Tuesday 31 March 2009

Trading the G20

One of the most obvious effects of the credit crunch has been to show the importance of politics in the markets.
These past years, hedge funds and banks have had analysts who were quantitative experts. They were maths grads and number men/girls. These people were the masters of the universe of financial prediction. And they were all wrong, almost entirely, swept away by the mistakes in their own algorithms (there is worthwhile comparison piece to be done here with Global Warming algorithmic predictions, but that is for another day).

Instead, perhaps those rubbished political economists should have had more of a say. Certainly the G20 is a gathering of the world's leaders and will point the market direction for some months to come.

In this situation it is therefore perhaps best to think of the likely political outcomes and develop a market strategy around that. Here is what I will do:

- Short Gold (ETF) - Yup, Gold falls on Dollar strength and economic recovery in other commodity assets like copper etc. My assumption is that the G20 will spin as a big success at least until the weekend. As such there will be continuing pressure on Gold which will see it drop below $900 an ounce.

- Buy Banks and Insurers - Stability as promoted by the G20 will push a further small recovery in these bombed out shares

- Buy Shipping (there is even a UK ETF now) - G20 will push for a resumption and completion of the Doha trade negotiations, this will boost the prospects for world trade and shipping in the short term.

All these trades have a very short time horizon as the events are this week and will probably unravel as countries start to spin success in different ways when the leaders are back home next week. I don't plan to stay in them beyond Friday. I wonder how the quants are modelling this?
UPDATE: Ok, closed out my positions this morning, SBUL, bought at 45.8, currently 47 (not selling yet, Gold might drop further if it closes under $900). LLOY, bought at 67.7, sold at 75, ETFS shipping, bought at 1140, sold at 1171. Aviva, bought 220, sold 245. Everything in the black, but I guess was a good week for the markets anyway. Still satisfaying though.


dearieme said...

To pick a nit, ".. the mistakes in their own algorithms" is not quite right. Their algorithms may have been pure as the driven snow; unfortunately, they were lousy models of reality. Someone - I've seen it attributed to George Box - said that all mathematical models are wrong but some are useful. These financial models have proved worse than useless. As for Climate Science; the modelling there may have started off as inept but much of it has become crooked.

CityUnslicker said...

Dearime, you are right, as per usual!

Anonymous said...


That’s what my professor of geology used to tell us as well when we would stand up and confidently present what the oil and gas reservoir was going to be like based upon our models. But his phrase was "all models are wrong but some are less wrong than others" that always brought us down to reality

Demetrius said...

All models, theories, etc. are based on the past. They cannot be based on the "present" because that is only a transitory moment in time. The future is never the same as the past. There may be similarities, or lessons, or aspects of geophysics or human conduct from which we can infer possibilities, but this is an art. When you try to put human conduct in man made constructs that relate to a past situation into rigorous fixed equations or belief systems then you are asking for trouble. And the more you adhere to a fixed system the more likely you are to go get it.

Sebastian Weetabix said...

Models are only good for hindcasting.

CityUnslicker said...

I was shocked to read that many CDO models could not accomodate a negative number for house price growth. They literally had continual uplift to house prices in the model!

CityUnslicker said...

day one of this position: +3%

Steven_L said...

I'm proud of my last punt too. I bought some Man Group shares at 198.5p a couple of weeks before they annouced their results round up thingy.

After reading their last annual report I realised that most of their senior staff got paid their bonus in stock that was locked in for a few years - in other words the dividend was their bonus and the stock their savings.

I gambled on the basis they would be really greedy, maintain the divi and sacking people. They surprised me by going one step further and announcing a buy-back!

Stoploss is off and I'm in for the ride.

Unless, of course, I've just jinxed myself for being so cocky.

CityUnslicker said...

Thursday Midday, just before G20. Will close positions over the course of friday.

Shipping ETF up 0.5% - pretty poor this etf, no volume in it.

Short gold - up 3%

Long banks & insurers - Up 10%