The market has been in turmoil lately, what with the fall of Investment Banking Giant Lehman Brothers, government takeover of Freddie Mac and Fennie Mae, government bailout of AIG, sale of Merry Lynch and the USD 700 billion bailout package to Wall Street! All the markets are in frenzy. As the European and British economy weakened, USD rallied initially and touched one year high against major currencies ( Euro peak of 1.61 to trough of 1.38), GBP ( peak of 2.12 to trough of 1.73) , Australian Dollar ( 98 cents to 77 cents) only to now give back sizable chunk of gains. For a period, I was thinking, bad days of USD are over and we can steadily improve from here. I hoped with a new President elected in November, who can presumably reign in deficit and bring our troops home, USD can get some of its shine back. Guess not! Seems like we are in for some more pain! Euro is now back to 1.48 after rallying some 4 cents in one single day! GBP is back to 1.85 and Australian Dollar is nearing 84 cents, go figure!
Currency Markets are not the only one undergoing price swings, same deal with the precious metal markets. Silver sold off from a peak of $21/oz earlier this year to $10.20/oz recently destroying many commodity long funds in the process only to rally back to $13.75/oz in few sessions. Similarly Gold Nosedived from 1025/oz to $730/oz and back to $915/oz in few sessions. Same deal with crude oil, from $147/ barrel to $90 / barrel and back to $122/barrel.
In bonds market, long bonds ( 30 year treasury) rallied almost up to 124.00 and 10 year notes to 119.5 before selling off fiercely to 116 on long bond (a move of approximately 80 basis points in terms of the yield curve) and 114 on the 10 year notes. Same deal with stock market, one day up 400 points DJIA (Dow Jones industrial Average) on bailout news, next day 400 sell off on Democratic party hurdle to bailout efforts. In this atmosphere it is very easy to get whipped both ways, and cash seems like the best position to have. I interact with other professional Money Managers and talking to them it seems like this market has amazed every one! To quote one of my Mentors in the field – she looks at the volatility and says, gosh in this business, never say never, no one could have foreseen such a wild volatility! well said, as a testimony to that I saw HSI ( Hong Kong) sell off to 16.5k from 19.5K in 2 days and then back again to 19.5k. Some of this volatility is going to take its toll and I am thinking some of the weaker hands in fund management business will close their door. You need ultimate risk management to survive in this environment! Additionally one needs to adjust position sizing to account for this increased volatility. As the volatility goes up, options premium shoots up ( a good measure of option premium is the VIX index, also called the fear index which has spiked from a low of 10 in beginning of 2007 to north of 30 today), ATR (Average True Range) shoots up. A good risk management strategy in such an environment would require reducing position sizing proportionately ( in other words reduce the leverage) so that total amount at risk stays constant. The money spent to manage risk should be treated as an investment in long term financial health and not to be fretted upon. It is OK to get whipsawed in this market every once in a while, you can still survive, but not OK to let go of risk control and ride the volatility all the way up and down! Hope this volatility, as it enters the history books, will serve as an eye opener for the money managers and we all can learn a lesson or two in risk management!!

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The market has been in turmoil lately, what with the fall of Investment Banking Giant Lehman Brothers, government takeover of Freddie Mac and Fennie Mae, government bailout of AIG, sale of Merry Lynch and the USD 700 billion bailout package to Wall Street! All the markets are in frenzy. As the European and British economy weakened, USD rallied initially and touched one year high against major currencies ( Euro peak of 1.61 to trough of 1.38), GBP ( peak of 2.12 to trough of 1.73) , Australian Dollar ( 98 cents to 77 cents) only to now give back sizable chunk of gains. For a period, I was thinking, bad days of USD are over and we can steadily improve from here. I hoped with a new President elected in November, who can presumably reign in deficit and bring our troops home, USD can get some of its shine back. Guess not! Seems like we are in for some more pain! Euro is now back to 1.48 after rallying some 4 cents in one single day! GBP is back to 1.85 and Australian Dollar is nearing 84 cents, go figure!
Currency Markets are not the only one undergoing price swings, same deal with the precious metal markets. Silver sold off from a peak of $21/oz earlier this year to $10.20/oz recently destroying many commodity long funds in the process only to rally back to $13.75/oz in few sessions. Similarly Gold Nosedived from 1025/oz to $730/oz and back to $915/oz in few sessions. Same deal with crude oil, from $147/ barrel to $90 / barrel and back to $122/barrel.
In bonds market, long bonds ( 30 year treasury) rallied almost up to 124.00 and 10 year notes to 119.5 before selling off fiercely to 116 on long bond (a move of approximately 80 basis points in terms of the yield curve) and 114 on the 10 year notes. Same deal with stock market, one day up 400 points DJIA (Dow Jones industrial Average) on bailout news, next day 400 sell off on Democratic party hurdle to bailout efforts. In this atmosphere it is very easy to get whipped both ways, and cash seems like the best position to have. I interact with other professional Money Managers and talking to them it seems like this market has amazed every one! To quote one of my Mentors in the field – she looks at the volatility and says, gosh in this business, never say never, no one could have foreseen such a wild volatility! well said, as a testimony to that I saw HSI ( Hong Kong) sell off to 16.5k from 19.5K in 2 days and then back again to 19.5k. Some of this volatility is going to take its toll and I am thinking some of the weaker hands in fund management business will close their door. You need ultimate risk management to survive in this environment! Additionally one needs to adjust position sizing to account for this increased volatility. As the volatility goes up, options premium shoots up ( a good measure of option premium is the VIX index, also called the fear index which has spiked from a low of 10 in beginning of 2007 to north of 30 today), ATR (Average True Range) shoots up. A good risk management strategy in such an environment would require reducing position sizing proportionately ( in other words reduce the leverage) so that total amount at risk stays constant. The money spent to manage risk should be treated as an investment in long term financial health and not to be fretted upon. It is OK to get whipsawed in this market every once in a while, you can still survive, but not OK to let go of risk control and ride the volatility all the way up and down! Hope this volatility, as it enters the history books, will serve as an eye opener for the money managers and we all can learn a lesson or two in risk management!!

Been a while since I wrote my thoughts on the commodities market or the bond market or the currency market, and there is a reason for it. I am not getting a clear signal in terms of what is going on in the market in the short term. For instance gold market had a sizable pull back ( form $1025/oz to $850/oz), similarly Silver pulled back from around $21/oz to $16.25/Oz. All things being equal, I think this is a buying opportunity, you know pull back in a strong bull market, that is when you buy. But I am staying away and chances are I am going to miss this move back to old highs and beyond. The reason I am on the sideline is because I see great divergence out there. Gold , silver have pulled back but Crude at $136/ barrel is still making new highs, there has been no meaningful pullback so to speak. This animal has rallied from $90/barrel to $136/barrel in a heart beat. The parabolic move means the correction is also going to be very painful, very steep and you don’t want to touch it with a 10 feet pole. Given that the various commodities usually have a highly correlated move, any correction in crude will likely drag all the other metals- gold, silver, copper,platinum..you name it. These commodity markets are notorious for sharp swings both ways. As early as last summer (2007) silver had a precipitous decline, in 2006 natural gas ,silver, gold all had sizable decline resulting in the busting of Amarnath hedge fund. I am thinking when crude corrects, all these markets including currencies will correct( Euro particularly I think has gotten ahead of itself). Euro can easily correct to 1.40 from the current 1.56 or so. As they say in financial markets “trees do not grow to the skies”, these markets will eventually correct, question is when? That would really be a clear signal to me, and be a good buying opportunity, till then I am staying out.

The long bond yields have been creeping up ( both 10 years and 30 years), and given that Fed is still on holding pattern means yield curve is getting steeper by the day, unmistakable signal that the market is finally pricing in the inflation concerns. I shorted the 30 year bond when it was flirting with $118 price level just few weeks ago( now at $112-$113) , now I am again on the side line. I think this market needs to consolidate here, although all indications are that the steepening will continue. What happens next with the bond prices is hard to say. I think both sides ( bulls and bears) have strong emotions. The bond bears point to inflation, whereas the bond bulls point to a slowing economy, a recession in the air, the China trade surplus, the petro dollars and so on. Me, I am not going to get trampled in this bull and bear fight, let them fight it out, eventually one side will come out victorious and a new trend will emerge, and I will be happy to join in. For now,my mantra, avoid this.

Last point, S&P futures, Dow futures, what about these? Dow has been flirting with 12000 level to the downside, really scary in here. I am constantly hedging my portfolio with the help of options, writing some covered calls, buying some spreads and so on. I sure hope 12000 works as support and we bounce from here, but you just never know. Lots of skeptics out there who believe credit crises is not done yet, and the market has yet to price these in. Gosh, if that happens Dow can easily go back to 11K in a heart beat, wouldn’t surprise me a single bit! I am staying defensive!

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Been a while since I wrote my thoughts on the commodities market or the bond market or the currency market, and there is a reason for it. I am not getting a clear signal in terms of what is going on in the market in the short term. For instance gold market had a sizable pull back ( form $1025/oz to $850/oz), similarly Silver pulled back from around $21/oz to $16.25/Oz. All things being equal, I think this is a buying opportunity, you know pull back in a strong bull market, that is when you buy. But I am staying away and chances are I am going to miss this move back to old highs and beyond. The reason I am on the sideline is because I see great divergence out there. Gold , silver have pulled back but Crude at $136/ barrel is still making new highs, there has been no meaningful pullback so to speak. This animal has rallied from $90/barrel to $136/barrel in a heart beat. The parabolic move means the correction is also going to be very painful, very steep and you don’t want to touch it with a 10 feet pole. Given that the various commodities usually have a highly correlated move, any correction in crude will likely drag all the other metals- gold, silver, copper,platinum..you name it. These commodity markets are notorious for sharp swings both ways. As early as last summer (2007) silver had a precipitous decline, in 2006 natural gas ,silver, gold all had sizable decline resulting in the busting of Amarnath hedge fund. I am thinking when crude corrects, all these markets including currencies will correct( Euro particularly I think has gotten ahead of itself). Euro can easily correct to 1.40 from the current 1.56 or so. As they say in financial markets “trees do not grow to the skies”, these markets will eventually correct, question is when? That would really be a clear signal to me, and be a good buying opportunity, till then I am staying out.

The long bond yields have been creeping up ( both 10 years and 30 years), and given that Fed is still on holding pattern means yield curve is getting steeper by the day, unmistakable signal that the market is finally pricing in the inflation concerns. I shorted the 30 year bond when it was flirting with $118 price level just few weeks ago( now at $112-$113) , now I am again on the side line. I think this market needs to consolidate here, although all indications are that the steepening will continue. What happens next with the bond prices is hard to say. I think both sides ( bulls and bears) have strong emotions. The bond bears point to inflation, whereas the bond bulls point to a slowing economy, a recession in the air, the China trade surplus, the petro dollars and so on. Me, I am not going to get trampled in this bull and bear fight, let them fight it out, eventually one side will come out victorious and a new trend will emerge, and I will be happy to join in. For now,my mantra, avoid this.

Last point, S&P futures, Dow futures, what about these? Dow has been flirting with 12000 level to the downside, really scary in here. I am constantly hedging my portfolio with the help of options, writing some covered calls, buying some spreads and so on. I sure hope 12000 works as support and we bounce from here, but you just never know. Lots of skeptics out there who believe credit crises is not done yet, and the market has yet to price these in. Gosh, if that happens Dow can easily go back to 11K in a heart beat, wouldn’t surprise me a single bit! I am staying defensive!