Netto's Numbers 2009 Preview: Structuring and Spreading

Netto’s Numbers 2009 Preview: Structuring and Spreading…

In the wake of the bloodiest and most volatile year in decades, much of the trading and investment public is confronted with two prominent ideologies. The first being this record sell off is creating lifetime buying opportunities and those positioned properly will reap huge rewards at purchasing investments at bargain prices. The second being the financial system is materially altered and equity/emerging market/carry trade currency returns will languish as a result of the world heading into a protracted recession/depression with cash being king.

The previous paragraph only addresses what impact 2008 has on future investment perspective. However there exists a larger and greater structural issue from this financial fallout. This being how investors view their investments and the “framework” they are managed under. The framework for how one customizes their portfolio in gauging what return they are seeking, the framework for greater transparency. And inevitably, how will investors adjust their framework in terms of liquidity and the ease of gaining access to their capital.

The days of multiple layers of fees, long lockups, and passive management are in our rear-view mirror. This past year not only leaves us with questions about what is the next best sector, but more importantly, what is the next best structure. Firms that offer products addressing this will reap huge rewards and position themselves to grab the reigns of leadership in the financial services marketplace. I’ll expound more on these products and firms in coming weeks and months along with ideas on how to make a play in this space…

As the Chief Investment Strategist for NetBlack Capital, LLC, (www.netblackcapital.com) we’re advising our clients and managing positions in a way that takes advantage of the opportunities created by what’s discussed in the aforementioned paragraphs. No doubt the precipitous sell off in currencies, commodities, real estate, and equities witnessed in Q3-Q4 has created volatility we will likely never experience again (VIX spiking to 90 intraday). The subsequent market action should create a distinct bifurcation of haves and have nots in 2009…

The haves will be those sectors within the equity, commodity, and currency space that shake the dust off of this wealth retrenchment and began to build traction in 2009. These investment vehicles will continue to decouple during the next round of selling that invariably hits, thereby distinguishing themselves from the group that have been shackled with the overriding issues that plagued the markets in 2008.

The below trade ideas are not all inclusive of the current portfolio I manage, as the market is in a constant state of flux. The point behind the below ideas is to provide insight into the process of what I am doing in an attempt to be profitable for 2009 and continue to deliver a great return per unit-of-risk invested…

Trade Ideas

Short EUR/AUD – (2008 close of 198.84) 2009 downside target 180.35

Like many of the trade ideas I’m putting forth within this 2009 preview, identifying currencies likely to rebound without taking on directional dollar risk should go a long way towards mitigating portfolio variance and still participating in trades that offer a superior risk-adjusted return. While I’m longer term bullish AUD/USD, the precipitous sell off seen in this cross during Q3 and Q4 may reemerge for one final washout and if this is the case, I like my chances of taking on exposure to AUD vis a short EUR/AUD position.

In the short term, this cross has come off of its highs nearly 15 handles and will require some skillful scaling to work back in at a decent price, however, the next rally in EUR/AUD should be sold into as a low-risk short entry. I will be hosting a webinar on January 24 where I will be going over options strategies for these currencies (www.osoktrading.com).

Long 10 year treasury futures (2008 close of ZNH9 125-24) short 30 year treasuries (2008 close of ZBH9 138-015). Downside target of 6175 on NOB Spread

The trend behind the NOB spread has been undeniably bullish and it’s not my style to step in front of this move and try to call a top. However, with the imbedded volatility in this market, the spread becomes a more palatable play as I see this spread trading back down towards the 6035 level during the course of the next six months. Most of the profitable price action in this spread will likely be a byproduct of the 30 year coming back to Earth.

Therefore, instead of trying to be short the 30 years by themselves, offsetting some of that interest rate risk one would have be being long the 10 year futures. As far as playing this in the next couple of weeks to see how deep this short term sell off has taken things and based on the extent of the pullback start scaling in on the short side on the next bounce at key Fibonacci levels (I’ll be conducting a live trade along in NYC on March 4-6 going over these tactics www.osoktrading.com).

Long Gold/Short EUR/GBP/CHF (2008 close of spot gold at 881) IEUR/USD (2008 close at 139.73) Upside Target on Gold is 1,200…

In line with our structure mindset, gold has been particularly robust in the last few weeks fighting off deflationary sentiment and offsetting many of the losses it experienced during the commodity meltdown in Q3-Q4 of ’08. Looking at gold for the first six months of ’09 a move to retest the ’08 highs of 1035 is well within the cards and if it has enough steam to ascend that high, then continuing in that trajectory as people see the world banks take on the fight of deflation with great alacrity, gold is poised to be a huge winner in their attempts to add liquidity the world financial system at any and all costs.

I am not as confident in the ability of the Euro to respond as favorably and wouldn’t be surprised to see it test back near the 130 level at some point in 2009, thereby making a long gold in Euros position an ideal investment approach to capture this idea.

S and P 500/Mini Russell Spread – (2008 close on ESH9 was 900) (2008 close on Russell 2000 TFEH9 was 498)

(see chart at www.osoktrading.com) With the chart showing a price quote of near 3745, a move back to 7,000 as the liquidity concerns begin to thaw in the first half of 2009 and the pressure of redemptions eases, the small cap stocks should fare well. With structure being the key here, taking away systemic risk for 2009 and focusing on the haves and have nots suggests this is one spread able to make headway even if the markets trade in a sideways range as the recent relative out performance of the small caps should continue. Again, much like the move in the NOB Spread and EURAUD, scaling in at these levels and using a pullback to improve your average price is the best way to proceed in order to keep the risk-reward metrics in place.

Short CHFJPY short term, long CHFJPY for year (2008 close of 8479) Upside target of 9250 and downside target of 8000.

While I expect some type of retest to ensue from these levels that creates a short-term bearish setup in this cross, the longer term picture suggests a rally back to the 9250 level on CHFJPY. This sets up an easier out than being long EURJPY, which I suspect will under perform its Swiss brethren…

The coming weeks and months bode well for those who have carved out pockets of the market offering opportunity and the moxy to act. Good luck to everyone in 2009…