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Current Market Opinions and Trading Ideas Victor Adair Senior Vice President / Derivatives Portfolio Manager MF Global C PowerPoint Presentation
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Current Market Opinions and Trading Ideas Victor Adair Senior Vice President / Derivatives Portfolio Manager MF Global Canada Co . Vancouver Resource Investment Conference January 26, 2009 . Program Outline. Current Market Opinions How I Trade / Manage Risk Current Trading Ideas

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Current Market Opinions and Trading IdeasVictor AdairSenior Vice President / Derivatives Portfolio ManagerMF Global Canada Co.

Vancouver Resource Investment Conference

January 26, 2009


program outline
Program Outline
  • Current Market Opinions
  • How I Trade / Manage Risk
  • Current Trading Ideas
  • What I am Doing With My Own Money: Cautious. Savings. Trading. Income. In cash too early. No leverage. Wait for bargains. Risk is another BIG leg down in asset prices.
  • This presentation is for information purposes only
  • Trading derivatives (futures, options, foreign exchange) involves risk of loss
  • Investments can go up as well as down and involve the risk of loss
  • Past performance will not necessarily be repeated in the future
  • MF Global Canada Co. is a member of the:
    • Investment Dealers Association
    • Canadian Investor Protection Fund
    • Toronto Stock Exchange
    • Montreal Exchange
    • Winnipeg Commodity Exchange
macro market opinions
Macro Market Opinions


Credit Boom = Asset Boom + High Risk Tolerance

  • Many years of low interest rates / easy money / rising asset prices fuelled a consumer spending boom and an attitude
  • Reaching for yield / don’t want to be left behind
  • Borrowers and Lenders - pushed the envelope on risk
  • NOW:
  • Lenders: less willing or able to lend
  • Borrowers: less willing or able to borrow
  • Risk being avoided – not embraced
  • What effect will the “Authorities’” actions have?
macro market opinions5
Macro Market Opinions
  • Asset price gains from 2001 to 2007 were extraordinary – not normal
  • Buy and hold is not good advice
  • Throw away your previous ideas about valuations and risk – this is a different world
  • Don’t buy something today because it is ½ price compared to what it used to be
  • Inflation is history – for now – deflation is the worry – for now
  • Inflation will come back
  • Be prepared for a lot more government in your lives
  • Stress = what’s the next shoe to drop? = Volatility
  • Something BIG will break…Euro? Country default?
macro market opinions6
Macro Market Opinions
  • Real estate prices will continue to soften
  • Unemployment will rise
  • Previous economic growth came from rising consumption based on rising asset prices, borrowed money and leverage. That’s over.
  • Expect a “L” shaped economy
  • Expect real interest rates to rise
  • Financial markets will have “relief rallies” but a weak real economy will keep a lid on gains
  • Demographics = Boomers will try to save more, spend less
  • China: the risks grow
marco market opinions
Marco Market Opinions
  • Commodities: bull market is over until the last “Johnny-come-lately” bull throws in the towel and promises to never return. Speculators fuelled most of the 2002- 2008 price increase
  • Currencies: incredible barometers of capital flows – 40% declines - will the Euro hold – US$ wins the least ugly contest
  • Stocks: a slow-motion (and sometimes not-so-slow) crash
  • Bonds: great battle ahead…Supply Vs. Demand
  • Volatility: new highs as a result of stress = opportunity. Learn option writing strategies
macro market opinions8
Macro Market Opinions
  • Inflation / Deflation?
  • Credit crisis induced recession = deflationary
  • Monetary reaction = inflationary
  • Credit tightness = deflationary
  • Fiscal action = bigger budget deficits = inflationary
  • Rising unemployment = deflationary
  • Demographic trends in West = deflationary
  • Rising US$ = deflationary
  • Weakness in global economy = deflationary
  • Competitive currency devaluations = inflationary
macro market opinions cont
Macro Market Opinions (Cont.)
  • We are all currency speculators now:
  • 6 years of US$ weakness = 6 years (2002-2008) of commodity gains
  • Currency trends overshoot + and make “V” shaped turns
  • Currency flows are now from risky to less risky – from the periphery to the center - as the market seeks to avoid risk
  • The US$ is the least ugly
  • Years of miss-matched currency assets / liabilities will be reversed
  • European banks with massive (and bad!) emerging market loans
  • Watch the “lesser” currency pairs
how i trade
How I trade
  • I develop Global macro opinions
  • I may be100% in cash or up to 4x leverage
  • I read a lot of different research – – to form my opinions
  • I’m not a day trader but I watch the markets all day
  • Opinions – necessary (you have to have the courage of your convictions) and dangerous (you have to give up quickly when proven wrong)
  • I try to anticipate a trade before it is time to make the trade – then I’m ready when its time to pull the trigger
  • I need a technical confirmation that my opinion may be right before I execute
how i trade cont
How I trade – (cont.)
  • I trade like a mercenary – (Dennis Gartman) when markets change I change
  • I challenge consensus – “what if” the popular idea is wrong, has run its course?
  • I try to judge the mass psychology – who has a weak / strong position in the market?
  • Changing psychology – not math – moves markets
  • All markets are spreads – try to think like a spread trader – what is X worth relative to Y?
  • Markets are inter-related – but relationships change
  • Options: Current I.V. relative to history - Use alone or in combination with futures
managing risk
Managing Risk
  • I know practically nothing and cannot predict the future
  • Most likely risk: my opinion is wrong
  • Anything can happen
  • Patience – sitting in cash is OK
  • Add to winners, never add to losers
  • I know where I will get out (if I’m wrong) before I get in
  • Write down my reasons
managing risk cont
Managing Risk – (cont.)
  • Max loss 1% – 2% per trade / use low leverage
  • Accept that most of my trades may lose money
  • No big losses, occasional big wins
  • Relationships between markets change, but markets always influence one another
  • Be aware of my prejudices – foundation of all opinions
  • Without risk management the road to the Poorhouse is paved with fine opinions
  • See: How To Be A Better Trader –
options trading ideas
Options trading ideas
  • Option volatility is extremely high. Learn option selling (writing) strategies:
  • 1) you like a stock/commodity at today’s price. Write a put option on it, collect the premium. If you get put you own the stock/commodity at a better price, if you don’t get put you keep the premium. Repeat.
  • 2) you like a stock/commodity at today’s price. Buy it and write a call against it. if you don’t get called you own the stock/commodity at a better price, if you get called you make a short term profit. Repeat.
  • 3) Write both calls and puts at the same time – look for the market to trade sideways. Repeat.
Commodity Index: 6 years of a bear market in US$ = 6 years of a bull market in commodities – until Summer 2008!
Euro Vs. Japanese Yen: Risk thermometer, week to week ups and downs very similar to ups and downs of G7 stock markets
Gold / Crude Oil: At least a 25 year low this past summer: all markets are spreads. What is X worth in terms of Y?
Copper: Does copper have a Phd in economics? Base metals have been weak (no kidding!!) lately (Speculators exit stage left??)
Crude Oil – Did “Investors” pile into the energy markets? Did rising global demand account for a tripling of prices in 18 months?
Corn: global demand for better food, ethanol, funds – prices hit all time high prices – what changed to cause prices to fall 50%?
Philly Bank Share Index: started to fall from all time highs before the “credit crisis” became front page news
Philly Housing Sector Index: The top was made well before the problems of the US housing market became front page news
Chicago Mercantile Exchange: it was a “triple play” on rising stocks, commodities and exchanges – what happened?
  • The Credit Boom produced an Asset Boom + a great Appetite for Risk – This fuelled a Global Economic Boom driven by Consumer Spending – the markets are now reversing this trade!
  • Big Risk – another major leg down in asset prices
  • How I trade / manage risks
  • Ultra-high option volatility creates opportunities to write options
  • Markets I am watching now – looking for trading opportunities
  • Be cautious – things have changed – wait for bargains