Wednesday, April 26, 2006

Profit-taking on 3 trades...5y & 10y Treasuries, plus CRUDE...and shorting some DOW futures.

Finally closed my 5y and 10y Treasury shorts...I just couldn't resist
taking the profits on it. If you read my post from Jan 31, when I
shorted them whilst the 10y was at 4.53%, my first stop was to aim for
5%. Today I bought them back at 5.10%. So I was right and Bill Gross was
wrong by 70bps (he tipped them at 4.40% to be long...moron)! I bought
back the Jun '06 10y at 105.18, and so in total the 10y trade made me

And the 5yr Future I shorted at 104.34 and 104.23 on April 3rd, I just
bought back at 103.79...was short £60 a tick, so made £1,980 out of that
one. Still see some downside for Treasuries from here, but I'll sit back
and be flat for a while and consider the price action and the economic
data coming out. Maybe the FED going to 5% really will slow the economy

And just one small other trade, I'd shorted £2/tick of Brent Crude @
73.00, just bought back at 71.90, so £220 quid there.

The future of the US economy and the FED really seem to hold the key to
so many markets, from bonds and stocks to commodities and credit
markets...there seems to be so many risks out there for the global
economy, it almost seems to obvious to be bearish risky assets. Housing
markets just seem to be an accident waiting to happen, and a serious
drop could kill the consumer. Looking back a few years to 1999/2000, I
remember that you could buy property and rent it out for about an 8%
rental yield. Seemed ok at the time, and certainly way over what (UK)
bonds would pay you. Now, everyone is loving the buy-to-let market with
yields of about 4-4.5%. And that yield compression seems to have
happened through an increase in house prices rather than an increase in
rents, as rents seem to move more in line with general wages/inflation.
Now that government bond yields are on the rise (UK 10y bonds have gone
from 3.90% to 4.70% this year), you have essentially competing
investments for property. What if bonds go to 6%? Does it still make
sense to achieve only 4% through buy-to-let, with all the hassle that it
entails? I guess the same goes for the US. So property seems incredibly
vulnerable, especially since the financing of that property both here in
the UK and in the US is linked to where interest rates are! Combine that
with the guaranteed economic slowdown that is currently unfolding in the
UK, and higher unemployment that will entail, this market and
potentially the global economy is going to get crushed.

So whats the trade on the back of this? Short equities is probably it,
especially at a time of high corporate profits. I should really short
some equity index futures against the equities I hold. At the moment all
I have is short £5/point of CAC Futures (for the regular readers, I
never did close that one out when I closed the DAX/FTSE). So as we speak
I just shorted £4/point of DOW Jun '06 at 11376, this is ~£45,000 of
notional, and since I have about £165,000 of equity exposure on my
individual stocks, leaves me room to increase this. I'll trade around
the DOW whilst having it in mind as a proxy hedge.


Anonymous Anonymous said...

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17 May, 2006 12:28  
Anonymous Anonymous said...

Nice! Where you get this guestbook? I want the same script.. Awesome content. thankyou.

17 May, 2006 12:45  
Anonymous Anonymous said...

Super color scheme, I like it! Good job. Go on.

17 May, 2006 12:57  

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