Some weeks are harder than others. Last week was one of those weeks. Whether its the difficulties of a trending market or perhaps the pinch of repeatedly bad settlements it is with eager anticipation that I look forward to this new week.
I desperately need to get Mr. Practical Thinker to write a piece or two on here. However, until he does, I will continue to poach his macro-mindedness and translate it into something we can all glean wisdom from.
"You provide the food, I'll provide the perspective..." (Anton Ego, Ratatoille)
This is not the first time I've stolen a line from Ratatoille (shameless plug: rent, borrow or buy this movie because its dialogue is supreme) and I hope broaden my "quotage" in the weeks to come but for now, you're stuck with the genius of Pixar.
All this to say...the rumor-mongers and Mr. PT have done some adjusted my thinking by providing the perspective. If you've been following our execution you might have noticed that one trade we've gotten consistently right is our NOB (Notes Over Bonds) where we have sold the yield spread as it approached 100 basis points. On Friday, the spread between the two dipped to (and closed at) 89 bps and I desperately wanted to get long for the ride back up.
The discussion was poignant and chalk full of salient information, but there were two quotes that I absolutely have to put on here.
"I want to stay in a trade until it is blatantly obvious that I should have it on the other way"
Two weeks ago, the NOB yield spread was trading 98bps and we sold it. If we (US) are really heading towards slightly higher short term rates and a better overall economic picture, one would expect a flattening yield curve. Why would we be in a hurry to tap out of at 90 or for that matter get long hoping to chop the last few basis points off of the giant's spear? Given where we believe the curve's rates are headed, we should have bet the farm at 98, looked to continue selling at 94, staying alert for any type of momentary blip while we continued to sell it until the 3 month low of 82 is taken out or we're so ultimately convinced that it is heading the other direction that we're forced to cover. Why would I give up on the right play? I think the answer lies within the Old Barron's wisdom of quote #2:
"It is so hard to stay long a winning trade, especially in this current trading climate."
That is so true. We're currently an office of grinders. We sit and grind through spread after spread, buying and selling both bids and offers while trying to not internalize to much of a position. Our ability to see the next tree and articulately describe it, inhibits our skill at seeing the actual forest. We are miss the global plays because we have our heads down and are furiously working at pounding out ticks. Though there is great wealth in "the grind," my guts says that the real money is in the being able to identify the trading climate you're headed towards and position yourself appropriately. Our tendency with winners is to close them out as soon as we've reached the maximum we were willing to lose. But trading isn't a bell-shaped curve. The best trades are great even if they retrace a bit and cause you to re-evaluate why you got into the position in the first place. Does the this particular trading strategy still hold water? If yes, you'll have to resist the temptation to close out and risk your chips a bit longer.
Needless to say, I didn't NOB it up. I'm actually flat.
~LH
