Global trading ideas for analysts and portfolio managers from Esoteric Insights. For more information and to sign up for a trial subscription, visit http://www.esotericinsights.com

1. The Esoteric
Report
Published
by,
Nariman
Point,
LLC
Monday
October
14th,
2013
Nariman
Point,
LLC
1

2. Global
Briefing
• SCll
no
resoluCon
on
the
U.S.
Government
shutdown
and
debt
ceiling
debates,
but
a
plan
should
pass
within
the
next
48
hours.
– PrioriCzaCon
of
payments
is
technically
a
default
but
a
8
week
debt
ceiling
raise
is
the
most
likely
outcome.
“Nudging
the
can
down
the
road”
in
the
worlds
of
a
TV
commentator.
ExpecCng
markets
to
rally
strongly
on
a
deal;
however,
it
could
fade
just
as
quickly
a
la
the
“no
taper”
announcement
rally
last
month.
• China
makes
another
round
of
comments
on
the
US’s
posiCon
as
global
reserve
currency.
– Chinese
inflaCon
rose
3.1%
YoY,
exports
fell
.3%
YoY.
• German
officials
cite
US
as
posing
a
larger
risk
to
Global
Markets
than
EU
or
Emerging
Markets.
– Angela
Merkel
sCll
has
not
obtained
her
coaliCon
government.
– Talks
of
EU
banking
Union
conCnue
laterally
with
no
REAL
progress.
Nariman
Point,
LLC
2

3. Global
Briefing
• ECB
begins
discussions
on
European
bank
recapitalizaCon.
– Bank
stress
tests
next
year
may
reveal
substanCal
losses
presently
kept
out
of
view
from
the
invesCng
public.
– The
IMF
states:
“Nobody
knows
the
true
scale
of
poten6al
losses
at
Europe's
banks,
but
the
Interna6onal
Monetary
Fund
hinted
at
the
enormity
of
the
problem
this
month,
saying
that
Spanish
and
Italian
banks
face
230
billion
euros
($310
billion)
of
losses
alone
on
credit
to
companies
in
the
next
two
years.”
– Depositors,
share
holders
and
bond
holders
will
be
expected
to
bare
the
first
losses
if
Germany
and
Finland
get
their
way,
while
Spain
and
Italy
will
push
for
access
to
ECB
bailout
funds.
The
quesCon
becomes
how
will
the
losses
be
broken
down
and
how
long
will
it
take
to
agree
on
such
a
plan?
• German
courts
will
determine
the
legality
of
the
Outright
Monetary
TransacCons
(OMT)
later
this
month.
– This
policy
tool
allows
the
ECB
to
suppress
borrowing
costs
for
European
naCons.
Nariman
Point,
LLC
3

4. Global
Briefing
– The
most
likely
outcome
is
that
German
courts
rule
that
OMT
is
condiConally
legal.
CondiConal
on
what?
We
will
find
out.
Since
OMT
was
announced
European
volaClity
receded
significantly.
10Y
BTP
Yield
since
OMT
Announcement
7.5
7
6.5
6
5.5
5
4.5
4
Nariman
Point,
LLC
10/2/13
9/2/13
8/2/13
7/2/13
6/2/13
5/2/13
4/2/13
3/2/13
2/2/13
1/2/13
12/2/12
11/2/12
10/2/12
9/2/12
8/2/12
7/2/12
6/2/12
5/2/12
4/2/12
3/2/12
2/2/12
3
1/2/12
3.5
4

5. The
Euro
is
on
Fire:
Why?
• The
Euro
has
been
on
a
tear
over
the
past
8
months
due
to
an
increasing
current
account
(CA)
surplus
as
well
as
USD
weakness.
– European
officials
are
poinCng
to
the
Euro’s
8-­‐month
high
as
proof
of
a
European
recovery
but
this
may
not
be
the
case.
– The
largest
contributor
to
the
Euro’s
strength
has
been
Germany’s
contribuCon
to
the
current
account
surplus.
• Germany
makes
up
approx.
67%
of
the
total
Eurozone’s
CA
surplus.
– Total
EU
CA
=
363B
USD;
Germany
CA
=241B
USD
– In
2012,
Germany
=
104%
of
EU’s
CA
surplus.
• Germany’s
largest
trading
partner
is
the
rest
of
Europe;
CA
surplus
implies
Germany
not
purchasing
goods
and
services
from
the
periphery.
– Italy,
Spain,
Portugal
and
Greece
will
not
be
able
to
address
their
employment
issues
unless
Germany
increases
consumpCon
of
goods
produced
in
the
periphery.
The
data
suggests
that
this
is
not
happening.
Nariman
Point,
LLC
5

6. 0
-­‐5
-­‐10
Nariman
Point,
LLC
4/1/2013
12/1/2012
8/1/2012
4/1/2012
12/1/2011
8/1/2011
4/1/2011
12/1/2010
8/1/2010
4/1/2010
12/1/2009
8/1/2009
4/1/2009
12/1/2008
8/1/2008
4/1/2008
12/1/2007
8/1/2007
4/1/2007
12/1/2006
8/1/2006
4/1/2006
12/1/2005
8/1/2005
4/1/2005
12/1/2004
8/1/2004
4/1/2004
12/1/2003
EU
Current
Accounts
Current
Account
%
of
GDP
2003-­‐2013
10
5
Portugal
Spain
Greece
Italy
Ireland
Germany
EU
-­‐15
-­‐20
Source:
Nariman
Point,
LLC
6

7. Emerging
Markets:
Taper
• Taper
in
2013
does
not
seem
likely
given
the
Government
shutdown
and
debt
ceiling
debates,
especially
given
a
new
debt
ceiling
deadline
of
Jan
7.
– This
would
be
posiCve
for
currencies
and
equiCes
of
countries
with
large
current
account
deficits
who
need
to
borrow
money
to
plug
their
spending
gap.
No
taper
means
financing
costs
will
remain
low…for
now.
US10Y
Yield
20
15
10
12/1/12
2/1/11
4/1/09
6/1/07
8/1/05
10/1/03
2/1/00
4/1/98
6/1/96
12/1/01
Nariman
Point,
LLC
8/1/94
10/1/92
12/1/90
2/1/89
4/1/87
6/1/85
8/1/83
10/1/81
2/1/78
12/1/79
4/1/76
6/1/74
8/1/72
12/1/68
10/1/70
0
2/1/67
5
4/1/65
•
If
the
US
10
Year
conCnues
to
rally
past
2.7%,
this
could
be
bullish
for
the
Indian
Rupee
and
other
large
CA
deficit
countries
like
Turkey.
While
these
are
not
necessarily
reasons
to
invest
in
a
country
for
the
long
haul,
this
is
certainly
a
logical
way
to
play
lower
U.S.
rates
with
greater
upside
than
simply
buying
bonds
outright.
TUR
(Turkish
ETF)
has
outperformed
the
TLT
(20
year
US
Bond
ETF)
since
the
“no
taper”
announcement.
Genng
long
US
10Y+
bonds
has
generated
approximately
3%
returns
post
the
Fed
announcement,
where
as
TUR
is
up
over
20%.
6/1/63
•
7

8. 0
-­‐2
-­‐4
-­‐6
Nariman
Point,
LLC
3/1/2013
11/1/2012
7/1/2012
3/1/2012
11/1/2011
7/1/2011
3/1/2011
11/1/2010
7/1/2010
3/1/2010
11/1/2009
7/1/2009
3/1/2009
11/1/2008
7/1/2008
3/1/2008
11/1/2007
7/1/2007
3/1/2007
11/1/2006
7/1/2006
3/1/2006
11/1/2005
7/1/2005
3/1/2005
11/1/2004
7/1/2004
3/1/2004
11/1/2003
7/1/2003
3/1/2003
EM
Current
Account
Current
Account
as
%
of
GDP
2003-­‐2013
6
4
2
Indonesia
Brazil
India
South
Africa
Turkey
-­‐8
-­‐10
-­‐12
8

9. EM
Currencies
• Large
budget
and
CA
deficits
in
EM
counCes
like
India
have
led
to
significant
currency
declines,
but
have
rallied
sharply
since
the
“no
taper”
announcement.
INR
SPOT
No
Taper
70
68
66
64
62
60
58
56
54
52
50
Nariman
Point,
LLC
9

10. EM
Benefits
from
No
Taper
TUR
vs.
TLT
%
Change
from
2012-­‐2013
40.00%
30.00%
20.00%
TUR
10.00%
TLT
0.00%
9/24/12
10/24/12
11/24/12
12/24/12
1/24/13
2/24/13
3/24/13
4/24/13
5/24/13
6/24/13
7/24/13
8/24/13
9/24/13
-­‐10.00%
-­‐20.00%
No
Taper
Nariman
Point,
LLC
10

11. Alpha
GeneraCon:
Trading
US
Fear
• We
closed
a
short
VXX
posiCon
on
Thursday
aqer
iniCaCng
the
trade
on
Tuesday.
– Purchased
11/16/13
$16
Puts
for
approximately
$1.40,
sold
$2.10.
•
Implied
vol
was
trading
north
of
70
with
realized
in
the
50s
suggesCng
that
the
market
was
overdoing
the
probability
of
U.S.
Default.
11/16
$16
VXX
Put
3.5
3
2.5
2
Nariman
Point,
LLC
10/11/13
0:00
10/10/13
0:00
10/9/13
0:00
10/8/13
0:00
10/7/13
0:00
10/6/13
0:00
10/5/13
0:00
10/4/13
0:00
10/3/13
0:00
10/2/13
0:00
10/1/13
0:00
9/30/13
0:00
9/29/13
0:00
9/28/13
0:00
9/27/13
0:00
9/26/13
0:00
9/25/13
0:00
9/24/13
0:00
9/23/13
0:00
9/22/13
0:00
9/21/13
0:00
9/20/13
0:00
9/19/13
0:00
9/18/13
0:00
9/17/13
0:00
1
9/16/13
0:00
1.5
11

12. Overblown
Fear
of
U.S.
Default
1M
T-­‐Bill
Yield
U.S.
CDS
Curve
0.4
70
0.35
60
0.3
0.25
50
0.2
40
0.15
30
0.1
20
0.05
0
4/15/13
-­‐0.05
10
5/15/13
6/15/13
7/15/13
8/15/13
9/15/13
0
6M
1Y
2Y
3Y
4Y
5Y
7Y
10Y
The
CDS
curve
has
inverted
due
to
largely
unfounded
risks
of
a
U.S.
default.
This
creates
an
opportunity
to
bet
on
curve
normalizaCon
similarly
to
the
summer
of
2011
during
the
last
debt-­‐ceiling
related
inversion.
Nariman
Point,
LLC
12

13. Alpha
GeneraCon:
Debt
Deal
Trade
90
80
70
60
50
40
30
20
10
0
6M
5Y
6m5Y
Spread
30
20
10
Bps
The
last
Cme
the
curve
was
inverted
and
6m
CDS
spread
traded
to
a
premium
over
the
5Y
was
the
last
debt
ceiling
debate
in
2011.
In
order
to
match
duraCons,
one
needs
to
sell
roughly
6.8x
the
6m
than
the
5Y.
In
2011,
the
spread
normalized
by
roughly
40bps
and
now
the
inversion
is
more
pronounced
senng
a
trade
up
for
an
even
larger
potenCal
gain.
Bps
6m
vs.
5Y
US
CDS
0
-­‐10
-­‐20
-­‐30
-­‐40
Nariman
Point,
LLC
13

14. Alpha
GeneraCon
• ConCnue
to
be
bullish
on
U.S.
10Y
– CPI
remains
low,
government
shut
down
will
shave
approximately
.5%
from
Q4
GDP
growth
(although
this
should
be
made
up
in
Q1
according
to
Goldman
Sachs
research
report),
U.S.
earnings
disappointment
risk,
no
2013
taper.
– Probability
of
U.S.
default
is
infinitely
less
than
risk
factors
menConed
above.
– Those
who
are
somewhat
worried
of
a
disrupCon
in
the
U.S.
Bond
market
may
be
interested
in
diversifying
into
Mexican
and
South
Korean
Bonds.
•
•
•
•
Mexico
has
a
slight
-­‐1.45%
current
account
deficit
relaCve
to
the
over
5%
CA
deficits
of
other
EM.
South
Korea
has
over
a
5%
CA
surplus.
Both
countries
weathered
the
EM
volaClity
throughout
the
year.
Although
very
high
correlaCons
(see
next
slide)
to
U.S.
Government
bonds,
in
a
tail-­‐risk
even
these
bonds
may
outperform
simply
due
to
a
lack
of
safe
haven
assets
in
the
developed
word.
Asia’s
former
safe
haven
asset,
the
JGB,
is
a
death
trap;
Bonds
of
Eurozone
are
too
risky;
Other
developed
naCons
are
simply
not
as
auracCve.
Nariman
Point,
LLC
14

15. AlternaCve
to
U.S.
Treasuries
US,
Mexico,
Korean
Govt
Yields
(%)
2008-­‐2013
12
2008-­‐2013
Correla6on
Current
Bond
Dura6on
10
US:MEX
81.81%
MEX:KOR
92.74%
US:KOR
86.25%
US
8.6
MEX
7.07
KOR
8.31
8
US10Y
6
MEX10Y
KOR10Y
4
2
0
10/15/08
10/15/09
10/15/10
10/15/11
10/15/12
Nariman
Point,
LLC
15

16. Similar
Credit
Risks
Korea
vs.
Mexico
5Y
CDS
Spread
800
700
600
Bps
500
KOREA
CDS
USD
SR
5Y
Corp
400
MEX
CDS
USD
SR
5Y
Corp
300
200
100
0
1/6/06
1/6/07
1/6/08
1/6/09
1/6/10
1/6/11
1/6/12
Nariman
Point,
LLC
1/6/13
16

17. Recap
• US
equiCes
seem
vulnerable
to
a
melt-­‐up/down
depending
poliCcal
rhetoric
and
earnings
season
(downside
risk
on
earnings).
• The
Fed
Taper,
German
ElecCon,
Syria,
Italian
poliCcal
risks
subsided
and
lower
gas
prices
are
all
bullish
signals;
however
markets
are
not
soaring.
One
the
same
token,
the
government
has
shut-­‐down
for
14
days
and
the
U.S.
is
approaching
the
debt
ceiling
and
the
markets
have
not
collapsed.
The
U.S.
does
not
“run
out
of
money”
on
Thursday
it
only
cannot
borrow
any
more.
There
is
sCll
some,
$30B
in
reserve
+
tax
receipts
leq
so
a
U.S.
default
would
be
highly
unlikely.
Nariman
Point,
LLC
17

18. SubscripCon
• SubscripCon
to
The
Esoteric
Report
is
$225.00
USD
per
month.
• Please
e-­‐mail
info@narimanpointgroup.com
Nariman
Point,
LLC
18