? Short selling prevents bubbles and is a very healthy arbitrageur for the market place.

    If you think Facebook is worth a higher price, you buy it. If you think it has reached the right price, you sell it. And if you think it is overpriced, you (borrow the shares and) short it. That's how healthy markets are supposed to operate. There is absolutely nothing wrong with proper short selling.

    Short selling is only harmful when done illegally. That is, when the short sell proceeds without having previously secured the borrowed shares. Other than that, short selling is very healthy for the marketplace.
    Sep 24 11:14 AM | 6 Likes Like |Link to Comment
  • Who's Afraid Of The Big, Bad QE? M2 Growth, Inflation And P/E Ratios [View article]
    Bard,

    Interesting post.

    Besides the TIPS, which you mention, should inflation lead to higher interest rates the most straight forward hedge is, naturally, shorting bonds. Equity retails investors can easily achieve this by shorting TLT (20+ Year Treasury Bond ETF) or, better yet, by going long the reverse ETF, TBT (UltraShort 20+ Year Treasury), which cancels the need for shorting.

    With interest rates still very close to their historical all-time lows, this trade provides a phenomenal risk-riward ratio and excellent hedge for the core equity portfolio.
    Sep 19 05:39 PM | Likes Like |Link to Comment
  • Why QE3 Can't Work: Understanding The Liquidity Trap [View article]
    Joseph,

    Interestingly, in terms of the model and trades' duration, I seem to have a much longer strategy time-span and much shorter tactical one: My fund intends to be perpetual. As such, it is firmly focused on long-term results, capital preservation and sustainability. Added short-term profits may be achieved through the use of various tactical tools, as long as this does not present a risk to the long-term model. So, basically, my core portfolio is built to last for a very long time (hopefully perpetually) and should not be affected by short-term market swings, but I do tactically trade everyday, as well, in a variety of ways. I just have to make sure I know exactly when and why I am strategically investing or trading tactically.
    Sep 17 07:11 AM | Likes Like |Link to Comment
  • Why QE3 Can't Work: Understanding The Liquidity Trap [View article]
    Joseph,

    I will take a look at the experiment. Thank you.

    I hope that you don't think that I have implied that you don't trade the 'right' way or that my trading is the better option. I haven't and nothing could be further from my own opinion. I am sure that our on trading models are best suited (or should be) to follow our own ideas, backgrounds and personalities. If we know ourselves well, develop solid models and strategies, and implement them in a very disciplined way we have a chance at being successful. This is true for very dissimilar or even opposing models and that's the beauty of it. There are many different ways of successfully trading the markets.

    Julian Robertson was a great stock picker, Stainhardt was good at block trading, Paul Tudor Jones is great at trend following and flexible strategies, Simmons and Shaw at pure rule based algo trading, and Louis Bacon, Soros and Drukenmiller at global macro. Their own trading styles perfectly match their belief sets and personalities and that's why their are comfortable and successful. If you switch them around and have them adopt each other's styles, they would, most probably, be quite mediocre or even really bad and unsuccessful.

    My experience tells me that the Efficient Market Theory is not correct and this is shared with almost all great Macro traders, which, by definition, profit from it. Since I truly enjoy trading everyday and the Macro strategies fit my belief set and personality I consciously choose them as the basis of my models. I am certain that you do the same and choose the strategies and models that fit your own set of beliefs and personality, even thought these are certainly different than mine. We can both be successful traders.
    Sep 17 07:09 AM | 1 Like Like |Link to Comment
  • Why QE3 Can't Work: Understanding The Liquidity Trap [View article]
    Joseph,

    I enjoyed the Market Euphoria article, although, as you might imagine by now, I disagree with the basic premise.

    I suppose that we are all somewhat prisoners of our backgrounds and see things in light of our own ideas. Whichever prism we choose will color our judgement. If you believe that markets are efficient and that the random walk theory is correct you probably end up setting up algorithmic trades with mean reversion as the basic underpinning. Your article seems to be based on these beliefs.

    Fair enough, that's how I started my trading career myself. With time, tough, like most Global Macro traders, I have come to believe that markets are far from being efficient, that they often miss price securities for rather long periods of time, and most importantly, that the markets are far from an accurate portrayal of the economy. Or, perhaps, it was the other way around: upon realizing that markets are indeed inefficient I became a Global Macro trader who could profit from it.

    In my humble opinion, this is why most economist make terrible traders: they can't quite understand that perception and psychology move markets and that they do not necessarily reflect or follow the underlying economy the way they think they should. So the markets are labeled 'wrong,' or 'irrational.' They are not. The markets are separate and independent entities with a 'life' of their own and one trades the markets, not the economy.

    Which brings me back to Keynes maxim. He really didn't mean to say that the markets were indeed irrational from time to time but would eventually come to their senses and follow the economy. He meant to say that the markets are what they are, they are independent constructs, that they can't really be wrong -they simply are - and that it is the trader's mistake to assign the 'irrationality' tag to the markets and bet on it, as it is the trader's own set of subjective beliefs (even if based on perceived objective economic theories) that labels what is rational and irrational behavior in the first place.
    As I wrote before: One should never be more invested in being right than in making money. This is the economists' cardinal and fatal sin!
    Sep 16 03:26 PM | 3 Likes Like |Link to Comment
  • Why QE3 Can't Work: Understanding The Liquidity Trap [View article]
    Joseph,

    You quoted Keynes regarding the liquidity trap. Nevertheless, you seem to have completely forgotten one of Keynes most famous maxims when you wrote:

    "There is no rational justification for stocks adding on to a 37% gain in a year."

    I personally believe that your are misreading the markets' reaction and their perceived lack of 'rational justification.' Nevertheless, even if you were to be correct, perhaps you would be well advised to remember Keynes this time, as well:

    “The market can stay irrational longer than you can stay solvent.”
    Sep 16 02:12 PM | 1 Like Like |Link to Comment
  • Why QE3 Can't Work: Understanding The Liquidity Trap [View article]
    The FOMC decision presented one of the easiest and potentially most profitable trading opportunities in a long time. The FED had been telegraphing its decision for quite some time and Mercedez Ben (I like the moniker) practically spelled it out at Jackson Hole.

    Since my job is to be pragmatic and make money, instead of arguing economic theory with the FED, I loaded up to take advantage of the decision several different ways: buying near term SPY calls and closing the short legs of the Iron Condor hedges; buying emerging markets and Europe (a risk on trade, as a result of reverse fly to safety); buying materials, housing and homebuilders; and finally, shorting even more bonds through TBT.

    Why shorting bonds? Well the risks of deflation have now almost disappeared and the FED stimulus will push inflation somewhat higher and cause Treasury yields to rise (they have risen the last two times around right after the FED’s easing). Here, it also helps that PIMCO sold 50 billion worth of Treasuries in August. That should tell us something.

    So, it has been a couple of unusually easy and profitable days. My point is not to brag, I am perfectly aware that these were unusual circumstances and successfully trading and investing is quite difficult. My point is to show that one ought to be pragmatic and try to profit from the circumstances presented regardless of one’s own particular point of view on whether the FED actions are right or wrong. Argue all you want about the FED’s decision but even if you completely disagree with it, turn around, forget the argument, be pragmatic, and profit from it.

    In short, one should never forget this dictum: You should never be more invested in being right than in making money!
    Sep 16 01:58 PM | 4 Likes Like |Link to Comment
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