Quantitative Wheezing

Friday's Non-Farm Payrolls report continues to roil the financial markets. Expectations had coalesced around a 125,000 net gain, but were dashed when only 96,000 positions were added and the previous two months’ gains were revised down by 41,000 in total.

At the Federal Open Market Committee's last meeting in early August, most members agreed that more stimulus would be required if a "substantial and sustainable strengthening" in the economy did not become evident.

Few would argue that this has transpired, making it likely (but not certain) that the central bank is poised to do something in an effort to stimulate activity.

So, traders are breaking champagne bottles over the bow of the QE3, betting that the Fed will launch it down the slipway after its meeting on Thursday.

The question now is what the vessel itself looks like.

Our educated guess is that Captain Bernanke and his mates will opt for an open-ended series of bond purchases. This would entail acquiring Treasury and mortgage-backed securities at an adjustable pace until the Committee determines that the economy has recovered to its satisfaction.

This has a number of strategic benefits.

By keeping the total size of the eventual programme undetermined, the bank will ward off traders who are inclined to bet against it. In giving officials the ability to wind purchases down, it allows them to react quickly in the event of a rise in inflation. And by essentially guaranteeing that purchases will continue until conditions improve, the bank will help to provide a sense of security to lenders and business owners who are considering investment plans in such an uncertain environment.
This analyst suspects that this will have a relatively muted impact in the real world, where the traditional transmission mechanism between interest rates and borrowing activity has seriously deteriorated in the last five years.

But the markets will unquestionably feel the effects. At the time of writing, the dollar is down, and commodity prices are up sharply, as investors forecast a dilution in the currency's value.
How durable will this be?

Perhaps for longer than we've become accustomed to. While a short-term trend reversal is likely to occur immediately following the announcement (sell on rumour, buy on news), we may see a more sustained period of dollar weakness driven by the open-ended nature of the Fed's commitment. By making the stimulus gradual and long-term, the bank may help to alleviate the "sugar rush" effect that has accompanied the last two rounds.

However, that will come to a screeching halt in the event that conditions elsewhere deteriorate. Low interest rates in the United States are wonderful while there are attractive opportunities elsewhere: traders can borrow in dollars and earn handsome rewards. But if China continues to slow and shred growth in the emerging economies, money will come home in a hurry.

And in a side note: If you thought the wailin' Germans were loud, wait until you hear the howling Republicans on Friday--buy some earplugs, and have a great week! 

Outraged Monetary Traditionalists

The euro area has been Draghi'd into the future--and German newspapers are certainly kicking and screaming.

The Bild called the European Central Bank's rescue plan a “Blank Cheque for Debtor States” and the front page of Die Welt said “Financial Markets Rejoice at the Death of the Bundesbank”.
The Süddeutsche Zeitung remarked that "Rescuing the euro at any price could be an economic disaster--that is the red line that must not be crossed. The other limit is the law: In a community based on law, the ends can never justify the means. A euro community that is based on constantly breaching treaties is built on a shaky foundation. On Thursday, the ECB unfortunately crossed both red lines....The crisis countries are not out of the woods yet. And that means that if the ECB provides them with unlimited help, then it is financing unsound states. It can only do so by printing ever more money. Ultimately, there will be the threat of bubbles, crises and inflation. It will benefit speculators, and the vast majority of citizens will have to foot the bill."

And from the Frankfurter Allgemeine Zeitung: "Draghi has made it clear that, from now on, the ECB will only buy bonds when a crisis-hit country asks for help from the euro rescue fund or agrees to other conditions. But that promise isn't new. The would-be saviors of the euro have been insisting on structural reforms for years. The recipients of aid make promises but often do not keep them. But what will the ECB do if, say, Italy does not carry out the labor market reforms it has promised? Is it going to start selling Italian bonds? It can't if it takes its own argument seriously, that monetary policy in the euro zone no longer functions properly.

"The leaders of southern euro-zone countries should be happy: they can continue to borrow at low interest rates and do not need to worry about finding investors. But the northern leaders are satisfied, too, because they can hide behind the ECB and do not need to face uncomfortable questions in, say, the Bundestag about all the additional risks that Germany is taking on. In the euro zone, there is no longer a distinction between monetary and fiscal policy."

This dichotomy between German dread and giddiness in the markets is dangerous. But perhaps more importantly, the yield-dampening effect of the ECB's programme may give peripheral-country governments more time to delay the reforms that are so badly needed.

If structural adjustments are not successfully implemented, the crisis could grow to afflict the entire euro area in the future. And by then, Germany's patience may have run out.

In other words, instead of giving peripheral countries the Beastie Boys' license to ill, the ECB may be providing them with James Bond's license to kill.

Thus, today's euphoria in the markets is quite likely to give way to a more sober assessment of the long-term risks in the coming days and weeks. One suspects that the euro will quickly reassume its role as a funding vehicle for the carry trade--and that market-entry opportunities will be created on both sides of the currency in the process.
  

Meet The CTA: Adkins Diversified Capital

             

In this issue, we talk with we talk with Scott Adkins of Adkins Diversified Capital a registered Commodity Trading Advisor.
 

To see the Adkins Diversified Capital performance sheet please log on to the IBTRADE Alternative Investment Database.

 

Name of Program:

Adkins Diversified Capital / Diversified Options Program

Name of Principal: Scott Adkins

NFA ID:0430634

Who are the principals with trading authority?

Scott Adkins

Can you provide details on the principal and/or managers' education, career and trading background?

Scott Adkins has a B.A. in History from Central College. Scott Adkins joined the Peregrine Financial Group (PFGBEST) team in May 2001 as a Customer Relations Manager. This position also gave Scott Adkins the knowledge of PFGBEST products as well as the tools needed to advance in the futures industry. In 2002 and 2003 he transitioned from Customer Relations Manager to a full-service broker, becoming an Associated Person in August 2002 and a Branch Office Manager in July 2003 of Wasendorf & Son Company, which was a Guaranteed Introducing Broker for PFGBEST. In January 2003 he registered as an Associated Person of PFGBEST and a branch office manager in July 2003. Scott Adkins ceased being an Associated Person and Branch Manager for Wasendorf in October 2007 when Wasendorf ceased operating as an introducing broker. Scott remains a registered Associated Person and Branch Office Manager of PFGBEST.

During his tenure as a broker Scott built a book of business working with retail clients from around the world advising them on the day-to-day activities of the markets. Joining the Wealth Management Team as a Senior Wealth Manager Scott brings his knowledge of the markets and risk management skills to bear working with clients on asset allocation and over-all market strategies as well as advising clients on Broker Assisted Strategies.
 

How do you divide your time and priorities between your CTA responsibilities and your Wealth Management Group duties?

With the trading strategy that I am following it comes down to time management and priorities. I have a schedule that I follow on a daily basis and the markets are always in front of me. The CTA responsibilities come first and foremost. However due to the nature of the style of trading I employ I am afforded time management flexibility, for example if I have trades on that are slowly decaying and things look good, I can devote more attention to my Wealth Management Group duties. The attention to detail of the trades and the structure of my daily schedule really help me balance the two sets of duties, however the CTA is my highest priority.

Which firm collates your performance numbers?              

Futures Accounting & Compliance

What is the minimum investment for your programs?

$30,000

Do you accept notional funding?

Yes, subject to approval of Adkins Diversified Capital.

What is your management and incentive fee structure?

Adkins Diversified Capital has no management fee. We have a 30% incentive fee.

What is your program's capacity?

Approximately $50 million.
 

When did you start trading this program?

March of 2009 / The Commodity Trading Advisor (CTA) registered in August 2nd 2011.

What type of accounts do you manage?

Mostly individual clients at this time. A few corporate accounts.

Can you give a brief description of your program?

Short Options Strangle Strategy attempting to diversify across different market sectors. This is a relatively non-directional strategy. We will make risk management adjustments as the net delta becomes too directionally bullish or bearish.

Do you have a systematic or discretionary approach to the market?

I use a systematic approach for trade selection but opt for a discretion approach to actual trade entry. Sometimes a computer-generated signal cannot adequately account for an atypical external risk event.
 

What is the average holding period for each trade?              

Our sweet spot for trades tends to be from 45 to around 85 days.
 

Do you trade options within your program? If yes, please describe the types of options traded and how options risk is monitored.

Yes we are an options selling strategy. Specifically short strangle strategies. We monitor the net delta of the position in an attempt to be relatively delta neutral. Too bullish or bearish we will make an adjustment. Adjustments may be adding puts or calls to bring the trade closer to neutral. We many buy back a put and sell a put further away from the market and also add a call, we may roll out the options to the next available options contract. And also in rare instances, we may use futures to hedge the position.
 

Are there any liquidity constraints in the markets you trade?

Yes we like to have the trades in markets with decent liquidity in the outlying options. Markets that we have traded are live cattle, bonds, notes, currencies, natural gas, crude, gold, corn, beans, wheat, E-mini S&P, sugar, et al.
 

In what types of market environments does your trading program do well and /or struggle?

We typically do well in markets that have a higher than normal Implied Volatility. We struggle to find trades that meet our guidelines when I.V. is low.
 

What is the standard range of margin to equity usage for the program?

We attempt to maintain around a 50% margin to equity ratio. If we are struggling that could be higher as we increase the size of trades or lower when we are underinvested.
 

How do you manage risk/reward and what metrics are employed?

We like to have a decent annualized return on trades. Usually if we are receiving anywhere from $800 to $400 in premium that meets our guidelines. The goal of the program is 20% for the year.
 

What are your investment goals?

The goal of the program is to return 20% for the year.

What makes your program unique and different from other managers in your sector?

I think our attention to detail and effort to diversify our trading among a number of different markets. We attempt to stay relatively delta neutral, and like to have non-correlated trades on if we can. I also think our attention to risk management and ability to make adjustments to trades sets us apart.

What is the one piece of advice that you would give to a new start-up Commodity Trading Advisor (CTA)?

Don't do it!!! No really I think if you are looking to start a Commodity Trading Advisor (CTA) you really need to fully test the strategy and look at it from the 10,000 foot level. Not every strategy is going to work well in all markets. You need to be aware that sometimes it is better to be under invested, than to be reaching for trades that may not necessarily work for your strategy. Stay true to your guidelines and yourself.
 

THERE IS A SUBSTANTIAL RISK OF LOSS IN TRADING COMMODITY FUTURES, OPTIONS AND OFF-EXCHANGE FOREIGN CURRENCY PRODUCTS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

ECB Announcement, Finally!

For weeks, market commentators have been anticipating European Central Bank (ECB) Chairman Mario Draghi’s moment in the sun, which finally arrived this morning.


As expected, Draghi announced a new unlimited outright bond-buying programme aimed at bringing struggling peripheral euro zone government yields, particularly those of Spain and Italy, back down to Earth.


Making good on previous promises, Draghi noted that the programme would serve as a “fully effective backstop” for those governments whose bonds have come under pressure from “unfounded” fears in global markets about the stability of the euro. He went on to mention that, despite being publicly opposed by the German Bundesbank, the new programme is “strictly within” the ECB mandate.


The ECB will drop preferred creditor status for purchases made under this programme, a title that it held when Greece restructured its debt, thereby protecting itself from the write-down losses that private investors were forced to take.

The programme will be fully sterilized, meaning that all liquidity injected into financial markets by way of the purchase of bonds will also be taken out of the market elsewhere.


And crucially, to be eligible for the new programme, governments will first have to request European Financial Stability Fund (EFSF) support and meet its conditions and requirements. This could prove to be a tough pill to swallow for sovereign governments in need of support.


The programme will focus on buying shorter-term instruments, dated one-to-three years. Draghi did, however, note that it will also buy longer-term instruments in the secondary market that are near maturity. For example, the ECB would consider purchasing a ten-year bond with three years remaining until maturity.


Because of the attention this topic has received, and the fact that some details were leaked to markets yesterday, we are seeing a classic “Buy the rumour, sell the news” pattern unfold. In the aftermath of Draghi’s press conference, the euro has actually sold off against many currencies, including the Greenback, Sterling, Loonie, and Aussie.


The only two major currencies that the euro has outperformed since Draghi took the stage are the Japanese yen and the Swiss franc. The EURCHF movement is particularly interesting: For the first time since March, the pair pulled off the Swiss National Bank-enforced 1.2000 floor in a meaningful way, and seems to be holding on to those gains.

The Other Central Bank Announcement

The ECB wasn’t the only game in town overnight. The Bank of England (BoE) also had its regular scheduled rate announcement. As expected, the BOE stayed the course, leaving current interest rates and asset-purchasing programmes untouched.


The situation in Europe has global reach, but its impact in the UK is especially significant. Uncertainty on the other side of the English Channel has been a very real drag on the British export market given the tough austerity plans many mainland European governments have adopted. This has put many barriers in the way of the British economic recovery.


The current round of British QE is expected to wrap up in November of this year.  Given the precarious state of the UK economy, which never really fully recovered from global market shocks in 2008, many are looking for more stimulus to be added in November.


The minutes from August’s BoE meeting, released previously, showed that the topic of further QE was discussed, as was the subject of size and the details of how to administer it; though it must be noted that there is not unanimous agreement amongst committee members that adding to the QE programme is the way to go.


With this in mind, investors will be eyeing the minutes from this month’s meeting, which are not slated to be released until September 19th, for clues to what might happen after November.  

 

 

 

 

 

 

September 6, 2012: Overview

If you read financial commentary, you’ve probably been waiting for today for quite some time. The big news this morning is the European Central Bank’s new bond-buying programme—which, according to Bank Chairman Mario Draghi, will be the cure-all for the financial crisis in Europe.


Asian stocks were broadly stronger through their session in anticipation of the ECB announcement, and now that the cat is out or the bag, European shares are finishing the day strong, and North American markets have opened with some pep in their step. In the government bond market, yields are trading with a negative tone, most notably in Europe, where Spanish, Italian, and German ten-year notes have all seen yields fall noticeably since Draghi took the stage.

 

 

 

 

 

Meet the CTA – Global Ag, LLC

Meet the CTA – Global Ag, LLC

In this issue we talk to Greg Firtik of Global Ag, LLC, a registered CTA, NFA ID #404932.  To see the performance sheet for the Global Ag, LLC, please log on to our Managed Investments Database by IBTRADE.  http://cta.ibtrade.com/

Name of Program

Global Ag, LLC- NFA ID #404932.                                

Name of Principals

David Skudder

Name of Principal with Trading Authority

David Skudder

Q: Can you give a brief description of your program? Do you accept notional funding?

The program is a discretionary model based on fundamental views.  All trading decisions are made by David Skudder.  Primarily corn, beans, and wheat.  Notional funding will be considered for institutional clients.

Q: What is the average holding period for each trade?

The program is opportunistic and does not employ any day trading.  Holding periods for any one position is mid to longer term.

Q: The program generates an astonishingly big number of AUM, what is your goal for it this year?

We are looking at capacity of $450 million.  Our goal for 2012 is to be closed.  

Q: The worldwide network of contacts and a wide range of market inputs associated in your program are very impressive.  Are these the principal indicators directing the way you trade?

David’s years of experience, industry contacts, meteorologists, and research are the sources for trading decisions.

Q: The program performed particularly well in the starting year of 2010 and even broke a single month’s record of 26.39% in October. What factors contributed to this brilliant success?

David saw the moves very early in the cycle and traded accordingly.  He is not content with simply a directional play but also look at inefficiencies between markets and months.  This separates him from merely directional moves.

Q: We’ve noticed that the following year (2011) was an overall poorly performed year, which presented a negative figure there. Drawdowns frequently occurred in that year. Can you briefly describe why there was a comparatively large volatility at that time?

2011 was a directionless year.  David saw this developing very early and held a conference in Memphis where he invited some of the smartest industry professionals.  The conclusion from most was the same.  Tough year to trade overall.  Breaking even beat most of his peers.  Those years happen.

Q: In what types of market environments does your trading program do well and /or struggle?

See #6.  When markets have no direction and are up one day and down the next and the that trend continues over months.  No one makes money.  When you can see markets developing and events that causes shortages and demands David does a good job seeing where the market is going and can adjust quickly.

Q: How do you manage risk/reward and what metrics are employed?

As assets have grown David is much more conscience of drawdowns.  He looks at positions daily and if he does not feel comfortable he will adjust.  He does not want to fight out of a hole and as such attempts to not have double digit down months.  He does not use a tremendous amount of margin so he does not believe in fighting a market.

Q: What’s your opinion on current agricultural markets and how do you prepare against the volatility? Do you trade options within your program? If yes, please describe the types of options traded and how options risk is monitored. 

Shortage in beans and everyone planting corn.  David will use options to control risk and volatility.  If he sees something is cheap he may buy it and if too expensive he may sell it.  Also sometimes you like to have some options on in case a particular event occurs.  This year everyone was planting early .  We had some options on just in case we saw a freeze and crops got hurt.  Cheap to buy at the time but let us sleep at night.

Q: What are your investment goals for this year (i.e. annual returns on performance)? 

We are posting about a 14% return for April.  Still look like opportunities persist as production numbers unravel.   Weather may continue to be a factor in the US.  No specific goal.

Q: What makes your program unique and outstanding among managers in your sector? 

David Skudder makes our program unique.  I do not feel many others have the insight or communication networks that compare.  You have to have 15 conversations a day sometimes to pick up only item that important.  When that item is mentioned you have to be able to know it and act accordingly.

David was a cash grain trader and learned his trade well.  If you have a chance to visit our websites you will  note very good returns from our other trades.  Mark Ditsch was a cash soybean trader, Megan Bocken was a wheat analyst for year for a major research firm, and Dave Zelinksi of Opus has been providing the grain research reports for our group for years. We have a good team.

 

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commoditie, IBTRADE, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.cta.ibtrade.com