Wednesday, October 27, 2010

Where is WIT/Brent Arbitrage?

There is one thing I don't understand about oil market. There are two major standard oil contracts on futures markets. There is West Texas Intermediate, aka WTI aka Texas Tea, traded on Nymex. And there is Brent, which is oil extracted from North Sea and traded on ICE. Usually price difference between WTI (what is usually presented to us by TV networks and internet sites as a price of oil) and Brent is below 2 dollars per barrel. But quite often this price difference can jump to 3-4 dollars in either direction.
My question is: why such price difference can exist and why it can stay for several days? Historically, price difference is below 2 dollars, so why there is no simplest price arbitrage: if difference above 3 dollars, sell more expensive oil and buy the one which is cheaper. Close contracts when price difference falls below 2 dollars.
Things would be much easier if there was a good liquid ETF for Brent. The existing one, The United States Brent Oil ETF (BNO), is not liquid at all. There are days when it's not traded at all and average daily volume is just about 12000. If it was liquid, it would be possible to short BNO and long USO, or vice versa. Of course, oil ETFs don't represent price of oil very accurately, and such trade would be riskier than direct futures trade. Anyway, I consider this trade when (if) BNO becomes liquid.

So, why there is no arbitrage?

Full disclosure: no positions.

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Wednesday, October 20, 2010

State of the Market Report

I'm still listening to the market. But it's time to come to some conclusions. As usual, I'm trying to watch market from three points of view: fundamentals, technicals and sentiment.


Hard to judge. Some companies report great earnings. Some, not so great. Manufacturing fell in US in September, this is minus. Fed is probably determined to go with QE2: big plus. I'm going to judge fundamentals as slightly bullish, because "you should never fight the Fed".


Screaming. Major indices bounced off 13-day moving average yesterday, for the second time during this rally. 50-day for major indices is just about to cross above 200-day MA, that's Golden Cross. The only technical indicator which is bearish is relative strength: markets are grossly overbought. But they are overbought for more than a month already. Besides, overbought condition (as well as the oversold one) can be worked out with time. Technicals are very bullish.


Despite very bullish calls made by such insignificant people as Warren Buffet, Legg Mason's Bill Miller, Jim Cramer etc., most calls are bearish to hysterics. However, there was some turn to bullish sentiment on CNBC lately. I'd judge sentiment as mostly bearish, but changing. Being contrarian indicator, it's bullish but changing to less bullish and maybe bearish.

Of course, there is something fishy in this rally. Still a silly reverse correlation between dollar and all (or almost all) asset classes. Still grossly overpriced commodities. But as Buffet, Miller and Cramer tell us, stocks are extremely cheap compared to bonds. Something gotta give. Another development: looks like fixed income is topping now. Not sure about Treasuries, but looks like corporate bonds are at the top.

Rally is great. You make money without moving a finger. The question: when and how it ends?

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Monday, October 18, 2010

Back to Even

I missed this moment. Some day in the middle of September my portfolio got back to even, compared with the end of 2007. It's up several percentage points since.

One more illustration that somebody without Wall Street experience, not a professional investor, can beat major indices in the long run. I had years when my performance was below major indices, but in most years I managed to beat them. My portfolio beat major indices for any 5 year interval since 1998. I think it's even beat for any 3 year interval, but not completely sure.

It's not blind luck. It's not some system. Just a lot of work, at least 10 hours every week, usually much more. Searching for picks, trying to understand current state of economy and markets, trying to predict trends. Sometimes right, sometimes wrong. Huge successes, like with Apple (AAPL), Yahoo! (YHOO), Google (GOOG). Huge disappointments, like (TSCM). Laggards like Home Depot (HD). It's all averaged out to nice 13% annual growth since 1998.

Cause for celebration? A little bit early. I'll get my bottle of good champagne on December 31st. For now, back to work.

Full disclosure: at the time of publication author had a long position in GOOG and no positions in other stocks mentioned. Positions can change any time.

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Monday, October 11, 2010

Listening to Market

First week after vacation. First impressions: market is crazy. All dollar gains of last three months: gone. Commodities shot up. Old game: if dollar is down, everything (stocks, commodities, even bonds) is up. OK, I can lament and whine, but it doesn't make me money. Or I can take different position, and remember what Niels Bohr supposedly answered to Albert Einsteins's "God doesn't play dice". The answer was: "Don't tell God what to do".
I decided that instead of telling Mr. Market what to do, I should try to understand what is it trying to tell me.

First: panic about EU countries possible default has gone. Market forgot about the issue.

Second: panic about US dollar future is back in vogue. Never mind that we are still in deflation, everybody is worried about future inflation, buying gold, commodities, and, which is funniest thing of all, Japanese yen. It's funny, because Japanese debt/GDP ratio is much higher than ours and government and Central Bank are explicitly trying to bring yen down.

Third: the only trend of the last three months which is still alive is fixed income bull market. All bonds are up, even junk.

Fourth: stocks are going up. S&P 500 index broke through 1150 resistance level, Dow Jones is above 11000, and Nasdaq composite is above 2400. This is the most important trend, because as most of my money is in US stocks, I can just sit and watch it grow.

What am I planning to do?

EU stocks. I think they are dead in the water for a long time. No action here.
US dollar:. No action either. I don't feel current trend.
Fixed income. Already sold all junk. I will keep remaining bank preferreds and REITs.
US stocks. I'm bullish long term, but don't see anything I'd like to buy now. That doesn't mean there is nothing to buy, just that I haven't found what to buy yet. That's main direction of my research for the current week.

Trend I don't see: there is a high probability that Bush tax breaks are not extended, including capital gain and dividend taxes. Capital gain increase from 15% to 20% isn't that big, but dividend rate increase from 15% to the marginal rate is huge. Why high yield stocks are going up?

I'm listening to Mr. Market...

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Monday, October 4, 2010

Back to the Game

Just returned from vacation on Hawaii. Fresh and rested, I'm back to the game.

First order of business, made some changes to my fixed income positions. Out goes Wells Fargo (former Evergreen) Advantage Income Opportunity Fund (EAD). Fund curently trades at more than 5% premium to its NAV, that's too much. I'm really surprised with the rush to buy any corporate bonds which I see in the last four months. I'm all for high quality corporate bonds, but junk is bought in high quantities as well. Since EAD holds mostly junk, I don't see any reason to hold it in risky environment.
In comes more of American Capital Agency Corp. (AGNC). This is a REIT with 20% yield. There is a small risk, this company is about 800% leveraged, but it's risky only if interest rates are going up, which is highly unlikely in the nearest 12 months.

Full disclosure: at the time of publication author had a long position in AGNC and no positions in EAD.

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