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.

Breadth of the US Equity Market – Where’s The Damn Towel

As much as we prefer to look at the long term behavior of the advance/decline indicator, how can you not focus on its shorter term behavior when you are long a market that’s making new highs? The health of the S&P 500 index looks terrible as measured by net advances (advances minus declines) on a daily basis. This is not a typical bull market behavior. The fact that we are witnessing negative net advances when the market is supposedly the strongest it has ever been is a screaming anomaly.

This article was chosen for publication on Seeking Alpha. Please click here to read the article.

The Currency Crocodile

The BIS publishes excellent data on almost all the currencies in the world; one of the data sets that caught my eye recently was this one: BIS Effective Exchange rate, CPI based, trade weighted. Please click here to continue reading.

 

My Macro Thesis And Its Derivatives (continued)

Cassel’s main argument was that the mismanagement of the gold standard is what led to the severe depression of the 1930s.  Just as Cassel argued that the mismanagement of gold led to the depression of the 1930s I’d argue that the mismanagement of the US dollar has already triggered the depression we are living in. Please click here to continue reading.

My Macro Thesis and Its Derivatives

Karl Gustav Cassel, who is known for his notable contributions to the theory of Purchasing Power Parity, is also one of the only economist who rightly predicted the depression that we all now famously know as The Great Depression. Please click here to continue reading.