The manager of Attain recommended CTA 2100 Xenon is Jay Feuerstein, CEO and founder of the 2100 Xenon Group. Mr. Feuerstein has been involved with fixed income trading for nearly 30 years, having begun trading interest rate vehicles in the early 1980’s as a trader on the Drexel Burnham Lambert futures trading desk. In Jay’s words, he immediately became fascinated with the treasury markets, learning his craft from veteran traders who specialized in trades such as buying the “basis”, which is when a trader simultaneously buys treasuries in the cash market while selling that treasury’s futures contract, or inter-market spreads (i.e. buy 5yr, sell 10yr) which were typically mispriced and required much less margin to trade.
Jay’s following piece, reprinted with permission from 2100 Xenon, points to a coming turning of the tides, with enough historical umph to quell your fears about a bleak and trendless future.
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Trading futures in 2011 has been tough because the budget, the budget deficit, the real estate crisis, the joblessness, the Federal Reserve, The European Central Bank and the IMF have all spawned surprise headlines that left well-thought-out trading strategies in shambles. Short-term traders find themselves whipsawed by the news while long-term traders own positions that appear to be going nowhere. Moreover, except for a brief respite at the end of 2010, the markets have been in this Bermuda Triangle trading environment for more than two years. Is this the state of markets to come, or will they return to trendiness?
History would suggest that they will not only return to trendiness but will yield the best opportunities of the last 30 years. Once the global economy finds a clear path—up or down—markets will price themselves accordingly, and disciplined traders will find a literal goldmine of opportunities. Just look at what happened in the 1970s. The recession of 1973-74 was the worst, at that time, since the Great Depression. War raged in the Middle East. The stock market lost 40 per cent of its value, housing prices plunged, workers lost jobs and for the first time the U.S. began to run a budget deficit. Fed Chairman Arthur Burns burst open the monetary spigots and was roundly criticized because commodities such as gold and silver began huge bull runs that saw their prices rise tenfold in less than five years. Emerging countries such as Japan were the miracle economies that kept the world afloat while the United States struggled with inflated union contracts and historic borrowing costs. Sound familiar?
At the same time, the resulting market opportunities in metals, grains, interest rates and soft commodities created the opportunities for the earliest trend followers such as Larry Hite and his Mint Asset Management. He and Ed Sekoyta are credited with being the first of their kind but they soon had company. Paul Tudor Jones, Richard Dennis, John Henry and Monroe Trout all amassed great trading records in the ensuing decade.
So what turned the violent, difficult markets of the early 1970s into probably the best trading environment of all time? Several factors. An overly accommodative Fed and a desperate Republican Party trying to erase the stain of the Nixon years worked together to revive the economy. With them came inflation and a robust economy. Jobs were plentiful, the real estate market boomed and commodities rallied to highs they have only this decade surpassed. On the flipside, the Republicans ended up underestimating the unpopularity of inflation and were booted from office in favor of Jimmy Carter and his new Fed Chairman: Paul Volcker. While the Republicans had engineered a quick fix for the economy, Volcker had other things in mind. He had a plan that would bring untold pain to the U.S. economy but, in the end, would build an economic landscape that would lead to the greatest financial boom in history.
Volcker drove interest rates to their highest levels ever: 21% for the Fed Funds contract, which ultimately dragged 30-year bonds to over 15%. The yield curve inverted by nearly 600 basis points! Inflationary expectations fell through the floor, but so did job creation, real estate prices and the bond market. In the end, Volcker knew what he was doing because for the next 20 years, bonds and stocks rallied, inflation remained tame and real estate prices skyrocketed. Only one recession—the savings and loan crisis of the late 1980s—interrupted the run of prosperity, and the end result of that was to create a new real estate boom that lasted for another 15 years.
Today, the markets are in much the same place as they were when Gerry Ford left office in 1976. Commodity prices are booming. The stock market, though just two per cent from three-year highs, is flat over that period as well. The Fed is especially generous, and the Obama administration is desperately trying to stay afloat as the 2012 election nears. No tough medicine is yet in sight. The Republicans are refusing to vote for an increase in the debt limit, threatening a government default and raising the ire of the rating agencies. The agencies, meanwhile, hurting from the structured products mess that they precipitated, have overzealously threatened to downgrade the United States. This has thrown a dagger into the financial sector, since financial companies hold trillions of dollars of U.S. debt. And, given that the financial companies have not recovered from the near meltdown of 2008, comes at a fragile time.
Meanwhile, the Fed says it is ready to continue to ease policy, though rates are already at zero. The only thing it could do is buy government debt, but that would not be the best idea given the possible downgrade that is coming. Still, the only bullets it has are in dollars, and it could flood the short-term money markets with cash in order to keep the economy afloat while Washington sorts out its problems. One of the differences between today and the late 1970s, early 1980s, is that the world is a much smaller place. Repercussions from Washington reach every corner of the world, with at least three of those corners in a pretty tough spot. The Eurozone is struggling with Greece, Portugal, Spain and Italy, whose defaults could throw French and German banks for a multi-billion dollar loss. China’s miracle is slowing, as inflation and real estate prices make workers there feel less successful than the economy they have struggled to build. And the Middle East, despite its oil profits, continues to be a violent place as nascent governments struggle with the new independence they have found in the wake of the deaths of Saddam Hussein and Osama bin Laden.
Ultimately, all of this will sort itself out. Congress will not let the U.S. default on its debt next month, but it will hold out long enough to make the point. In the next two weeks, the threat of default will hurt equity markets, blow out swap spreads and keep a bid in the short-term Treasury market. Also, problems in the Eurozone will remain in the background and make the whole situation appear to be even worse.
Going forward, when looking at the political prospects for the country, possible results run along party lines. If the Democrats win, the markets will know what they stand for: inflation and a lack of fiscal discipline. The Obama/Bernanke team will revive the economy but at a severe inflationary cost. Nonetheless, markets will have direction. Bonds will fall, stocks and commodities will rally. Traders will have plenty of trades to choose from. If the Republicans gain office, trades will still abound but they will be the trades of a double dip, deflation and illiquidity. Most likely, the Republicans will cut the deficit, thereby removing fiscal stimulus. Bonds will skyrocket, the yield curve will flatten, stocks and commodities will swoon and swap spreads will dramatically widen. Even if the two parties work together—Heaven forbid—regardless of the presidential outcome, good trades would emerge because stocks would rally, bonds would fall, commodities would flatten out, however, but the dollar would rally. Markets would move enough for sustainable trends in any of the three cases. All traders need is some direction, and it is coming.
Jay Feuerstein is the Chief Executive Officer and Chief Investment Officer of 2100 Xenon, a firm he founded in May, 2001. He is responsible for managing the futures portfolio and directing futures research. Mr. Feuerstein began his investment career in 1980 as one of the earliest traders and arbitrageurs of the financial futures complex. Prior to founding 2100 Xenon, he was a Managing Director and Principal at Bear Stearns & Co. Inc., and before that he was a Senior Vice President for Paine Webber, where he was responsible for national futures sales. Mr. Feuerstein also was Director of Global Futures Sales and Marketing for Fixed Income at Kidder Peabody in the 1990s and was a First Vice President of Drexel Burnham Lambert, where he established and ran the futures trading desk in the 1980s. Mr. Feuerstein has published works in The Journal of Futures Markets, Corporate Finance Review, cnbc.com, and numerous other publications. In addition, he is a frequent industry speaker at events sponsored by such institutions as the Chicago Mercantile Exchange, the Chicago Board Options Exchange and The University of Chicago. Mr. Feuerstein earned his MBA in finance from the University of Chicago, and his B.S. from the University of Illinois.
