August 19, 2014 (Tuesday)

Since Inception - June 18

,
2014:
Equity/Futures Account: +2.29%
Forex Account: +7.07%

Benchmark: S&P 500: +1.02%








8/19/14 Commentary

Being on the wrong side of the trade cost 70-basis points, bringing down the two-month return (since
inception) to 2.35%. As I was being humbled by the market this morning (might as well forever get used to it), it
has allowed me to be more introspective and notice things that I wouldve otherwise ignored if I had been on
the right side of the trade.

What I noticed was how scarce the liquidity was in the equity market. SPY (probably the most liquid ETF) was
almost 40% below 3-month avg. Sure, its August and volume is at a seasonal low-point, but the low-volume
environment has been a multi-year trend.

But todays 150-pt gap-up open in the Dow made me wonder how illiquidity could become the main driver of
price in both ways. In other words, illiquidity can drive prices up to extremes and, vice versa, drive prices down.

This is not to say that theres an outright sell sign flashing for the equity market. But it does make you wonder
what will happen to the market if the neon light on the sell sign does light up one day when there are no
buyers to be seen.

I was a sophomore at Duke when the real heavy selling took place during the financial crisis of 2009. At the
time, I was mesmerized by how quickly liquidity dried up overnight even in the most liquid markets. In the
period leading up to the crisis, compared to today, there were far more participants and ample liquidity.
Therefore, it does make me wonder what will happen to the market if the complexions were to quickly
change.

Up until last week, Id been very constructive about risk assets. But such thoughts make me apprehensive
about that perspective. What scares me more is that I can find little reason to want to sell or be net-short - Im
guessing thats how many feel about the market as well.


But if I were to reframe the market narrative to reflect my mindset that is increasingly becoming conflicted and
view it with renewed cynicism, perhaps the global growth story may not become as rosy as I pictured. Europe
for sure and possibly Japan and China may become a drag on growth. The U.S. may look like the rock star for
now but given how fickle data points have been in the past five years of the recovery, it can change very
quickly.

Thus, to reflect the growing uneasiness, Ive decided to trim my positions down to a few (from 14 positions to 5)
that I have the most conviction in and so that I could be more nimble and more mindful of risk.

1) Short EUR/USD it has been the most highly concentrated position since I began this trading simulation. The
position has always been large, but it has certainly grown in size with each technical level and data point
hurdle that it cleared that has made me comfortable enough to add more to the trade.

The short EUR/USD trade is one of the few macro trades where all elements of the trade (historical analysis,
policy analysis, economic data, trends/technicals and etc) all line up favorably to be short.

2) Long US Treasury continuing with the deteriorating Eurozone macro theme, in which the ECB will be
expanding its LTRO for the second time in three years, the difference in yield between the German Bund and a
lack of alternative for global investors has created a force large enough to push U.S. yields lower. Also,
emerging market central banks have bought U.S. treasuries in concert to keep their own economies stable by
keeping U.S. rates low. And finally, theres the likelihood that the U.S Federal Reserve will be dovish for a longer
period than people expect.

3) Short Gold golds reputation/status as a safe haven asset has suffered in recent years. Ive been bearish
when it broke the major support of $1600 in early 2013 and I believe gold still hasnt proved its purpose or
worth.

For one, it fails to be insurance when theres a geopolitical issue. Two, the U.S. dollars ascent on the backdrop

of the declining Euro will continue to be a headwind for gold. Third, gold doesn't yield anything thus in a
search-for-yield environment, gold is not attractive especially if Europe and other parts of the world show
signs of deflation. Fourth, on the other hand, if rates do normalize and Fed policy becomes more hawkish, gold
once again wont have a leg to stand because it doesn't yield anything.

4) Short German DAX (EWG) I flipped my position and shorted the DAX as insurance against Putin (a peace
deal where Putin washes his hands clean of Ukraine goes against all that I know about Russian history and the
man I studied in college) and against continuing deterioration in economic conditions in the Eurozone. The bet
is that it is more likely for the DAX to break 9000 than it is likely to hold the line.

5) US Equities (SPY) ???? I wrote a question mark because I don't have the answer, and am rather confused
about risk/reward nature of U.S. equity market. With my mind leaning more on the negative side, I have
initiated a small short position on the S&P 500. But overall, my view on equities as of today is a work-in-progress.


Positions:

1) Short Euro against U.S. Dollar

2) Short Gold (via ETF: GLD)

3) Short equities via S&P 500 (ETF: SPY)

4) Long treasuries (via ETF: TLT)

5) Short German DAX (via ETF: EWG)



8/19/14 Platform Snapshot (Optimized for viewing on iPhone, iPad, or Android)



Trading Account Rules:
1) Starting Account Size:
a. Cash equities/futures/option: $10million
b. Forex: $10million

2) For the cash account (non-forex), macro views will be reflected using listed equity ETFs with deep liquidity/volume and net
assets of $1 billion or greater in order to best represent the odds of the strategy being scalable.

3) Most of the speculative positions can also be accurately expressed using futures, but because the volume is more
constrained at different times and because the platform fails to take volume into consideration (hence the trades' impact
on the actual price), the use of futures will be limited. Positions that I deem to be core/longer-term would be better
expressed via equities. But for commodities such as crude oil, silver, copper, etc., they will solely be expressed through the
futures contract market due to contango/decay issues that most commodities ETFs suffer.

4) The overall goal is to identify attractive opportunities with goals of holding the positions for multi-week/month periods.
Importance will always be put on liquidity and risk exposure. Also, being able to realistically liquidate all positions by end of
trading day or vice versa, scale up risk, will be an advantage of the strategy.

5) Daily updates will be simple and short, as youll receive a time-stamped screenshot of the account summary where detailed
positions and P/L will be all within a single image.

6) Leverage for spot currency position will be limited 2.5x the underlying cash value with stringent risk management in mind.