Weekly Game Plan - 27.7.2015

July is almost finished - last week starting. Here are some thoughts for anyone attempting to stick a finger in the air and decipher the things to come. 

a) the FED is expected to  hike in September despite short term interest rates not yet reflecting this scenario. This will be USD-Bullish and the key is deciding what to sell against dollars. The Euro is rangebound and there's not much interest to play the euro directionally, so Aud and Cad remain the best candidates (for now) to short vs. USD.

b) BOE wants to track the FED, but how hawkish can the BOE can really be?  I am still waiting for clearer drivers.

c) Aud is the worst performer and the runner-up is Cad. It is hard to pin this underperformance on domestic factors since the CPI was largely a non-event and Governor Stevens disappointed doves by flagging upside risks. Citigroup believes that external forces, as well as positioning, have likely been the dominant drivers of the depreciation. Also, any further declines in commodities will weigh on Aud,just as further declines in Crude will weigh on Cad.

1. Who Said What

-  BoJ DepGov Nakaso – Inflation around zero now, to pick up pace post-summer,  to meet 2% target in H1 FY’16, export slowdown temporary, eyeing both up-down  risks to scenario, BoJ to adjust policy as needed, effect of Fed rate hikes/China growth to be eyed closely - Reuters.

-  Mitsubishi Motors to transfer some of US output to Japan – Reuters.

-  BoE ChiefEcon Haldane – No need for rush to raise rates – BBC.

- Debt conundrum to keep Greek banks in months-long freeze – Reuters

2. Themes for the Week

- Fed statement will be watched for signals of a near-term policy rate hike

-  First estimates of UK and US Q2 GDP to show a pickup in growth

-  Euro area inflation to hold steady in July despite decline in oil price

- Remain cautious on Cad: the near-term outlook for CAD and other risk-correlated

and commodity G10 currencies remains rather subdued. 

3. Calendar

GMT Times - Source: Investing.com

4. Look around the markets

Vix heading back up as the markets decline. 

Choppy moments in equities but as long as the recent lows hold,

the uptrend isn't dead yet.

Energy sector not looking good.

In FX, we've already spoken about the main themes:

weakness in Aud & Cad; strength in USD even though

we're currently retracing.

Summer Doldrums...

Taking it really easy gentlemen...would suggest you take it easy to...relax and take advantage of the weather. The markets will try to sit still until mid-august and the fireworks usually begin around the second week of September again.  So yeah...chill out!

Weekly Game Plan - 19.7.2015

Greek banks will reopen this week, following the modest boost in ELA late last week. Any further adjustments in ECB support for Greek banks or local Political chaos will trigger further volatility, but the market is most likely happy to move on, focus on other themes and/or finally take a break and enjoy the above average summer heat.

What events can the market look forward to this week? The Aussie sits close to its cyclical lows ahead of the release of Q2 CPI and a key speech by RBA Governor Stevens. The outlook remains bearish for the time being. More in the "Themes for the week" section.

1. Themes for the Week

- Greece to meet ECB payment on Monday and a further parliamentary vote is scheduled.
- Markets to refocus on global divergence in monetary policy. Euro remains a sell on rallies from this perspective.
- UK retail sales, BoE minutes and China/euro area PMIs in spotlight.
- More weak Japanese data continues to leave the door open to further BoJ easing
- Some analysts still calling for a RBNZ rate cut.

2. Who Said What

-  Spot Gold Falls more than 3% to lowest since March 2010

-  Germany's Merkel Says on German TV Channel ard Schaeuble's Proposal for Temporary Grexit was on table but we chose another Option; Says Capital Controls are still in Place in Greece, That's not a Normal Life so have to Negotiate Quickly; Regarding Speculation about Possible Schaeuble Resignation, No one has asked me to be relieved of their Duties; Can't have a Classic Haircut in Currency Union but this is Possible outside Currency Union

- China V/Finmin Zhu Guangyao says China must Learn Lessons from Stock Market Rout, To Focus on Supervision; Quota of 2 Trillion Yuan for Debt Swap Program Should be Sufficient for now

3. Calendar

4. Look around the Markets

Tough to fight the "complacent" rally in equities

USD strength quite evident in FX, and best played vs. Cad, Nzd or Aud at current levels.

Good Luck this week!

Where Large Traders Place their Stops

Note: a prior version of this article was produced for OrderFlowTrading.com

A good way to understand the importance of stop clusters and why they are positioned in certain places is to first review the concept of support and resistance.

Support and resistance are two very important concepts and you can build your entire trading career around these two concepts. Broadly speaking, a support is a level where the market previously showed demand; it's a level that propelled price higher.  Instead, a resistance is a level that has previously shown supply; it's a level that has propelled price lower. Professional traders day in & day out highlight supply & demand zones and then wait for certain characteristics in order to initiate a trade. 

There are always a great number of supply and demand zones on the charts, simply because the perception of value is constantly changing. 

Market participants are constantly trying to price in (or discount) what will happen tomorrow, next week, next month, next year (which are all uncertain) and thus create an expectancy. Thus something that is highly in demand today may be sold aggressively tomorrow or next week. Of course, as many other things with the markets, we should always look at the most evident supply and demand levels (i.e. Support and resistance levels). The more evident the level, the larger the imbalance was created and the more likely price is to find renewed support or resistance next time round.

Take note that support and resistance are not precise prices. They are “zones” 

that can extend 20-30 pips above and below the actual price level.

Source: FXCM Marketscope

Now, due to the fractal nature of the markets, these support and resistance zones are created on all time frames. It's up to the trader's own objectives and risk-tolerance to decide whether to use them on all time frames or whether to stick to a handful of chosen time frames. Obviously the higher the time frame, the more participants are active and see it. Therefore, the more weight that particular zone/level may have.

The fact is that evident price levels that have been rejected before are evident on the chart, because they usually show some sort of orderflow imbalance footprint: inside/outside candles, doji's, spinning bottoms/tops, etc. and price gets pushed aggressively away. When the market comes back to challenge that area, chances are that it will be a crossroads once again, where buyers and sellers will be fighting to estalish the upper hand. Who will win? We will never know ahead of time. The trend and the fundamental influences at the time can give us a hand but the fact is that:

you will never know ahead of time if a previously relevant support/resistance zone will hold and act the same as it did in the past. The price drivers (fundamental flavouring) at one point in time are never the same as they are in other points of time, so what was once an important level may now be completely ignored. Or it will be equally important. The fact is that on a price chart we, as chartist, can observe these important zones where buyers and sellers fought it out once before, and may very well fight it out again. 

Instead of trying to trade in the middle of nowhere, why not try to plan your trades around  something so evident and so simple to use, like a support or resistance area?

From Support and Resistance to Stop Clusters

Where's the link between support/resistance and stop orders? Take a look at the chart below.

Evident price zones harbour “2-way traffic”: buy orders and sell orders. 

Very useful to have on your chart.

Source: FXCM Marketscope

These kinds of price levels or zones are usually associated with a relatively large number of transactions (from both buyers and sellers) and that makes them consistent focal points. Because these areas tend to promote more trading, these areas see even more trading volume and have a tendency to reinforce themselves.  This is why areas of support and resistance usually repeat or stay in force.

There comes the time when the agents of support or resistance simply exhaust themselves and the price pattern breaks through the zone. This brings us to an important twist. These focal points harbour buyers and sellers. Often, once the buyers are exhausted, the zone becomes a good selling point (and vice versa). This might not seem very logical at first, but when we take into consideration the market's psychology, it can make more sense.

Source: proprietary illustration

In the chart above, let's assume traders buy at point 1. The market has a good advance, going to point 2 and the traders are feeling good. Then the market takes a bad turn and drops below their entry point, going towards point 3. Now the traders are concerned about holding onto a loosing position but still don't want to book a loss. They hold, hoping that the market will turn around and reach their entry point, so they can reverse their positions at point 4. So at point 4, the marketplace is flooded with sell orders. Re-cap: at point 1 we had support, at point 4 (same area) we have resistance. The opposite would be true for a resistance-becomes-support.

How to use Touted Orderflow Information

Note: this article was first written for Orderflowtrading.com

“ Bids tipped at 1.1000”. Sounds like some kind of code language...and if you're like me, the first thing that comes to mind is “who's tipping what where?”.

No, we're not talking about COW Tipping here...

Bids (interest to BUY something), Offers (interest to SELL something), Options Barriers, Stops, are all elements that are frequently reported in our Skype Trading Room, as they are on other professional news feeds. But what exactly are they, and what can they do for you?

First it should be clear that the big dealers in FX (investment banks) do not open their order books directly to just any outsider, because that information is very valuable in FX – more than in other markets given there is no central trading hub or clearling house. As Carol Osler has demonstrated, market share and a more comprehensive order book usually mean more profits for the investment bank that has it (http://people.brandeis.edu/~cosler/publications.html). So people claiming they have some software that shows the order books for the FX market are being a little shady because there is no real 'Depth of Market' for the FX market.

Touted order  flow information is something different, and it usually travels down the grapevine through people that have some connections in the trading industry, mostly as they worked as traders  in the past. However, even if the information can be very reliable, it is best used as complimentary information and not trade signals.

It's logical to understand why. In the grand scheme of things in the FX market, relying on a discretional piece of information is like betting on “black or red” at the casino. It could work, but it also might wipe you out. After all, orders get pulled all the time and while we may know where some orders are clustering, we cannot know the size of the mentioned orders so they might not have the weight to stop the market and push it back.

So observing the market's behaviour, and staying on the right side of directional "trendy" flows as a filter are paramount.

EurGbp 1H - Source: FXCM Marketscope

In the chart above, we have highlighted the two most influential levels touted for a recent session (Monday March 9th 2015). Why are 7220 and 7185/90 the most influential levels to analyze? Simply because they encompass more than one side of the market. There are not simply “bids” or “offers” at these levels. There are also stops. Why is the presence of Stop Orders (so stop loss, as well as stop entry orders) so important?

It's the “2-way traffic” principle. Where there is room for error (expecting the “bids” or “offers” to push price to the expected side) there is room for profit. And by simply observing these “2-way intersections” you can take advantage of the reaction, and profit at the cost of those that are blindly fading levels or catching spikes. 

So let's magnify the levels a little more, and drop down to a 5Min chart.

EurGbp 5Min - Source: FXCM Marketscope

The example illustrated a typical behavioural trait of these zones: they will react, potentially more than once, but the first touch is usually the best place to look for a playable reaction.  Secondly, one of the trades was a potentially excellent entry. The other was potentially suicide. And yet, they are both “2-way intersections” and carry weight. 

The fact is that we need to keep the larger picture in mind and not miss the forest by focusing on the trees. We are in a clear downwards move with a clearly observable trend behind us. So the players that are trying to pick a bottom by playing the stop-hunt at 7220 are the weaker hand, as are the players trying to catch the falling knife at 7185-90. And they get washed out pretty quickly.

There lies the most logical way to use this complimentary information: inserting it into a trading plan that rotates around evident trend-backed moves, in stark contrast to “playing every level, anywhere & everywhere”. 

Good Luck!

EU Open Report - 14.7.2015

So the EU has agreed to bailout Greece once more...and now it's up to the local politicians to pass the reforms. Kathimerini reported that Energy Minister Panayiotis Lafazanis, who heads SYRIZA’s Left Platform confirmed he would not vote for the legislation and he would not resign from the government either. Many others hold the same point of view.

USD is up across the board after  yesterday’s developments in Europe, appreciating against the EUR and a range of other currencies. The Greek drama is not yet finished, but the removal of any near term Grexit Risk has proven USD supportive. Greece looks like less of a limitation for the Fed, so rising expectations on US interest rates can act as a lever for USD appreciation.

1. Who Said What

- Greek PM Tsipras faces party revolt over bailout deal – Reuters.

- IMF – Greece misses Eur 456 mln loan payment due yesterday, arrears now 2 bln Euros.

- Greece paid back Y11.7 bln of samurai bonds which matured yesterday – Reuters.

-  UK June BRC like-for-like retail sales +1.8% y/y, May unch, total sales +2.9%, biggest rise since March, May +1.1%, sales strongest since January ’14.

- China June money supply M2 +11.8% y/y, CNY lending +13.4%, +11% and +14% eyed,  end-June FX reserves $3.69 trln.

-  Australia June NAB business conditions index +5 pts to 11, highest in 8-months business confidence index +2 pts to 10, highest since September ‘13.

2. Calendar

CET Times - Source: Investing.com

3. Asian Equity & FX Roundup

Euro and Jpys sold as we approach London,

Cad also weak, USD bought.

Source: Reuters Eikon/Metastock Xenith

Asian equities generally higher.

Source: Reuters Eikon/Metastock Xenith

EU Open Report - 13.7.2015

Deja-vu? This week's FX open followed the same pattern seen the past two weeks: Euro gapped lower on the open, but the dip was smaller and flight to safety was modest.The gap was also closed quickly. European authorities have proposed (forced) tougher measures (more austerity) to Greece and the key issue is whether Greece is able to  pass legislation before the deadline on July 15th. European Finance Ministers have suggested that if Greece fails to push through reforms by the 15th, there will be no basis for further negotiations. Personally, I think the political divide has become too large. Tsipras is being shown "the door out" and is being given reason to cross it.

The way things are going, it looks quite clear that the USD is going to be the place to park capital as events come to a close.

1. Who Said What

- Greece talks continue but proving to be exceptionally difficult, Greek parliament must pass reforms by Wednesday, if Germany approves then Bundestag will vote on bailout, Friday earlier for news on deal, weekend more likely, another EU Summit then? – IFR, media.

- French deny EU report of possible bridge loan for Greece – Reuters.

- China June trade surplus $46.54 bln, exports +2.8% y./y, imports -6.1%, $55.7 bln, -0.2% and -15.0% eyed.

- China regulator orders brokerages to review trades following stock rout –RTRS.

2. Calendar

GMT times - Source: FXStreet

3. Asia Equity & FX roundup (via IFR)

• Nikkei opens gap up after Wall Street gain Friday, Greece no-news ignored.
• Rise from early 19,911.39 low to 20,111.97, optimism on Greece deal.
• At 20,103.63, index up 323.80 points or 1.64% on day, 20k+ trade again?
• AXJ up too, Shanghai 2.28%, Hang Seng +0.22%, KOSPI +1.39%, STI +0.45%.
• Sensex +0.12% and ASX +0.72% as well.

All eyes & ears on the wires...

Weekly Game Plan - 12.7.2015

As you well know, there are ongoing meetings in place between Greece and creditors. What can happen? There are two views of the weekend events. The most probable is business as usual in the euro zone.

The Eurogroup likely will end up sending Greece a list of proposals that they will have to legislate immediately. The big question here is whether Tsipras can get any proposals through the Greek Parliament, after a useless "NO" referendum, and an evident (and logical) loss of consensus amongst the Greek population. Most likely that the Greek Parliament will end up passing legislation that never really gets implemented.

The second view, less probable but still possible, is that Greece is out of the EU. The northern EU countries do not trust the Greeks  and feel that they can handle the contagion to other peripherals in the event of a  Grexit. However, I would like to highlight the emerging sentiment that was also spoken about in the skype trading room: the divergence between countries & politicians is demonstrating how the EU is effectively useless. Members are fighting amongst themselves once again, just that instead of pointing guns at each other, they are pointing fingers and enforcing austerity. The fact remains that there are no "europeans" in the room. There are Germans, Greeks, Italians, French, etc. and each party thinks only for themselves it appears. These ongoing negotiations are the demonstration that the EU project is an utter failure.

The more divergence is shown between north & south, the more "extremist" parties will form, and the closer we will get to seeing the likes of another dictatorship in a G10 country.

Why is it that politicians never learn from the past?

1. Themes for the Week

- Decision on Greek bailout to be made over the weekend
- Fed Chair Yellen delivers semi- ellen delivers semi-annual testimony to Congress
- Headline UK inflation to mask underlying upside price pressures

2. Calendar

Times are GMT, source: FXStreet.com

3. Look around the markets

Chop chop continues in equities..expect some risk off 

if no deal is reached overnight.

Energy sector not liking this uncertainty.

In FX, Cad & Nzd still seem like the easiest currencies to short

vs. USD.

Good Luck this week!

EU Open Report - 10.7.2015

Good Morning & TGI-F!

1. Who Said What

- Japan Econmin Amari: Chinese Shares in Adjustment Phase, Hoping They Make Soft Landing in Line With Real State of its Economy

- U.S. Stock Futures Jump 1% after Greek Reform Proposals

- Greek Reforms Proposal Sets Primary Surplus Target of 1% in 2015, 2% in 2016

- Greek Reforms Proposal Includes Vat Rate of 23% for Restaurants and Catering

- Greek Reforms Proposal Sets Vat for Hotels at 13%

- Greek Reforms Proposal to Eliminate Vat Tax Breaks for Islands by End 2016

- Greek Reforms Proposal to Raise Corporate Tax In 2015

- Greek Reforms Proposal to Increase Tax on Shipping Companies

- Greek Reforms Proposal Ekas Benefit to be Gradually Phased Out for all Pensioners by End December 2019

- Greek Reforms Proposal to Increase Luxury Tax and Implement Tax on TV Adverts Immediately

- Greek Reforms Proposal says Legislation on a New System of Collective Bargaining to be ready by Q4 2015

- Greek Reforms Proposal Says Will Facilitate Completion of Tenders for Privatisation of Regional Airports, Trainose, Ports of Piraeus, Thessaloniki and Hellinikon

- Greek Reforms Proposal says will Announce Binding Bid Dates for Privatizations of Ports No Later than October 2015

- Greek Reforms Proposal says will Transfer Remaining State Shares in Greek Telecoms Company Ote to the Privatisation Agency

- Greek Reforms Proposal says will raise the Solidarity Surcharge on Income Tax

- Greece Reforms Proposal to Cut Defence Spending by 300mln Euros by 2016 End

- Greece Reforms Proposal says Zero Deficit Clause on Pensions will be Suspended Until Oct 2015 When There will be Pension Reform Legislation

- Greece Reforms Proposal says to Save 1% of GDP worth of Pension Savings in 2016, Curb Early Retirement

- Greece says will Seek Funding to Cover Loan Obligations Totaling 53.5bln Euros until the End of June 2018

2. Calendar

CET Time - Source: Investing.com

3. Asian Equity & FX roundup

The renewed proposals from Tsipras seem to be just what the Troika ordered. Markets are back  into risk-on mode although we are still waiting for the official "approval" which will be decided over the weekend. Again, not a great weekend to carry risk.

Asian equities were higher, and EU stocks are opening higher as well.

Not too much directional clarity intraday on FX, so playing long "hit & run" positions on European Indices might be a little easier today.

Option Writing Strategies

As promised, I'm going to detail my experience with the first plain vanilla option strategy of my life: the short strangle. It could actually be a mix between a short strangle, short straddle and variable write strategy...because it's a hybrid creation by my father who has been using it for 30 years. I've bought and sold puts and calls before...but maybe 5 times in total. So what I'm going to do is explain the rationale behind what I'm doing, so you can give you own thoughts and/or your own spin on the same idea.

1. Option Writing Strategies

First we need to start with idea behind "selling" options on common stock or on indices. I shall try to keep things as basic as they can be, since I'm also no expert in the field yet. So basically, you sell options to:

a) collect premium (you get paid to sell things) hence generating current income; in options lingo, this is called "playing the theta decay".  Since options have time value (i.e. the closer to expiration you get, the les value there is in the option), if you sell a longer dated option and price goes nowhere, you collect time value each day tha passes. This is "theta decay".

b) deploy a neutral view on the underlying asset.  Many writing strategies are "neutral", in as you don't expect the underlying asset to move much by the expiry date. You might call it a "range bound strategy" to make things simple. 

c) reduce basis. This is applicable to naked writing strategies, on an underlying asset that you believe will rise in value. So you are not afraid to write naked options, hence being at risk of exercize. What does this mean?

- if you write a call, you SOLD someone the RIGHT to BUY the stock FROM YOU at the strike price. So

- if you write a put, you SOLD someone the RIGHT to SELL the stock TO YOU at the strike price.

So for example, if you wanted to generate some income, you could sell naked puts on the stock and simply continue to roll the strategy until you get "put" the stock. So you've generated premium over time, before you got handed the stock, that now has effectively lowered your price of the stock itself. And this has proven to be a good strategy, over time. 

2. Buying Stock & Selling Options

So what have I been suggested to do?  Pick up a good stock, and use options to generate some passive income from it. So far, how am I doing this?

a) which stocks? As I have written in the "equities" section of this blog, I use "value" stocks as a preferred scenario, but in case there aren't any "cheap" stocks out there at the time of necessity, I'll go for "quality" stocks that have better long term fundamentals than their peers.

So cheap - relatively high quality stocks.

b) stocks rise on average over time. So it's tricky to short single stocks, even if there's some "technical reasoning" for it. I use an index overlay. For example, my first stock is Telecom Italia (Tlit.MI) so I use the FTSE-MIB as the index of reference. I only take longs if the index is trending up; I only consider shorts if the index is trending down.

c) the options overlay. So now I have a stock I "like" and I think will outperform over time. Can I not enhance the yield on it? Buy & Hold is a little passive and risky. Plus, being a coin flipper, I'd like to believe that years of directional play is useful somehow. So here's what I do.

- sell OTM puts so long as the market is in an uptrend.

- if/when put the stock, sell ITM calls and OTM puts, with more than 50 days of time value left.

- Protect the premium received via directional option buying.

The fact is that you never know what the market is going to do. So given that this is a "range trading" strategy, when the market tells me it's ready to rise or fall, I need to hedge the leg of the strategy that will lose money. So when the market drops, the sold puts are going to lose money, so I need to buy puts to hedge that risk.  When the market rises, it'll be the calls that lose money. Sure, I have the stock in hand, so the upside loss is covered...but IF I can predict directional moves, why not buy some calls as well and enhance the return?

3. My stock + short straddle since inception

I need to say...this was not the ideal scenario for starting the strategy. The stock at hand was NOT a value stock NOR a high quality stock. It is only a stock that will be around for some time. Telecom Italia is nowhere near a 5x or 3x EV/EBIT (which is where "value premium" lies):

Telecom vs. EV/EBIT

Source: Metastock Xenith/Reuters Eikon

So why is Telecom Italia rising, from a fundamental perspective? If you've read through my blog posts, you'll know the answer... it's making more money now than in the recent past.

Telecom vs. Net Income

Source: Metastock Xenith/Reuters Eikon

So this was a good "baptism of fire" for me, considering that the ideal situation would instead be:

a) having a stock I like, picking if up when it's cheap
b) writing options on it
c) defending the theta profits.

Here is how I played it:

On May 26th Long Telecom Italia 4000 shares at 1.1260
Short 1.10 Calls at 0,070 July
Short 1,10 Puts at 0,044 July

Real time source: Netdania.com

On June 11, long 2 1.10 calls July at 0,085 spot ref. 1,1460
On June 11, close 1 Call at spot ref. 1,1700 for 0,099

On June 12 close 1 Call at spot ref. 1,1500 for 0,082

On June 16, buy 2 puts spot ref. 1.1110 for 0,0705
On June 16 close 1 put spot ref 1,0880 and the other closed 1,1100

On June 18, buy 2 puts spot ref. 1,1120 for 0,0653
Close 1 at 1,0950 for 0,076
Close other scratching at 1.1100 for 0,065

On June 24, bought 2 puts at 1,1800 for 0,456
Closed both at 1,1680 for 0,0516

On July 7th bought 2 puts spot ref. 1.1100
Closed 1 at spot ref. 1.0950
Scratched the other at par.

Currently no hedge is on, strategy still active.

Hope this first introduction was enlightening!

EU Open Report - 8.7.2015

Eurozone leaders’ summit ended on a cautious note. Another summit has been called for Sunday, with a deadline for tomorrow set for detailed proposals from Greece.

Key comments from the press conference:

*RENZI CONFIDENT TSIPRAS WILL PRODUCE A CREDIBLE, GOOD PLAN

*SOME EU LEADERS WERE 'MUCH MORE RIGID' THAN LAST TIME: RENZI

*TUSK SAYS EU HAS FIVE DAYS LEFT TO FIND AGREEMENT ON GREECE

*HOLLANDE: NO MORE TIME TO LOSE, CALENDAR HAS BEEN FIXED

*MERKEL SAYS ECB BRIEFING SIGNALED GREECE NEEDS SUNDAY DECISION

*HOLLANDE: MEDIUM-TERM PLAN TWINNED WITH SHORT-TERM FINANCE

*MERKEL SAYS SCOPE OF GREEK PROGRAM WIDER THAN PREVIOUSLY SEEN

*MERKEL SAYS GREEK PROPOSALS MUST GO BEYOND INSTITUTIONS' TEXT

*MERKEL TO INSIST ON 'PRIOR ACTIONS' FOR START OF GREEK TALKS

*MERKEL RULES OUT DEBT 'HAIRCUT'

*TUSK: WE CAN'T EXCLUDE THE `BLACK SCENARIO'

*TUSK: WE NEED TO DISCUSS CONSEQUENCES FOR ENTIRE EURO ZONE

*MERKEL SAYS SHE ISN'T 'ESPECIALLY OPTIMISTIC' ABOUT GREECE

Finally, deadlines have been set for Greece, and the Euro (and EU equities) dipped as last night s meetings appeared to offer little progress once again. The emergence of a roadmap for the next several days may have helped feed into this stabilization, with tomorrow marking the deadline for a detailed proposal from Greece and Sunday's Eurogroup meeting the deadline for a decision - which will also force the ECB to reconsider it's support for Greek banks. Again, until there is a binary outcome available, traders and investors alike will shy away from taking positions in the Euro. However, what's happening is very much negative, so the path of least resistance is still downwards.

1. Who Said What
- China PBOC – To help China Sec Finance Corp get sufficient liquidity, guard against systemic regional financial risks, closely monitor stock market.

- China Sec Finance Corp – Panic noted in market, big increase in irrational  sales, closely monitoring situation, to provide adequate liquidity for  brokerages, step up purchases of medium-small caps – Xinhua, Reuters.

- German Chanc Merkel - ECB to keep Greek banks afloat till Sunday – Reuters.


2. Calendar

CET Time - Source: Investing.com

3. Asian Equity & FX Roundup

Asian equities continued lower, with Shanghai down 3.8% despite an initial drop of 8% (!). The PBOC is active, attempting to cushion the blow to the stock market but this is a bubble that needs to burst. Nikkei was down 2.2% and the ASX down 1.8%.

Jpy complex was bid during asia in a typical risk-off scenario, as Crude and Gold also continue their declines.

Lots of trendiness appearing this week. AudUsd and AudNzd, NzdUsd and NzdJpy, Crude and it's FX counterpart: CadJpy.

(chart sources: FXCM Marketscope)

Good Luck today!

EU Open Report - 7.7.2015

The RBA showed very few changes compared to the June statement. This is dovish on an absolute basis, although the market was looking for even more dovishness.  The RBA did  add a reference to China and Greece, but downplays the impact of recent volatility in light of accommodative financial conditions across the globe. They do not change the language on commodities despite recent pressure. So not much to work with, and the Aussie is falling more on inertia than anything else.

 Europe developments have also been boring...ECB kept ELA in place at current levels but upped haircuts, while fiscal authorities sounded optimistic on prospects for an agreement approaching today’s Eurogroup meeting. However, 6 EU countries now support a Grexit, and the market is pricing a 70% chance of a Grexit. So the bias on the Euro is still to the downside.

1. Who Said What

-  ECB maintains ELA assistance as is, ups haircut on collateral 10% - Reuters.

- IMF tells Greece it cannot provide money due to missed payment – Reuters.

- ECB/Austria CB Nowotny says bridge program for Greece thinkable – ORF TV.

- RBA leaves OCR at 2.0% as eyed, lower AUD likely, inflation consistent with  Target, policy needs to remain accommodative, China-Greece bond impact small.

- Fitch affirms New Zealand at AA with positive outlook.


2. Calendar

CET Time - Source: Investing.com

3. Asian Equity & FX Roundup

Slow session in Asia. Attention is being stolen by Chinese stocks after the weekend policy move. Shanghai A-shares Index opened down 3.2%, did recover initially but later came under pressure again with Shanghai B-shares plunging nearly 9%.

Nothing much to note in the FX world. Indices remain quite choppy, with a logical underperformance of EU indices.

JPM on market liquidity issues

6 Charts, self explanatory, by JPM.

Weekly Game Plan - 6.7.2015

- Note: the EU open and the Game Plan have been merged this week, due to the Greek referendum. It would have been illogical to write a Game Plan prior to the results. 

The Greek Population has voted "NO", rejecting the terms proposed by creditors.

Technical reaction similar to last week's weekend Gap: EurUsd down, but has not yet tested last week’s low (1.0955); EurJpy has bounced from effectively the same level as last week (133.80 last week and 133.78 today); UsdJpy is back above 122, and bears need to see some hourly closes below 122 in order to start shorting. Otherwise it's game on for bulls still.

However, the unerwhelming price action may be more a function of light liquidity and low convictions across markets than anything else. The Greek referendum followed the US July 4th holiday; price action last week was as choppy as ever; uncertainty still high.

Comments from an array of German politicians suggest that northern Europe has lost all trust in this Greek government. Greek PM Tsipras is calling for new negotiations, Greek FinMin Varoufakis has resigned. The ECB has little choice but to maintain its ELA, though capped at current levels, until politicians decide what's next. A EuroGroup meeting Tuesday sets the stage for a EU leaders meeting later that day.  If politicians pull back, so will the ECB and a Grexit will be closer.

1. Themes for the Week

- UK Chancellor’s Budget statement could revise down net borrowing for 2015/16
- FOMC minutes and a slew of Fed speakers are due
- Greece Says NO, Euro most likely under pressure
- Risk Aversion will most likely show up in Jpy crosses
- RBA to stand pat although the market is pushing for cuts.

2.Who Said What

-  Greeks defy Europe with overwhelming referendum “no” – Reuters.

-  German EconMin Gabriel – Tsipras has torn down last bridge of compromise, other conservative German lawmakers agree, Greece may be better off outside  Euro – Tagesspiegel, Reuters.

-  Base case now for Greece to exit EZ – Reuters Buzz.

-  BoJ Gov Kuroda – Monitoring market moves carefully after Greece vote, economy continues to recover, inflation likely at zero for now, to maintain QQE for as  long as needed, will adjust policy as needed, fin’l system stable – Reuters.

- China takes more drastic action to halt market slide, suspends all IPOs,  brokers-fund managers to invest at least US$19 bln in shares, to set up stabilization fund – Wall Street Journal.

3. Calendar

CET Times - Source: Investing.com

4. Asian Equity & FX Roundup

Easy to understand what's going on in equities. Risk-off, gap open lower, negative performance during asia. Shanghai stock exchange is a mess...up on Chinese stimulus, down after the hot money rally. We look like we're about to burst the bubble over there.

With new lows in the indices, the path of least resistance is downward.

However the rumour mill is active, and we are likely to see more risk on/risk off

shifting each session. 

In FX space, Aud & Nzd look like the clearest trending

candidates still this week. 

Good Luck!

Why Value Investing still works

- A previous version of this article was published for OrderFlowTrading.com in June 2014 - 

1. Expectations Gap

“Often expectation fails, and most often there where most it promises.” - William Shakespeare

There are predictable patterns of investor errors. These errors are so systematic that the knowledgable investor can take advantage of them. We contend that a long term edge in the financial markets is obtained in the realm of cognitive heuristics. Why, even after all these years, do we still act the same even with superior knowledge? Because we're human...and shaking bad habits is really tough. Also, being surrounded by information is great, but there's a catch: you need to know how to filter the information and use the information. Everyone knows that walking the walk is always tougher than talking the talk. We also  get distracted easily, greed/fear set in and complacency sets in...it's tough to stay balanced.

Thus, bubbles are created. Big bubbles like the Tech Bubble of the lat e '90s and smaller bubbles like social media nowadays.

Source: Nasdaq.com

While a number of factors influence P/E ratios, the most influential is the expectation for future growth. Clearly, at the time of writing, investors had a high expectation for the future growth of Facebook. We’d agree that Facebook might be likely to grow faster than say...Entravision Comunication, but we are also confident that Entravision will continue on a growth path for years to come while providing a dividend that will rise with earnings. The same can’t be said for Facebook. The company could deliver heroic growth rates by the standards of any top-tier media company yet still disappoint investors and fail as an investment given its already-lofty valuation.

Source: Nasdaq.com

Bubbles (exhuberance) are very similar in nature. The first of many destructive characteristics they have in common is the excessive use of credit. Easy money, used to leverage positions and investments. Secondly, they grow during periods of complacency, when economic conditions are stable and confidence is high. That is when prudent principles are abandoned and people forget the concept of “risk”. The wild enthusiasm of some days will be met with the equally unwarranted pessimism of tomorrow.

The major thesis presented here is that investors overreact to events. People overprice the “best investments” and underprice the “worst investments”. This is the main reason why "value investing" still works. We have previously demonstrated how market participants correctnly price in the current and recent fundamentals and news regarding financial assets...so in the near term, the price is "fair" and the direction (trend) is correct. However, market participants, that are caught up in all the day-to-day hustle, also forget to step back and assess the larger picture. How low is too low? How high is too high? 

In order to answer these questions, a more in-depth look at longer term financials is necessary, and a certain disregard for the macro view is also necessary. Stocks are different than FX or Bonds. Stocks represent businesses which have physical assets and produce a good or service in the real economy. It's not merely a piece of paper or an account adjustment exercize. Hence, investors can actually extrapolate bad news so much that they push a stock way below the value of it's assets (NCAV style investing) or they extrapolate the growth prospects so much that they push a stock intoall the way to the moon (Growth stories & bubbles). 

Stocks in outerspace usually means that sentiment behind them is irrationally bullish, which also means that analysts' expectations are through the roof. All this enhances the probability of successive downward surprizes! Vice versa: stocks that are in the graveyard have a number of negative expectations attached to them, and they are expected to perform worse. This enhances the probability of successive upward surprizes.

Mean reversion, which is the tendency of stocks to revert to a mean P/E and mean EPS Growth over time, is one of the most disregarded aspects of stock investing. This keeps the value premium alive & well. Stocks cannot grow at 25-30-40% forever; and the price cannot be totally detached from the earnings of the company. Over time, the P/E will gravitate towards 15 more or less, and EPS Growth will gravitate towards the rate of growth of the economy + inflation.

A short term example of what we're talking about can be illustrated on the EurUsd currency pair. It's a good example of how the market had gradually priced in negative expectations, and how easy it becomes to shock the market in the opposite direction.

EurUsd 1H chart. Source: tradingview.com

Looking at the Euro above, we were in a clear downward move on the back of negative deposit rate expectations and deteriorating CPI. We get a 0.2% negative beat, which was trumped by a 0.1% beat in unemployment, giving birth to a short term positive boost. Why? The market had priced in much more negative news! And the usual psychological bias repeats itself.

So going back to our application in stocks, analysts and experts are too optimistic in times of expansion and too pessimistic in times of recession. This can give birth to significant longer term surprizes that can be used to create a sentiment-based investment portfolio. But based on what? In our view, stock market value is driven primarily by earnings, dividends and multiple expansion/contraction. 

Here's the rationale we're creating: filter cheap stocks relative to the market, and relative to their own industry group. Then scan the cheap stocks' long term fundamentals and stick to the higher quality stocks.

As you may have guessed, we're looking to position ourselves in line for positive surprizes. Surprize has an enormous, predictable, and systematic influence on stock prices. The event trigger can be something like unexpectedly positive news on a mediocre looking stock. People re-evaluate their ideas and expectations and major price changes can occur. Most frequently, the event triggers are earnings surprizes. Then, there are reinforcing events. When things are going well, they are expected to continue to do so. This is less of an impact and there's more risk of negative surprize.

Are we the first to think of this type of strategy? Obviously not! There are a number of research papers out that have tried to prove this reasoning. 

Above we have the results of a study done by David Dremer in the 1990s. Many research papers have followed in his footsteps but he was one of the first to speak about contrarian investing, and market psychology. As we can see, positive surprizes on low P/E stocks outperform all the others. This is practical evidence of the psychological biases spoken about earlier.

But if it's so easy to build value-based portfolios then why is everyone not doing it? It's not enough to know a winning strategy, you also must follow through. This is where investor psychology comes into play. And it's a nightmare to follow contrarian strategies when everyone is saying the opposite! Psychology is the link between a succesful strategy and a good performance.

Good Luck!

REFERENCES

1. Tuckett, D. (2009). Addressing the Psychology of Financial Markets. Economics: The Open-Access, Open-Assessment E-Journal, 3(2009-40). DOI 10.5018/economics-ejournal.ja.2009-40. URL http://dx.doi.org/10.5018/economics-ejournal.ja.2009-40.

2. Lux, T. (2011). Sentiment dynamics and stock returns: the case of the German stock market. Empirical Economics, 41: 663–679. ISSN 0377-7332. URL http://dx.doi.org/10.1007/s00181-010-0397-0. 10.1007/s00181-010-0397-0.

3. Daniel, K. D., Hirshleifer, D., and Subrahmanyam, A. (2004). A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions. Finance 0412006, EconWPA. URL http://ideas.repec.org/p/wpa/wuwpfi/0412006. Html.

4. De Long, J. B., Shleifer, A., Summers, L. H., and Waldmann, R. J. (1990). Noise Trader Risk in Financial Markets. Journal of Political Economy, 98(4): 703–38. URL http://ideas.repec.org/a/ucp/jpolec/v98y1990i4p703-38.html.

5. http://en.wikipedia.org/wiki/Price%E2%80%93earnings_ratio

 

EU Open Report - 3.7.2015

TGI-F!

NFP came out weak but was not a disaster. The market was coming in looking for strong number but in any case it's hard to believe that the mediocre  outcome will lead to big position taking in advance of the Greek referendum, along with the US holiday today.

And now onto the Greek Referendum. The polls open at 7 local time and close at 19:00 local time (12:00 EST). This means that exit polls or other indications of the result should begin to emerge early evening local time, with firmer indications late in the evening. Ahead of the referendum and accounting for the US holiday, we suspect a quiet session is in store.

Reminder: CME, CBOT, NYSE, NYMEX pits are closed today. Electronic trading has reduced hours. Liquidity will be worse today and before a big referendum, with weekend Gap risk, it may be best not to open fresh positions.

1. Who Said What

-  Japan FinMin Aso – Business leaders gradually losing deflationary mindset.

-  Japan June services PMI 51.8, best in 9-months, May 51.5.

-  China June HSBC/Markit services PMI 51.8, 5-month low, May 53.5.

2. Calendar 

Source: Investing.com - CET time

3. Asian Equity & FX Roundup

Asian equities fell, with Shanghai down 0.7%, ASX down 1.3%, Nikkei down 0.3% and Chinese data worse than expected.  Aud is the underperformer after worse retail sales data.

No trading today as US is on holidays and the Greek referendum needs to get pushed out of the way first.