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We are a hedge fund that specializes in macro/value research and systematic trading. Rigel_R_Logo_SmallerOur research universe consists of a broad spectrum of asset classes that include commodities, equities, interest rates, and currencies. We currently manage two systematic portfolios that invest in all major asset classes: 1) Shuttle, a systematic, momentum based, trend-following strategy, and 2) Reversio, a systematic, sentiment based, counter-trend strategy.

The information contained in this blog, including any links, is provided solely for informational purposes with the idea of enabling a free intellectual exchange between the author and the readers. Any dissemination, re-distribution or other use of any information on this blog is unauthorized. Under no circumstances should the information contained herein be used or considered as an offer to sell, or a solicitation of an offer to purchase, any security or investment service. The information presented herein is presented in summary form and is, therefore, subject to qualification and further explanation.


Rigel’s Currency Corner – Long GBP/AUD

This article is a continuation of our short Australian dollar “AUD” thesis. In this post, we zoom in on the battered British Pound Sterling “GBP”. We are of the view that all the negative news (BREXIT, lack of a clear majority in the parliament, Carney’s recent remarks) is most likely priced in to the GBP. On the other side of the equation, we see plenty of signs that China is most likely headed into a recession and we don’t think this has been priced in to the AUD.

  • China iron ore prices show no signs of bottoming. The pain continues!
  • There has been a sharp turn around in China’s inflation surprise index. With the demographic time bomb that is ticking in China, it is deflation surprise that we should be interested in, not inflation surprise!
  • China’s broad money, as measured by M3, grew at an average rate of around 15% from 2001 to 2013. It started decelerating in 2014 and is continuing to decelerate. It is now growing at a year over year rate of just over 10%! Decelerating money supply is a harbinger of ‘slowing economic activity’ / recession.
  • What is even more alarming is that China’s yield curve, as measured by 10 year yield minus 2 year yield, has now inverted. Another warning sign of a recession to come!
  • All signs are now pointing to a recession in China and being short AUD is a sure way to play that game.

To continue reading, please click here.

Rigel’s Currency Corner – Long EUR/AUD

On the monthly chart of the currency pair, if you count the 2008 high of 2.08 as the high and 1.16 low of late-2012 as the low, then the price action fits the following pattern:

  1. The ‘high to low’ move was followed by a clean break of the 76.4% retracement level and a successful test of the 61.8% retracement level of that move.
  2. The pair found support at the 76.4% retracement level, broke through the 61.8% level and successfully tested the 50% retracement level.
  3. The pair found support, again, at the 76.4% retracement level and as of this writing is testing the 61.8% retracement level around 1.5125.

A clear close above 1.5125 should open up further possibilities of retesting the 50% retracement level at around 1.62, that’s a thousand points if you are a forex trader.

Please click here to read the entire article.

The Ascent of Aurum – Long Gold

Exactly a year ago, in May-2016, we published our analysis of Gold demand trends provided by the World Gold Council. We wrote:

Gold price charts and physical gold demand trends offer a dichotomous view on the future of gold price. On the one hand, the extremely lose [sic] monetary policies of the world, and the phenomenal 1st quarter performance of gold relative to every other major asset in the world makes for a very compelling bullish case and on the other hand the physical gold demand trends paint a very bleak, if not scary, picture.

The World Gold Council recently published their 1st quarter 2017 report on gold trends but this time our analysis of that report leaves us with anything but a bearish outlook on gold. We have turned massively bullish on gold and we will outline our reasons below.

Our thesis rests on three reasons:

  1. Declining global mine production in years to come — a result of past, massive, haircuts to capex by some of the largest gold miners around the world. Gold miners’ Capex has declined 65% from 2012 to 2016.
  2. Gold is a safe haven asset and according to world Gold Council’s most recent report on demand trends, current uncertainties in China and Europe are driving these flows.
  3. Technical analysis of gold price chart reveals a strong bullish set-up at a time when this trade is far from being crowded.

Please click here to read the entire article.

Long Vega of Vega – an update on the breadth of the US stock market

Breadth of the US stock market (number of new highs minus number of new lows) is pointing to continued weakness in the markets.

Over the last five years, on average, the price of the S&P 500 index has been about 20% above its long term mean. This dynamic broke down in June-2015 and it coincided with a text-book-correction: dropped 20%, tested support and bounced off. Since then, however, it has struggled to go over 16% of its long term mean. The last two times it tried to get above 16% (Feb-2017) and (May-2017) it turned back down. The market has lost its upside momentum.

Every time the ratio of 1 month S&P 500 volatility to 3 month S&P 500 volatility spikes, it, almost always, is accompanied/followed by a decline in S&P 500. Why would this time be any different?

When an asset that has been appreciating for the last 8 years turns lower even by small amounts, the introduction of negative daily returns to its return distribution tends to increase the volatility of that asset by a meaningful amount. While we are long volatility we think a better trade structure might be to focus on acquiring long exposure to volatility of volatility of the US stock market. In our view, one of the best trades for the next 12 months is to be long Vega of Vega. We will continue to develop this idea and post our thoughts on an ongoing basis.

Please click here to read the entire article.

AUD/JPY – The Boat We Missed

We published a thesis yesterday for being short Australian dollars “AUD” and Long Swiss Franc “CHF”. In conclusion, we wrote: While we started drilling down on this idea because of our bearish view on AUD, in conclusion we have to admit that we like this trade more because of the CHF component.

Despite our gargantuan temptation to want to focus on CHF, we did our best to resist it and focused instead on the bearish AUD idea chain. We will be sure to publish our report on a long CHF idea in the coming days. This article, however, is a continuation of the short AUD idea chain. Our focus here is the Japanese yen “JPY” , another safe haven currency.

For those of you who haven’t followed along, please check out our previous posts for a quick primer on this idea chain:

  1. The Aussie Dollar, In A Checkmate!
  2. Australian Dollar – A Bearish Outlook But A Bullish Set-Up
  3. Rigel’s Currency Corner – Short AUD/CHF

Our Thesis

Most of what we laid out yesterday applies to the AUD/JPY pair as well. Salient points below:

  1. Protection is cheap:
  2. In times of crises, during a risk-off mode, the US dollar, the Japanese Yen, and the Swiss Franc are seen as currency safe-havens.
  3. The Bank of Japan’s (BOJ) balance sheet size to GDP ratio is at 90%, currency intervention from the BOJ is a low risk.
  4. China devaluation risks have disappeared only from the minds of traders.

Please click here to read the entire article.

Short AUD/CHF

Our Thesis

  • We have been voicing our views on the Australian dollar “AUD” for the last couple of months. For a primer, please check out our previous posts: The Aussie Dollar, In A Checkmate! and Australian Dollar – A Bearish Outlook But A Bullish Set-Up.
  • Protection is cheap:
    • Despite the most heightened uncertainties surrounding China, North Korea, Middle-East, Russia, Turkey, Trump, etc. protection is cheap.
    • Global markets are not prepared for a risk-off scenario.
  • In times of crises, during a risk-off mode, the US dollar, the Japanese Yen and the Swiss Franc are seen as currency safe-havens.
    • “Ranaldo and Söderlind (2010) showed that the yen and Swiss franc appreciated in a systematic way when risk peaked… De Bock and de Carvalho Filho (2013) found strong evidence for the same conclusion – returns on the yen and Swiss franc outperformed those of all other currencies when risk spiked.” – Adrian Jäggi, Martin Schlegel, Attilio Zanetti.
  • The Swiss National Bank’s (SNB) balance sheet size to GDP ratio is nearly 100%, higher than BOJ’s which is at 90% of Japan’s GDP.
    • We will not dare assume that the probability of a currency intervention by the SNB is zero but we do think that the bar for a new round of currency intervention is high considering SNB’s obese balance sheet.
  • China devaluation risks have disappeared only from the minds of traders.
    • Being short the Australian dollar against the Swiss Franc, in our view, is the best way to capture this risk premium.

Please click here to read the entire article.

Short ICICI Bank – I see; do you?

In India, public sector banks’ advances-policies are dictated by the ministry of finance. Every year, the ministry decides where funding is needed and the banks are given targets for specific sectors and the target-chasing begins. I know this first hand because both my parents were branch managers at two different, such public sector banks and ‘Banking’ was a common dinner-time topic. Private sector banks, on the other hand enjoy a much greater autonomy on their advances-portfolios and as a result are much more efficient in designing them. This is fully discounted in the markets: average P/B of public sector banks is 0.5x versus 2.4x for private sector banks.

ICICI Bank Limited (NYSE: IBN) is the largest private sector bank in India and in our view, ICICI’s common stock is a sell for the following reasons:

  1. ICICI is priced like a private sector bank but its NPAs are comparable to public sector banks.
  2. Heavy exposure to ‘Infrastructure and Energy’ Rising Non Performing Assets (NPAs).
  3. Infrastructure Sector is in limbo due to policy-bottleneck.
  4. Revised Reserve Bank of India (RBI) Guidelines — NPA calculation.
  5. Sky High EPS Growth Expectations. Over the next 5-years, EPS is expected to grow 22% p.a.

As at the end of FY-2016, ICICI had made provisions for less than half of its total gross NPAs. We think they will be forced to make provisions for the remaining NPAs over the next few years, which will drive their EPS and valuations much lower.

Please click here to read the entire article.