A Year for Non-US Developed Market Equities

ECB QE, Stronger Dollar, GPIF / BOJ ETF buying – this is setting up to be the year of non-US DM equities. Beggaring thy neighbor, negative sovereign yields, and insane compression of credit spreads have/will cause a generational asset squeeze.

Are valuations too high and fake? Probably… but who cares. We discount by ~ (B * eqrp + rf). rf is negative. eqrp (at least the vol risk premium part) is restrained by central banks.

DAX – Up 17.4% YTD
NIKKEI – Up 7.4% YTD

I suspect Shanghai Composite is about to fall off a cliff though. Also, NFP tomorrow threatens to change the macro landscape / theme. SPX will continue to lag it’s global counterparts.

I’m uncautiously long… but will get cautious if I see an impending risky catalyst. There are no catalysts around… so buy the rallies & buy the dips.

PS – Been really too busy to post. I’m a bit worried that I’m compounding returns into a blowup “0”. Luckily, that hasn’t happened yet. I continue to take unbecoming magnitudes of risk, but will scale back into cruise control soon.


2014 Year in Review

Blended 2014 statistics for the “Lawrence Zhou No Real Alpha High Leverage Don’t Follow Me Into Trades Fund”, including deposits/withdrawals purely for “safety” margin (understates actual P&L). This is almost straight from IB (except for DD, which they calculate incorrectly).

Blended Stats:
Return: 237.64%
Daily StDev: 4.32%
Sharpe: 2.46
Max Drawdown: 42%

Best Delta Exposures:
Long Dollar
Long SPX

Worst Delta Exposures:
Long Crude
Long Bitcoin (still have two R9 290xs for a mining-switch strats [that bombed] for sale)
Short USDRUB (so far) – will write something more robust in the future

Basically, long bubbles (non-linear growth in log prices) & long momentum worked. Long mean reversion did not work.

2015 Initial Thoughts:

  • I targeted an insane RoR this year – which came with insane risks. I plan to “de-risk” significantly next year, with the expectation that volatility will increase.
  • As long as QE / intervention persist globally, a “long bubble” strat should work. Will rate/QE-driven credit booms happen in Europe & China (the two holdouts)? Who knows… Draghi has under-delivered, and China seems committed to “fine-tuning”. But rates globally are incredibly low (especially in the US), which should continue to fuel yield (or dividend) seeking plays.
  • Equity markets are probably over-valued, but might be over-valued for quite some time. New (and massive) tech IPOs will put pressure on the market via supply.
  • Geopolitical risk is real, especially with Grexit in the near term. Does Greece really pose a systemic risk to the world? Ultimately, unlikely. We’ve had since 2011 to prepare… and the country’s GDP is only a few billion more than AAPL’s revenues. The tremors & uncertainty it causes, though, will be felt. What are the implications if all the periphery decide to bail (as a tail case)? Euro was a bad idea to begin with.
  • Russia will probably not default… but edge chance they invade Ukraine. Certainly a risk to look out for.
  • Oil – I have 0 idea where it goes. I got burned already, so I’ll stay away and watch. Apparently, oil is extremely inelastic on the short end, and the tankers rates are already skyrocketing (Brent March 2016 vs 2015 is 67.3 vs 58.21, or ~15%).
  • Volatility looks cheap going into 2015…



I’m going to add a short USDRUB position with tiny notional. This is a semi-short-term trade… might exit any moment.

1) Russia has reserves to cover M2 at the ~60 USDRUB. Back in 98, they had roughly 1/3 of M2.
2) O/N rates are around 26% (around 16% on interactive brokers for smaller amounts).
3) Oil / gas is a real asset, despite the drop in price.
4) Russia will probably get Yuan financing on its ~170BB rollover private external debt?

Also went long GILD a tiny amount at 94.20 (lost money already).

Crude Price Flow-Through

OK, the crude flow-through seems real…

Retail Gas Prices - NYC

And wage inflation around the corner? (courtesy of @esoltas)

Google Trends Wage?

So we need to ask ourselves:
1) Is the doom & gloom market-top view justified? Is the contrarian view a bullish view?
2) Can the governments/central banks of the world sufficiently shield us from negative shocks (EM crisis)?
3) Will the Chinese government end up easing (Western-style money printing)? Or will they continue a slow targeted restructuring of the economy?

I think the Russian worst-case is off of the table (default). Venezuela is probably in a bind though.

End-Year Gambits

These are my Hail Marys. All trades subject to change based on fear, greed, ignorance, hope, or margin calls.

1) Long USD in massive size (short JPY / Euro)
2) Long ES straddle
3) Short Crude
4) Long Nikkei (BOJ buys equities — yea… really).
5) Long BIDU

In Kuroda I trust. Maybe Abe too. Please don’t burn me bros.

Kuroda - BOJ

* 12/12/2014, 7:20 AM EST – After some reading, thinking, and praying… I’ve decided that we’ve bottomed. I took off the crude short, cut some puts on my straddle. I cut Long Nikkei for now, but will reenter closer to EOD.

Posting these quick changes is getting semi-tedious… so maybe tweeting is better realtime (@lrzhou)



Crude Blowup

WTI Crude is now below $65. I attempted to catch the knife on Friday, but ended up losing a hand. I’m a bit disturbed at the implications and potential for collateral damage. High Yield? Margin Calls? What about a recognition of a potential hard-landing in China? Is the commodity glut really a supply story? Or a demand one?

I’ve cut most of my long-beta position. I might be the fearful fool, though. Maybe the “oil stimulus” story is real, but I’m skeptical for now.

Edit: I put my beta exposure back on this morning (12/1/14, 10:17AM). Markets don’t care about cracks… we’re going higher.

Plausible Free Money

We’re all trained to be overly skeptical. Markets are generally efficient. Everything is priced in. You never get something for nothing.

It’s not surprising that this mentality gets ingrained in us. We live in a culture of economic distrust. Everyone is out to get us. We’re the products being sold on Facebook and Google. Anyone offering us a free CD or squeegeeing  is a charlatan. If something looks too good to be true, it must be.

It’s taken me over nine years to recant the skepticism. But I’ve recanted. “Too good to be true” opportunities end up being good and true all the time. There seems to be free money everywhere. That money might be risky. Sometimes, you’re picking up nickles in front of steam rollers. Most of the time, though, you end up picking up fifties in front of baby strollers.

I’m trying a new strategy in 2015 (along with the other strategies I detailed earlier). I plan to pick up (in small size) any “plausible” free money in the markets.

  • It must obviously be free money and a no-brainer.
  • It should be too good to be true without being a definite scam.
  • Estimating the free money must not be more complicated than assessing 3-4 numbers with arithmetic.
  • It must be well known free money (ie, it’s not a secret that I’ve discovered by digging into the 10K).
  • Any previous market actions don’t matter… nothing is ever priced in.

Interstellar & John Wick

After a few months of barely watchable movies in the theaters, we’ve finally entered the season of winter blockbusters. Imagine my excitement when I saw the trailers for Interstellar and John Wick. After all, one movie features space-ships and wormholes. The other has Keanu Reaves playing an assassin who goes on a rampage after the murder of his dog. Both movies were worth the ticket cost (in their own ways).  I’ve decided to give a graphical review.

Graphical Review (SPOILERS?)



Time Dilation, Wormholes, Black Holes, Catwoman, Alfred, the Gamemaker, AI Robots. If those were the constraints by which a movie was generated, the movie must be awesome right?

Set in the near (dystopian) future, the movie starts off having a completely foreign feel. This is definitely not the world we’re used to. Action picks up quickly, though, sending us into space within the first hour. Excitement builds until we reach a climax on one of the planets in the new galaxy. Soon after, however, the movie becomes pseudo-religious and bizarre. The writers have painted themselves into a corner. Still a fine movie none-the-less (if only for the visuals).

John Wick

John Wick

With John Wick, you get exactly what you pay for. 0 surprises. None. the trailer pretty much gives away the plot. The only question, then, is the shape of the journey. The journey is action-packed (as we’d expect), punctuated only briefly by “touchy-feely” moments. Would watch again.

Note: Graphs were made using a simple tool that I built: Tool for XKCD Graphs in Excel