Happy Holidays!

As the leaders of countries go on holiday, I wonder just how they will be feeling. Mr Sarkozy will probably go and have a great time, forgetting the troubles both Europe and France face in 2012. No doubt his tremendous self belief, that sometimes crosses the line into blinded arrogance, will allow him to forget the following: France and other major European countries need to refinance and a large amount of debt in 2012, banks need also need to refinance a large amount of debt especially as they start preparing for new regulatory capital rules. French banks in particular hold a large percentage of Greek, Italian, Spanish and Portuguese debt. The rating agencies have France on their negative watch-list for a potential downgrade. Europe need to implement their new treaty quickly to at least give the markets some positive action to be come optimistic to a solution to the European debt problem.  He has elections in April and he basing his campaign on his handling of the economy. No matter of the severity of these problems, Mr Sarkozy will no doubt feel he has handled the situation to date perfectly, even though he has managed to cause friction with the UK, who the rest of Europe need to be amicable in order to quickly implement many of their new measures by using existing European Union infrastructure. Regardless Mr Sakozy will look into the mirror and still remain firmly in love in what he sees. Mrs Merkel will not quite have such a joyous christmas. Her biggest concern is how to convince domestic politicians and the German public that a greater federal Europe is the best for Germany. While economically her arguments are strong and clear, sociologically there are many issues. The greatest is Germany once being perceived as wanting to be the masters of Europe. If austerity leads to a protracted European recession Germany will become once again resented by the rest of Europe. This is something the German public want to avoid at all costs. Mr Cameroon christmas will be a subdued affair with element of exhaustion. While he knows deep down the stand he made regarding Europe was the correct one, he also knows the reaction to this action needs to be managed. Mostly he knows he must keep a coalition government united which has mixed and vastly different views on UK's participation in Europe. He also must balance UK's interest while still appreciating how dependent the UK is on the free trade benefits of being a part of a European union. He might feel a little proud of how he handled himself on the international stage especially compared to the juvenile French leader.  But this warm feeling may dissipate quickly as he remembers the present stress of the global banking industry, which is the main driver of the UK economy. Mr Obama will have a philosophical holiday break. He will be bemused at the process behind the US political system. He will question whether the systems allows for personal gain to prevent consensus cross party politics, which is necessary in times of crisis. He will be preoccupied by the Iranian situation. Somehow he must appease Israel enough not to take military action, and work out how best to diplomatically handle a irrationally Iranian leader. And for the Chinese premier it will be just another day, in a week, in a month, of a long term -cycle that will see China's influence in the world increasing. Happy holidays. 2012 looks set be just as challenging yet full of immense potential as 2011.

Making Money with the Swiss Franc

Most traders, hedge fund managers and portfolio managers I speak to have lost money trying to trade the Swiss Franc this year. I initially find this surprising as trading the Swiss Franc this year has been a very profitable currency for myself. I decided to conduct some research into why this is so. The conclusion to this research may also have some bearing on why I have been profitable in 2011 and to my surprise others have not. The key in 2011 to making money in the Swiss Franc (also I believe this will continue in 2012) is to understand Hildebrand the Head of the Swiss National Bank.  Unlike other Central Bank chiefs he has true market experience in trading. This means when he decides to intervene or use political messages to depreciate the Swiss Franc, this can be, to a certain degree, preempted. It takes a simple trading analysis of what you would do as a trader if you were in his shoes. This study of market psychology is sadly not conducted by the majority of macro and FX dedicated traders. Most short-term traders in FX are purely systematic. I should point that this style of trading, I believe, does have true validity but can go through periods of losing, as 2011 shows. Pure systematic traders therefore ignore the market psychology aspect that I believe is the key to Swiss Franc trading at the moment.

Its Better To Die On Your Feet Than Live On Your Knees

After the UK's decision to step out of the Euro crisis and risk political isolation, the immediate reaction of many market participants has been to consider this a negative move. I am not sure this is the correct perception. It must be not be forgotten that UK's GDP is driven predominately by services, most of which stem from finance. This fact means the greatest risk the UK face from all the proposals of Europe on the table is the financial transaction tax. In fact it was JFK's decision to have a tax regarding Eurobonds that original aided London to become the financial centre in Europe in modern times. It would have been a risk to trust that Germany and France would not have used the new proposed treaty changes to try to take some of this lucrative business away from London to Paris and Frankfurt. In fact the French's Napoleon-like president's reaction was all too clear in showing his disappointment in what might have been his saving political move to win himself another term. France under his leadership is definitely not to be trusted. As for Germany this is rather more of a complex analysis. I fortunately have worked closely with a German bank  and so maybe have a little bit more of an insight into their motives. However a quick review of recent history can be an interesting guide. When German reunification was first proposed, both UK represented by Thatcher and France by Mitterrand opposed the move as they believed this nation would become too powerful within Europe. At present their fears seem to have some validity. Germany now controls Italy and Greece via technocratic governments, as well as France. Germany seems to be making the fatal mistake of ignoring the public feeling of other nations in favor of austerity at all costs. Is this similar to their previous mistakes of dominating Europe? Unfortunately yes. But this is only true of German leaders and politicians. The average German on the street does not want to be in the spotlight. They fear accusations of similarity between them and Nazi Germany. They want their country to do well, be the great industrial power which they are, but not to invade Europe. Unfortunately this rational and sensible view is lost at the political and high ranking German level. Here you find characters who have the fatal cocktail of arrogance and resentment. I never thought Merkel fell in to this category but unfortunately I think I was wrong. For Sarkozy the analysis was straight forward. His ego is  his biggest hindrance combined with his inability to control his feelings. The French must be totally embarrassed at voting such an individual into power? Remember his first speech on US soil after his election win: he told the Americans to get their finances in order! The French have a chance to rectify this situation at the April elections. It will be interesting for me to see just what the French people decide and certainly for an onlooker the result will tell us a lot about the French public. They may also feel that they do not want to be Germany's puppet...will we see. So given this background, the UK's decision may not be perceived that negatively. What I find the most disturbing is that the European Union was set up to prevent war and a dictatorship in Europe by friendly nations sharing defense and trade. It was never about the loss of individual nation's sovereignty.   The UK demands last week were not that unreasonable. Germany and France response was worrying. For me as trader I think the probability of all outcomes, including the most negative for the UK, Cameron's decision was a good trade. I bet many Greeks and Italians must feel they wish their governments have made similar decisions. For surely it is better to die on your feet than live on your knees?

How to Profit from a key week in Euroland

As the markets prepare themselves for another European summit, canny investors will be prepared to take advantage of the weeks events. When they analyze how to implement strategies it is always worth assessing what they know and they do not. What they do know is there will be price movements surrounding the summit as politicians use the press to restore confidence in the European debt markets. Whether the final announcement will induce this confidence or be ignored is an unknown. Therefore a trading plan should incorporate both these outcomes. It is relatively clear how a positive outcome should be played: go long equities, short treasuries, short the dollar and long commodities.  However the key to success will be picking the right way to implement these macro themes. given the expected volatility, it is essential to avoid crowded trades. These crowded trades will have numerous stops placed by traders and therefore will experience excessive volatility on an intraday basis. This means there is a higher probability of a trade held being stopped out. The answer is simple search for uncrowded trade that has the same macro catalyst. Let me give you an example: instead of going long the Euro verses the dollar, an extremely crowded trade, an alternative is to go long Canadian dollar verse Swiss Franc. This latter trade is essentially long risk, just like the Euro position. It also has the characteristic that it may benefit from Euro specific very negative news due Swiss National Bank's policy of pegging to the Euro. This kind of alternative trade can be sort in all asset classes. The next piece of the puzzle is to decide on an entry level, profit target (if used) and stop loss level. Once these have been established the size of the trade in terms of risk can be defined. The same exercise can be done for a negative reaction to the summit. In this way an investor can be armed with definitive plans to quickly react once a direction is established.

Wise Words from Karl Lagerfeld

In order to be a successful investor you must appreciate that good advice can come from many sources. Running a country through a global credit crisis is no different and leaders would do worse than consider a suggestion from this fashion guru: Karl Lagerfeld. I have mentioned before in a previous post that we need leaders to exert creative thinking in order to help their national and also ultimately the world economy. Mr Lagerfeld has suggested an interesting proposal to get rich people to spend their money. So I understand, he has suggested that people who earn over a certain excessive amount should be taxed if they do not spend a certain proportion of it. Obviously the implementation of this suggestion needs to be clarified but I think its actually the kind of creative solution we need. Maybe it could be taken even further and applied retrospectively to the banking industry. This would have a massive positive sociological effect, as many investment bankers who have taken large bonus payments during the last 5 years would be forced to spend money to help their national economies. I guess as a hedge fund manager I have to accept that this also should be applied to all areas of finance, including asset management. Mr Lagerfeld suggestion has real merit from a practical to a psychological perspective. Personally my extra spending may not go to haute couture which will probably will disappoint  Mr Lagerfeld, and believe  me my partner definitely does not need haute couture clothing to look amazing, but could go to investing in the economy through loans to small business and entrepreneurs. Bravo Mr Lagerfeld for your creativity.... but I bet you have heard that before!

Time for a Recap

What an interesting day the last day of November 2011 turned out to be. I congratulate Central Banks on their timing. Not only did it have the surprise element but it also helped year end trading books of banks with a 4% rise in equities. I hope every investor out there had the appropriate risk management discipline to survive such intraday volatility. So lets assess where we are the day after. Is there still a problem Europe? Unfortunately yes even after todays relatively successful French and Spanish auctions. While maybe European banks situation is slightly better with more relative cheap central bank funding available there is a whole plethora of problems facing the banking industry and Europe. The European debt problem remains. Yesterday action did nothing to resolve this except insure the security of a functioning global banking system. Countries around the world still face large debts to repay with falling revenues. Europe has not resolved their unity issues. As I have repeated many times they need fiscal and political harmonization through treaty changes. The grapevine says the draft treaty changes being considered does not have complete backing from all countries. Giving sovereign rights to a central European institution is a tough decision and not one to be rushed. Both US and China are being effected by the European problem. But lets not get too downbeat, there are many great investment opportunities. Liked I mentioned in my previous blog a long commodity short European problem is an interesting trade and one that has already paid dividends in the last few days. If interested I suggest you look at a Euro vs Australian dollar chart. In fact I think they some interesting plays in commodities. If you combine fundamentals with a technical reading of the markets I would suggest look at some long commodity plays. With commodities supply and demand metrics are key, combined with the analysis of the positions of both investors and the industry players. Also equity market provides some interesting investment opportunity.  I have identified some interesting companies that will benefit from an increase in infrastructure investment. Corporate credit should not be overlooked. Strong fundamental analysis of future expected cash flows in a recession environment can provide some great lending opportunities. This a market where hard work pays off. But whatever you decide to invest in discipline in risk management is key. They are many opportunities but there is also a high probability of surprises as well. The key to making money is discipline. It is what separates a great investor who has the potential to benefit from all market environments from a just a lucky investor. This is the key question that many participants in the hedge fund industry should ask, especially hedge fund of funds. I wonder if they have analyzed this about their hedge fund investments, and what category the likes of John Paulson or  Greg Coffey fit into?