Alpha Thinking

Risk Sensor: Asian high yield bonds suffer as default risk rises

noreply@blogger.com (Dr. Junhua Lu) — Wed, 14 May 2014 03:18:00 +0000

A 2.76% gain for speculative grade Asian notes denominated in U.S. dollars this year is nearly 2% behind the gain for high grade bonds, according to data from JPMorgan Chase. The reversal of fortunes comes as China's economy continues to slow and officials raise expectations of more defaults. (Bloomberg)

Risk Sensor: Study finds high rate of unoccupied housing units in China

noreply@blogger.com (Dr. Junhua Lu) — Wed, 14 May 2014 03:13:00 +0000

Adding another data point to gauge the state of China's property market, a study by CLSA finds a high 15% vacancy rate in the nation's housing, leaving 10.2 million units unoccupied. The report says that total could rise by up to 4 million units annually. (China Daily).

Shanghai relaxes home purchase restrictions

noreply@blogger.com (Dr. Junhua Lu) — Wed, 22 Feb 2012 02:35:00 +0000

* Non-local residents are now qualified to buy 2nd homes once they've
held residence permits for 3yrs. (Shanghai Securities News)
* Residence permit holders previously were not allowed to buy 2nd homes
in Shanghai
* Local agents believe this is a relaxation policy as there has never
been such a case that non-local residents could buy 2 homes.

More customized relaxation on the property market later?

Live Gold Chart

noreply@blogger.com (Dr. Junhua Lu) — Wed, 20 Jul 2011 08:39:00 +0000

Live Gold Price

Incoming! Interest Rate Risk...

noreply@blogger.com (Dr. Junhua Lu) — Wed, 06 Apr 2011 02:43:00 +0000

"Pimco to Raise $600 Million for REIT to Buy Mortgage Debt..."

Although most central bankers in the developed world still maintain a low interest rate environment to support the economy recovery, they might soon reverse the process more abruptly than the market predict. When they do that, short term interest rate tend to spike up quickly. Pimco certainly anticipate such a scenario, and preparing for it by reducing the duration of their fixed income investments, in other words, they start to move from the short end of the yield curve (short terms bond investments) to the long end of the yield curve (long terms bond investment such as mortgage debt). It is a key signal for other bond investors to follow in the market place.

Maybe our sovereign wealth fund should do the same thing to hedge against the perceived interest rate risks?

Gold at $3000?

noreply@blogger.com (Dr. Junhua Lu) — Mon, 28 Mar 2011 06:24:00 +0000

This chart tracks the the performance of gold since July of 2002 against the three largest bubbles of the last 40 years. Past bubbles have shown strong but steady growth for the first 7-8 years before moving into a hyper-growth phase for the last 18-24 months. Each series is adjusted for inflation and is smoothed with a 3-month moving average.

Saving the economy, or saving the bubble?

noreply@blogger.com (Dr. Junhua Lu) — Wed, 08 Sep 2010 06:11:00 +0000

An interesting article published on the Caijing.com.

http://www.caijing.com.cn/2010-09-07/110515467.html

Bear Index

noreply@blogger.com (Dr. Junhua Lu) — Wed, 13 Jan 2010 15:31:00 +0000

An interesting chart regarding the investment preferences for gold these days. I think I am a cub...

Avatar

noreply@blogger.com (Dr. Junhua Lu) — Mon, 11 Jan 2010 15:56:00 +0000

Avatar has certainly become one of the hot topics these days. The two-and-a half hour Twentieth Century-Fox movie that cost about $300 million to produce and an additional $100 million to market breaks the creative barriers that have stymied 3D technology for decades. “(It) will set off a new wave of 3D film making in the years to come and is likely to accelerate consumer interest in in-home 3D,” said Pali Capital analyst Richard Greenfield. Piper Jaffray estimates the 3D market will grow from $5.5 billion this year to $25 billion by 2012 at a compound annual rate of 50 percent.

To get the 3D visual experience, the viewer in the cinema has to wear a silly looking 3D glasses that mimic stereoscopic vision. However, this may not be necessary. Indeed, a PhD student at Carnegie Mellon University had taken a standard Nintendo Wii remote and turned a monitor into 3D VR display.

Dynamic Multiple Portfolio Gain Insurance Strategy

noreply@blogger.com (Dr. Junhua Lu) — Mon, 11 Jan 2010 11:37:00 +0000

I have recently developed a principal protection strategy called "Dynamic Multiple Portfolio Gain Insurance".

Compared to the traditional CPPI (Constant Proportion Portfolio Insurance) strategy, it has two features: dynamic multiple and gain protection.

Unlike the CPPI which normally sets the multiple fix at the beginning of the portfolio investing, the DMPGI set the multiple within a range of possible vlaues, conditional on the downside risk of the risky asset. Therefore, it recognizes the essential fact that the risk of the risky underlying asset changes according to market evolutions.

It is also different from the CPPI as the protection level is not based on the beginning value of the portfolio investments but the highest level of the portfolio (gains) throughout the life of the investments, which is appealing to investors who do want to participate in the upside potentials to some extents and do want to lock in those gains.

The following example is based on the S&P/TSX 60 Index and is carried out in the Matlab application.

The fund selection sting: What criteria?

noreply@blogger.com (Dr. Junhua Lu) — Mon, 02 Nov 2009 11:50:00 +0000

Many studies deal with the sustainability of performance, but few with their determinants. Which qualitative or quantitative factors, we should leave as long-suffering in the Institutional fund selection?

To address the above question, I establish robust results by comparing the performance of different fund portfolios formed based upon objective fund qualitative and quantitative fund performance factors, providing an economically meaningful measure of the magnitude of the relation between performance and attributes. The article has been recently quoted by the magazine of Institutional Money in Germany.

http://www.institutional-money.com/cms/magazin/uebersicht/artikel/die-fondsauswahl-welche-kriterien-stechen/?tx_ttnews[backPid]=15&cHash=9dea4ae647

Is diversification dead? A new look at asset allocation

noreply@blogger.com (Dr. Junhua Lu) — Thu, 15 Oct 2009 13:43:00 +0000

I recently wrote an artitle on multi-asset investing for Professional Wealth Management magazine which is part of the Financial Times Group.

Basically, the perfect storm of the financial crisis nullified the supposed diversification benefits of multi-asset class strategies, but it is argued that for a range of innovative featues, they can provide investors with a more efficient and effective diversification strategy.

For more details, please refer to the following web link.

http://www.pwmnet.com/news/get_file.php3/id/297/file/p23+pwm.pdf

"Honey, I Shrunk the Portfolio Concentration Risk!"

noreply@blogger.com (Dr. Junhua Lu) — Wed, 14 Oct 2009 10:00:00 +0000

The 2008 crisis was unique in terms of its speed, the jump in correlations and the fall in liquidity. Multiple asset-class returns have been headed in the same direction: down!

The dramatic downturn in 2008 severely shook the confidence of investors in the ability of traditional risk management practices to mitigate their downside exposure. Traditional portfolio optimization with asset weights constraints might not generate truly risk-diversified portfolio. The resulting optimal portfolios tend to be overly concentrated in a very limited subset of the full assets or securities spectrum. For example, traditional 60/40 (i.e., S&P 500 and Lehman Aggregate) or so-called balanced portfolios do not offer investors true diversification because the 60% stock allocation (S&P 500) actually accounts for almost 95% of the portfolio risk. In a sense, 60/40 portfolios put almost all the “eggs” in one basket. When (not if) the stock market has a severe downturn (as witnessed recently), 60/40 portfolios would also suffer tremendous losses.

A direct relationship exists between loss contribution to a portfolio from its underlying components, and their risk contribution counterparts. The risk contribution of component i is the share of total risk of the portfolio which is attributable to this component.

I propose a simple way to measure the homogeneity of risk contributions, which is related to the efficiency of the portfolio risk diversification. The risk diversification efficiency measure guarantees that the risk contribution weights are not too widespread. It works with negative risk contributions which are typical with bonds in a traditional portfolio, due to the negative correlations with stocks or alternative assets. The lower the value of the risk diversification measure, the more efficient the risk diversification of the portfolio.

An Innovative ETFs Solution based on Core- Satellite Framework

noreply@blogger.com (Dr. Junhua Lu) — Wed, 14 Oct 2009 09:40:00 +0000

Slide 2I recently implement a core/satellite approach to combine “core”, or diversifying asset class investments, with “satellites” that seek outperformance, aiming to create a dynamic balance between a strong foundation based on diversified asset allocation and opportunities for risk-controlled, enhanced performance.

Core/Satellite delivers the best of both worlds. Passive core investments gives the investor a low cost , tax effective and diversified portfolio, while active satellite exposures gives potential for enhanced returns. The core component of the portfolio is attuned to the investor’s long-term strategic aims, comprising assets that reflect the investor’s appetite for risk. The risk and return are optimally balanced in line with the investment goals of the investor. At the same time, we can implement tactical calls efficiently within the satellite component of the portfolio, which provides the opportunity to pursue shorter-term market-driven investment ideas.

The following chart shows the historical asset allocation and active risk exposures.

Taming the Beast for the Beauty - The "FIT" Framework for Currency Strategy

noreply@blogger.com (Dr. Junhua Lu) — Fri, 02 Oct 2009 14:52:00 +0000

As you may notice, the FX market has become extremely volatile recently, thanks for the obscure economic outlook and the massive money printing process of major central banker all around the world.

Yes, high volatility means more investment opportunities,only if one can find the "holy grail" for the market. Unlike those traditional trading models built on price momentum (technical models) or rate differentials (the carry trade model), I have recently developed a new framework for currency trading which employs a nubmer of factors including Fundamental factor, Irrational factor, and Technical factor. The FIT model (the abbreviation for the first letter of all the three factor categories) is built as a fusion of fundamental analysis and financial engineering, which may benefit from pronounced up or down trends in the global FX markets. The currencies included in the strategy are Euros, British Pounds, Canadian Dollars, Swiss Francs, Australian Dollars, and Japanese Yen.

The following tables show the historical backtesting results for the strategy. Over the last 20 year, only 2 years realized small negative returns (-0.36% for 1994 and -0.19% for 2007)…

Gold, Gold, Gold, Ale Ale Ale!!!

noreply@blogger.com (Dr. Junhua Lu) — Tue, 25 Aug 2009 09:26:00 +0000

In May this year, I posted a note on a dynamic commodity long/short strategy which tries to establish a bull/bear signal for a specific component commodity market. Currently the model is signalling a bullish outlook for the precious metals sector, including gold and silver, for the coming month. Indeed, the signal is really strong as the underlying composite factors including fundamental factor, momentum factor, and market sentiment factor all point to the potential upside.

Interestingly, an article on Bloomberg today also confirmed the bullish outlook for gold.

"Gold will rise to more than $1,000 an ounce next month based on moving-average “deja vu” patterns since the start of 2005, according to Barclays Capital.

JPMorgan Chase & Co., Standard Chartered Bank and three other financial companies predicted bullion would top $1,000 in the fourth quarter, the survey by Bloomberg showed."

The party for gold has yet started....

An Innovative Asset Allocation Framework for Alternative Investment Strategies

noreply@blogger.com (Dr. Junhua Lu) — Mon, 24 Aug 2009 11:18:00 +0000

Slide 5I have recently developed a dynamic asset allocation model that could be used to address the need of investors focusing on absolute return performance, as compared to those investors with relative return performance mandate. Basically, the model is developed to try to address the following issues associated with traditional asset allocation models.

Firstly, portfolio optimization tools based on normally distributed asset returns (Markowitz) no longer give valid outcomes, as the inclusion of alternative investments introduces skewness and kurtosis (fat tails) to the probability distribution of the returns of a combined portfolio. Risk measurement tools may underestimate the true risk-characteristics of a portfolio. One needs a distribution with adjustable skewness and kurtosis, which gives a higher probability to outliers than the normal distribution.

Secondly, given the non-normality of the return distribution, the traditional risk measure - standard deviation - is unable to address the higher probability of extreme losses (fat tails) faced by most investors. An intuitive measure of risk (short fall risk) is used to only penalize downside risk in the portfolio risk budgeting.

Thirdly, traditional portfolio optimization with asset weights constraints might not generate truly risk-diversified portfolio. The resulting optimal portfolios tend to be overly concentrated in a very limited subset of the full assets or securities spectrum. Traditional 60/40 (i.e., S&P 500 and Lehman Aggregate) or so-called balanced portfolios do not offer investors true diversification because the 60% stock allocation (S&P 500) actually accounts for almost 95% of the portfolio risk. In a sense, 60/40 portfolios put almost all the “eggs” in one basket. When (not if) the stock market has a severe downturn (as witnessed recently), 60/40 portfolios would also suffer tremendous losses.

The following example shows the risk profile of an optimal portfolio, compared to its three underlying component strategies. The component strategies are long/short (market neutral) strategies in the equities and commodities space.

Multi-Asset Class Investing

noreply@blogger.com (Dr. Junhua Lu) — Fri, 03 Jul 2009 08:44:00 +0000

I recently wrote an article for the magazine of Portfolio Adviser on the topic of multi-asset class strutured products.

The current market environment has left investors struggling to generate high yields and capital growth from traditional asset classes. The current low interest rate environment means bonds may minimise risks but do not satisfy an investor’s appetite for yield. As correlations are currently high between equity indices, satisfactory portfolio diversification is harder to obtain using pure equity strategies. This is leading investors to seek yield from new asset classes or a composite of asset classes.

For more details, please refer to the following link:

http://junhua.lu.googlepages.com/MyCerosDownload.pdf

Dancing with Wolves? No, Dancing with Oil!

noreply@blogger.com (Dr. Junhua Lu) — Thu, 02 Jul 2009 08:56:00 +0000

The correlations between oil and other asset classes have picked up a lot (either positive or negative) recently, which may provide excellent trading opportunities...

The correlation between oil and equity is high currently:

The correlation between oil and bond is significantly negative...

The correlation with FX (US dollar):

The correlation between oil and real estate:

The correlation between oil and hedge fund performance:

Investing in Dividends

noreply@blogger.com (Dr. Junhua Lu) — Tue, 30 Jun 2009 08:29:00 +0000

Dividends are an important part of the total return stream of S&P 500, contributing one-third of long term total returns. S&P 500 linked index derivatives have meaningful exposure to dividend risk.

The chart illustrates peaks and troughs in dividend points, highlighting the importance of dividend risk management tools.

The figure illustrates the breakdown of S&P 500 dividend points across sectors over the past decade. At the beginning of the decade, dividend point contribution is more evenly split across the sectors relative to the end of 2008. The top three dividend weights at the beginning of the decade were financials, consumer staples, and energy, which accounted for 44.4% of the total dividend points of the S&P 500. At the end of the period, the top three dividend point contributors were financials, consumer staples, and industrials, which in total accounted for 48.5% of the total dividend points of the S&P 500.

The chart plots the relationship between the S&P 500 dividend growth and the headline CPI rate during the last 20 years. It suggests that dividend growth remained elevated during periods when inflation spiked above trend levels. To take the example of 1990-91, this is the last time the US experienced a phase of above-trend inflation and below-trend growth, or “stagflation-light”. Dividends per share rose by as much as 15% that year and closely followed the trend in inflation. In more recent years, with the commodity boom, dividend growth has persistently remained above 10%, providing decent inflation protection at a time when year on year headline CPI growth has moved above 4%. Recently, as the economic recession deepened and CPI number dropped dramatically, dividend growth has plummeted and entered the negative territory. The positive correlation with inflation may be attractive to investors – particularly those attempting to hedge longer-dated inflation-linked liabilities – where there are because low real yields on index-linked securities.

Hence, dividends may prove to a strong alternative asset to provide inflation protection. The advent of the exchange-traded futures on index dividend market seem likely to eventually rehabilitate equities as an inflation hedge, largely because dividends provide a portion of equity total returns free of the inveterate volatility caused by swings in equity valuation.
Besides using the index dividend as a sole inflation-hedging investment vehicle, the index dividend can also be used to improve the risk-return profile of a portfolio hedging against inflation. Using a future on index dividend, one can achieve a reasonable dividend exposure, providing inflation protection and diversification. As an example we build a portfolio including Commodities (S&P GSCI Index), Inflation-Linked Bonds (Barclay Capital US TIPS Index), and the S&P 500 Dividend Growth data. As shown in the figure, this portfolio exhibits less volatility and higher Sharpe ratio with respect to a portfolio that doesn’t include the S&P 500 Dividend Growth.

For those readers who are interested in the idea of investing in dividends, please refer to a paper I wrote recently on the topic of dividend investing on ssrn.com

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1425518

What to be blamed for the current crisis?

noreply@blogger.com (Dr. Junhua Lu) — Mon, 29 Jun 2009 16:30:00 +0000

Today, Bernard Madoff was sentenced to 150 years for masterminding the largest Ponzi scheme in history, six times longer than the penalties meted out to the chief executives of WorldCom Inc. and Enron Corp.

When this case is finally driven to a close, there is certainly something that we can learn from it, not only the lessons that we should bear in our minds that how obvious the crime can be conducted without being noticed for years before people finally get burned by the burst of the Ponzi scheme; but also the deeper understanding the link between the case of Madoff and the origin of the current crisis.

What causes the current crisis? There could be a number of answers to the above question, such as the home price bubble, the weak transparency of mortage back securities, corporate malgovernance, excessively loose monetary policy, etc. These answers might be good to explain one aspect of the current crisis, however, to my opinion, they are just the apparent phenomeno reflecting a deeper origin of the current crisis - Mistrust.

Why Madoff can conduct the Ponzi scheme for years before being caught? Because most people are relying on the judgements of others when they make their investment decisions. For years, Madoff had been a star in the investment community, and was trusted by so many people, especially by those so-called smart people (celebrities and investment bankers). The more people trusted Madoff, the easier for him to gain the trust of others. It is like a snowball which is intially small in size but grows into a huge size of trust from other people. Most of the trust involved is not based upon the truth, the firsthand information, instead, it is based upon the idendities adn reputation of those people who already trusted Madoff. Yes, it is a Ponzi scheme, but it is not only a Ponzi schme of money making, but also a Ponzi scheme of mis-trusts by so many people.

In the run-up to the current crisis, a similar process of Ponzi sheme related to information cascades, because a great many retailed investors have put excessive trust in highly leveraged banks and other business plans, because the central bankers have put excessive trust in the well functioning of the market economy, because a large number of professional investors (institutions) have put excessive trust in the optimistic expectations of others.

Another classic example of "Greed and Fear"!

Day Trading the Currency Market : Technical and Fundamental Strategies To Profit from Market Swings?

noreply@blogger.com (Dr. Junhua Lu) — Thu, 25 Jun 2009 08:44:00 +0000

As a following article to the previous one "Currency Volatility and the Disparity of Currency Outlook", I dig out the following book from Google, written by Kathy Lien, a seasoned FX analyst and trader, which could be useful for designing specific FX trading strategies that try to capitalize the heighted volatility in the market place.

Here are some interesting contents taken from her book:

Asian Session (Tokyo): 7 P.m.–4 A.m. EST

FX trading in Asia is conducted in major regional financial hubs; during the Asian trading session, Tokyo takes the largest market share, followed by Hong Kong and Singapore.

For the more risk-tolerant traders, USD/JPY, GBP/CHF, and GBP/JPY are good picks because their broad ranges provide short-term traders with lucrative profit potentials, averaging 90 pips. Foreign investment banks and institutional investors, which hold mostly dollar-dominated assets, generate a significant amount of USD/JPY transactions when they enter the Japanese equity and bond markets. Japan’s central bank, with more than $800 billion of U.S. Treasury securities, also plays an influential role in affecting the supply and demand of USD/JPY through its open market operations. Last but not least, large Japanese exporters are known to use the Tokyo trading hours to repatriate their foreign earnings, heightening the fluctuation of the currency pair. GBP/CHF and GBP/JPY remain highly volatile as central bankers and large players start to scale themselves into positions in anticipation of the opening of the European session.

For the more risk-averse traders, AUD/JPY, GBP/USD, and USD/CHF are good choices because they allow medium-term to long-term traders to take fundamental factors into account when making a decision. The moderate volatility of the currency pairs will help to shield traders and their investment strategies from being prone to irregular market movements due to intraday speculative trades.

U.S. Session (New York): 8 A.m.–5 P.m. EST

New York is the second largest FX marketplace, encompassing 19 percent of total FX market volume turnover according to the 2004 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2004, published by the Bank for International Settlements (BIS). It is also the financial center that guards the back door of the world’s FX market as trading activity usually winds down to a minimum from its afternoon session until the opening of the Tokyo market the next day. The majority of the transactions during the U.S. Session are executed between 8 a.m. And noon, a period with high liquidity because European traders are still in the market.

For the more risk-tolerant traders, GBP/USD, USD/CHF, GBP/JPY, and GBP/CHF are good choices for day traders since the daily ranges average about 120 pips. Trading activities in these currency pairs are particularly active because these transactions directly involve the U.S. Dollar. When the U.S. Equity and bond markets are open during the U.S. Session, foreign investors have to convert their domestic currency, such as the Japanese yen, the euro, and the Swiss franc, into dollardominated assets in order to carry out their transactions. With the market overlap, GBP/JPY and GBP/CHF have the widest daily ranges.

For the more risk-averse traders, USD/JPY, EUR/USD, and USD/CAD appear to be good choices since these pairs offer traders a decent amount of trading range to garner handsome profits with a smaller amount of risk. Their highly liquid nature allows an investor to secure profits or cut losses promptly and efficiently. The modest volatility of these pairs also provides a favorable environment for traders who want to pursue long-term strategies.

European Session (London): 2 A.m.–12 P.m. EST

London is the largest and most important dealing center in the world, with a market share at more than 30 percent according to the BIS survey.

Most of the dealing desks of large banks are located in London; the majority of major FX transactions are completed during London hours due to the market’s high liquidity and efficiency. The vast number of market participants and their high transaction value make London the most volatile FX market of all. Half of the 12 major pairs surpass the 80 pips line, the benchmark that we used to identify volatile pairs with GBP/JPY and GBP/CHF reaching as high as 140 and 146 pips respectively.

GBP/JPY and GBP/CHF are apt for the risk lovers. These two pairs have an average daily range of more than 140 pips and can be used to generate a huge amount of profits in a short period of time. Such high volatility for the two pairs reflects the peak of daily trade activity as large participants are about to complete their cycle of currency conversion around the world. London hours are directly connected to both the U.S.

And the Asian sessions; as soon as large banks and institutional investors are finished repositioning their portfolios, they will need to start converting the European assets into dollar-denominated ones again in anticipation of the opening of the U.S. Market. The combination of the two reconversions by the big players is the major reason for the extremely high volatility in the pairs.

For the more risk-tolerant traders, there are plenty of pairs to choose from. EUR/USD, USD/CAD, GBP/USD, and USD/CHF, with an average range of 100 pips, are ideal picks as their high volatilities offer an abundance of opportunity to enter the market. As mentioned earlier, trade between the European currencies and the dollars picks up again because the large participants have to reshuffle their portfolios for the opening of the U.S. Session.

For the more risk-averse participants, the NZD/USD, AUD/USD, EUR/CHF, and AUD/JPY, with an average of about 50 pips, are good choices as these pairs provide traders with high interest incomes in additional to potential trade profits. These pairs allow investors to determine their direction of movements based on fundamental economic factors and be less prone to losses due to intraday speculative trades.

U.S.–European Overlap: 8 A.m.–12 P.m. EST

The FX markets tend to be most active when the hours of the world’s two largest trading centers overlap. The range of trading between 8 a.m. And noon EST constitutes on average 70 percent of the total average range of trading for all of the currency pairs during the European trading hours and 80 percent of the total average range of trading for all of the currency pairs during U.S. Trading hours. Just these percentages alone tell day traders that if they are really looking for volatile price action and wide ranges and cannot sit at the screen all day, the time to trade is the U.S. And European overlap.

European–Asian Overlap: 2 A.m.–4 A.m. EST

The trade intensity in the European–Asian overlap is far lower than in any other session because of the slow trading during the Asian morning. Of course, the time period surveyed is relatively smaller as well. With trading extremely thin during these hours, risk-tolerant and risk-loving traders can take a two-hour nap or spend the time positioning themselves for a breakout move at the European or U.S. Open.

Currency Volatility and the Disparity of Currency Outlook

noreply@blogger.com (Dr. Junhua Lu) — Mon, 22 Jun 2009 10:29:00 +0000

I saw an article on Bloomberg today, discussing the Dollar Forecast Disarray Leading to Higher Volatilityin the currency market (the quoted text are displayed in Italic).

"Redtower Asset Management sees the currency strengthening to $1.16 per euro by year’s end, from $1.3849 today, as the world economy recovers from the first global recession since World War II. Standard Chartered Plc predicts a more stable economy will weaken the dollar to $1.55 as the Federal Reserve keeps its benchmark interest rate near zero to sustain growth, prompting investors to sell greenbacks for higher-returning assets. The 39-cent gap between the high and low calls in Bloomberg’s strategist survey is almost double August 2007’s 20- cent divide. Wider fluctuations increase the risk for so-called carry trades, where money borrowed from countries with low rates is used to invest for higher yields."

Currency volatility has increased dramatically since the credit crunch outbreak in 2008. As shown in the following chart from Bloomberg, over the short term, the 12 week volatility for Euro/USD peaked in December 2008 and then touched the bottom in March 2009, since then, the volatility has picked up significantly by more than 50%. Over the mid term and long term, the 26/52 week volatility followed a rather different pattern as they continued to trend upward into 2009. Nonetheless, the current level is well above its historical norm before 2008 when the crisis began.

Volatility can have a devastating impact on corporate performance, as exporters try to protect overseas earnings. Pittsburgh-based H.J. Heinz Co., the world’s biggest ketchup maker, said on May 28 that its profit fell in the previous three calendar months in the face of “significant FX-related cost headwinds.” Similarly, the heightened volatility in the currency market could put additioanal headwinds for those international airliners, who are already struggling for their diminishing profit base as the economy crisis deepened over time.

Moreover, higher currency volatility could restrict the international investment activities further, in the sense that it makes the cost of international merger and acquisition less predictable and inceases the cost of funding dramatically. The US conglomerate GE announced the £5.7bn deal of acquiring Amersham, the UK medical diagnostics company in October 2003. By the time the deal was completed in May 2004, the dollar had fallen 12 per cent against sterling and GE was forced to pay almost $350m more to close the deal.

Another victims of this heightened currency volatility are probably the emerging market currencies, which have had “a pretty good run” might suffer from increased volatility, as investors flee to safety investments and close their carry-trade posisions quickly.

Deflation or inflation is the question

noreply@blogger.com (Dr. Junhua Lu) — Fri, 19 Jun 2009 09:42:00 +0000

Today on Bloomberg, there is an article talking about the 36 South Investment Managers Ltd., whose Black Swan Fund gained 234 percent in 2008, is raising money for a new hedge fund, betting that government efforts to pump money into economies could result in hyperinflation.

"Black swan" alludes to the once-widespread belief that all swans are white -- proved false when European explorers found black swans in Australia. A black-swan event is something extreme and highly unexpected.

U.S. President Barack Obama is selling record amounts of debt to try to end the steepest U.S. recession in 50 years, while Japanese Prime Minister Taro Aso has unveiled three stimulus packages worth 25 trillion yen ($261 billion) since taking office in September. Governments around the world selling record amounts of debt may devalue currencies against assets and spark inflation.

Time to think about inflation play?

In the classic investment cycle different types of industry rotate in and out of fashion as the economic cycle progresses, in response to the various stages the profits of each kind of company are most likely to outperform.

Here is a inflation/deflation timing strategy I have developed to help users maximise returns by exploiting this industry rotational phenomenon.

Are we really in the state of de-leveraging?

noreply@blogger.com (Dr. Junhua Lu) — Fri, 12 Jun 2009 10:14:00 +0000

The Fed published its latest Flow of Funds report today. One key takeaway: While total debt is growing more slowly, it is still growing. Since Q3 ‘08 households have cut their debt (slightly), but the federal government is borrowing so rapidly, overall debt continues to expand. In some ways, what the US governmetn currently doing is not to reduce the debt level and de-leverage the economy, on the contrary, they just transform the massive debts in the private sector to the public sector, and in the end, to the hands of foreign lenders, imagine those countries (China for example) that have accumulated large amounts of US Dollar assets, mainly in the form of US Treasuries.

As a percentage of GDP, debt continues to expand, from 368% at the end of Q4 to 375% at the end of Q1.

It’s been said that the income statement is the past, but the balance sheet is the future. The balance sheet is getting worse. As the equity value of the economy is going down—think the stock market and housing equity; the debt level is still going up. In other words, as a whole economy, we are still in the process of leveraging, rather than de-leveraging. The origin of the current crisis is the credit bubble, which continues to inflate in the aggregate.

The only way to climb out of a debt-induced depression is to pay down debt or to write it off. Levering up only delays the inevitable.

When will the clock stop for the leveraging bomb?