2012 Predicitions

Everybody is doing it these days, why not throw my hat into the ring. Besides, its always fun to be ridiculously wrong and subsequently mocked.

I'll focus on the areas where we actually trade, work, and enjoy.

Left Hash's Calls for 2012

Fed Funds: 

I think Ben and his gang have sufficiently squashed any hope of a rate hike for all of 2012. Their language at the last FOMC meeting even hinted at further QE, which in my opinion, is an even bigger mess than the one he's trying to solve. The funds rates have been settling around 7-9 bps for a while now and though the market and its participants don't really like this level, I don't foresee it moving more than 4-5 bps {and the only direction is lower}. I am comfortable selling the 1 year 87-93 strangle strip at 39.5 {1.5.12 settlement prices + some modeled data}. Any premium collected with cover you in the rare event that we actually move. Additionally, I believe that our model will create a lot more opportunities to trade if we do head lower and spreads start expanding. I firmly believe, a settle outside of that strangle has about a 15 delta. 

ED: 

I don't believe LIBOR will stay here for the year. I believe that the European banking/sovereign debt crisis has 'mostly' blown over and we'll begin to see a return to cheaper money. If Ben and company do initiate some type of QE3, I don't think its out of the realm of possibilities to see the 97 line come back into play across the whites. However, I would wager that for the most part, you'll see LIBOR average around 40-45 bps for the year with an occasional dip down into the 50-55 range. I would buy put spreads to take advantage of extremely rich put skew and to hedge some of the event exposure {9925-9900 or similar}Buying calls on the grind higher also would be prudent, as they somehow 'decay' on an uptick in the futures. It will be interesting to see if the Fed Funds vs Eurodollar correlation comes back into line as 2013 {and raising rates} looms. 

SPX: 

I don't really trade equity futures except to speculate. My one year target is 1405. The range will be 1080-1465. Drifting lower at the end of Q1 will bring about some type of QE3 and rally the equities into the 1400 range. A long grind for the summer months, followed by a slight pull back into year's end for a gorgeous print of 1405. Buy ES puts when the VIX is below 20, sell everything you can if it spikes above 40. 

Yield Curve: 

The Tens will print 1.50% and the Bond will touch 2.40% and because neither is good for anyone but giant banks, they will snap back and settle at 2.25% and 3.50%. The locals still have the front skews to the calls {implying that in the near term, the traders feel we'll trend higher and therefor pay a premium for that protection versus the puts} However, if you look 6 months out that trend levels out and 9 months out, it has actually shifted towards the puts {implying lower price and higher yields}. I wouldn't be afraid to buy puts and sell calls up to 3 months out. 

Gold: 

 Currently $1600 

2012's high: $1872 

2012's low: $1344 

 Settle: $1440 

Crude: 

Currently $101 

2012's high: $114 

 2012's low: $82 

Settle: $88 

 EuroCurrency: 

Currently $1.2725 

2012's high: $1.3630 

2012's low: $1.2200 

Settle: $1.3150 ______________________________________________________________________ 

Never to be out done, my colleague, Mr. PrD {Philosophical Rail Defender} has offered a quick glimpse at what he believes will be our 2012. 

Mr. PrD's Calls for 2012 

Overall, I think 2012 will have a periods of reflationary hopes, dashed by deflationary fears, much like 2011. Much will be dependent upon further increases in central bank balance sheets. However, I predict that the half-life of any such increases will be increasingly shorter and shorter. My advice for the year is not marry any one idea, keep an open mind (don't fall into the trap of extreme sentiment accompanied with herd psychology), and understand that we live in exponential times. 

That being said, the predictions are: 
S&P 
High:1320-1350 
 Low: 950-980 

Oil 
High:110-112 
Low: 65-68 

Gold 
High:1850 
Low:1400 

30 Year yields 
High: 3.75 
Low: 2.40 

Euro currency 
High: 1.3400 
Low: 1.1800 

Hope we all make a ton of money this year. 

~LH

Reviewing a week

It took me awhile to figure out why manufactures insisted on putting cameras on cell phones. Finally, it has come to me. They did it so that we can take pictures of white boards and be able to disseminate the information at a later date and time.

So here's a whiteboard shot of our calls for the week we just exited:

 The Red column is our agreed upon guess for the week's low and the Blue was our week's high. The small black numbers are the actual prices.

For those of you scoring at home, I created the little matrix below to help with understanding my chicken scratch.

Not a bad week, and though it is completely contrary to my nature, we would have fared pretty well as premium sellers {strangles or outrights}.

From an email with Mr. Practical Thinker:

"... I'm pretty impressed with our calls. I think it's safe to say we accidentally nailed the dual mindset of last week. There was the 'all-clear' knee jerk reaction which got us within $1 of the high of crude, 1 penny of the high in ECM, etc. AND then the lows which came off the 'drip, drip, drip' reality of second thoughts. Which reality will win mind share in the week ahead? Not a very positive lead for the former but the market sure is comprised of the optimistic sort. We shall see...."

He's right, the market is optimistic. They {the ominous marketeers}seem to have grown accustomed to shaking off the brutal headlines and forging forward. It will be interesting to see what happens IF the market ever has real buyer's remorse on the whole thing. You wont see a 1000 point drop in a few moments, but I would say that you'd see a 1500 point drop over 8-10 trading sessions! Like I have said previously, I would love to be long gamma!

~LH

Play card: 03.09.10

What seems like a good play right now? Interestingly we've been a bit scattered on our picks, and though we've avoided a lot of trouble, it hasn't been easy.

If you'll recall:

• We were stopped out of our SPX play and covered all short deltas. We haven't bought any puts back in, but it is on the radar.
• We're long gold. Greed may have gotten the better of us as we got near the 1140 handle. In retrospect, it would have been prudent to place a stop around 1135. We didn't, and are still long. However, I've moved the stop up to 15 ticks 1110.{Stopped out 1110.50 on 03.10.10 we were off by 5 ticks!}
• Our U/U was brutally difficult to trade. After buying 24s and selling 27s a couple of time we were able to get the unit costs down to roughly 24.5 before getting flat at 28.
• The 'end-of-the-world' trade with FFJ vs EDH hasn't really paid off, though it is getting back to our levels and we would maintain a hold.

If you want to check on any of these click here.

Where does this quiet economic week send us? There are a few auctions in the yield curve however, the only piece of real data in my opinion is the retail sales number expected on Friday. Going forward, here where I'm focused.

• We're looking for a drift lower in the yield curve (though today's 3 year notes did fairly well at auction, drawing 1.437% with ~15% allotted at the high). If the long end (30 year) can below 115.28 we will be looking to sell 25 delta put spreads. Perhaps the 109-112 or the 110-113. 
• As the SPX continues to grind higher I can't help to get more and more bearish. However, after being stomped out of my last position I need to find a better way to express my opinions. Two plays come to mind: Short ratio called spreads and long cheap combos (risk reversals) 
• The J1175c-1200c call spread on a 2x3 ratio. You'll collect $7.35 (8.85 and 3.45 respectively) to sell the 1175 x2 and buy the 1200 x3. This provides you will a long premium play and a fat tail for protection.
• J1090p--J1190p is currently trading 3.60 to the put. That feels really cheap. I would look to be a buyer around $3.00
• The NOB spread is currently .98 bps. We sold the TY at 117.035 and bought the US at 116.17 on a 10:6.6 ratio {We reduced our exposure by 50% after netting 225 ticks, we plan on taking the balance off around 94 bps 3.10.10 UPDATED2: We traded completely out of this position buying 116.195 and selling 116.03}
• In the Eurodollar, I like being long high-octane put spreads. E0J 78-82 put 1x2 offers me that opportunity. It is priced off of the EDM11 (currently 9844.5). It costs 3.5 ticks and has about 6 weeks left. It break-even at 9821.5 and begins to lose money after 9784. This gives me 37.5 ticks to collect a profit.

 A few closing point lifted from my cohort in trading Mr. Practical Thinker:

1. Australian Unemployment is released tomorrow evening at 6:30 CST. This may finally be the catalyst that brings the AUD above .9225-.9250 and may provide an immediate term trade to get short looking for a retracement back to .8700

2. The chart here is of the SPX on a one week basis. Though it may be a bit difficult to read, it would appear to us that we have now ground through the free-fall area of October 2008. If we seriously get through 1148 which was the high set back in January, I would expect us to get up to 1175. From there, the next stop is near 1200-1225 (thus the 2x3). Failing to crack that 1148 level would potentially send us back down towards 1100 (thus the combos).

~LH

Updating the MGC (Monday Great Calls)

Here's the update going into the PPI data tomorrow and Friday's CPI.

1. Closed out the UL vs TY spread at 120.21 and 117.205. This trade netted 1007 ticks ($31.468.75). In its place we've intiated a very basic NOB. Re-initiating, with the US 63 @ 116.27 and sold the TY -100 @ 117.205
2. Buy premium, the VIX is too low. (See SPU section #6)
3. Hold on Euro FX positions
4. Look to sell the AUD over .9050
5. Currently Long this U vs U spread and looking to sell 31s
6. Purchase the 1095 SPX straddle for 12.40. Look to hedge below 1085 and above 1115
7. Neutral. Flat CL after getting to the expected target.

 My gut says that the PPI & CPI data (Bloomberg Calendar) will be a complete duds and the overall market will slowly drift towards unchanged for the week.

LH