A Trump presidency, financially speaking, portents huge change. Maybe.
The bond market thinks it’s a definite maybe – US 10 years Treasuries have sold off the most sharply since 1991! This is no less than the end of the “new normal” being priced in.
The “new, new normal” currently anticipated is this:
- Fiscal policy in
- US stocks in
- US growth in
- Emerging markets out
This opens up significant opportunities for a new set of long/short, relative value trades.Some areas of interest to consider carefully:
- Leverage. Rates to rise on fiscal expansion suggests companies with more leverage face revised growth estimates. But in which direction? Macro growth plus leverage often equals out-performance. But consider the markets where the growth may not come or is patchy – including President-elect Trump’s own commercial real estate sector where maturity schedules coinciding with rate rises may be painful.
- Exports. A stronger dollar plus higher bond yields in the US is not great for emerging markets. Factor in potential tariffs, walls and quotas and it looks worse still. Take Mexico for example. Kansas City Southern railroad fell heavily on the election result given it generates nearly half its revenue from US-Mexico trade. If you believe that is a durable position it may be worth looking at why, since Mexico is the largest buyer of US corn, there has been a negligible impact of (presumably) lower animal feed costs on US companies like Tyson, Pilgrim’s Pride and Sanderson.
- Rotation. If fiscal expansion equals growth and that is why US Treasuries are selling off so dramatically it is worth asking why high dividend stocks are holding up so well. Rising bond yields should be hurting a lot more than they are.
- Energy. There are interesting opportunities between US oil producers and a variety of energy consuming industries. President Trump’s anti-OPEC rhetoric and pro-drilling policies state-side make it very hard to envisage any crude price increase manufactured by OPEC sticking. Traditional automotive, transport, travel (to mention but a few) are all potential beneficiaries.
These ideas, and others, can of course be tested under ArbMaker (see this video for more on how).
The Premium Newsletter has now covered 28 paired trades since inception. A comparative performance chart against the S&P 500 is below.
- We trade every idea and flash alert sent to subscribers in our own real-money Interactive Brokers account
- Pair win rate of 79%; leg win rate of 64%
- Positively skewed distribution of returns
- Low correlation versus the S&P 500
- Absolute returns to date compared to a negative S&P 500
- Max equity drawdown of 2.45% (vs 4.35% for the S&P 500)
- Max CFD drawdown of 6.21%
- Real time alerts for all our trades
It is an attractive profile and one you can follow without obligation for a month.
Of the inquiries we receive about both the software and our research service are several related to trading philosophy. We address this regularly in our newsletter service for it is a large topic. Here’s an excerpt from today’s edition to be dispatched to subscribers at 10h00 GMT.
“Some definitions, particularly for newer clients, behind what we do under the banners of ‘equity long/short’ and ‘relative value’.
While hedge fund strategy definitions tend to be fluid it is reasonable to say that pure equity long/short is about stock picking. The long and short securities are not necessarily related. Frequently the overarching portfolio goal is to provide the flexibility to be positive, negative or neutral in terms of market beta.
Pairs trading is a variant of this but seeks to match-up similar securities. And statistical arbitrage is the snooty relation to pairs trading.
Where the traded instruments come from a broader universe of financial assets than equities alone (CFDs, for example), ‘long/short’ tends to be called relative value trading.
Clearly there is much overlap here. This newsletter aims to be pragmatic and forms its trades across what is in reality a broad church of strategies.
Economic substitutes, near substitutes and securities linked by common factors (usually macroeconomic) interest us the most. Statistical substitutes are typically of least interest.”
‘Pragmatic’ is perhaps the most important word in there. Experience and new academic research sometimes offers up new information that needs to be wheated and chaffed; and in this sense a trading methodology may have the characteristics of an evolving framework!
We have now researched 24 relative value pair ideas for our Premium Newsletter subscribers since 10 June. We trade every idea in our own real-money account.
The returns to a $10,000 portfolio, allocating $1,333 to each of those 24 ideas (equal to 6.7% per single position) are shown below. Subscribers can allocate more or less aggressively as a function of their risk appetite.
Interactive Brokers’ commissions are included and the data is up to close on Friday 29 October 2016.
If you would like to track our research and alerts for 30 days with no obligation to subscribe please click here!
The relevant data is in our latest newsletter – click the graphic for detail (and then sign up to get these automatically). To get the Premium Newsletter the research comes from go here.
Cumulatively the Premium Newsletter has covered 18 trade ideas, all executed in our account. Some data:
- 78% of these pairs have won
- At the individual component level 69% have won
- Average trade duration is 6.4 days for all positions and 6.8 days for closed trades
- Average trade profit is 4.3% (CFDs) and 1.9% (equity margin) for all positions and 5.3% / 2.3% for closed trades
The September highlights are covered in our latest newsletter below (also visible here). If you have not tried the Premium Newsletter it please consider doing so based on the hard data – the first month is on us!
Another poor week for markets. Our latest free newsletter has the gory results (and a suggestion) – to check it out just click here. It also contains details of the great content coming in the Monday 19 September Premium Newsletter. With a no-risk free trial going Premium means there’s a strong chance of strengthening your trading performance.
Directional trading is great…until it isn’t.
Last week was a case in point. Every sector bar Energy was in the red. And even Energy barely squeaked a gain.
Take a look at our latest free newsletter to see how we managed (you might want to subscribe via that link too).
Then receive real time trade ideas like this via our Premium Newsletter:
That was an actual alert sent to subscribers on 6 July 2016. And it closed profitably on 13 July.
Try the Premium Newsletter risk-free now – it is comfortably in profit year to date.
Here’s an extract from a recent issue of our Premium Newsletter service. The letter focuses is on generating actionable trade ideas. But it goes way beyond that to present methodological information and trading context.
Our next issue is released tomorrow at 10h30 GMT. We offer a free trial – try it out!