Friday, September 29, 2006

Hung, drawn, and quartered

As the quarter mercifully comes to an end, a few things have become obvious. Sometimes, the simplest strategy actually works. The SPX is up nearly 6% including dividends this quarter, a performance record that most hedge funds and prop guys would dearly love to match. Sometimes the macro theme is that there IS no macro theme, other than position squaring and/or distress. It appears that Q3 was just such a period.

One of the great dangers on investing, particularly macro investing, is attempting to see patterns or themes when none actually exists. Macro Man is as guilty of this as anyone else, and has struggled over the last few weeks as a result. There are times to trade tactically, and the past few weeks been one of them. Little surprise, then, that strategic positions have been taken behind the woodshed and caned.

How long will it continue? This, of course, is (literally) the million dollar question. October is a month that typically sees rising volatility and financial accidents, which should provide some tradable opportunities. Then again, the same could be said of September, which turned out to be an absolutely dire month. One source of hope is that it is difficult for non commodity vols to get much lower. The Q3 range in EUR/USD, for example, was the smallest since Q1 1979 (thanks, dodgy central banks!) The ‘opportunity’ in USD/JPY was only modestly better; it was the smallest quarterly range since Q1 1996. A once in a decade crap quarter versus once in a career crap quarter- what a result!

Commodities, obviously, sustained substantially greater volatility. But given the embedded long ‘buy and hold’ positions of many funds and investors, this was clearly the wrong kind of volatility. Macro Man is clearly betting that the weak hands have been shaken out there. The initial crude reaction to the OPEC production was encouraging, and the DIA/OIH spread was looking diamond (ho ho ho.) But the late day sell-off in crude was discouraging both psychologically and p/l wise, taking the spread from a tasty profit to a modest loss in the span of a couple of hours. Energy bears watching to make sure that there isn’t more distressed selling in the pipeline (OK, I’ll stop.) Meanwhile, SPZ6 is nearly and the topside strike of the long strangle. It is time to start hedging some gamma. Macro Man offers 3 SPZ6 @ 1350, 3 more @ 1355, and 3 more @ 1360. Today’s quarter end mark up should give Macro Man a fill in one or two of the gamma orders, and the CNBC crowd a record high in the Dow over which to crow. Come Monday, though, the QTD and MTD get wiped clean and it’s nose to the grindstone time. We’ll strap on the crash helmet and try not to get crushed by falling vols.