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According to Bloomberg the worlds top tech stocks have gained $1.7T in value in the beginning of the year…….


Size Does Matter

Whilst wading through all the associated bibs and bobs that accumulate when you are away, this article popped into my feed this morning. For those too lazy to read it and I wouldn’t blame you it is a mild hysteria piece by Fairfax on the collapse of China’s state owned energy producers – PetroChina. Apparently, the collapse in value is so large (about $1.04T) that you could buy every listed company in Italy should you so  desire and according to the chart below the wipeout is impressive when compared to standard units of value such as the net worth of the worlds 12 wealthiest  people.

Petrochina 2

Much of the blame for the collapse is placed upon China’s drive to become clean and green using alternative energy technologies (something our politicians are too stupid to think about), the collapse in the price of oil and the coming rise of the electric car. However, to my way of thinking there are two things missing in the story. The first is that the bulk of the destruction in shareholder wealth occurred in the first month of trading – PetroChina has been a dog since it listed. So this is the death of a thousand cuts not a decapitation. This is that same old story of investors get sold a pup , investors hang on forever, stock dies a slow death and there is bitching and moaning. This is nothing new, the Western archetype for this was undoubtedly Enron. I am quite certain there are brokers telling local investors to hang that it will get better because good stocks always get better.

This slow demise can be seen in the chart below.


The second aspect that is neglected in the story is that this is China where everything is on a size and scale that often defies belief. In thinking about writing this piece I was actually wondering whether the scale of things in China actually defeats Western thinking – we are thinking at a different speed than is needed for dealing with China. Everything about China is massive as you would expect of an emerging superpower that is backed by an estimated 1.3B people. This point was also brought home to me when I caught up with a friend over the weekend and was discussing how Chinese tourists seem to have a love for shopping in London (particularity Burburry) and he said he wasn’t quite certain what to make of it. My response was simple – China is 17% of the worlds population so we had all better get used to it. And that includes journalists who need a new frame of reference when thinking about scale.

Once Upon A Time

Sometimes I feel sorry for traders/investors who need to construct a narrative as part of their investment process. Whilst you are cocooned inside your own delusional story you would never know whether your story is the right one and is the one the market has chosen. As an example consider the year to date moves of various indices from around the world.

Index Performance YTD

As might be expected there are a range of performances but what is interesting to me is that if you look at the US markets in isolation you see something interesting. The Russell 3000 and S&P500 are doing better than the benchmark index. This positive performance seems quite obvious when you drop in the performance of the VIX – the so called fear index.

Index Performance_VIX

The VIX has had a somewhat precipitous drop since the beginning of the year. As such the narrative could go volatility (uncertainty) has leaked out of the system therefore investors feel more comfortable with equities. Sounds reasonable, however, there is always someone who will spoil a good story. Consider the chart below  is of the ETF GLD and the Dow since the US election in November. GLD tracks the spot price of gold so it serves as a useful proxy.

Dow_GLD Since Election

Throughout November the gap in performance between the Dow and GLD widened – this would fit our existing narrative of the market being more settled therefore there is no need to set in place a hedge via gold. However , this story starts to change as Trumps profound lack of suitability as President  becomes obvious and the performance gap narrows. If we shrink the time frame down to YTD only then the Trump idiot premium widens.


All of a sudden we have a wrinkle in our narrative. The original narrative was uncertainty has left the system, investors are happy and buying equities but hang on the performance of gold which is traditionally seen as a hedge instrument is improving. WTF is going on?

This is the issue with narratives they are simply stories designed to make us feel better about our decisions as such they are equal parts post-dictive error, self justification  and comfort food. Hence, they are largely meaningless.


Well Here It Comes

In line with the notion of January predicts the direction if the not the quanta of the year ahead here is a rundown of the January gains or losses for various markets. Make of it what you will….if anything…..


What is more interesting to me is what I perceive to be a dislocation between perception and reality. The market commentary I have had the misfortune to hear lately has spoken about the sudden rise in volatility in the market. The basis for this judgement has been a bit of a jump in the VIX over the last trading period. Of course completely ignoring the fact that the VIX has been meandering around at historically low levels for the past three months. It is worth noting what the VIX measures before assigning any weight to it.

According to CBOE’s marketing blurb –

The CBOE Volatility Index® (VIX® Index) is a leading measure of market expectations of near-term volatility conveyed by S&P 500 Index (SPX) option prices. With the introduction of the VIX® Index in 1993, followed by the launch of trading of VIX futures at CBOE Futures Exchange (CFE) in 2004 and VIX options at CBOE in 2006, there has been a growing acceptance of trading VIX and VIX-linked products as risk management tools.

VIX options and futures enable investors to trade volatility independent of the direction or the level of stock prices. Whether an investor’s outlook on the market is bullish, bearish or somewhere in between — VIX options and futures can provide the ability to diversify a portfolio or hedge, mitigate or capitalize on broad market volatility.

That is the VIX is a measure of other peoples perception, granted this is arrived at by looking at changes in volatility expectations implicit within options pricing. So the VIX really doesn’t measure market expectations and hence one of the major criticisms I have of it. It is simpler to default to actually looking at what the current historical volatility of an instrument is.


This is the Dow with a simple 15 day historical volatility plotted and as you can see since July of last year the peaks in volatility have been dropping and the post electio bump has been a time of very stable volatility.

Index Correlations

For my own curiosity I decided to have a quick look at the price correlations of a handful of world indices. Those correlations that are below 0.5 I have coloured red.

Index Correlations

As expected most share a positive correlation with the only true diversification coming from the Shanghai Composite. This does pose a conundrum for index traders since it causes difficulties with diversification in the traditional sense. However,these are price correlations not return correlations. If I get some time I will redo this as returns table and see what the difference is.

The Year That Was.

It is that time of the year when everyone involved in this business looks in the rear vision mirror and attempts to make sense of what happened.  And of course to everyone involved everything is so obvious and predictable. What is worse is that they take this data and attempt to make some form of prediction about the year ahead. Hindsight is all we have and whilst it is the perfect investment tool; we are denied its luxury in the real world. Even looking at a league table of performance of various instruments is somewhat meaningless. However, since they are all the rage below is one such table I quickly knocked up for a few common instruments.

League Table

Part of the problem is that these tables are looked at from the perspective of the buy and hold investor. It is assumed that you simply bought one of everything last year and held onto it and your performance either good or bad is a function of this. However, this is not how trading works. For example the AUD/USD began the year with a 15% gain, which is then gave back and settled into a meandering decline resulting in its ordinary year on year performance. Likewise all the gain in heating oil came in the first half of the year. Conversely, cocoa which turned in a shocker traded in a range for most of the year and then collapsed in October.

Whilst it is twee to say so in trading only the journey counts not the destination, in fact I would go a little bit further and say that even the starting point is irrelevant. As such tables such as the one above whilst vaguely interesting are essentially irrelevant to us.

You Cant Keep A Good Bubble Down.

Jeremy He started pouring his savings into commodities last month after losing money in China’s stock rout and deciding that returns from his WMPs were too low. The 25-year-old employee at a multinational trade company in Shanghai set up a joint account with his friend to trade futures on rebar, coal and cotton, making as much as 150 percent before prices started falling at the end of last month.

“I’m pretty bored at work, so I trade commodities futures for some excitement,’’ said He, whose account swelled to as much as 700,000 yuan ($107,443) before sliding back to 400,000 yuan at the end of April. “Because I’m making investments with my friend, we can comfort each other when we are making a loss.’’

Nobody knows for sure how much of the trading surge has been driven by individuals, but the evidence suggests retail punters are playing a big role. More than 40 percent of the volume in rebar futures last month came during the night session, when it’s more convenient for people with day jobs to trade. The average holding period for contracts including rebar and iron ore was less than 3 hours in April, according to data compiled by Bloomberg.

Individuals with a bank account and official identity card can open a futures trading account at a brokerage within 40 minutes, with no initial balance required, Morgan Stanley said in a report on May 4.

More here – Bloomberg

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