Update Note: Volatility is Officially Back

In retrospect, June 2014 was actually the exact bottom of the volatility, as we wrote back then as of June 29, 2014:

“In addition, the volatility, which the Global Macro funds have relied on to make money, has also been tamed by the Fed during the last couple years. However, Contrarian Capitalist thinks the volatility will come back towards the end of the taper, should the course of the taper continues.”


Source: Yahoo Finance

Brief Thoughts on the HK Shanghai Stock Connect

Short Shanghai Index and Long Hang Seng Index: Reward to risk might not be attractive enough for the trade during the short term as of 11/30/2014; watch out for further stimulus support and lower interest rate around or before the Chinese New Year, as of 11/30/2014.

Below, is our current take on the topic.

HK-Shanghai Stock Connect Research

A Current Take On The Copper Market

Copper: short term Neutral, long term Bearish at $3.05 per pound as of 11/08/2014

Below, is our current take on the copper market.

Copper Research


Update as of December 28, 2014

The recent weak data from China has played into effect on copper price at least for now.

COMEX Copper Futures, Continuous Contract #1 (HG1) (Front Month)


Update Note: Changing Expectations

We expected the Fed to reverse the QE or even start another round of QE when we wrote in June, but we expected the Fed to do so after bad economic statistics start kicking in. However that has not been the case for the past week as the following chart from Zero hedge has shown; the Federal Reserve is not giving forward-expectations based on changing economic statistics but merely on the stock market index. While we acknowledge the mere credibility that the Federal Reserve has had in the economic history of United States, we were still amazed by how desperate on some Fed members (both dovish and hawkish) on protecting the stock market returns for an approximately 10% correction.

The expectations have been changed somewhat, but the fundamentals of the real economic picture of United States has not yet kicked in, which might require some time. Moving forward, are we going to expect something like the following chart to happen again? Very likely. It’s just a matter of times on them “talking” about delaying the QE or restarting the QE (or another form of monetary easing) before it really happens.


Source: Zero Hedge

Disclosure: The author currently does not long any S&P puts at the time of publishing this article.

Update as of December 18, 2014.

This time is Janet Yellen talking about delaying interest rate hike on December 17, 2014 after a 5% drop on S&P 500.


Update Note: The Roaring Back Volatility

As we previously mentioned here in the end of June this year, the VIX was close to a historical low point, which was considered abnormal; we believed that a large reason of it being this low was due to Federal Reserve’s monetary support of QE program. As much has been said about the strong correlation of Federal Reserve’s balance sheet and U.S. equity index, we will not touch upon this topic here. The QE program will end this month and the volatility roars back as the program approaches its ending point. We continue to believe that a higher volatility will maintain and S&P 500 may have a major correction over the short term period, if not this time.


Bonus Chart:

Bonus Chart

Source: Alchemy of Finance, George Soros

Disclosure: The author is long S&P puts at the time of publishing this article.

A Reflection on Japan’s “Quantitative Freezing”

USD/JPY: Bullish (depreciation of Yen against Dollar) within the near term future at 108.94, as of 09/21/2014

As Contrarian Capitalist discussed two years ago in summer 2012, Yen has depreciated against dollar from a low of 76 Yen/Dollar to 105 Yen/Dollar, a 38% movement during the last two years. However, another part of our prediction has yet come to reality. The yields on JGBs have only gone lower during the same time period; a fully powered central bank such as Bank of Japan can easily delay the burst of a bubble for years. The further it delays, the bigger and more severe the bubble may become. Since April 2013, Bank of Japan has re-initiated another round of quantitative easing program under the Abenomics.

Dollar Yen

Source: Yahoo Finance

BOJ Balance Sheet Projection

Source: Bank of Japan


“Quantitative Freezing” a term that was coined by The Economist’s recent issue, figuratively depicted the current distorted market condition of the 10-year Japanese government bond market.

Japan Quantitative Freezing

Source: The Economist

We dug into the source of the data and compiled a chart with total JGB trading volume and longer time frame, in order to show a better perspective on the topic. As The Economist further put, Bank of Japan currently buys (monetizes) 70% of total newly issued Japanese Government Bonds and owns 20% of total outstanding Japanese Government Bonds; we suspect that the recent spike (marked by red circle) on the volume is majorly due to purchases from the Bank of Japan. It is also important to note that the JGB purchase volume by foreigners has been increasingly exceeding the sale volume since the financial crisis, which represents a bigger interest in the JGBs from foreign investors.

JGB Total Trading Volume
JGB Trading Volume by Foreigner

Moreover, we have found that JGB futures and JGB futures options trading volume have dropped to close historical lows, marked by the red line in the following chart. Perhaps, Bank of Japan is not purchasing those two types of securities as part of the QE program, which could be proved from the table at the bottom of the post.

JGB Futures Options Trading Volume

JGB Futures Trading Volume

In addition, as the following quote from the recent article in The Economist indicates, large JGB bond trading desks at European banks have been laying off traders as the volume of JGBs continues to fall off.

“Yet a little market malfunction would be a small price to pay for lifting Japan out of deflation. In fact, argue some, the situation is of concern only to bond traders. They are making rather less money than before, says Peter Tasker of Arcus Investment, a fund-management firm. Trading desks could be pared down if volumes fail to rebound, says Ki Cho of PIMCO, a big bond-fund manager. Some European banks have already drastically shrunk their JGB departments.”

Volume is only a factor of liquidity. We are afraid that when the whole trend reverses, would those desks be able to hire people fast enough to fully capture the trend? Or a better question is, would liquidity be there when the whole trend reverses?


According to the definition set by Bank of International Settlements,  a liquid market is “a market where participants can rapidly execute large-volume transactions with a small impact on prices.” Based on a recent paper (November 2013) published by Bank of Japan itself, “Indicators Related to Liquidity in JGB Markets”, liquidity can be evaluated in a number of indicators, including turnover/turnover ratio measuring volume, the bid-ask spread measuring trading cost, the daily price range to turnover ratio measuring market resiliency, and information on the trading board measuring market depth.

It should be noted that the paper aforementioned above concluded that the introduction of the recent QE program in April 2013 had only had minor impacts on the JGB market and JGB futures market through November 2013. The paper supported its conclusions by focusing more on JGB futures market than the JGB market, but we don’t think the recent QE program should have any significant and long term liquidity impact on the future market as Bank of Japan does not directly intervene that particular market. However, we do want to present couple charts from the paper, which could be essential to monitor through the present day, even though they didn’t show red flags as of November 2013.

The following chart presents the turnover rate and the turnover ratio for the newly issued 10-year JGBs.

Turnover of Newly Issued 10-Year JGBS

Source: Bank of Japan

The following chart is the bid-ask spread of all the JGB futures and newly issued 10-year JGBs. However, if one takes a second look at the chart, he should wonder why is the author comparing all the JGB futures to only newly issued 10-year JGBs, instead of comparing all JGBs and newly issued 10-year JGBs. In addition, why did the historical bid-ask spread data for newly issued 10-year JGBs only go back to 2009 but not to 2005? We don’t know the answers to the above two questions, but we don’t think the conclusion that “the spread widened somewhat after the introduction of QQE but has moved within the past average range” is fully supported by the following chart.

Bid-Ask Spread

Source: Bank of Japan

The following chart is the daily changes in the Daily Price Range to Turnover Ratio for newly issued 10-year JGBs that are decomposed into the daily price range factor and the turnover factor.


Source: Bank of Japan

The full paper can be accessed here.

Nevertheless, the liquidity of the JGB market started to become a concern in 2014. In April of 2014, cash 10-year bonds were not traded for a day and half, the first time in 13 years. In fact, even the market participants of JGBs are really worried about the liquidity issue. Based on a recent Meeting of JGB Market Special Participants dated as of March 2014, the following excerpts from the minutes are quite illuminating. The liquidity of 15-year Floating Bond is practically provided “only” by the Bank of Japan. And we would agree with their view that there is a high probability that at this stage of cycle, any additional major intervention from Bank of Japan would likely to reverse a dropping yield situation, at least temporarily, as it did in 2013.


Minutes 1

Source: Ministry of Finance

We are humble about our ignorance – it would be extremely difficult or even impossible to call the inflection point of this decade-long trend or the end point of the Quantitative Easing experiment.  However, this might be an early indication of a gradually reversing trend, as the imploding process gradually unfolds with increasing amount of quantitative easing from Central Bank of Japan and Abe’s determination to fight price deflation. And yes, Contrarian Capitalist continues to expect further depreciation of Yen against Dollar within the near term future (it actually did depreciate from 105 to 109 after this paragraph was written, we didn’t finish the whole post until today though), as the Fed continues to taper and initiate talks with potential rate hikes (for now) and an increasing probability that Bank of Japan will continue or expand its QE program.

A Quick Screen on Global Real Estate Markets

Irish Real Estate: long term Bullish as of 09/11/2014

Where can you hide your money in real assets in the next couple years in a global context? Let’s do a quick top-down screening process, starting from The Economist’s house-price indicators.

Global Real Estate

Source: The Economist

Hong Kong:

The average housing price in Hong Kong has increased by approximately 100% since 2008 and recently the upward trend has been topping. There is very high probability that the property bubble could burst at a level of 79 times the local rents.

Italy and Spain:

The worst two performers have been Spain and Italy. The two countries have been experiencing recessionary and deflationary pressure since the European debt crisis started. The average house price in Spain, has dropped by 31.6% since the first quarter 2008, much worse than Italy’s -15.2% during the same time period. As the two countries continue to fight high unemployment rates and shrinking economic activities after several years, thanks to governments’ resistance on budget austerity, Contrarian Capitalist expect those two countries will remain the worst places to invest in real estate assets in the near term future.


After a real estate bubble burst and a full scale banking crisis three years ago, Ireland’s property market price level is still 42.2% lower than the price level seen since in first quarter 2008. However, since last year, the trend has been reversing and Ireland has become the best performer among the surveyed real estate markets. The most important factor is also the fact that the country has exited the bailout program, which almost always distorts the recovery process. In addition, given the high probability that ECB will start its own version of QE program, asset backed purchases, and recent negative interest rate policy, real estate as an asset class in Ireland is certainly warranted for a more in-depth look. It should be noted that the yield on Ireland’s two-year note has recently fallen as low as -0.004%. Investors in Europe, to be flooded with liquidity, would likely seek for high-yield assets with more upside potential and less downside risk in Ireland.

The following table and chart represent the latest price movements of residential properties in Ireland.

Small Table

Source: Ireland Central Statistics Office

Residential Property Price Index

Source: Ireland Central Statistics Office

The following chart shows a year-over-year change for houses and apartments in Dublin and in the whole nation

Residential Property Price Index Annual Change

Source: Ireland Central Statistics Office

And, the construction activity is picking up.

Dwellings completions, number

Dwelling Completion

Source: Ireland Central Statistics Office

Finally, a quick screen from Bloomberg showed three real estate listing securities on Irish Stock Exchange, including Green REIT PLC, Hibernia REIT PLC and Irish Residentia, which could be researched into further for potential investment opportunities.


Source: Bloomberg


Update as of December 28, 2014

The price level of residential properties has continued to rise in Ireland through October 2014, from July 2014 when we wrote the original post.


Source: Ireland Central Statistics Office

An Interesting Case with Argentina, Part I

A brief on Argentina’s default

Argentina has technically defaulted on their debts as US Judge Griesa has blocked the country’s payment to restructured bond holders without paying the holdouts. The Finance Minister Axel Kicillof has claimed that Argentina cannot pay the holdouts without paying the restructured bond holders the same deal based on the RUFO Clause, the “Rights Upon Futures Offer” that was set to expire as of December 31, 2014.

But, why can’t Argentina just print the money and give out to the holdouts? Sure, that might trigger a devaluation of its currency, but that has been happening for the last decade, with a result of soaring M2 and a U.S. dollar black market. The most likely answer is the Argentine politicians don’t want to pay for it. And they didn’t, catching a lot of people off the guard, who expected that a final deal or compromise from either side will work out. Merval Buenos Aires, the Argentine stock index has responded to the shock by falling off approximately 10%, but has since then bounced back to a higher point based on optimism that somehow, at some point a final deal will be structured to work out.

Argentina m2


The Best Performer with a Default

The Argentine stock exchange, Merv Buenos Aires has been the best performer in Argentinean peso among the roughly 60 equity indexes surveyed by The Economist, increasing by 82.0% through August 27, 2014. Moreover, the index has also been the best performer, in dollar terms, increasing by 41.1% through August 27, 2014. It’s important to note the large divergence of 41%, between the index return in Argentine peso and the index return in U.S. dollar term (the biggest among the surveyed indexes), due to the ongoing devaluation of the local currency in a rapid pace.

World Market

Source: Economist

A more important question from the investor would be how long will the index keep going up, at what point will the index halts and starts crashing. In this case, Argentina has experienced an inflationary environment for six years since 2008 and the equity index didn’t start increasing in a rapid pace until October 2012, when Argentine peso started devaluating in a fast pace as well; since then the index has increased from approximately 2,300 points to approximately 9,800 points. You can barely see the effect of a default from the following historical price chart.

Argentine Stock Exchange Historical Chart