Diary of a Financier

From the Trading Desk: Reconciliation (February 20-March10)

In Trading Desk on Sat 10 Mar 2012 at 22:41

The Eurocrisis has created a complex environment for money managers. Since I approach everything with a hint of cynicism, I’ve long-awaited the end-game in Europe, starting with a Greek default. I see this train coming, and I know I should get off the tracks. But, something happened in early 2011, and the market rallied with blissful ignorance… then again in December. The trash rallied harder than anything else, and I’m sitting at Christmas with cash and quality on my book. We started to Beta-up in the New Year 2012, because the calendar provided a nice breather for markets, with Greece’s fate back-end-loaded in March… and upon the Ides of March are we now, with markets at unimaginable heights, with Greece barreling down the rails. Proof, as ever, that the market seeks to maximize pain for the the greatest number of participants.

How many more times can I hear the term “Lehman weekend” in a lifetime? I’m spending this (another) weekend digging like a forensic analyst. Is there a hot potato out there? Who holds it? There’s no way for anyone to tell, so the best I can do is manage risk. I’m considering going market neutral for March 19th’s ISDA auction for Greek CDS. I plan to keep my long book and hedge the entire exposure, rather than blowing-out everything. My risk is losing 1-2% in performance relative to SPX if a relief rally materializes quickly, which could happen if I consider the lax retail participation to date. My reward is gaining 3-4% on SPX if some Belgian bank collapses and triggers a chain-reaction.

More to come on my thought-process throughout the coming weeks. For now, enjoy my trade & thought reconciliation…





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