Short Silver

Commodity de-levering theme. Silver appears especially vulnerable.
At this point my portfolio appears increasingly vulnerable to a large drop in the dollar, so will be looking at some hedging options later this afternoon.

Nat Gas cover

Although I still believe in the fundamentals driving this trade, I covered my long nat-gas long at 10.135, after the market moved higher by nearly .40 in a few hours. This market has moved in my favor too swiftly, and I wish to take a profit. I'd like to re-enter the trade once this settles (although, knowing the volatility of the nat-gas market, this may never happen). Nonetheless, I'd rather protect my profit in this environment. Maintaining ths short CL leg, but watching it very closely.

Canada

Short CAD/USD.
The US dollar has depreciated substantially, and its relationship with commodity prices has been exceptionally tight this year. Whether commodities are a leading or lagging indicator tied to the USD is subject to debate (though commodities are certainly not responsible for the lion's share of the USD's weakening). However on a daily basis, the two have tended to trade in lockstep. Although this trade has already moved, I would like to go long the USD and short the CAD, on the basis that commodity price crashes, and the severe damage done to their export-driven economy by the run-up in the CAD's value earlier this year (there has been a string of defaults and near defaults for Canadian exporting companies) will hurt their postive balance of trade status, and will force a correction in the currency. I'm expecting approximately a 50% retracement from where the currency moved last year. Price target is $1.05. Hopefully it will reach this level sooner rather than later.

Re-entering copper

After sitting patiently for a week, as copper moved higher, I think that now is an opportune time to re-enter the trade. I'm going short copper due to the continuing theme of commodity de-leveraging, which, due to the nature of margin calls, could very quickly turn into a negative feedback loop and drag the entire asset class down dramatically. Barron's had an interesting article highlighting the level of speculative activity in the space, and I believe they are correct. The only commodity I would continue to be long of would be Natural Gas, for the CFTC commitments of traders report shows that it is still positioned materially net-short. However it is trading above $10, a psychologically important level, and if it shows signs of weakness in here, I will most likely cover this trade today, as it has been nicely profitable, and leave the short CL leg of the trade on.

Also, going short Sugar and Palladium, as those appear to be the most vulnerable to the withdrawl of the "fast money" in commodities, seems to make a great deal of sense, although it is a very risky trade, and one that I would not put my capital to work on. However I will continue to watch these two in the coming days.

Closing copper

Copper has fallen substantially today, and I've been fortunate enough to be heavily short the metal. I was able to cover at 3.5140 and 3.5120, as I think it is, temporarily, oversold. Look to re-enter the trade at close to 3.57.

Closing CHF

The USD is staging a strong recovery and this will probably persist for several days, as there are signifigant amounts of capital bet against it, with large gains to protect. I am taking profits on my long CHF position today.

Closing cotton

Due to the previous commentary and potential for commodity de-levering, I am closing my position in cotton, and looking for a re-entry point in the mid $0.60's.

Commodity de-levering

Commodities markets today are hearing rumours that the CFTC will begin to impose more stringent margin requirements for non-commercial speculators. Although this will give commercial traders a signifigant advantage (and large firms that are not qualified as commercial will most likely buy energy assets in order to make their traders such), it may serve as a method of wringing out much of the liquidity that commodities have sopped up, and transfering it to equities and fixed income securities, as well as possibly reducing oil prices and price volatility. More importantly in the short term, it would force traders in highly levered commodities to liquidate their holdings. This would most liquid commodities, but especially those that are trading well above their net non-commerical position averages. This includes Copper, Corn and Wheat most prominently. This would be bullish for Natural Gas, which is largely net short (all readings are as of March 11).

This increases my confidence in the bearish case for HG. I would also go long Natural Gas and short an equivalent amount of Crude Oil.

2008 returns

Year to date returns and positions.

Closing SPX

Although I think the US economy is still poised for a severe slowdown, I would like to reverse my short position in the SPX. Given the actions of the Federal Reserve, and the decline of the dollar, there is currently a credible risk that the S&P will rally. I will maintain the position that the global economy will slow substantially via my short position in Copper, however equities contain too much risk to take a directional bet right now.

Francs in Pounds

Going long the CHF/GBP cross (so short the pound, and long the franc), as the UK has many of the same systemic economic problems that the US faces, and with the recent decline in the USD their central bank will be forced to cut rates so that the appreciation of their currency relative to the dollar does not substantially damage their already wounded economy.

Copper in Yen

Adding to my short copper position, correlated with long yen of equal size (creates a bet on the price of copper in yen, as making the trade in dollars creates an inadvertantly bullish position on inflation, which is wrong). I believe this trade has a signifigant amount of room to fall, and the cash that entered commodities as a safe haven from equties will exit copper once the market "normalizes".

Covering Yen

Last night felt like an over-reaction to the poor economic news coming out of the US. Although the long-term picture has not improved (it is materially worse), I traded out of half my position at 96 (which was all the forex market lifted me for). I believe that there will be an opportunity to re-enter this trade, and I look forward to doing so. However this concludes one of the most violent weeks of currency movement, and I believe that the markets had become overly emotional. I hope to re-enter this trade at close to par.

Closing CMBX

The recent rally should be used as an opportunity to exit any CMBX trade while maintaining any short in commerical RE equities. Although at historic highs, the second leg of the credit crisis has, unfortunately, just begun, and there will most likely be a better entry point to purchase these securities than now.

Copper

It's been said that copper "has a PhD in Economics", as it's price directly responds to the economic cycle. As we are in the downward economic leg of this, it is no surprise that copper has sold off in the past months. However, I just read a well respected economic report that discussed the outlook for copper demand in the next two years, which projected a 10% increase in copper demand from China and a 2% reduction from the US. Given the abysmal state of the US economy, particularly new home construction, which is the destination of most copper, I believe these estimates are extremely optimistic. Although there are currently supply disruptions, these are short-term, and the long-term picture is much bleaker than the market is currently factoring in (the report also stated that they were on the conservative side, with a 16% gain being the consensus view). These reports assume a global de-coupling between the US and China, which simply is not true. Once the market loses the marginal demand consumed by China, an inelastic market like Copper will experience precipitous price declines.

One risk here is the continued devaluation of the US dollar due to our trade policies. Copper, being a global commodity, is a natural hedge against inflation, which could spur more buying as the dollar drops further. Therefore, it would be prudent to pair this trade with a position in either TIPS or a DXY (dollar index) short, though the DXY poses a great deal of its own risks.

CMBX

CMBX (CMBX-NA-AAA-4 is pictured) is being thrown into the same pool as sub-prime, and this comparison should not be made. CMBS are investment properties (where the owner largely realizes the inherent risk), and most importantly they are backed with a substantial equity cushion. CMBX is getting particularly hard-hit, as it is the subject of selling pressure by managers attempting to hedge positions in individual mortgages. Commerical real estate does have a way to drop before it reaches it's settling price, and the owner is properly compensated for his risk via an appropriate cap rate, however it appears that "true AAA" CMBX CDS is overpriced, as the risk of default is overstated given the size of the typical equity cushion above CMBS (which is much more signifigant than residential).

Long CMBX (Short CMBX CDS), Short Commerical RE Equities

Also short SPX, long Cotton