Paolo Pellegrini Market Outlook

Thursday, March 4th, 2010

I found this great post from the Pragmatic Capitalist: GURU OUTLOOK: Paolo Pellegrini

This week’s Guru Outlook brings you Paolo Pellegrini.  Although he is not the most well known of investment gurus Pellegrini has built quite a name for himself in recent years.  Before founding his own hedge fund PSQR (a play on PP Squared) Pellegrini was John Paulson’s right hand man at Paulson and Co (see Paulson’s guru outlook here & most recent strategy comments here).  Of course, Paulson and Co. made waves during the sub-prime crisis when they made billions shorting the market during the crisis.  Pellegrini was instrumental in devising the strategy.  Like Paulson, however, Pellegrini wasn’t a one trick, short the market, pony.  In 2009 he crushed the market with a 61.6% return in his fund after he made big bets on a rising oil market and a tanking treasury market.

So where does Pellegrini see the market going now?  In a recent letter to shareholders he said:

“the structural problems that precipitated the Great Recession around the globe remain unresolved”

He says we are essentially papering over the problems with more debt.  We are simply adding more debt to a debt-laden world while China adds more exports to a saturated market.  He says the problems in Europe are a harbinger of these continuing issues.    Thus far the massive stimulus has been successful in jumpstarting the global economy, but is nothing more than a temporary respite from the longer-term structural problems that remain.

Pellegrini’s favorite trades in 2010 are the following four:

• Short US fixed income
• Short US equities
• Short US dollar
• Long commodities

The short trade on fixed income is a reflection of the likelihood for higher yields as investors grow increasingly fearful of the U.S. as a steward of its debt.  Pellegrini believes demand for treasuries will decrease in the coming years.

In terms of equities Pellegrini says valuations are becoming stretched as organic growth fails to match expectations. He also believes higher taxes could ultimately be a net negative for equities.

Pellegrini is short the dollar based on the expectation of more stimulus.  He predicts that policymakers will come back to the taxpayer asking for another handout as they explain their first stimulus plan was not a failure, but simply too small.  He says the dollar will “plunge” if this occurs.

The one sector of the market Pellegrini likes is commodities.  He says they remain attractive long-term as China exports inflation and demand for hard assets remains high.

One of Pellegrini’s primary concerns is the stimulus based growth occurring in China.  He says China is one of the greatest risks to the recovery.  He says:

“I was in China late last year.  One particularly enlightening meeting was with the top official of a major bank, who pointed to all the empty office buildings surrounding his own, observing that his country’s stimulus money would have been better spent paying people to stay home”

Pellegrini expects China’s CPI to exceed 5% in H1 2010 due to excessive demand from the stimulus programs.  He says China will respond aggressively with policy measures throughout 2010.  He expects the equity market to respond negatively.  One of this favorite China investments is the Yuan.  He is long the Yuan based on his “impossible trinity” trade:

“a country can control its interest rate, its exchange rate or its capital account – but not all three.  If the US keeps interest rates low, the only way China can raise rates is by first addressing the currency undervaluation.  Otherwise, it would just attract hot money inflows, as it did in 2006-2008.  Indeed, it is our expectation the the experience of that period – when gradual CNY appreciation was chosen – will lead China’s policymakers to prefer a more aggressive, upfront, one-off revaluation this time around.”

In the US, Pellegrini says we are coming face-to-face with the critical structural problems.  The end of the stimulus and the Fed’s programs will mark an economic top in Q1 2010 and set the stage for economic weakness in the latter half of 2010.   He says the headwinds we face are likely to occur sooner rather than later:

“Eventually, there must be a reckoning.  In our judgment, that day may be much sooner than the markets suggest.”

Source: http://pragcap.com/guru-outlook-paolo-pellegrini

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Revenge of the Nerds: The New Masters of Wall Street

Friday, February 12th, 2010

Scott Patterson, author of “The Quants,” discusses systematic trading:

Rise of the Machines: How Quant Trading Triggered the Credit Crisis:

Posted in Emotions, Hedge Funds, Trading | No Comments »

Even the Experts Get It Wrong Sometimes and More on The Inflation Debate

Saturday, February 6th, 2010

John Paulson Gold Fund Said to Tumble 14% in Its First Month

That’s the Bloomberg headline from this article:

John Paulson Gold Fund Said to Tumble 14% in Its First Month

I am have been in the business a long time and I have been wrong many times. People tend to forget that we are all human and we don’t get it right all the time. The thing that stands out to me right now is that Paulson is betting Gold is going higher by starting this fund, Taleb is betting interest rates are going to go through the roof, and many others including Paul Tudor Jones think we are headed for massive inflation. My inclination is that they may be very, very wrong in the short to intermediate term. In terms of inflation gauges I see nothing that screams inflation in terms of market movement. Short term interest rates are making new highs in price and lows in yield and many asset markets are making new lows such as housing. While we do have massive deficits, printing of money, and major government spending it is not showing up in the markets, yet. As I have been saying for years; More money is going to money heaven than is being created.

Do I think there is massive fraud going on with the government printing money and supporting many industries such as banking, housing, auto makers, and the like? Yes, absolutely I do, that’s why the Fed won’t show us their balance sheet. But, that is not the point, the point is if the government was not doing that we would be in the worst deflationary spiral in history. The government is merely doing everything in their power to try to hold the markets up. What they are doing is simply off-setting the decline from getting worse. I am not defending them in any way shape or form, in fact I think they are going to make the problem worse.

The other problem with us heading into massive inflation is that we are not acting in isolation. Many other central banks around the world are acting just as irresponsible as we are here in the US. Where is this inflation going to come from? My point is what currency is going to be the safe haven? We are too connected globally today that many of the old economic models do not work the same as they once did before globalization. If the whole world is acting as one and we are all in the same predicament I just don’t see how we go inflationary…

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Billionaires: & Hedge Funds

Saturday, January 16th, 2010

This is a great video on billionaires and hedge funds. The key is to find an EDGE and work it over and over and over again:

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Managed Futures and Trend Following on CNBC

Friday, January 8th, 2010

Great discussion on some of the strategies that I teach in my Systematic Trading Course. AQR is one of the largest hedge funds in the world and they are launching a new fund to take advantage of trend following in the managed futures space. I detail several trend following systems in my Systematic Trading Course that can be used to trade both futures and equities. This video discussion only pertains to futures but I have developed many trend following systems for stocks as well.

Posted in Hedge Funds, Trend Following | 1 Comment »