XRP Thesis: Trade finance disruptor of the future?

There are many reasons why people are so excited about Cryptos.

 Instead of looking at stores of value, let us look at Use Cases instead or the practical applications of a crypto currency. This way, it is easier to manage expectations into the future.

The leader at this point is Ethereum with it smart contracts via the Virtual Machine. Its clear Use Cases include rental contracts, insurance, sports betting etc. However, my crypto of choice is XRP because of its clear use case in disrupting a 1.6 Trillion dollar industry. Trade Finance.

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R3 via its distributed ledger platform Corda is able to process accounts receivable purchase transactions and letters of credit. For anyone familiar with trade finance the traditional processing of this work tends to be arduous.

Although Corda in itself is not a crypto but a “blockchain inspired” system.  But there were statements that Corda will support digital currencies “later.” The SBI group which is both part of the XRP consortium and the R3 consortium alluded that there may be synergistic areas, this could be one of them. 

Small problem, there is a lawsuit between R3 and Ripple. I will not go into the full details of the lawsuit, but needless to say, it is messy.

However, the proof-of-concept is certainly place for the potential for such a platform to be developed.

XRP is already used by banks, and it has been rumored to be restarting its Codius program (Ripple’s smart contract platform).

Given the stakeholders within Ripple themselves, I would be surprised if they are not tackling this potentially disruptive technology head-on.

The below reasons are why I believe Ripple will be the first to tackle the trade finance problem. I will use R3 and Ripple interchangeably because I believe the strategic thrusts of the two companies is to tackle the trade finance issue.

So when it comes to finding an edge, I like to refer to traditional economics. Here I refer to one of Warren Buffetts most recommended books, Adam Smith and the Wealth of Nations. 

Based on the concepts of Adam Smith, here is why I believe Ripple will succeed.

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1) Division of Labour /Specialization

The point of Satoshi Nakamoto paper was for no one entity to have complete dominion of the system. However this creates an unfocused network.

While most other Cryptocurrencies do have own development teams, they are often fragmented and have a tendency to be decentralized.

One team may be trying to tackle the rental contract Use Case, while others are doing Sports Betting. And within each team there are different sales staff, developers , testers, administrators etc..

Ripple has a singularly large team with multiple offices in locations all over the world. This ensures a concentrated effort towards a goal or multiple goals.

If Adam Smith has anything to say about efficiency of division of labour, he would most likely say Ripple has the most competitive edge here.

2) Productivity

Trade finance is that it is arduous and systematic, the ideal candidate for Automation. However, it requires advance knowledge of each various part of the value chain.

This requires a team who is an expert in each area so they can work systematically. This includes understanding the legal implications of trade finance and could be why R3 released the following paper:

Source: https://elaineou.com/

So now that R3 is no longer on friendly terms, is the Ripple team able to either 1) patch things up with R3 or 2) develop their own technology.

I believe the answer to be yes. This again because of the consortiums on both ends of the equations. The management will act in the best interest of the consortium.

3) Invisible Hand

The invisible hand mean that everyone will act in the interest of themselves, this in turn will benefit the community.

My belief is that Ripple has the economic means to support and attract the best developers and coders in financial terms. This best talent would likely mean the fastest to the use case.

Moat

Warren Buffett discusses when value investing, having a moat. One could call this a competitive advantage.

Does XRP have such a moat? Can such idea work on other platforms with smart contract enabled features such as NEO and ETH? Yes, in theory but banks will unlikely use it.

Charley Cooper, managing director of R3, once quoted that ETH has “issues around privacy controls, scalability, immutability of transactions, and consensus mechanisms for validating transactions”.

If this is true, then the moat will hold true till we see a new contender.

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But What If I Am Wrong?

So say I am completely wrong and this is not the business direction Ripple is headed towards. The downside risk to XRP is still limited.

Fastest Execution

XRP is already used by banks. Not just for the added privacy but for XRP speed of transfer.

Meaning there is use of XRP in its base form, so there is already some value there. Marketing efforts to use XRP have also been ramping up, Ripple offering rebates for financial institutions that are the first in their markets to process and promote commercial payments on RippleNet.

SWIFT, the current payments gateway for banks, is trying to compete with XRP by creating its own Cryptocurrency which may be better than XRP. But it is still in the Proof-Of-Concept phase.

55 Billion in Escrow

In order to reduce uncertainty as well as maintaining ongoing XRP distribution, Ripple has committed to placing 55 billion XRP into a cryptographically-secured escrow.

By securing this, “investors can now mathematically verify the maximum supply of XRP that can enter the market”.

This stability brought about by Ripple themselves means that even though upside is capped, downside is also somewhat capped.

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Summary

Given that XRP is over 70% owned by banks, and some of the consortiums money will be tied up, I doubt the volatility especially to the downside will be taken well by the invested banks.

So what we have is a cryptocurrency with a potentially massive use case, if successful. Even if unsuccessful, the downside is limited. 

Long Ethereum Thesis - (Part 3) Managing Active Trading

This thesis a super long term play and I am thinking of getting involved in this via Brick and Motor mining so this is a big play for me.

On the eToro network, here is how I will be playing this by drawing inspiration from some of the most successful trend followers.

Source:http://turtletrader.com/images/trend-com-big2.jpg

The Value of Ethereum is currently linked to an extremely positive sentiment.

Bubble?

One of my recent readings was titled "Extraordinary Popular Delusions and the Madness of Crowds" and it covered financial bubbles. While I do see Cryptos as potentially being a bubble it does form an interesting topic of conversation in terms of how it is likely to react to an open market situation.

A study by Meb Faber titled "What if (Sir Issac) Newton was a Trendfollower?" shows that even during periods of Bubbles, the use of Trend following strategies provides for a better returns with lower drawdowns than buy-and-hold strategies.

So which trend following strategy is best used?

I don't have a good frame of refence given the short nature of Cryptos but we do know they are an

- upward moving

- unlikely to return to reviously known lows
- possibly fueled by credit in the future

These are characteristics where perhaps the turtles provide the best frame of reference.

Looking forward by looking back

The turtles for those who do not know is a bunch of famous traders who used a leveraged strategy to bring profits back in the day. They had the distinct advantage of having a market somewhat similar to what the Cryptos are.

I believe we can use their framework. Taking from the book "Following the Trend" we will take a modified long only approach as i did notice for instruments such as bonds, it has been unfavourable to trade both long and short due to the single tradrectory. Also modifactions were neccessary due to using CFDs as opposed to Futures contracts, hence the calculation of vol and risk is different.

I will employ a short only on BTC, and only selectively.

• Long entries are only allowed if the 50-day moving average is above the 100-day moving average.

• If today’s closing price is the highest close in the past 50 days, 

• Position sizing is volatility adjusted according to the ATR-based formula. Risk per trade will be 0.5%-1%

• A long position is closed when it has moved three ATR units down from its highest closing price since the position was opened.

Accuracy is expected to be low, around 30-40% but returns if the call is correct will be much larger than risk capital taken.

Long Ethereum Thesis - (Part 2) Bubble or Not

Source: https://pbs.twimg.com/media/CO3fihqUAAA2VMS.jpg

Proof of work vs. Proof of Stake

Proof of work is how transactions get processed on Crypto networks. Ethereum CEO plans on moving away from this to a proof of stake.

I will not go into this in detail but this is one of the reasons why i prefer Ethereum over other cryptos.

Briefly, miners currently use large amounts of computing power to solve problems. Once the problem is solved, they are rewarded.

In the future, Ether will owned by a validator who will use their own Ether to validate transactions. I.e. Individuals who have more access to coinage are more likely to get more fees.

They will then a nominal interest on this. My understanding is it is 2%-15%.

This should encourage a gradual accumulation of coins and a potential bubble could form. If leverage becomes accessible then this will be even more the case.

This creates a fixed income type product. Its nominal value may never diminsh due to the cap in coinage.

Because of this, a reinforcing cylce(ala Sorros) could apply here.

Possible Risks and Exit Theses

Of course, these things may not apply if forces more powerful than us determine that it is not to be.

So here are a few exit points where I will no longer be holding on to the thesis. This lis is of course not exhaustive and I will be constantly be looking out for reasons that I am wrong. 

• Etherum uses proof of work, and price does not seem to be gradually increasing due to the low amount of interest
• Bitcoin sudden adaptation of alt coins in their network
• Hard forks due to global disagreements
• Too much Ethereum in the hands of too few(due to the risk of forks)

Long Ethereum Thesis - (Part 1) Long ETH short BTC?

I have often accused Crypto currencies of being bubble territory. This has not changed, especially for Bitcoin.

As Warren Buffet says about gold, it looks nice but have no real value.

Ray Dalio, one of my absolute heros in trading buys gold because of historical context.

Cryptos do not have any real value or historical context.

So I have been skeptical. Until now.

Source: hhttps://i1.wp.com/coinspondent.de/wrdprss_XXX/wp-content/uploads/2016/10/Bitcoin-vs-Ethereum-1.png?fit=672%2C372&ssl=1

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Bitcoin to me, had a value-add no different from Western Union and to a certain extent Visa and MasterCard.

It was a way to transfer value between parties effectively and at little cost.

These are two industries have significant distprutive value but not a lot.

Bitcoin works as a base means of transferance currency. That is all.

Advantage 1: Smart Contracts

Ethereum has ability to produce smart contracts. The business model allows for contracts and conditional transference.

A common example, is the vending machine. You put in the money, it is irrevocable and it will produce a can of soda in exchange.

The ability to define properties and produce payment is staggering.

There are already applications to gambling, airline insurance and even stock markets.

I can see potential even in the alibaba.com space or trade finance, it is could be a major disruptor.

Disrupting these areas are much more lucrative.

Advantage 2: Decentralized Independent Cryptos

Ethereum has a mover advantage over its competitors.

It has the DAO (Decentralized Autonomus Organization) which allow for other cryptos to form off of the ethereum network.

Dai for instance, another crypto currency based on the value of SDRs (Special Drawing Rights) is on the Ethereum network.

Augur, an online prediction site is being developed utilizes the Ethereum network.

These are coins on their own, but run off the Ethereum blockchain.

Advantage 3: Friendly to users

The Ethereum Virtual Machine (EVM) allows all programming languages to use the network, meaning it is also accesible.

Advantage 4: First mover

In the above 3 advantages, they are the first to move into this and are currently the largest.

Dash, Litecoin, Ripple etc are not as developed in these areas.

With so many projects in the pipline, i do not see other cryptos affecting these advantages.

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Even today as I publish this post, BTC rose 5% while ETH did practically nothing. It is apparent that Bitcoin is still the favoured child amongst Cryptos and is quite possibly in a bubble. However its long term value to me is  questionable.

In Ethereum, there could quite possibly change the world as we know it and they are ahead of the pack. Till this vision is realized I will be long.

Stay tuned for Part 2 & 3 where i go into further depth on my thesis and how I will manage this actively.

2 months later: USDCHF finally paid off

Finally it paid off, well some of it

I took off a majority of my position on Friday at the 0.9760 level due to structural resistance. While it did drop after, I beleive there is more strength to go.

Part 1: CHF Weakness via Central Bank Intervention

I wrote on my wall that I did not think the SNB would like the dollar to be too strong against the dollar and levels for the EURCHF were close to the previous floor that was set by the SNB.

Since then both crosses have seen CHF weakness.

The EUR though, continues to soar. I believe in the long term, this faith is misplaced, but for now, let us leave it as that.

Part 2: USD Strength yet to recover

The reason why I am taking this direction is because a weak US dollar affect practically everyone. As the reserve currency of the world, there are implactions. 

Sentiment is weak for America because of the turmoil in the Whitehouse and I do not expect it to get better, but global implacations will be there. Moving too quickly too fast will cause some problems.

https://static.seekingalpha.com/uploads/2017/2/7/1693591-14865128824778109_origin.png

Oil for instance, involves the US Dollar, the higher the oil price in conjunction with the dollar the more one will make in their home currency.

This does not affect shale oil producers who have their expenses in US dollars and revenue in US dollars. But in a place like Russia where Revenue is in US dollars but expenses are in Rubbles, there is a large effect against the companies.

Now the same senario is terrible for countries who are dependent on oil. Oil prices have already recovered slightly on the back on the weaker US dollar, but this double whammy effect needs to be taken into consideration in the broad global market.


The DXY though has yet to bounce to a level where i am willing to say, "the dollar is going weaker from here". When that happens i will take out my other position. It helps that the USDCHF has a positive carry so i will get paid a small amount per day to keep the position open, this way i can afford to be patient.

Is Winter Coming? Being Wrong vs. Not Yet

I use this euphemism as an example because so many things in my thesis are correct yet last week's comments from Yellen were "dovish" the market rallied and the USD strength fell and the SPX recovered.

SPX

Recap of thesis:

- PE multiples are high

- Earnings are likely to diminish

- Interest rates are heading up, risk premia for equities should be higher hence P/E should fall

For my SPX theory, I had reckon that the market is expensive and should not be so high. Nothing has changed. Yet, the market has continued to head higher.

We have had a threat of a POTUS impeachment, higher interest rates and the a "failed" Trump trade. Yet the stock market has not corrected.

Perhaps this is the ETF market has continued to pushed the market higher. A 2% correction was seen as a buy-the-dip opportunity. Either way, this market still wants to go higher.

If winter comes, it may be August, and this is where most traders are not at their desks and where the most unexpected usually happens, but if nothing happens here I will stop out of the trade.

Perhaps a 2500 mark is a good place to double down for a short correction, but at most I expect a 1.5% - 2% correction unless we see a big market moving reaction.

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USDCHF -

For the CHF the thesis was as follows:

- SNB does not want the CHF to be too strong

- The dollar index should correct somewhat

For the first part it still holds true, both on the USDCHF basis and the EURCHF basis.

While the EUR has strengthened against the CHF it is still below the 1.20 level which was previously the floor for the SNB. There is still some way to go before the SNB is happy again.

The USD may not seem like as big a deal to most as trading between EUR members is more prominent, but the US does make up 21% of exports.

Last week's print in the import export number should be evidence to the need to adjust.

So in view of this the CHF should still weaken. Against the EUR and the USD.

However, the dollar index is falling like a rock.

USD smile theory dictates the dollar should strengthen on global markets being either very weak or very strong. Right now the indices are higher, indicating the market should be strong. Pundits and economic "experts" however, have contradicted this by saying the Trump reflation trade is over, hence the weak dollar.

Both side however, would be supportive of the smile theory with a strong dollar. This has not happened.

Right now the DXY and Dollar index have reversed to levels seen before the Trump trade. A recovery of any type has yet to be seen. If this was any other level, I would say this may never recover but these levels are significant.

USDCHF also has a significant support level at 0.945 or 0.95 level, if it beats this I will exit. But right now I do not see this being a threat.

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The SPX has not worked out for me, in the words of the SNB, I have been "overwhelmed by the market". I am hoping for a slight correction off the 2500 level and i will exit at a loss. Hopefully managing this as best as I can. Unless there an altering news event then this is how the thesis has changed will hold.

The USDCHF is looking good despite the large drawdown, i do fully expect this to recover. I have no reasons to believe it will be otherwise.

My reflections: Auditioning for 2 professional proprietary trading firms (Part 1)

Sorry all.

I have not been very active over the past 3 months, the reason being I have been trying out for 2 different prop firms and it has consumed most of my time. One with a global mandate (trade any instrument on the platform, very similar to eToro) and the other futures.

I signed non-disclosures so I cannot say exactly what I did, but I can talk about what I learnt from my experiences.

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Games we cannot play: Market timing - A lesson in Oil

I have been an avid supporter of Macro type trading because it is based on principles we can understand. And if we are wrong or when the market has overwhelmed us, we can understand why.

But alas 1H2017 was miserable for me on eToro. So is macro usable by retail traders?

This certainty is something I have taken pride in through my research, but yet I have found timing is always a problem with this type of trading.

An example of this was OIL where I shorted at $46.97, well before the OPEC meeting, it went up to $51 and in between I tried to trade it and got completely wrecked. But was my thesis wrong? Looking at price now, no.

I have learnt over the course of the last few weeks, modern macro traders use options to try and elevate this concern. As retail traders, perhaps an approach could be martingale, it negates the requirement to be correct on completely correct on timing but IF wrong, must exit immediately.

I have been very critical of this method because many eToro traders blow up after using this method but if used correctly, I suddenly find it has its merits.

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Games we cannot: Know your role - Outright futures are difficult to play

One of the firms I was trading for used DOMs or Depth of Market, this shows you the order book and you can take positions based on the order book. This method of trading is highly profitable but at the moment is not available to retail traders.

It is not for our purposes but what I have found is that it is profitable on a daily basis. Scalping profits daily.

It is not accessible by retail traders and even for Gold and Oil provide a very different set of data which if one does not have access to puts one at a huge disadvantage.

Looking at Oil, Gold and even indices, is it even fair for us to try and trade these instruments intraday? Probably not. These instruments we have to stay away from in intraday basis, here I will either do daily or weekly candles only.

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We all lose

Even at the prop funds where I was trailing for. Psychology of losing is so important.

There will be periods of not making money, but it does not mean you are bad, just conditions maybe have changed or some other reason. 

Part 2 coming soon.

Short idea update: The SPX500 rise continues

I was trading interest rates futures yesterday when the FOMC minutes were going to be released.

It was not outside what I expected. June interest rates were on the table and the taper was going to begin. I sold my VXX position knowing I could lose whatever profits I had at the time. 

And the market rallied.

My thesis continues to hold true but has become even more reflexive. Short-term interest rates are going up and consumer spending I expect to decrease means that the US will have to rely on exports. This cannot happen given the policies put in place.

Credit is already high so increasing credit does not seem feasible for growth.

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The conditions that remain for not having a potential rate hike are as follows:

1) Jobs creations - less than 75k

2) Inflation - more than 2% as per CPE data

3) Growth slow - move into recessionary area

4) Disorderly decline of stock market - more than 10%

If not I expect there to be a continuous hike to the 3% area.

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Short-term rates and interest rates are looking to increase yet we are seeing a stock market rally. There is something wrong here.

Growth expectations are still high, in the last budget launched by Trump we see that there is an indefinite projection of 2-3% growth. This could be why markets are rallying, but it is based on demographics is simply a unicorn. 

Last week's drop in the SPX due to "Trump impeachment" was more likely due to funds flow to Europe. I see this from the market shrugging off the news, spreads on the German Bonds, the strength in Euro, and dollar weakness.

Trump impeachment was probably media hype, although extremely serious.

My position is quite down now and I must be more active on the position now. I will be adding a bit more to my SPX position trying to recoup some of the losses and increase profit if there is a large fall in prices.

3% a month Thesis? - Black Swans are rare in a Fragile Market

I have recently picked up Nassim Taleb's book Anti-Fragile. For copiers & followers, you will know that I am a huge fan of this man.

Black Swans is often where I live. And here instead I am taking the opposite view. Why? Monthly income.

As much as I love macro trading, in terms of frequency, it is not quite enough to live life. In 2016, according to Eurkahedge analytics, global macro style funds only made 3.77% in 2016. YTD 2017 only stands at 1.27%.

This is not a stat which is palatable to the eToro community. But who am I to beat professional managers? The answer lies in market structure and leverage.

If I can play in the space where retail traders mostly fail in a more controlled manner perhaps I can be successful. 

These certain advantages also are available which may be why this thesis should work for my copiers.

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Fundamental Structure:

We are in a fragile market which is not used to shocks. Thus, volatility is generally low across asset classes. The Market Structure have evolved to a point where it does not allow for it. With High-Frequency Trading Algorithms and dark pools means that overbought and oversold conditions are quickly reverted to a mean.

Using eToro being a Level 2 / STP (Straight Through Processing) allows us to take advantage of a great amount of relative liquidity in a low volatility market.

This system is temporal; I do not think it will exist 10 years into the future. It is a temporary arbitrage. It is also only available because I have a small amount of capital, scaling this system up will likely fail.

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The details:

There are three flushes of liquidity in a day, they are during the Asian Open, the European Open and the US open.

If the early part of these sessions produces a breakout, it should retrace to the mean quickly. High-Frequency Traders, Dark Pools and the like will sell (buy) overbought (oversold) conditions using RSI, MACD or MA which are programmable. It should then return to the mean quite quickly.

How can I trade these? Using MACD/RSI/MAs are probably arbitraged away and I probably can't be fast enough to get in. But what is not programmable quite yet? Chart Patterns.

It is difficult to program what a bullish engulfing candle is, but it is not hard to see how such a pattern could equate to a crossover of the MACD histogram. We can take advantage of this till it programmers finds a way to take advantage of these.

During my test, I was able to find a sweet spot at a 10 pip TP level while SL was 15 pips. This had an 80%+ success rate.

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System failure:

The system fails during economic news or sentiment which doesn't allow the market to remain in its low volatility state. So it is key to avoid these timings. This system is not predictive of the news.

It also fails during low volatility periods 2hrs prior to entering the trade. Lower than 19 pips.

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How I test my system:

Painstakingly. I will do a YouTube video to show how I do it.

 picture of my excel test results

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Currency Used:

Only USDJPY due to lower spreads and also high trading volume. This should result in a lower standard deviation from the mean.

I have tried it with GBPUSD, but it has not worked out. For one the high spreads are a concern, the second if the runners tend to be quite frequent due to the European session. The spreads are no fault of eToro I understand this is the service that they offer. So, for now, USDJPY seems to be the most workable on eToro.

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When am I going to start:

I started today, making barely breakeven because I wanted to test the change to my risk score. I will scale accordingly because I rather my risk score remains lower.

If all goes well, I shall start properly tomorrow.

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USD/TRY Thesis: My most complicated yet least evidenced thesis

****************WARNING: ADVANCED USERS OR OBSERVERS ONLY***************

I heard this possible trade on Real Vision TV on an interview by Michael Harris. My first response was to stay far away from this trade.

Reason? There are the three pillars that define what makes a discretionary macro trader. It is having an edge over 1) information 2) analytics or 3) execution.

If I do not have an advantage in these, I would not have an edge and will not trade.

My initial response to Turkey's issue was that it complex with too many variables. The last time Erdogan went to people, he got 51% of votes. This time he needs exactly 50% which is scary and too close to bet on.

But my recent reading has brought me into the realm of politics. I read a lot so it was luck that my initial view would have changed.

This is my longest post, so I had to cut down some details. But feel free to post on my wall or Twitter if there is something you would like to ask.

 Fundamentals - Part 1: Anatomy of a political player

Investors have been waiting on the sideline for Turkey. Long Term bulls in the country have been disappointed since the Arab Spring incident in 2010. The current state of emergency has not helped.

The recent referendum gives president Erdogan more power.

Any time power moves from the people to the elite few, I am against. Not just from a moral point of view, but is also the underlying basis of credit & business cycles.  So I bet against people who want try to keep power.

But this case may be different, instead, I am finding myself believing that Erdogan may win this. His reign has mixed results unemployment, rising to the highest level since 2010.

But GDP growth rate maintaining above 5% for a good part of his reign.

This screams to me that the Gini coefficient(income gap) must be widening, but there is no information as per World Bank(suspicious?).

Although I cannot confirm this, I am going to assume this is true. Countries suffering a large income gap will be unhappy. This set ups a move towards equalization.

Under the credit & business cycles, the next step is clear. It is usually war, recessions, or a political transference of power.

Here is where the script may not be the same. Erdogan has been using his power to increase his political power.

These factors that convince me to say this are:

 1) Poor/current/bad environment. The people want change.

Erdogan messaging to the people is "I will bring peace" and leaves out how his reign has done so far.

 2) Populism, one strong man who can make a change.

 Erdogan paints himself as the man to do this.

 3) "Us against them" rhetoric.

Recent Erdogan spats against Netherlands and Germany who he claims are "Nazis".

 4) Control of "good" image via media.

The takeover of Turkish media to appear like what Machiavelli calls "Virtuous", alike Putin. See recent movie called Reis

 5) Control of "bad" image.

Jailing of 144 journalists and seized control of more than 150 media companies.

 6) Shaming on making the wrong choice

He uses his influence on his supporters. He tells them "No" voters do not want peace.

 7) Religious bias.

He plays to be the Muslim hero despite the Turkish constitution being a secular state. This country is 99.8% Muslim

To keep this short and digestible I will leave the points at the above.

Source: http://www.politico.eu/article/recep-tayyip-erdogan-pursues-his-plan-for-even-greater-power-turkish-president-akp/

Fundamentals Part 2: How current investors are looking at it?

There may be mispricing because in reality there is a high amount of Media bias.

Erdogan is portrayed as a "bad guy". Focusing on what the Germany/Netherlands incidents and his dictatorship style.

The investment community probably thinks this at this very moment.

But the people interviewed to talk about these trends. Aren't they already outside of Turkey and do not represent the domestic Turkish community. Do we see the same effect of Putin outside of Russia?

There is also low coverage on the issue, most of the world not looking at Erdogan. Keyword searches on "Erdogan" show that few-ish searches have been done.

The last time there was a spike was during the last failed coup and the state of emergency. Remove Germany and Netherlands from recent searches due to spat, that number decreases.

Do investors understand what the domestic economy is thinking? I am not 100% sure. The USD/TRY is not even that well traded.

Michael Harris who was interview on real vision indicated many are short the Lire. Reasoning though but may not be correct in the long-run.

Fundamental Conclusion:

It is easy to pivot this against Russia. One can look at how high approval ratings can exist despite a poor performing economy.

Pivoting bias can ruin our trading.

It is in reading "The Prince" by Niccolò Machiavelli that I saw textbook tactics that Erdogan uses.

His play on the political environment has gained him much power and favour with the people. I can say with high probability he is going to be successful in this referendum.

Technical Analysis

I enjoy Macro trading because there are areas of mispricing. Especially if I assume price is wrong (ala George Soros).

Looking at the USD/TRY which is the only instrument I can use via eToro.

The cross looking back has been nothing but an upward move with no retracements or any other movement other than up to speak of. It is at a very extreme level.

Sentiment Analysis

The initial market reaction may be poor; most investors are outside of Turkey and think of him as a bad guy. 

XM the trading platform has increased margin on the USDTRY due to the expected volatility. Digital look is calling a higher cross if a "yes" vote is achieved. 

But it will likely turn when they realize or the event of the end of a state of emergency happens. One that has been holding the country back.

A stable President with much power, and a beat down economy with many many merits is very attractive.

The population over 80% literate. Many speaking English, French or German, this country's trade has much potential

Public investments in power plants, roads, and oil refineries will further improve prospects. The future looks good for the country.

Entry:

If Erdogan gets the win, I will play this.

If he loses I will sit out.

If the wins follow a positive move in the market, I will take half a position and wait for retracement for next half.

If it moves negative, I will wait for a reversal pattern on the daily chart before entering a full position.

If EU possibility is (finally) taken off the table, market reaction may be bad for a long time. I will wait even longer.

Stop loss levels

This started with the Arab Spring in December 2010 and due to a series of political issues, we are here now. The resistance I see is at 3.80, 3.95 and physiologically a break of 4.10.

A good stop loss is the last high at 3.95 or the 4.10 level.

Take profit levels

A comparable country with Turkey GDP is Indonesia. While different in the investment nature of the two, it is a good proxy since both emerging economies.

It is easy to see how Turkey's Lire(TYR) has suffered since 2010. The Indonesian Rupiah (IDR) has depreciated against USD by about 35% to date. The TYR has depreciated more than 142%

Michael Harris believes that Erdogan will be pro-business. This I also believe is true, the GDP growth evidence of this.

The take-profit will have to be at a level where Turkey was actually stable. Before the coup, we are looking at 2.88 levels a 1:3 risk-reward. If one were to look at before Arab springs, this could be at the 1.42 levels with a 1:8 Risk-Reward.

Given our timeframe for this trade, the former would be a more sensible take-profit area for now but holding for a long period seem inevitable for this cross. Given the high amount of refund though, carry cost is low.

The only disadvantage is the short USD side of this, which is against my long term view. 

That aside though, relative value seems in favour of the Lire.

Conclusion - Cognitive dissonance

There is no doubt Erdogan is not as he paints himself.

He is the only president due to the term limit as a Prime Minister. He is running this referendum because he wants more power.  

He built a 1,150 room (no not a typo) palace for himself. This has no place in a country that is facing high unemployment and in political turmoil.

There are recordings of him asking someone to "hide the money".

The failed coup is clear signs that the country is unhappy and suspects him of not being honest.

He has taken away free speech by jailing journalist and shutting down media.

From a moral point of view, these are not ideals I wish upon anyone.  Yet I cannot deny that this may be growing pains of emerging countries.

·         Do I think this referendum is good for Turkey? No.

·         Do I think Erdogan will be able to settle the country down? Maybe

·         Is Turkey a place that has a potential to grow if politics can be settled? Yes.

·         Is this an attractive trade with good risk:reward metrics? Yes! Yes! And Yes!

Cognitive dissonance is when two parts of a person do not agree with each other. Here my moral and logical sides are at odds. But feelings aside I will invest may invest here.

EURUSD Thesis: Are we forgetting Populism?

The recent moves in the American politics has caused the EURUSD rally.

The dollar strength seen during the initial speculation of the interest rate rise. It then trended downward upon confirmation of the interest rate hike. While this makes very little sense, we can only observe (I have written more on my eToro wall here)

  

But, my thesis is that there is a dollar funding crisis and the Eurozone still faces considerable headwinds.

Fundamental - EU

 I have also been transparent on my blog about my view that the EU will dissolve at some point.

The EU French elections may be a catalyst for this.

I have but a limited understanding of the election. But Marine Le Pen, who is leading the populist movement in France has called EU as "going to die". Needless to say, she is against the EU.

François Fillon of the Republicans and Marine Le Pen of the National Front led in first-round opinion polls between November 2016 and mid-January 2017(source: Wiki). And so I expect the EUR to weaken as fear sets in leading up to April 23.

France is one of the larger economies of the EU, if they leave the EU, this could mark the end of the union.

Consider the birth of the EU was due to Margret Thatcher and the Single Market Agreement (SMA). And now Britain is leaving.

_________________________________________

Fundamental - US Dollar

The US dollar has been suffering at the failed passing of the healthcare bill

Look at how the SPX500 recovered from the initial dips.  The recent move in many markets may have been exagerated.

If this is true, a recovery is imminent.

I have also written a little about my US dollar strength thesis here and while I do have a few more reasons, I do not see any reason to think otherwise.

___________________________________________

Technical entry

The fundamentals usually get me more excited. But for this trade, the technical prove more interesting.

The DXY (or $USDollar on eToro) index has reached an important support level. A break up here would indicate we are likely to headed higher.

For the EURUSD, the 4hr chart formed a shooting star candle pattern with a bear candle following it. Another sign we are going lower.

Even with all these confirmation I will only enter this position after I see considerable consolidation. A retracement and 3 candles below the 10EMA would also be a good entry for me.

Given the risk: reward, i can afford to be patient here.

____________________________________________

Sentiment

Sentiment for today, especially during the Asian trading sessions has been all about the failed passing of the bill.

However, Article 50 execution is expected on Wednesday. From there we are likely going to see a change in sentiment.

____________________________________________

Entries

I suspect after article 50, there will be a start of a correction. I may be wrong here, and is why i prefer to wait for a consolidation to ensure that this EURUSD bull run is over.

Possible Exits

Whether of not  Marine Le Pen wins is not of great consideration to me. (but I think she will) There are too many variables to predict.

Even if I did, I wouldn't know how the market would react. It could happen like the Trump rally or it could fall. I plan on exiting at least half the position before the results, especially if we are in profits.

If the market moves away from the EUR in fear of the EU dissolving, we will test this the 1.04 levels again.

______________________________________

Summary:

Short EURUSD.

Sentiment has moved to the US after the whole healthcare bill taking full view of the market.

The EU troubles have flown under the radar, but i expect it to be the centre of attention till the French elections.

This presents an intersting risk: reward for a short.

The entries and exits are not 100% clear at the moment, but i am watching out for it.

Dealing with a losing position - The SP500 & Horses

Now I have a position that is open, it is not very big but it is still part of what I believe is part of a bubble.

I have talked about the reasons at length and why I think it is a bubble(please see here) and since then have developed more evidence to support why it is a bubble and little evidence that it is not. For e.g. 8 presidents of the US has come after a two-term president. 7 of them experienced a recession in the year following their election, Donald Trump is number 8.

I know gurus such as Druckenmiller and Ichan are long in the market but yet others such as Soros are short.

But I am holding a short position in the SP500, and down quite badly, slightly over 1% of my account.

Recovery here would mean averaging down, but more than my initial holding amount. Essentially doubling down on a losing bet to hope it recovers. This specific strategy is called martingale, a term that shares a term with horse riding.

Source: https://angusbarrett.com.au/complete-german-martingale-4866 

***********************WARNING***************************

I have to caution, there are many people who use martingale mainly because they do not wish to be wrong, or to be seen as wrong, or do not like to sell losers(prospect theory) especially on eToro. This is super dangerous because when they lose big, they lose everything.

I find this kind of trading is irresponsible if it is blind.

If you are copying someone using this, be aware that it will be like a Turkey effect. Everything will be fine and dandy for 364 days a year, and that one Christmas day. Well...

****************************************

But i do not mind employing it here because one of the marks of a good macro trader is to know when to call it quits and when to recognize it is an even better opportunity. For me, this is a better opportunity.

Using this is merely recovering some of the position, even if it turns against me, that is fine because i do not mind being down double this position.

Looking back at the SP500, each successive high was met with a retracement at least to the 38.2% mark. Using the martingale, i will try to recover the position in full and immediately reenter the trade so my exposure is still similar to what i initially bet on.

In math terms where "x" equal initial entry size

1x - - - > Enter additional Position, of 1x + 1.6x = 2.6x

Sell 2.6A when P&L = $0

Re-enter immediately with 1x

I can exit completely and move on, or i could re-enter at a later time, but i am doing this so i can constantly be exposed to the market and not lose out if my timing is off.

Can I just close 1.6A instead of closing everything, Yes i can, but i am doing this because transaction costs are minimal and exposure can be better managed this way. In other words, its easier for me to math.

If i were to enter current levels now it would look something like this:

	Trade Size (total)	Open Price	Current
Level 1	8.80	2268.7600	2,311.1231	19,965.09
			New Value	20,337.88
			P&L	-372.80
Level 2	14.08	2,337.6000	2,311.1231	32,913.41
			New Value	32,540.61
			P&L	372.80

While Breakeven is going to be somewhere around 2311 levels above the 38.2% fib retracement levels. i will not be upset if it trends higher following that.

For now, i have to wait for consolidation to make my entry, no telling how much more this rally will persist.

Oil Update & The Unfair Advantage

Hi all,

I am at heart and by training and circumstances am a technical analyst.

     - When i first picked up trading, this was what i learnt,

- for the first few years of trading this is what i used,

       - most books that i have read preach technicals

- when i was working part-time for a fund, it was based on technicals.

 Credits: https://www.colourbox.com/image/young-man-showing-poker-cards-image-4253145

In trying to find a way to trade oil, i ultimately found out the technicals did not hold in certain periods (e.g. Jan - Mid Feb 2016).

The recent Trump victory scenario is one period where technicals and fundamentals did not apply and some traders lost money (including myself). Yet as eToro traders we have one thing that gives us an advantage over all hedge funds and mutual funds out there.

The ability to walk away and not play the game.

I liken this to playing poker, if we have a bad hand instead of folding or staying or whatever, we can just walk away. If you are a large fund manager, it is difficult to liquidate large positions without adversely affecting your portfolio, transaction costs, move the market, scare your brokers, not to mention regulations and things like that.

But for us, if we have a bad hand, we walk. We do not need to keep positions open, nor do we need to have capital invested at all times.

We do not have a liquidity problem or have issues entering or exiting the market.

Many of you know i was thinking of entering the oil trade, but i have decided not to. The OPEC meeting looking back at the past few months is nothing better than a coin flip with reasons no more compelling than the last. So while my thesis holds true, and i believe in it, without having someone who specialises in oil giving this a review i will not pretend to fully understand all the powers at work. 

Maybe next week once speculation has died down. But in the meantime, I am walking away from the poker table.

______________________________________________________________________

Trading Trump Part 1 - Financials

Summary:

- Short Financial stocks, selected, only JPM at the moment

- Look for breakout

There was a good amount of movement in the Spider (Trader talk for the SPX500) during the election period. The initial price factored into the market was initially for a Hillary win, proceeded by the market selling off in fears of Trump winning, proceeded by a rally to an all-time high after the Trump indeed did win, erasing all fears of the Trump win.

To this effect, does the recent movement post-election make any sense? It is hard to say.

Looking at the spider for a broad view of the sentiment of the market might not be the most accurate given that it is a market weighted average http://www.investopedia.com/terms/p/priceweightedindex.asp) index and is weighted more heavily to the bigger companies.

Another way to take one step deeper is to look at the heat map (as seen below), this breakdown the various sectors and gives us a good look at the sectors that have benefited from this election.

Part 1 Financials - Overall Short position but not willing to risk

Repeal the Dodd-Frank and Jamie Dimon was considered for the post of the FED chairperson. This caused an understandable rally in the financial stocks.

However, after reading the book "Makers and Takers" & "Why We Want You to Be Rich: Two Men, One Message" plus watching some of Donald Trump's interviews, this may really be a question of credit availability to the regular man in the street.

Dodd-Frank was designed to reduce the risky lending practices that use to exist, I believe Trump, coming from a real estate background sees this as a bad thing because he sees first hand in his business the freeze in credit to the regular joe. This was elaborated in one of his older interviews with Pierce Morgan, he said he does not understand why people with actual income cannot get a proper loan.

Therefore it is important for us to differentiate the two aspects of Dodd-Frank

1) Relaxing the credit structure and requirements to reduce risky lending

2) Reduce the financialization of assets, this is in the realm where derivatives lie and where the Mortgage Backed Securities were birthed from.

One such crazy example of this financialization is not allowing the banks to speculate or hold on to metals like aluminum. There is this huge issue where JP morgan held so much that a report emerged alleging JP Morgan Chase & Co. owned over half of the aluminum traded on the London Metal Exchange

All this to make money. This affected companies such as Coke and Pepsi who actually require these raw materials for which were being speculated on.

Will Trump dismantle Dodd-Frank to this point? Unlikely. One of his first marketing points for his campaign was that he was not in involved with the large banks. Unlike Hillary.

Given this scenario, share prices may have rallied erroneously to reflect an expected increase in derivative income.

While there will be an increase in loan income, it is best then to look at banks with a differential between loan and derivative income to best reflect this thesis.

Looking at the Comptroller of the Currency report on Derivatives, JPM seems to have benefited the most in the last quarter from Derivatives making a total of US$2.8 bil in 2Q2016 in relation to net income reported by the bank' total Net income applicable to common stockholders at $5.7 bil (representing over half of possible income).

It is easy to see why the expected increase in derivative income would have such a significant effect.

Unless we see a significant increase in commercial banking lending as well as consumer & community target, this coupled with increasing yields, it is unlikely for JPM to return the increased relative P/E expected of this spike in price. 

Target: JPM a minimum reversion back to initial pre-election prices, at $67.70, a $9 correction over today's price.

Thesis likely to be realized on clarification of the Dodd-Frank or earning announcement reports.

GBP/USD Have we found the bottom?

Source: http://www.gannett-cdn.com/

Trading one currency against another is a matter of relative value. The Pound vs US Dollar has taken an absolute beating recently; can we conclude that the GBPUSD has reached the peak of its decline? The last time the currency pair reached this low was far back at 1985.

Are we experiencing the same thing? Or is this time different?

Taking inference from the book "This tine is different" by Carmen Reinhart and Kenneth Rogof; the phrase is worth contemplating. Let us consider the 1985 precedence and see if we can draw any inference from the two scenarios

_______________________________________________________________

1985

For the UK the 1985 was the Thatcherism era where shoulder pads and Neoliberal policies dominated the United Kingdom policy.

The policies enacted by the "iron lady" increased unemployment and low income manufacturing jobs were fizzled out. Consequently, citizens were encouraged to purchase homes and invest in the stock market. The economy grew worse and as a last resort, companies like companies like British Telecom (1984), British Leyland (1984), Rolls-Royce (1987), and British Steel Corporation (1988) had to be taken over by the public sector. Things actually got a lot worse in the UK before they ultimately became better.

At that time, the economy in the US was an exact opposite when Ronald Reagan was in power; The GDP growth was good; unemployment at a record low and economy buoyant.

As of 1984, GDP growth in the UK was only 2.26% compared to 7.26% in the US. Pertaining Debt to GDP, US was just starting to mount up credit; rising from 38.4% to 41.7% while UK lowering from 43.5% to 43.4% is not enviable at all. As par unemployment, the US experienced a considerable decline from 7,6% to 7.2% while unemployment rate in the UK rises to record high of above 11%.

(numbers courtesy of FRED, Office of Nation Statistics(UK) and World Bank)

_____________________________________________________________

Today

Fast forward to the present, the US economy seems to have limited prospect for improvement while at the same time, there is no reason to anticipate a decline. According to Ray Dalio analysis, we might have reached a state where we are "pushing on strings" a situation which he said an "asymmetrical risk to the downside" may likely occur.

GDP growth for both countries stand modestly at 2%-2.5% and unemployment for the two nations is relatively low - just above 5%. Debt to GDP ratio in the UK is relatively low compared to the US, standing at 84.4% while that of the US is at an all-time high above 100% mark.

The difference between the two giant economies can only be described as marginal; with the US having a higher downside risk due to GDP to debt ratio and elections for the POTUS just round the corner.

With Brexit coming to reality, it is no longer news that the UK is not a part of EU anymore. But, how it will be implemented is presently uncertain. Whether it will be a soft or hard Brexit remains a mystery.

Bear in mind that one of the reason why UK decided to leave the EU is to restrict other EU citizens from living and working in their country; this will negatively impact the stance of London as a financial hub in the sub region. Also, due to the fact that the services sector form the bulk part of the GDP, the country may be at the verge of decline to the old times.

The Brexit minister David Davies did promise during the negotiation for Britain exit that the British government will do whatever is required to uphold the good standing of the markets and financial sector.

Although Prime Minister Theresa May is in consent and would prefer to have the financial industry maintain a status quo; the possibility for other countries such as Germany taking over the role as the nucleus of the EU financial sector is quite tempting. One may be safe to assume that quite a number of countries will be interested in taking over the role erstwhile occupied by Britain.

________________________________________________________

Conclusion

In event that a hard Brexit occurs, the major driving factors of the UK GDP will be negatively imparted and a recession with the potency decline leading to the 1985 economy disparity between the two countries may be inevitable.

The fact that we are heading back to the 1985 economic discrepancies between the US and the UK cannot be overruled. But till that event happens, it is more likely for us to see a recovery as the discrepancy of outlook is not as bleak as it was in 1985.

Interpreting the possible sequel of events in financial terms; one could expect the GBP/ USD pair to recover slightly at least until the terms of Brexit are made clear. Technical analysis shows the pair standing at around 1.22000 with a downside of 1.0600 (close to the 1985 lows). A recovery to 61.8% Fibonacci level will reach an upside of 1.3900.

Evidently, the risk/reward ratio of trading the currency pair is in favor of the bull

I love etoro: News Confusion and Interpretation

The headlines on the front page of the

Wall Street Journal

, front and center, read "Yellen Sends Strong Signal on Rates."

The Financial Times reported

, "Gold bugs initially breathed a sigh of relief after Fed chair Janet Yellen said the argument for a rate rise had 'strengthened' but stopped short of signaling that a move could come in September

Fed vice-chairman Stanley Fischer, who was interviewed on

CNBC

soon after the speech, played the interpreter role. Mr. Fischer made "some bullish remarks on the US economy" and then said that "Ms. Yellen's remarks were consistent with the possibility of a rate rise as early as next month."

These are the news sources, pay close attention, remember the markets make little sense and hindsight is 20/20. I was discussing this with a friend who does Options for a very large bank in Singapore.

For simplicity I shall use the USDJPY, as I am in it, as a proxy for our discussion. We were agreeing over the initial movement of the USDJPY market was correct from an academic economics perspective.

However, the market shortly reversed. The following day, I had another conversation with someone else on how the upward movement was academically correct given the circumstances.

So who is correct? The answer is not clear, nor black or white. A couple of students who study Finance is not a good proxy, neither are the popular news outlets WSJ, BT and CNBC.

When it comes to life, I end arguments on how the market should react with a lot of people with a simple statement. If you know the market, why don't you trade? After all smart, high profile traders such as Bill Gross use economic conditions and their track record shows what they are talking about.

Etoro makes a lot of sense because no matter what someone says, the proof is in their trading.

eToro AUS Capital Limited AFSL 491139. eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk.

Stay safe people!

USD/JPY: Abenomics effect

So how far can the USD/JPY go? Let us take a stroll back in history and see what the USDJPY did.

I believe the Brexit caused a rush into USDJPY as a safe-haven currency due to its G3 status. This would nullify the effect of the QE somewhat and the BOJ would not like that. 

However, the BOJ may not have wanted to intervene in anticipation of the upper house election results  So now that it is over, and even though no concrete plans has been announced, Abe has spoken and he aims to continue to provide stimulus to the economy with a new round of QE.

One of the expected effects of classical and neoclassical economics is that currency will weaken upon the use of such fiscal policies that Japan has been using above. 

This in turn should stimulate the economy and help bring it out of deflationary territory and is the goal of "Abenomics". Abenomics has also traditionally been aggressive and I don’t expect it to stop with their next QE or QQE. 

Whatever the case, the last 2 day move was so strong it is truly incredible.  The moves over the last 2 days was greater than what was previously experienced by the market, i believe this is due to the economic backdrop of the Brexit and historical information can't help us here.

					3 Day	1 Week	1 Mth
Abe upper house election					4.87 (2 Day Move)	??	??
QE with Negative int rates					-0.7	-0.76	1.25
QE Expanded to 80 Trillion					1.27	2.21	6.06
BOJ Announces QE(60-70 trillion Yen)					3.02	3.34	2.69
10.3 Trillion Yen Stimulus Bill					-0.39	0.9	5.15
Average					1.30	2.15	4.63

I was already in the position before the elections expecting Abenomics, I will look to exit half my position before Friday as i expect profit taking. The other half will be put on a trailing stop and i hope it runs for another month.

Stay safe people!