2015 was a tough trading year. There weren’t a lot of “great” opportunities. This assessment is corroborated empirically, as many of the fixed income desks and hedge funds seem to have underperformed. We eventually got liftoff, but hiking in a questionably weak economy is not the stuff that causes curve volatility or opportunity.
I hate to admit it, but I miss Bill Gross. Having him run a $200+ billion fund and punting an absurd number of futures that he was not a particular expert on caused a lot of interesting dislocations that we were able to take advantage of over the years. I suppose when you have to do trades in large enough size, you sometimes don’t pay attention to the second order effects of how the curve is affected. There are other similar large players in the market, but there weren’t many “spectacular” opportunities out there last year.
The other thing going on in the markets could be the (increased?) presence of interest rate algos. This may result in less curve and spread volatility than in the past. It’s a little unclear to me what the algo presence is in the ED markets, but one can only expect a larger presence as time goes on. Regardless, whether we are dealing with human or machine opponents, futures trading will always be a zero-sum game. And both opponents will leave observable patterns of behavior that I think we should be able to capitalize on. I look forward to the challenge.
Speaking of challenges…
My 12 year old got back his career assessment from middle school and his #1 future job occupation was “trader.” What are the odds of that?!? Some of the neighbor’s kids got things like “truck driver” and “nurse.” He is very eager to learn and I’m supposed to start helping him look at the various trading markets next year. So this will force me to look at some neglected markets a little more carefully than in the past. I was telling him the other day that there are four major groups of products one can trade: (1) rates, (2) equities, (3) currencies and (4) commodities.
Predictions aren’t my forte – otherwise, I would have called my newsletter the “Punting Advisor.” But I suppose everyone writing a newsletter is doing it at the start of the year. At the risk of becoming the next Dennis Gartman, below are my predictions for the end of 2016:
- US Rates. In the short maturities, the market is at my over/under for the number of hikes next year. However, I think the tails are larger than what the markets are pricing in (on both upside and downside). So as vol comes off, I like taking cheap views on the tails. In the long maturities, it seems that the “world is doomed” and “we will never see inflation again” views are overcrowded. I prefer playing for the tail where the longer-term rates are higher, and will look to express that view on dips in rates. YE 2016 ten year treasury yield = 2.60% (YE 2015 = 2.27%)
- US Equities. I have thought for a while that equities are rich to valuations. Just as high yield bonds came off as rates normalized, I think you could see some underperformance in equities. There’s a sizable hurdle to overcome however, as companies keep engaging in share buybacks and employees keep funding their 401Ks. YE 2016 S&P = 2000 (YE 2015 = 2044)
- Currencies. A number of people who watch and/or trade FX, both well-known personalities and former colleagues, have said they have no idea what drives movements in currencies. The fact that I rarely watch currencies could put me at an advantage! The USD is a somewhat obvious long, and should be very crowded. That does not seem like an attractive vehicle now. Longer term, I really like shorting JPY – a country whose population is shrinking and getting older, whose products are less attractive globally and whose government is blindly jacking up debt, is going down in flames. On the other side, I like the idea of INR. Any country that can take jobs away from the “greatest country in the world” (US) has to have some things going for it, and the markets could start piling in as a growth engine story after China’s recent sputtering. India is the soon-to-be most populous country in the world, with 7+% growth, and still a bunch of things that can be improved upon (education, social, infrastructure, etc). And let’s not forget the massive positive carry. YE 2016 JPYINR = 0.50 (YE 2015: 0.55)
- Commodities. As previously mentioned, it’s really hard to see what’s going to cause oil to surge when demand is lower and most of the oil producers are running a large budget deficit and have terribly unbalanced economies. If turmoil in the Middle East isn’t going to cause a surge in oil prices, the bar is somewhat high for oil to spike higher. I think there could be an opportunity to buy some other commodities on dips around multi-year lows, as the whole commodity sector has probably gotten hit. After spending way too much time on looking at random charts, I decided on live cattle. I like it as an indirect harsh winter / La Nina feed price-surge play, and the Chois are always doing our part to support the beef industry. When the price of ribeye approaches the price of asparagus, that’s a reasonable buy signal. Also, I am clueless as to why, but the fact it rolls noticeably positively helps. YE 2016 LEZ6 = 135 (YE 2015: 124.625)
The above predictions are mostly for “fun.” Even if I am horribly wrong, I may identify myself as a reliable contrarian indicator, which is just as valuable as a reliable predictor. While listening to how enthusiastic my son was when we talked about going over investing in the different vehicles, it occurs to me that some people may have lost the fun in trading – especially after a sub-par year. Trading is one of the great professions in the world, and it will be full of many short-term challenges. I wish you the very best for 2016, and hope you continue to enjoy the journey.
 More accurately, a negative sum game, if you include (transactions and other) costs.
 Known more as a contrarian indicator.
 Apparently my Korean ancestors have taken over my frontal lobe.