Archive for the ‘Time Triads’ category

Alrroya - Resurrecting the dollar

If you are surprised about what happened to the dollar, there might be more to come.

If there was an indicator that could measure change of opinion like change of colour, human beings would have replaced chameleons as the top colour changing creatures. Unfortunately this meter is not very popular. Who would want to know how unstable, mercurial he/she is when it comes to asset classes and their intermediate direction?

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The perfect hedge

Hedging a portfolio is an illusion, because a near perfect hedge delivers more than a risk free return consistently.

Aristotle’s Organon is not to tell readers what is true, but rather to give approaches for how to investigate the truth and how to make sense of the world. The primary tool in Aristotle’s tool kit is the syllogism, a three step argument, such as “All woman are mortal; Cleopatra is a woman; therefore Cleopatra is mortal”.  Aristotle was also the first one to use the term Hedge, explaining a financial innovation used by Thales a philosopher from Miletus and his transaction of Olives.

The first modern organized futures exchange began in 1710 at the Dojima Rice Exchange in Osaka, Japan. John C. Hull, Professor of Derivatives and Risk Management detailed the hedge process in his now famous book on Options, Futures and Other Derivatives.
In the chapter on Hedging with futures he says “Many of the participants in the futures markets are hedgers. Their aim is to use futures markets to reduce a particular risk that they face. Study of hedging using futures contracts is a study of the ways in which hedges can be constructed so that they perform as close to perfect as possible”.

Hull takes two kinds of cases, hedge and forget i.e. there is no readjustment of a hedge position once it is taken. The aim of hedge is to neutralize the risk as much as possible.  Now there is a problem here. The idea of hedge failed for LTCM (Long Term Capital Management), failed in our understanding and calculation of risk. The reason we don’t understand risk may not be the only reason we can’t hedge it. We may also not know how to hedge in the first place.  The near perfect hedge which Hull illustrates in his book should not diverge more than the risk free rate of return. If despite following the hedge steps, the strategy can deliver more than the risk free rate of return, the hedge as John taught us or as the world understands is incorrect.

Inefficiency in prices is when it diverts far from notional, theoretical value. While efficiency is when markets finds it value. Performance cycles is about illustrating how markets move from efficiency to inefficiency. The more visible performance cycles get, the more challenged the idea will be. How can you show the market movement from efficiency to inefficiency?

Market technicians have done it for decades. What Orpheus is doing is making the exercise mathematical. We have illustrated cross market cases till now on metals, energy, agro, bonds, global assets, global indices, US sectors, US stocks, CEE indices, Indian stocks and sectors, Romanian markets etc.

Today we are carrying a special case, which conventionally would be considered a near perfect hedge. A perfect hedge has no business of making money and it is tough to build a strategy of making profit from such a situation. We have carried similar cases when we carried pairs between Gold-Silver, Oil-Natural Gas, S&P500-Dow30, but they are still not as perfect as buying spot and selling the future on the same asset. This strategy is executed by an investor who wants to insulate a portfolio from unwarranted loss. At least this is what we have read from John-Hull and all the international finance books. Conventional knowledge gets renewed with time. Time changes everything.

We have illustrated the case where we have bought Nifty BEES and sold Nifty futures (Indian Index and its future). Since we cannot short NIFTY bees we have taken only cases where we can Short Nifty Futures. Since Apr 2008 we have illustrated 4 times when one could have shorted Nifty futures and bought Nifty bees making on average 6% and annualized 88% with an average holding period of 44 days. We have illustrated all the cases below.

Alpha is infinite just like inefficiency and there is nothing called a hedge. You were never and can never be hedged. The only thing you can do is understand when markets are moving from low inefficiency to extreme inefficiency and when markets for that infinitesimally small moment pass through efficiency. Black and Scholes Nobel prize winning model assumes Geometric Brownian motion, which is also known as exponential Brownian motion could not have existed without assuming exponential nature in prices. This brings us back to the Aristotle’s logic.

If markets are inefficient, hedge is a part of market, so hedge should be inefficient.
If nature is exponential, TIME creates nature, so TIME should be exponential
If truth is exponential, TIME is exponential, then TIME must be the truth.

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The dollar link (Archive)

This is what we wrote on 30 Aug 2008. The EURUSD was at 1.48.

“Though immediate targets for Dollar lie near 1.45 levels (EURO-USD), we are anticipating a multi month of strengthening back to January 2005 levels sub 1.4. This means that our case of commodity weakness and multi month of global equity reprieve starting October 2008 remains valid.”

Archive link

Rediff link

The influence of Dollar on various assets is very high. How it influences us this time around, however remains to be seen.

Understanding Dollar is as important as understanding commodity, equity and bond cycles. The currency is a global benchmark and it is this Dollar link that completes the economic cycle as assets interact with each other. Unfortunately we do not pay much attention to this link. The geographical bias, lack of inter-market knowledge, single asset focus and cycle blindness restrains our understanding of the currency.

The Dollar is as important as Gold. The two assets mirror each other and run contrary. If Gold strengthens, Dollar weakens and vice versa. It is the classic interaction between the tangible and intangible. Gold and commodities being the hard or tangible assets and the Dollar being the intangible or paper asset. Cash is an important aspect of the society and even if we are moving ahead to a more inflationary time, understanding cash cycles was never more important. Rather there have been times Gold was given less importance than the Dollar. In 1928, D H Robertson said, “The value of the yellow metal, originally chosen as money because it tickled the fancy of savages, is clearly a chancy and irrelevant thing on which to base the value of our money and the stability of our industrial system”. The quote more relevant then might seem so out of place today. But, the choice between Gold and Dollar is as cyclical as ever.

The American experience shows how debates about the nature of money, the control of the amount of money in circulation and how the relationship between Gold, Silver and Paper had moved to the central of political stage in the nineteenth century. This was a new phenomenon in the history of money caused by the extensive development of paper money and the constantly changing economic and political conditions of the modern world. In the book, ‘Money, A History’, Catherine Eagleton and Jonathon Williams explain how on one side it was the economic disasters linked to uncontrolled issue of paper money and on the other side a metal that faced vagaries of increased supply or a chanced discovery.

Though we have managed some of the old problems of the economic society, we are still moving in and out of an implicit Gold standard. And in some ways the Dollar is more important than Gold today. Important in terms the exposure we have to Dollar compared to Gold. The industrialisation of the global economy and consumerism of commodities are at a historical high. So, we have moved from the classical Dollar and Gold equation to Dollar and consumption as a whole. Dollar is the global cash proxy today. Even if we deny it, a Dollar strengthening or weakening of a few months can impose reversal in trends of global assets. Econohistory is replete with incidents of cycles in the debasement of currency and currency crisis. There are cycles from 18 years, 54 years, 108 years and 300 years. These patterns have been dominant back through time to the era before Christ.

Dollar weakness started at the base of the commodity cycle in 2000. While commodities soared, Dollar lost its value. In ‘The gold cycle’, we talked about a primary pause in commodity cycle. And in October 2007 (The Rupee Correlation) we said, “The big surprise always happens when people least expect it. We do not see the Rupee appreciating beyond 38, it is a turning point for us. And we are not far from a Dollar surprise as it turns around for a multi-month of strengthening.” This is what happened to the Dollar. Starting March 2008, the Dollar stopped weakening and is nearing back to January 2008 levels. About the Indian rupee, the Indian currency turned from a low at 39 in November 2007 and is back to 44, the 2006 levels.

Though immediate targets for Dollar lie near 1.45 levels (EURO-USD), we are anticipating a multi month of strengthening back to January 2005 levels sub 1.4. This means that our case of commodity weakness and multi month of global equity reprieve starting October 2008 remains valid. There are more reasons why we think that the Dollar strengthening is here for more than a few weeks. There have been prior occasions of marginal Dollar strengthening. But, there are only a few times that other currency pairs and assets also come in focus. The current bout of Dollar strengthening also affected the British Pound, which fell to a two year low. And, both Oil and Gold also witnessed sharp drawdown. This is a classic confluence and comes at a time when the world is waiting for a recession, a financial crisis, Oil at $200 and higher Gold.

Even sentiment against the dollar is at extreme levels. The negativity has also entered mass psychology and magazine covers still question whether the dollar comeback is for real? Investment strategist also mentioned about commodity and oil markets used as hedge against falling dollar. These linkages also break if dollar strengthens and oil drops. It’s only after the trend strengthens that generally trend news starts appearing, like now with American GDP numbers beating analyst expectations at 3.3%. In the process of crying negativity on dollar, the masses forgot that falling currency value also leads to flourishing exports.

We are in unprecedented times, which is no way similar to the discovery of Gold near Sacramento in 1848 when within four years more than 1 per cent of the population of the United States had moved to California. Monetary economics has moved from the central banker, to the state, to the markets ruled by the mob. This time it is the global Gold rush. How Dollar influences us this time around, however remains to be seen.

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Why the K Cycle Fails alternately?

The following was a question asked by a fellow market technician.

Is India starting a Kondratieff Winter ?

INDIA’S KONDRATIEFF WAVE CYCLE : 25 FEB 2010 - I have posted my most detailed analysis of where I think India stands on the Kondratieff wave cycle. This article will enrich you with the basics of this most important 70 year financial cycle that affects our economy and markets very closely and works around the 5-3 Elliott Wave Structure. I also discuss what will now be my preferred wave count for the price structure for 2008-2013. Its probably the first cyclic analysis of the Kondratieff wave done on the Indian economy and should get you thinking. Views and comments are welcome.

This was the answer given.

The long cycle debate was addressed by Tony Plummer in his book. Where he explained why only alternate K cycles work. Even from Time Triads structures of 3-10-30-90 year cycles one comes to the same conclusion that alternate K cycles will work as K cycles is near 60 years. Because of it’s length sometime it fits in the Time Triads and sometime it conflicts (Explained in illustration above). This is the reason for alternate potency. This was also the reason we carried the 2010 India outlook comparing Sensex to 1990′s bear market on DOW.

A net positive 2010 is a low probability scenario at this stage. India is in a multiyear trading range for us, something like the 1990’s US bear market which lasted for 4 years. Till the time we get clarity on the absolute performance, we will stick to the relative performance, get out of today’s top performers and get into today’s top underperformers.

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Member's post - Nifty Vix

Attached is the chart of India Vix which clearly shows that rise in volatility from the bottom around 20 levels till 32 is clearly a five wave advanced. And recent drop in Volatility is the expanded flat a-b-c, which is wave 2 or wave B, which is the current state of the market showing narrow trading range and dull price movement. But the principle of volatility says contraction in volatility is generally followed by the expansion in volatility. Same way once the wave B (or Wave 2) of Vix completes then wave C (or wave 3) should resume which is likely to target 43.

Vishvesh


The sugar decay

Shorting sugar really or metaphorically is possible and healthy.

My wife kept us off excess sugar. We stopped ‘juicing’ (drinking sweetened beverages) a few years back, stopped putting loads of sugar tea spoons in our regular cup of coffee or tea and learnt to share a chocolate bar in a week. Can you believe that? Well I could not till I leashed my urge for sweet things. Coming from Delhi, it was harder for me, it still is, I am trying. She also taught me the 80-20 principle of food. You have to control 80% of time what you eat and 20% of the time is when one can indulge with food. I have a confession. I indulged last night and almost elbowed an 8 year old digging into a large bowl of ice-cream.

The sugar urge economics

It’s so tough to control the sugar urge. There are multibillion dollar businesses built around this urge. No wonder the world calls it a sugar crisis and forecasts further upside. Raw sugar traded on New York’s Intercontinental Exchange surged nearing a 30 year high. Consumption habits have changed, the sugar crisis is total from Philippines, India, Pakistan to Brazil and Mexico. There is violence, protest and panic about tomorrow being the day of no sugar.
Government of India has been asked to urgently import 3-5 million tonnes of sugar. This also has been pegged as the toughest years for the beverage industry. Hedge funds could not have been far behind.  There is simply not enough sugar.  The cry is always at an extreme.

The performance cycle approach

This is what we said on 27 Aug 2007 on Sugar, “The soft has been falling internationally from the last seven quarters, but the negative news about sugar barons miseries, output glut only mark the sentiment landscape from the last two quarters, while prices internationally have been stagnating near $10. Negative news could not push prices lower. We continue to see this as a low risk entry point for sugar too along with coffee and cotton, all of which should see better prices ahead.”

We at Orpheus have a habit of looking at top losers and top gainers carefully, as real value occasionally lies with top losers while top winners are great reduce or short opportunities. Wheat was the top loser among the agro complex registering 27% losses in the last 12 months. Sugar on the other hand was the top gainer for the respective period. Long wheat, short sugar might look like a workable strategy. We will review long wheat – short sugar for entry later.

It is not just with sugar, we humans have an uncanny ability to cry at extremes. We said on 5 Feb 2007, “Killing the Cotton farmer – While Dow Jones Cotton Index is finishing a multi year and a multi decade bottom. We anticipate supports coming in on the intermediate time frame.” Nov 2008 cotton bottomed and has been rising since then. Cotton closed the year with the second largest gain in the agro complex at 34%.

Barring Coffee, which is still below 2007 prices, cocoa and sugar pushed up from Oct 2008 to Jan highs, up 140% and 90% respectively. We also mentioned about how equity play works contrary to cocoa and sugar. As equity markets came under stress the two softs took off. Wheat looks to be bottoming and we continue to look at entry levels on the grain.

How irrational?

There will always be inefficiency and irrationality. But can’t a rational mind ask, are we not always late in identifying the impending demand-supply gaps? How much does product feel, product knowledge, economics valuable in predictive knowledge?  Extrapolation is easy. But like Jeff Watson, blogger at Daily Speculations says, “There is nothing in the USDA (United States Department of Agriculture) 2010 crop report that will affect prices on the upside unless demand increases, country movement slows, or some type of crop disease infects the crop”. What one can add to this argument is “Show me three published reports talking about the sugar bull from 2008 lows?” How few were the bulls then and how few are the bears now.

Conclusion (Short Sugar, Long Corn)

Absolutely speaking the Sugar bull may have more to go before it surprises the staunchest of bulls. However, on relative performance cycles sugar is topping as an agro complex performer soon. This means relatively one can still profit by doing short sugar - long corn, short sugar – long wheat pairs.  The ongoing long sugar – short corn pair should reverse in polarity soon. Sugar like everything else is connected with time and as time decays, the sugar decay will follow.

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Waves.oil - Energy complex gets ready for a C leg down

To access member’s area or Orpheus estore click here.

WAVES.OIL is a perspective product published once a week. The report covers BRENT, WTM, XLE (Energy SPDR), top energy stocks, Natural Gas and related FUTURES. The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools and sentiment indicators. REUTERS RICS: BRT-, WTM-, .XLE , CVX.N, XOM.N, IPNG, NG-P-CAL

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Interest Rates from 3000 B.C.

Source: Foundation of Cycles

Do you see the TIME TRIADS Head and Shoulder in Interest Rates?

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Risk and Innovation

At the recent 15 year anniversary of the SIBIU Futures Exchange, Romania, I met Professor Gabriela Anghelache. She heads the Securities Market Commission for Romania and is a highly regarded woman for her efforts to develop the capital markets. Being well connected with capital market participants, she also queried me on my capital market vision and told me to ponder till we met the next time. On one side I was elated that my opinion mattered to her and on the other side it set me thinking. Capital market vision was more important than forecasting, trading, economic cycles, as it tells us where we want our markets (an embodiment of society) to head tomorrow.

The question took me back to the Bombay Stock Exchange training institute. My derivatives training started with the question, what is more risky, a future or the spot. Being the basic program, I had to spend more than a few minutes explaining how a 20% move on derivatives could wipe the trader out. The thoughts took me back to my early days with Nifty Futures. Many incidents flashed in front of me. Early 2000, I asked a senior colleague, Rajiv Handa from Indiabulls (brokerage house) early basement days. “Rajiv when a trader can make enough in the stock market, why go through all the trouble of creating a business?” His answer still reverberates in my mind. While I was conjuring up two comparisons, on one side a large industry structure generating 10% return on investment and on the other side 10% gains in a day on Nifty Futures, he said “Mukul the business has more staying power than the stock market gains”. The idea is that somewhere investing has more staying power than reckless speculation. You got to learn how to stay in the trade.

Then there was my MTA mentor, Rona Shroder, Asset Manager, Zurich. Rona starting 2007 consistently mentioned her worry regarding the market. She went in cash, returned the funds to her clients and mentioned the strong need for deleveraging of portfolios. “The dangers of leverage” she pointed out are huge. Then there was this survey I took in Martin Pring’s book on investment psychology explained. The survey was to find out the risk profile; speculative or risk averse. The survey went out to explain that based on the risk profile what instruments I should be trading. Then my thoughts moved to “Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving” program conducted by Behavioral Finance gurus Richard Thaler and Shlomo Benartzi. Saving rate of India, China statistics started travelling behind my head.

What market vision should thinkers give back to the society? Only a few ask the question and a few attempt answering it? We have lost many of our modern thinkers to Twitter. They are busy tweeting than visioning. Where are the guys who can teach the society about the difference between risk and return? A trader should ask himself if he has read one investment psychology book? Have I ever taken a risk profiling survey? Do I know where I belong? Majority of capital market trainings are about return training, where is the risk training? Society had moved so high on return trajectory, crisis forced us to reflect. Before you blame the fund manager understand your risk profile. Are you better investing passively? Or are you the trader profile?

According to a latest article in the Wall Street Journal, “Will we ever Again Trust Wall Street? For many investors, the market’s turbulence hasn’t just destroyed wealth. It has shattered their faith in the financial system itself”. Now that Greek woes revive seven-year old Goldman swap story, the same question pops up again, the question of how well we understand risk? Well psychologists could help understand the human mind. They have created a subject of behavioral finance now. But emerging markets give less importance to a psychologist. If we have not read investment psychology, visiting a psychologist is a long shot.

Well it’s all not general, there are societies who understand risk more than others and there are companies who thrive in risky times. Understanding risk also creates opportunities. Now we have MAVINS taking over BRICS, we have Fundamental Indexing and we have ETF Securities. Financial innovations are another aspect of capital market vision after deleveraging and risk profiling. We have talked about the fundamental indexing on prior occasions. Fundamentally based indexes are indices in which stocks are weighted by a fundamental factor or composite of fundamental factors. The fundamental factors can be book value, revenue, cash flow, profits, price/sales ratio and even the number of employees. The fundamental index approach stands in direct contrast to capitalization weighted indices.

Another four year old financial innovations are the ETF securities. This company started in 2006 offers investing opportunities to purchase commodities, currencies as non leveraged spot instruments. This is high convenience for an investor who could neither own a commodity physically nor take too much risk buying the commodity derivative. With a few dollars one could buy a unit of crude oil or Natural gas. The company offers more than 140 instruments and has $16 billion assets under manangement. This all growth happened in four years and despite many awards, the innovation does not stop here. Alpha pair trading strategies can now be done without leverage or with contained leverage. Long Sugar - Short Corn, Long Gold – Short Platinum, Long Natural Gas – Short Oil, all without margin or contained margin.

Despite the fact that the crisis has come from the developed economies and the respective countries have somewhere failed in containing and understanding risk, there is an attempt to bring new financial innovations to fill the gap. There is also an attempt to teach investors about risk and risk profiling. The ongoing crisis should also be used by emerging markets to embrace, create and adapt such ideas to local needs.

On a specific note, India still lacks sectoral focus. Bombay Stock exchange should dust up its sectoral portfolio of indices and launch financial innovations similar to ETFsecurities, allowing investors to look beyond stocks and into sectoral broad based allocations. This could not only boost volumes on Dalal Street, but energize the overall market. Emerging markets like Romania should take cues from India. The broker – exchange community is well knit in India. There is more dialogue, more training, and more hand holding. This was one key reason markets moved from a few thousand contracts to nearly 3 million contracts today. Arbitrage happened not just in derivatives, it also happened in spot markets.  Arbitrageurs have to be nurtured, passive instruments should be given due weightage and a balance has to be found between over regulation and under regulation. Only then maybe we can have some idea about where we want to go tomorrow.

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Time decay in Fed funds rate change

Interest rates are supposed to be a central banker domain. To suggest that time proportion and pattern acts here too is no short of economic blasphemy. We took the data for all Fed Funds rate changes since 1994, tabulated them and sorted the changes in time between the rate cuts. We got the classic time decay function yet again. Is this coincidence or reality? Time proportionality causes proportional economic cyclicality and consequently proportionality in the actions of the Fed.

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