2/6/15 macro trading simulation

8/9/2019 2/6/15 Macro Trading Simulation

1/14

1

February 6, 2015 (Friday)

Since Inception – June 2014:

Equity/Futures Account: +9.63% ($10,963,099)

FX Currency Account: +58.72% ($15,872,328)

Benchmark: S&P 500: +5.36%

Equities/Futures

Year Jun2014 Jul Aug Sep Oct Nov Dec Jan2015 Feb Mar Apr May Tot. Ret2014-2015

+2.01% -1.02% +2.02% +6.28% -2.52% +4.29% -1.69% +1.07% - 0.95% +9.63%

FX Currency

Year Jun2014 Jul Aug Sep Oct Nov Dec Jan2015 Feb Mar Apr May Tot. Ret2014-2015

-0.15% +4.84% +7.24% +20.17% +6.01% +4.47% +5.58% +0.37% +0.11% +58.7%


2/14

2

2/6/15 Thursday – Trade UpdateHi Mr. Platt,As noted in yesterday ’s note, the S&P 500 breaking above trend from December gives it a bull ish setup going forward. The trade for me sinceDecember has been selling the index into rallies in adherence to the trend already in place. It looks like the t rade from the short side is over fornow.

To gain clarity, upon reflection of the confusing trading month in January, I had taken risk exposure down significantly late last week. I alsounloaded positions in gold and gold miners by 75% this week ahead of the jobs report. Today’s job’s report (taking a step bac k to gain simplicity alsohelped) gave birth to trades that I think have a great risk/return profile for the next few weeks (if not longer, as momentum will l ikely clearly shiftfrom these securities).

Immediately after the announcement of the job news, I shorted XLU (SPDR Utilities ETF) and TLT (US Bond ETF), and have added to the shortDollar/Yen position as well as taken a small long position in the Nikkei Futures.

The Dollar/Yen looks poised to take another leg higher and the set up in the Nikkei looks bullish as well. The backdrop of today’s data points will be

great fundamental and sentiment drivers for the trades placed in the last 48 hours.

Current Equity Positions (as of 2/6/15 Friday) EWC - iShares MSCI Canada ETF: +50,000 shares = 1,381,500 (Long)EWY - IShares MSCI South Korea ETF: -40,000 shares = $2,231,200 (Short)GLD - SPDR Gold ETF: +3,000 shares = $355,710 (Long)RSX - Market Vectors Russia ETF: +100,000 shares = $1,596,200 (Long)SPY - SPDR S&P 500: +10,000 shares = $2,062,100 (Long)TLT - iShares 20+ YR Treasury ETF: -20,000 shares = $2,621,400 (Short)XLU - Select Sector SPDR Utilities ETF: -40,000 shares = $1,878,400 (Short)Account Cash Value: $10,963,099, Total Exposure: $9,505,110, Leverage: 0.86x

Current FX Positions (as of 2/6/15 - Friday)Euro/US Dollar: $0.00US Dollar/Japanese Yen Spot: $18,000,000US Dollar/Korean Won = $0.00Account Cash Value: $15,872,328, Total Exposure: $18,000,000, Leverage: 1.13x


3/14

3

SPDR Select Utilities ETF (XLU) – 2/6/15

iShares Treasury ETF (TLT) – 2/6/15


4/14

4

Market Vectors Russia ETF – 2/5/15

S&P 500 SPY ETF – 2/5/15


5/14

5

2/5/15 Thursday – Trade Update

1) The technical picture in the S&P 500 has changed from being slightly bearish to a rather bull ish setup (please see the chart on the following page)

2) I’ve reduced the gold long position by almost 75% - as I wrote in the previous update, certain price actions taking place in the market place have

been downright confusing, and since the last update, I’ve reduced exposure to the lowest point in more than three months. I r ealized over the yearsthat whenever the mirror gets foggy, i t’s always best to slow down and get rid of positions that I no longer feel confident in and keep things simpleuntil trends become more identifiable and stories more coherent. As they say in poker, money saved is money earned.

3) Oil may be trying to find a bottom here, and if it does, a great derivative trade should still be the Russian equities (ETF: RSX - although I’ve beenstopped out once before due to the unfortunate timing of the credit downgrade by S&P). I also think that about Canadian equiti es (ETF: EWC). I’vetaken a small position in both. I should be able to capture the upside of the stabilization of oil prices with half the volatility of the actual physicalcommodity.

1/23/15 Friday – Trade Update

I don’t regret the decision to take profits by liquidating all currency exposure because I believe event risk should be avoided especially if one hasbuilt up a significant profit ahead of the event and if the outcome is heavily binary. Though it was difficult to see the euro fa ll another 2% againstthe U.S. dollar (missing out on the action), it wasn’t all a loss. T he yen traded down to 117 against the dollar even hours after the ECBannouncement so I was still able to get back on the long side against the yen without giving up too much of the upside.

Also, given today’s price action within the broader risk assets, I quickly realized that the day and possibly the next c ouple days (until this euphoriasurrounding the ECB fades) wouldn’t be too good for the simulation’s core holdings. I trimmed both the EEM and EWY short by a third but I alsohedged the downside risk by going long the SPDR S&P 500 (SPY) and will continue to look to trade around the core.

In the last few weeks, the Russian ETF, RSX, seems to have been carving out a bottom and has started to trade independently from the headlines

coming out of the region. Like today, despite Ukrainian separatists taking over Donestk airport, that didn’t stem the rally in the ETF.

I initiated a small long position in the ETF:RSX today (making up roughly 15% of the portfolio) with hopes that it can defiantly break $16.50 andestablish an upward trend. On the downside, I plan to keep the initial position on a tight leash with $15 as the stop loss.


6/14

6

1/20/15 Tuesday – From Grozny to Frankfurt

Grozny, Chechnya

The chance of a peace accord taking place between Ukraine and Russia went from slim to none this weekend. The fact that the leaders on both

sides need the conflict to continue or even escalate further to stay in power is quickly elevating the danger.One turn of events that can deescalate the situation is if Grozny becomes a bigger problem for Russia, as it did during the Yeltsin era, than Ukraine isat the moment. Chechnya is quickly becoming a hotbed for Islamic jihadist activity, and part of the resurgence is due to many of Russia’s militaryand intelligence assets being shifted to the Ukraine front (or within Ukraine itself) and, secondly, the formation of ISIS and some factions of ChechenIslamists pledging allegiance to al-Baghadi and fighters returning back to Chechnya f rom Syria/Iraq.

The severe rise in attacks on Russian security forces in the region combined with a heightened fear of a pan-European terrorist network followingthe recent tragic events in France may lead cooperation between Western Europe and Russia. Russia may be one major terror att ack on its own soilaway from experiencing a strategic shift towards the Caucus rather than the Crimea . It may be a long shot, but monitoring the events in Chechnyaand the Caucasus region, which no longer has the coverage it used to, perhaps will offer insight into how the Ukrainian confl ict concludes in the

short-term. Further deterioration in Chechnya would may become a buy signal for Russian stocks as it puts Russia on the same page as the West.Such cooperation and mutual understanding occurred following 9/11 attack between Bush and Putin (Chechnya at the time was also in a periodof violent Islamic insurgency).

Euro

The short Euro trade benefited greatly from SNB’s snap decision to remove the peg. The move has created an excitement for mor e downsidepotential for the euro on the speculation that SNB’s decision is to get in front of ECB’s massive QE. As a result, the Euro has moved significantlylower ahead of this week’s meeting on the 22 nd – reaching a 1.15-handle against the U.S. dollar.

Even the most optimistic size of the quantitative easing might be al ready priced in, so the risk has gone up significantly of staying short ahead of the

ECB meeting on Thursday. A temporary counter-trend rally to 1.20-1.21 where the currency really breaks decade-long support is not out of therealm of possibility – this would probably be a great level to re-short the currency against the dollar.


7/14

7

2/6/15 – Platform Snapshot


8/14

8

Core Positions (listed in reverse chronological order):

1) Short MSCI South Korea (initiated 9/4/14) –

Written on Sept 4 th – There are three major headwinds for the country: 1) weaker yen 2) over-reliance on chaebol and the subsequent lack of

diversification, and 3) demographic time-bomb.

Korea is a trading powerhouse. It derives 55% of its GDP from exports and is the seventh largest exporter in the world. The majority of goods thatfall into that export figure are electronic & electric equipment and automobile and transportation equipment. That puts South Korea in directcompetition with Japanese multi-nationals that play in a similar field (the likes of Sony, Toyota, and Honda) who are again getting a renewed boostfrom the yen’s weakness, likely to come at the exp ense of Korean rivals.

This exposes a structural issue within the South Korean economy. The chaebol system (chaebol refers to a family-controlled conglomerate) hasmade South Korea the 12 th largest economy in the world but it’s also its biggest threat. In order to bring about quick modernization and economicgrowth, since the 1960s, the South Korean government has groomed companies within certain sectors of the economy via protectionist policies and

state subsidies. This path has helped bring rapid growth to South Korea and allowed companies like Samsung, Hyundai, and LG to become giants onthe world stage.

The economy that was ultimately created was one dominated by very few players. Thus, the country’s reliance on too few compan ies to be itsdrivers of growth gambles its economic fate in their hands. Subsequently, the over dominance by the chaebols stifles competition, creativity,innovation and entrepreneurship (which is excruciatingly low for a country of its size) and although the effect of, let’s s ay, lower creativity is difficultto quantify, without a doubt the longer-term implications are negative.

To grasp how sorely the Korean economy is in need of diversity, one just needs to look at the components that make up the weighting of the KOSPIIndex. By industry, Electronic & Electric Equipment accounts for 29%, and KOSPI Transport Equipment accounts fo r 16%. In total that’s 45%. The top20 companies with the largest market cap amount to 49% of the KOSPI Index (Samsung alone accounts for 18%). If you break it down further bychaebol ownership, for example, Samsung’s Lee family controls 3 out of the 20. M ore comprehensively, 4chaebol families (Samsung, Hyundai, LG,and SK) control 12 of the 20 largest companies, or roughly 40%.

Samsung Electronics recently reported disappointing shipment numbers for its f lagship Galaxy smartphone. Q2 earnings were dis appointing due todeclining smartphone sales (revenue declined from 57.46 trillion won to 52.35 trillion won) and the outlook for the second ye ar is likely to be worse.With the expected launch of the iPhone 6 in September – Apple going after the category of larger screens' turf that Samsung has dominated since


9/14

9

the launch of its Galaxy flagship line and other trinkets such as Apple iWallet – there’s a chance that Samsung will lose a tremendous amount ofmarket share.

That should serve as a reminder of how vulnerable South Korea is in terms of how concentrated its economy is around a few companies.Technology is an extremely competitive space where an advantage or leadership can quickly turn on its head within a single cycle. Margin

compression is the name of the game since all devices quickly become commoditized through competition and saturation. It's scary that SamsungElectronics alone makes up 17.5% of the KOSPI or 21% of the assets in the ETF: EWY (Samsung as a holding company roughly accounts for onequar ter of South Korea’s GDP).

As for the auto industry, South Korean companies such as Hyundai and Kia (Hyundai Motors and Hyundai Mobis account for 7% of the weighting inthe index) have been able to gain market share in the last decade from their Japanese rivals through aggressive pricing that was partly aided by thestrengthening yen. But now the situations have reversed and Japanese carmakers should be able to compete better on price (every 1% weakeningin the yen boosts Japanese automakers’ operating pr ofits by 2-6% - which is significant given that Toyota exports roughly 2 million vehicles that itproduces domestically).

As a society, the intense focus Koreans put on education produces far more negative outcomes for quality of life and demographics. It props up theinexcusably high suicide rate (the highest in the world – 38.3 per 100,000) and fuels the corruption in its educational system. The intensecompetition and structural education issues focused on entrance exams for its prestigious SKY universities have created an arms race where parentsare forced to spend additional disposable income on hours of private lessons outside of normal school hours. It’s normal for Korean studentsstarting from 12 years of age to have an additional 6 hours of tutoring after school.

All of this fuels additional downward pressure on the birth rate on top of the usual pressures that take place in developed/developing countries.The cost of raising a child in such a competitive environment is astronomical. Thus, South Ko rea’s birthrate is actually lower than Japan and equallySouth Korea’s working age population is falling by 1.2% annually (the fastest decline among OECD) and it will see the biggest jump in its elderlypopulation compared to any other developed nations (61% of the population versus 10% today). In essence, South Korea sees Japan when it looksinto the mirror – in fact, one could make the case that the demographic issues of Korea are worse.

The breakdown of the weighting in the Korean indices and within what the instrument I have access to ETF:EWY (I hope to explore other ways ofexpressing this bet), makes it a compelling longer-term short. But what makes the trade more attractive is that the country as a whole seems to beoblivious to its problems and the image it sees in the mirror is eerily similar to Japan.


10/14

10

2) Long Gold (SPDR Select ETF: GLD – position initiated on 9/30) -

Finally, all roads lead back to the shiny stuff. I believe it’s very possible that gold will decouple from its traditional relationship with the U.S. dollar,ironically due to the uncertainty and disruptions that are created as the dollar continues its ascent. The currency war among regional Asian nationsshould also cause the demand for gold to rise in the region as the forced currency devaluation continues.

I laid out the case in the Nov. 3rd note that gold’s move has always been centered on financial stability. Gold’s move from $ 700 to $1900 (from2008 to 2011) in my opinion was driven by the fear of financial instability and the perceived inability of central banks to calm the storm. Whetherit’s extreme inflation or deflation, start of a bubble or end of a bubble, the very existence of either extreme is a knock on the system and an erosionof confidence in central banks. It wasn’t until 2012, after several years of stock markets’ steady rise, that those fears were placated, which alsomarked the top in gold.

The world is on track to double the size of its sovereign debt load from 2007 supported by little more than half the growth when the debt load washalf the size. And the final word has yet to be written on the unprecedented monetary policies in U.S., Europe, and Japan and whether the world'slargest economies are in fact playing musical chairs. If the threat of deflation is real, central authority will continue to rely on the printing press toreflate.

Thus, perhaps the biggest risk to the market is when the music actually stops, when the realization sets in that the panacea isn't in financialengineering and when the childlike innocence and trust in central banks' ability to fix problems shatters. Hope becomes the biggest enemy of themarket as it creates wild swings and extreme positioning. It's likely that each time hope is crushed the central planners will outdo the previousmethod. Rinse, repeat.

Down the line, the insane debt levels all around the globe will do everyone in. Such a prognostication is excruciatingly gloomy. But I also accept thatwithin it, there will be market swings of excess in both directions and plenty of opportunity to make money in either direction.

3) Long USD/JPY (initiated 8/20/14)

Written on August 20 th – It was only a matter of time before the yen moved lower on the backdrop of dollar strength as well as the divergence incentral banks' policies -- they've been in different stages of easing for quite some time now. The prospect of additional easing seems more likely tocombat the continued lukewarm data points in Japan.


11/14

11

USD/JPY cross has been on the radar for a while as it's been in a tight trading range since February of this year. The position was initiated as it brokeout of consolidation and given how long it has consolidated, it will retest and l ikely close higher above the previous high of 105.43.

It is likely that this move might be the next leg lower for the yen – part of the larger macro move that has occurred since late 2011.

4) Short EUR/USD (initiated 6/17/14) –

Written on June 17 th and edited on August 27 th – The short euro trade has been the most highly concentrated (and the longest held) position since Ibegan this trading simulation.

I believe short EUR/USD trade has been one of the few macro trades where all elements of the trade (historical analysis, pol icy analysis, economicdata, trends/technicals and etc) all line up favorably to be short.

From 8/27:Good trades are often those that have multiple catalysts to push prices in the desired direction. But great trades are those that right or wrong, willmove in that direction anyway.

The short euro trade has been the most highly concentrated position sinc e I began this trading simulation. The divergence in central banks’ policies(Fed vs. ECB) and the growing divergence in economic data points have been the main reasons for holding a negative view on the euro against theU.S. dollar since May of this year. And that as the economic realities become worse, the chances of QE in the Euro zone will increase. On theflipside, contrasting Fed policy will strengthen the U.S. currency, further fueling the weakness in the Euro.

Government policy is not providing the solution so the burden will only continue to disproportionately fall on monetary policy to somehow uncoverthe panacea for Europe’s woes. In my opinion, the future does not look bright. I see all of this as part of the larger macro trend that is movingEurope away from the intended goal of integration.

The sovereign debt crisis in 2011 clearly drew the line between the haves and the have -nots. What is also ironic about the situation is that the eventleft both sides bitter. The haves were upset because of the imposed f inancial obligation to help those who have less (or those who lied and abusedthe system) and the side on the receiving end felt they were being overly punished and bullied by those who have more. Those feelings stillcontinue to burn and run counter to a longer-term integration process.

Those grievances eventually manifested themselves in domestic politics. All across Europe, parties that have lost significant ground to their socialist


12/14

12

or center-left political adversaries for decades came back to the forefront of their respective domestic political stages in the first half of this year.

In France, the National Front won the nationwide election for the first time – with nearly 25% of the vote, winning 118 council seats on a local level.In the UK, the UK Independence party won 23 seats – making it a first time in a century that neither the Conservative nor the Labour Party won theelection. In Finland, the newcomer Finns Party established itself as a legitimate third-party option after winning 13% of the vote. And the Five Star

Movement Party in Italy scored 21% of the vote – just behind the ruling Democratic Party. Even Germany saw newcomers Alternative Party and aneo-nazi party burst onto the political scene.

The narrative was much the same for Netherland, Hungary, and Greece – those who favored leaving the currency union did extraordinarily well.This laundry list speaks to the political earthquake Europe experienced in its first major election after the sovereign crisis and to the growingpersuasion of the Euroskeptic platform.

Despite what the establishment and spin-doctors in Brussels may say, one could characterize the population as having one foot over the fence. Onefinal push over and they may never come back. The more radical tools imposed from Brussels to stave off disintegration may also be the stick thatknocks voters to the other side.

It took a great amount of effort in the decades following World War II to convince Europeans of the merits of European unity and the eventual pathtoward integration. But in one single swoop, all of that has changed. The younger generation, which has fleeting ties and experiences to the GreatWars and vague memories of the Iron Curtain of the Cold War, only knows the failures of the integration experiment.

The worry is that it may be too late to win back the hearts of voters. A further push for integration in order to save the union will produce evenmore backlash and build on the momentum Europskeptic parties have already displayed in the recent election. But doing nothing will also producea similar outcome as recession, stagnation, high youth unemployment (and high unemployment in general) will see anger directe d at Brussels. It’s alose-lose situation.

There is also one other wild card that may push the euro even lower and that is the situation in Ukraine. Further escalation will punish the strongestEuropean economy, which does the most amount of business with Russia than anyone else on the continent. And the consequent safety trade willbe away from the Euro but into U.S. assets – which is why EUR/USD pair makes the most sense to short.

What makes the Ukraine situation dangerous is what made the First World War dangerous – nationalism – and the answer is once again found inhistory. Ironically, the possession of Ukraine in WWII was fought between Germany and Russia. When Germany was finally defeated, Stalin subduedall nationalism but that was especially the case in Ukraine. From ethnic cleansing (Tartar population in Crimea/Ukraine) to s ending all dissenters to


13/14

13

the eastern corners of Sibera (never to be seen again).

In other words, the collapse of the Soviet Union made it inevitable that Ukrainian nationalism would reassert itself like a coiled spring. Ukrainianstatehood and nationalism has never been more embraced than it is now since its independence. Poroshenko is playing a very dangerous game bybranding the conflict as a fight for survival and matching Russia’s nationalistic war cry with one of Ukraine's own. Initiall y, I have largely written off

the impact of the conflict as a distraction. However, Poroshenko’s rash pursuit of achieving complete military victory in Don etsk and Luhansk, hasmade me somewhat fearful as head-on collision of nationalism often produces unfortunate outcomes.

In order to understand Russia’s actions, one need to look at what Ukraine historically meant to her. Kiev was in fact a capit al for the early formationof Russian identity. The word Russia derives from the name of the early kingdom, Kingdom of Rus and its capital of Kiev. West’s condemnation ofRussia’s action in Ukraine only reinforces Russia’s long history of suspicion and the narrative of “Russia against the world” . One must look at theevents through the eyes of a “Russian bear” that has fought the European coalition time after time again throughout history as the foreign policy ofcontinental Europe shifted from “containing France” to “containing Russia” from 1800s onward. The most relevant war of them a ll was the CrimeanWar in 1853 that Russia lost to a coalition of European superpowers. Thus, the expulsion of Yanukovych was the earliest reminder of this conflict,the long-standing view that Russia is being contained and robbed of its possessions.

A lot of analysis that discounts Russia’s abi lity to be more of a menace based on potential economic hardship that Russia may or may not face isessentially discounting the resilience and the loyalty of the Russian people.

Historically, the “Russian Bear” has been known for its ability to persevere . But beyond that, one should also realize that under Putin most Russianshave enjoyed a significant boost in their standard of living. The chaos during the l iberalization era under Yeltsin and the shame/shock Russians feltwhen their empire suddenly fell were reversed (at least it felt that way) when Putin rose to power. And for that the Russian people will be far moreloyal than what voters in the West would be willing to tolerate under similar circumstances.


14/14

14

Trading Account Rules:1) Starting Account Size:

a. Cash equities/futures/option: $10millionb. Forex: $10million

2) For the cash account (non-forex), macro views will be reflected using listed equity indexed ETFs with deep liquidity/volume and net assets of$1 billion or greater in order to best represent the odds of the strategy being scalable (single-stock, company specific stocks will not betraded).

3) Most of the speculative positions can also be accurately expressed using futures, but because the volume is more constrained at differenttimes and because the platform fails to take volume into consideration (hence the trades' impact on the actual price), the use of futures willbe limited. Positions that I deem to be core/longer-term would be better expressed via equities. But for commodities such as crude oil,silver, copper, etc., they will solely be expressed through the futures contract market due to contango/decay issues that most commoditiesETFs suffer.

4) The overall goal is to identify attractive opportunities with goals of holding the positions for multi-week/month periods. Importance willalways be put on liquidity and risk exposure. Also, being able to realistically liquidate all positions by end of trading day or vice versa, scaleup risk, will be an advantage of the strategy.

5) Daily updates will be simple and short, as you’ll receive a time -stamped screenshot of the account summary where detai led positions andP/L will be all within a single image.

6) Leverage for spot currency position will be limited to 2.5x the underlying cash

Leverage for equity/futures account will be limited to 1.3x the underlying cash – with net aggregate overnight risk exposure (“net liquidvalue”) often falling well below that limit.

2/6/15 macro trading simulation

Documents