Diary of a Financier

Posts Tagged ‘Short’

Top Newsstuffs (July 7-13)

In Bookshelf on Sun 13 Jul 2014 at 07:06

First Cape weekend of the summer…

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Australia: First Derivative of Slowing Chinese Investment

In Economics on Thu 22 Mar 2012 at 11:03

Quick intraday note here.  I wanted to pull together some of my recent StockTwits on Australia, because recent [weak] data out of China has made this all the more relevant: Read the rest of this entry »

Natural Resource Correction: A Surprise Ending

In Capital Markets on Fri 12 Aug 2011 at 02:36

I can accept that energy resources are scarce. This is our second bout with noisy contentions of peak oil, the other being the 1970s crisis. Yet, renewable resources like agriculture may in fact be overvalued because of a supply/demand mis-extrapolation.

Consider that population demographics are declining. Like a climber having just summited Everest, the world economy is contending with a treacherous descent from peak consumption. We’re tethered to the aging population, a force so powerful as to cast the entire world–developed and developing alike–into a rolling economic recession.

Take a look at the decelerating population growth rates of some major nations:

China- Population Growth Rate

US- Population Growth Rate

Japan- Population Growth Rate

In the face of poor demographics, economic (Real GDP) growth rates depend on current account appreciation and organic growth (i.e. innovation). A widely touted natural resource theme has captured the imaginations of many investors. They say it’s a secular bull already underway, and they point to the rising middle class in emerging markets. While it’s currently stalled due to the relapse of systemic matters, the natural resource theme still stands as a generally accepted, de facto standard. Accordingly, investors are throwing their money behind it… and I suspect many agricultural/foodstuff shares are enjoying fatter premiums than necessary.

I’m not talking energy, because the Earth yields as much fossil fuel as she may. Nor am I talking precious metals, which are also finite fruits of the Earth. I am talking agriculture & foodstuffs. For resources like wheat, what makes today unique? What makes this point in history the supply squeeze that the sell-side claims? Yes, farm land is finite. No, we have not groped its outer bound. Yes, there were fires in Russia, riots in the MENA states, and political chess in the Congo. No, these are not permanent features of the global outlook (at least not any more than they were before).

I don’t know an investment manager, an analyst or a journalist who doesn’t subscribe to the “Ag Boom.” Both the sell-side and the buy-side love a theme to latch onto, especially an accessible theme that clients understand. I smell smoke, and I’m looking for the fire.

In the end, the risk to my thesis is that the middle class monster in China continues to proliferate despite it all. The research is more complex than this, but take a look at a Chinese consumption growth rates (flat public & declining private) compared to strong inflation:

China- Public Consumption Growth Rate

China- Private Consumption Growth Rate

China- CPI Rate

Worst case, an outshift in demand for more farmland is eventually met by supply, for which I’d want to own fertilizer stocks. (Problem solved, I’ll buy a stake in Yara International (YAR-OS) if ever I decide to all-out short Ag. Look no further than the historical bull market in farmland & crops. It’s a golden age for farmers.)

Maybe it’s the economy or maybe it’s the recurring crises, but Ag equities like ADM & DE have pulled-back from rich valuations. The surprise to me is that physical Ag commodities have not pulled-back to the same degree. Capital markets are always late to discipline unruly bubbles. In another phrase, shorts are always too early to paradigm shift trades. The Ag lofty highs should persist for weeks to a month (at most). I may cut myself loose to consider some shorts on physical commodities, particularly the ones positioned with bearish long-term fractals. I’m evaluating an Agriculture ETF (DBA) as an eligible vehicle:

Coffee- descending


Cotton- completing a pullback to its base

Feeder Cattle- top of its range

Live Cattle- one more assault on the top

Rough Rice- not done rallying yet

Soybeans- starting the descent


The “Ephemeral Rally” Is Ready

In Capital Markets on Wed 10 Aug 2011 at 15:50

The S&P 500 (SPX) sits at a second test of that 1118 support as of the close tonight, the “last snag” before the air pocket down to 1024.

Indicators are oversold, with nearly all equities at both extreme lows in their daily trading ranges and rock-bottoms in buyer interest (MFI). Further, SPX seems to have respected its 38.2% Fibonacci support at 1100:

SP daily- 1118 support held on close, 1100 fibonacci support provided trampoline once already, but an air-pocket below otherwise.

SP weekly

SP monthly

As you can see, long-term fractals are still very bearish. I expect that “ephemeral rally” now. It’s time to cover most of my shorts, then sell my longs into the rally when it materializes.

I covered my short in Small Caps (IWM) today just before the close. Representing the Russell 2000, IWM has reached its prime meridian at $65, amidst oversold conditions even deeper than those of SPX.

I’m leaving the short on Italy (EWI) open, since Italy has further to fall both fundamentally & technically:

EWI daily- MFI holding 40 support, which indicates buyer interest hasn't capitulated yet.

I now digress. I keep a note at my desk:


TRUST THE CHARTS’ SIGNALS ABOVE ALL ELSE, including headlines, fundamentals and quants.

I try my best to stick to that dogma, particularly in open positions. Maybe I’ll kick myself later for this, but open short positions feel a bit different. The will of masses is to push stocks higher. For example, political risk discourages me from leaving a short position open overnight. I hear Mr. Obama is holding a meeting with Messrs. Bernanke & Geithner this evening, and even despite substantial gains in my shorts, I’ve now covered most of the short-bias on my book. That’s violating every sin in the passage above. Amateur move? Time will tell.


The Italian Job

In Capital Markets on Thu 28 Jul 2011 at 20:39

I’m sitting 30% long equities, from which I expect remarkable relative strength to US peers. My confidence in our long positions was redoubled by their behavior during the July 19 rally, after the White House held a press conference to announce a real debt deal proposal was on the table. That long book includes a Norwegian single-name and a Canadian single-name–both exposures are now denominated in USD. Further, I’ve stuck with my winner, Japan (EWJ). Going into the eye of this storm–where the Euro crisis and US debt deal converge–I’m trying to position the whole portfolio not just for relative strength, but for absolute return.

Recall my musing from earlier this week:

I’m waiting for a trigger before opening a short EWI position…

I regard the American situation as avoidable, fixable, or, at very least, sweep-under-the-rug-able. Harry Reid is onto something, and by virtue of having the only palatable plan on the table, he might get the nod from fellow Democrats plus the ratings agencies plus Messrs. Boehner & Cantor. Europe has no chance. At this point, neither EFSF supra-national bond issuance nor a European Monetary Fund has the magnitude to reverse the demise forecast by fundamentals, history, and the long-term charts. When a sovereign is tapped by the Reaper, he cannot escape death without renouncing his sins. The Original Sin for the Euro fringe was marrying into the EMU for a large dowry. Fiscal Union can start to mend these travails if Germany & France are willing to access credit markets at interest rates that reflect a higher weighted average, accounting for PIIGS subprime credit worthiness as of today. That’s in stark contrast to PIIGS having accessed credit markets at interest rates that reflected the prime credit worthiness of Germany throughout the decade. I’m suggesting that Germany & France will have to [largely] foot the bill in recapitalizing the PIIGS. That’s a substantial bill. That’s not worth the synergies of a Eurozone.

I was ready to short a chunk of the Italy ETF (EWI) this morning. My last words of Wednesday’s trading session were, ‘If EWI catches a momentary bid tomorrow, I’ll consider it a gift from the market and I’ll pounce on the offer.’ I’ve built a strong case against Italy and the European fringe states. Thus, I was poised to short EWI today.

The American-traded EWI closed Wednesday down 5%+, having accelerated after Italian markets ended their session down only 2.4%. I hit the phones after the NYSE close to check some American traders’ wits about the European situation.

Later that night, Italian futures were trading in the black, and my eyes widened. I woke up this morning… Italian cash markets were positive, and they accelerated into the close: FTSEMIB +0.34% on Thursday’s session.

American markets opened Thursday as I saw a Financial Times headline:

Italy’s borrowing costs rose sharply to an 11-year high at a bond auction on Thursday as markets reacted nervously to the Greek rescue package and the debt impasse in Washington.

Italy sold €2.7bn ($3.9bn) of its benchmark 10-year security at a yield of 5.77 per cent, the highest since 2000. That compares with 4.94 per cent at the last 10-year bond sale on June 28.

Traders noted that yields on Italian debt were close to the highs reached before the eurozone summit agreed a framework rescue package for Greece a week ago. Although Italy has a large domestic investor base, the country has increasingly come under pressure from nervous financial markets this summer.

…and I checked my charts to see the spike in Italian yields. It didn’t make sense: Italian equities close in the black, but bond yields blow-out at a failed auction?! EWI had oversold in Wednesday, but it gave me the gift I wanted by levitating for a few hours after the open to let me short it.

But then, the Italian equity/bond anomaly made me pause. It made me question myself. I felt as if everyone else saw or knew something that I was missing. So, I called an economist Germany. I called a trader & an analyst in London. I was looking for someone to refute me. I wanted a reason to nix my trade.

I asked how they thought Italy would react to an American debt deal–agnostic (due to their own problems) or relieved?

I asked their outlook for the Euro crisis.

I asked how the EMU could survive.

They all answered the same; they all gave me the party line. These are professionals I’ve dealt with before. They call me occasionally for my perspective. A couple of them eat what they kill, so they have no incentive to follow the herd. Yet, I got nothing but consensus from their answers.

He: ‘The Euro will get through this, it will just take a while. The EFSF has any wobbles covered, and it’s only 1/3rd funded.’

Me: ‘The EFSF fully funded cannot cover Greece & Italy. Not only that, but all the PIIGS are guarantors funding the EFSF, so if Greece & Italy need bailout funds, Germany & France will have to cover the PIIGS contributions. So the question is at which point do the liabilities outweigh the synergies of the EMU–for everyone from Germany to Spain to Greece?’

‘The EMU was more politically motivated than economically.’

‘I get that. I understand the Maastricht Treaty, I’m aware of the scars from WWII, etc. But have you seen Greece? Have you seen Ireland or Spain? The people are pissed. The uprisings are real. The Greeks curse the Germans. If EFSF funding is contingent upon austerity, the PIIGS’s hatred will only fester.’

‘These countries & their people knew the risks of a currency union. They consciously entered EMU without fiscal union because of national pride and bureaucratic prohibitors. They believe in the bloc, and they understand the sanctity of contracts.’

‘Like the contract of ERM?’

So on and so on. Their optimism was backed by nothing I didn’t already know. My silver lining: by the transitive property I had deduced that defection back to a local currency (e.g. Spain leaving the Euro and repaying its debt in Pasetas) wouldn’t trigger a default, since entry into the Euro currency wasn’t a “credit event” in the first place. I was able to confirm this with a CDS desk.¹ There’s less stopping a country from defecting from the Euro than most people think.

I let my phone rest for a while. With renewed conviction, I found a borrow, then entered my offer to short EWI at $16.04. The ETF was printing 16.01 ask. It ticked up to 16.02 at one point, but I never executed. I modified the order twice, but I just chased EWI all the way down into its close, $15.80. I never executed.

I was following my 1-minute chart almost exclusively the whole time. The 30-minute chart showed no chance of EWI reaching 16.04, and I deferred to the 1-minute, which looked more deterministic. What amateur mistakes though. It’s like leaving a birdie putt short of the hole. I questioned myself, I sat above the ask, then I chased it down. I missed the trade. Not only do I feel naked going into battle tomorrow, but I missed out on a huge opportunity. I’m now reactive to a market decline instead of proactive, and I hate being behind. I’ll have to reassess EWI on Friday. Kicking myself now, but I’ll have to shake it off, because pining for lost pennies messes with an investor’s psyche.

EWI 1-minute


¹Some English Law bonds (non-local) may have covenant language that could prompt bondholder suits in UK courts, but most vintage, pre-2011 CDS contracts don’t specify whether or not denomination of repayment constitutes a “credit event.”

Short SPY

In Trading Desk on Mon 18 Jul 2011 at 23:20
  • Shorted SPY @ $131.10 this morning.
  • Executed trade upon finding a big arb gap between ETF & its NAV.
  • Trade looks sound not only technically, but also as a hedge for long equity exposure.
  • Political resolution to US debt deal is a headwind.

I wanted to elaborate on the StockTwits trade rec I posted this morning:

$SPY shorted at 131.10. I need to hedge equity exposure, worry about slide below 130.5 in head n shouldrs. Daily n wkly show suppt at 126.18

So, I’m short the S&P 500 ETF (SPY) @ $131.10. There’s much to that trade, but I should start by mentioning that I found it a pricing anomaly at the time of execution, so I pounced on the entry opportunity. The S&P 500 (SPX ) itself was -0.63% when I placed my short order on SPY, which was persisting at a -0.43% level. At the same time, SPY.IV was -1%+ (that’s the ETF’s intraday NAV). Unless I made a clerical error, I thought, the ETF manager hadn’t been able to keep up with the sell orders, as it’s his job to redeem shares in keeping the SPY market price tied to NAV (and the SPX index it tracks on a percentage basis). This is the “tracking error,” by which the quality of all index ETFs is measured.

The big question, therefore, was which vehicle would move in which direction to close the arb gap. Since the technicals supported SPY falling intraday–and certainly did not support a rally in the indices–I initiated the trade. Here’s the 1-minute intraday chart I was watching at the time:

SPY intraday @ 948am

Notice the bearish indicators, which suggest the price will crash through nearby support around $130.86… and they did:

SPY intraday @ close

In longer fractals, it’s easy to see the mess of a week SPX has ahead of it. The daily chart shows a cautious combination. Having just broken down through its 50DMA, SPY is nearing trendline support that dates back to the bull market basin from March 10, 2009. SPY also closed tonight slightly below that historical prime meridian around $130.86, holding that crucial $130.50 support below which the Head & Shoulders neckline around $126 is the lowly support. Although, I’m likely to cover part of my short at $129.50 1st support:

SPY daily

I have reason to believe that the $129.50 1st support will hold up. The weekly fractal shows a dearth of buyer interest (MFI) on par with the market bottoms of 2002 & 2009. This comes in the midst of resilient momentum with SPY in the middle of its weekly trading range:

SPY weekly

I’m not quite sure how long I’ll be in this trade. While I have my targets as always, the market will ultimately tell me when to move. As I sit here tonight with a nice one-day profit in this position, I reflect on the conscious decision to open the short as a sound hedge for my long equity exposure. Given both the sound technical setup and the risk management premise, I have no trouble sleeping at night with an open short like this. As a standalone investment, short SPY in this environment would make my stomach turn–even considering the high-probability setup. The political risk is something with which I wouldn’t mess. (To clarify, Europe cannot be fixed. The political risk of which I speak comes from a US debt deal. I also recall a voice reciting ‘shorts have gotten burned at every turn in this market’ on CNBC this afternoon. You never know what the politicos can come up with overnight. Still, the Fed is sidelined for the time being, which is kind of like the Patriots without Tom Brady in 2008.) In light of the political will for asset inflation, I’ll be vigilant in preserving gains as always.


Citi Turning Over

In Capital Markets on Fri 4 Mar 2011 at 17:43
  • BAC vocally downgraded C & GS today.
  • C  has turned-over and confirmed a bear trend.
  • C rests at the same price where US Treasury anounced the divestiture of its final shares.
  • Shortable down to 2nd support @ $4.

After Bank of America vocally downgraded Citi (C) and Goldman Sachs (GS) today, both stocks really turned over.  Citi downright confirmed a bear trend:

C daily- upside momentum is waning in divergence to the triple top price action. Further, support has been breached in MACD & MFI, confirming a bearish reversal.

The stock sits on first support, conincidentally, exactly where it was when the Treasury announced the sale of its remaining stake on December 6, 2010.  Now, second support at $4 is my target:

C daily- 2nd support at $4 is the critical threshold separating C from its 2009 pit-of-despair.

The government will have a basket case on its hands if Citi dips under $4.  When a bank goes under, equity just gets wiped out.  End of story.  According to FinViz, Citi sits with LTDER= 2.33 and a P/B= 0.83.  If Citi had to writedown a portion of its assets, you better believe that book value will evaporate, and the mark-to-market reverberation throughout the US would be deafening.  Luckily, banks don’t have to mark-to-market, thanks to April 9, 2009 updates in FAS 157:

Status of FASB Staff

Position FAS 157-4

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly


…so the burden is really only borne by the FDIC.


South Africa ETF Heading Further South

In Capital Markets on Tue 25 Jan 2011 at 08:39
  • Waiting for an entry to short EZA, probably via long puts.
  • EZA should snap back up to $71-72 range before starting its ultimate descent.

One day in late 2011, I’ll buy the iShares MSCI South Africa ETF (EZA) and hold it long term with blinders on, because I know that in the near future it’ll explode to the upside.  (A 2.64% dividend doesn’t hurt either.)  Today is not that day, however.

Having been burned by premature convictions in the past, economists & traders have long awaited the African emergence.  My Mom even noticed Wal-Mart (WMT) snatching up its South African counterpart, Massmart, at the end of 2010.  Normally, I’d avoid the hype and ritualistic chants of ‘it’s different this time,’ but with the developed world having overextended to pull-forward growth, I do believe that emerging markets will be tapped to quench global GDP expectations in the first half of this decade.  Particularly in this age of financial commoditization & monetization, I [unfortunately] see Africa as a perfectly impressionable subject for financiers’ artful craft.

But first, EMs will have to undergo a setback, because hot money fled G7 nations and washed up in EMs to hide from the latter stages of this Great Recession.  EZA is headed lower, and I’m comfortable shorting it with conviction:

EZA weekly- teetering on the brink of breaching 1st support @ $68. Technical indicators are headed down to test their key thresholds, indicated with pink support lines.


EZA daily- support around $68.15 is holding fast, as the stock rested on it at the close 1/20 & 1/21. Technical indicators have already confirmed the downside.


I expect a snap-back up to the $71-72 range before the weekly chart has had enough time to coordinate with the shorter term charts and confirm the bearish reversal.  That’s when I’ll enter a short-biased position.  I do not want to commit too much capital to this trade, since I rarely outright short a holding without a relative-strength-paired long as protection.  Even though I’ve been spot-on this Emerging Markets inflation & underperformance du jour, I really don’t care to outright short something when I could be deploying capital to bull market trends around it (developed markets).  In the end, I’ll probably play it by buying puts.

I’ll post on any trades if they come to fruition.


Closed Trade: Short Acorda After Gap Down

In Capital Markets on Fri 21 Jan 2011 at 11:53
  • ACOR gaps down after EMA rejects drug.
  • My first support @ $25 has been left behind, closing short position +12% net.

This tidbit came across my Reuters this morning:


7:05 AM (GMT-05:00) Eastern Time (US & Canada) Jan 21, 2011

Acorda (ACOR) immediately opened down 15% this morning–now down 17%+ on the day.

ACOR 10-minute intraday: Gap down this morning

I’m closing this short position, as I’m satisfied with a bit more than 12% net gains.  I was down as much as 15% at a point with this one, and I was near my stop limit of $32 too.

Saved by the bell? Deus ex machina?  God only knows.


Opened Trade: Acorda Short Position

In Capital Markets on Fri 17 Dec 2010 at 12:19
  • Opening short position in ACOR @ $26.22, per 12/8 note.
  • Target: first support @ $25.