Posted by: Bevan | January 2, 2012

December 2011 Trading Commentary

The continuing cycle of risk aversion due to Sovereign debt contagion fears in the Eurozone has led to another volatile month in the financial markets.  The first day saw central banks including the ECB, US Federal Reserve and the Bank of England announcing ‘coordinated action’ to support the global financial system.  This was due to liquidity drying up in interbank lending due to fears about counterparty exposure to Sovereign debt.  The action resulted in losses on our short Eurodollar and long 10 Year Note positions as liquidity returned to the European short-term debt market, and investors moved away from ‘no-risk’ US Treasury Notes.

The relief was shortlived however, with a continuing backdrop of fear and the threat of credit rating downgrades including France, potentially losing its AAA rating.  Yet another summit was held (the eighth of the year), however hopes that a fiscal union would be unanimously agreed upon and open the doors for money printing by the ECB were dashed, with the UK walking out.  For most market observers it was just another empty gesture with no substance.  This opened the door for another significant leg down, benefitting our short Euro/USD position.  The perceived failure of the talks also added to profits on a new 10 Year T Note position, and opened the downside on a short US Crude trade.  The FOMC meeting on the 14th also contributed to increased demand for T Note’s, as investors who were disappointed by no news of new stimulus measures piled out of risk.  In the primary debt market an auction of $21 billion saw a bid to cover ratio of 3.53, the highest in 20 months, and resulting in further demand transferring into the secondary bond market.

The existing short Corn position, which had begun stagnating also began another downmove to new lows for the March 2012 contract of 576.25 on the 15th.  This represents a huge move which opened at 632.80 in mid November (on the December contract).  As well as the negative Euro sentiment, the latest move was probably helped by a significant increase in the US Department of Agriculture’s corn production and stock estimates, as well as data from China’s National Bureau of Statistics that said China’s 2011 corn harvest jumped +8.2% (CRB).  Although we don’t trade them, Wheat and Soybeans were looking bearish as well.

Towards the end of the month leading up to Christmas a rebound in many markets saw the closure of the Corn and Crude Oil trades (the latter at a loss).  The Euro FX and Treasury Notes lost some ground as well.  There wasn’t any obvious fundamental reason for the change and my feeling is that it was just an unwinding of positions in thinner markets as the year ended (the so-called Santa Claus rally!).

Even as December drew to a close new lows were being made in the Euro FX market.

Although open equity had reached a height of 13% growth mid month, overall the month ended with -8.55% closed equity.  This is in the nature of trend following.  It is common to see brief run-ups in open equity followed by their swift disappearance.   Over time enough trades develop into big winners for these temporary fluctuations to be put in perspective.  Most traders cannot hack buying extremes, poor winning percentages and seeing winning trades turn into losers as we wait for the significant trends to develop.  That fact means that those who can patiently wait managing risk can win over the long run, putting aside the sort term equity fluctuations in expectation of the outlier larger trends.  This is also a reason why we don’t track open equity – it isn’t that meaningful.  What is important is closed equity over a two – five year time horizon.



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