Monthly Observations
July 2018 Issue

EMMA Program was up 0.3% in July and up 5.7% YTD.

While European trade and NAFTA issues abated, the U.S. has ratcheted up pressure on China. With S&P 500 up 5% and Chinese stockmarkets down almost 20% YTD, Trump has every reason to believe that he's winning the trade war, not to mention China bashing is proving very popular politically. There are indeed few things China can do – stop propping up the yuan but only to the extent of not triggering capital flight; dump U.S. treasury but doing so in large enough quantity will offset the yuan move; ally with Europe against America but unlikely due to IP theft problem irking the Europeans; impose dollar-for-dollar retaliation but there is not enough trade American import to do so; punish American corporations’ subsidiaries but risk being denied critical technologies. They even have to soften the tough rhetoric for fear of tarnishing President Xi’s halo in case the trade war turns nasty. So yes, trade war with China is going to be around for a while.

It is apparent that the U.S. stockmarket is, for now, a safe haven. With turbulent political headwinds in Europe, rapid yuan depreciation dragging down emerging economies, and rising yield hurting the appeal of bonds and precious metals, there are few other asset classes worth holding. Strong dollar and higher interest rates appear to have halted the hot money flowing into the real estate markets in Seattle, SoCal on the west coast and Manhattan. The stage is being set for an upset when the hot money flow reverses.

We are fans of matrix thinking. Right now, in the universe of commodities we trade, volatility is muted and correlations (with macro factors and each other) are fairly low. And aside from crude oil and gasoline, nothing is quite trending. According to our market environment matrices as applied to our style of macro-fundamentals trading shown in the diagrams above, we are trying to catch an occasional short wave while burning our precious energy in the sun. In the poker analogy, we’re burning the blinds and fighting for a lot of small pots.

Our ongoing positioning is based on dollar strength, further weakening of base and precious metals, and a potential volatility spike. As of this writing, we are seeing VIX in the 10-handle again! One other commodity we like is natgas. Although inventory is at 5-year low due to high summer demand, record production levels have turned off buyers and checked price increase, setting up a favorable risk/reward profile for this winter. As long as prices don’t collapse from here, we are motivated to maintain a bullish position in winter natgas.

For those of you interested in crypto-currencies and blockchain, check out this white paper we published in July. We do not yet trade crypto-currencies but will continue to monitor the feasibility.
Lastly, EMMA program is currently open to new investors. Please let us know if you'd like more information.

Jeff Lee, CTA
Copyright © 2018 Kronos Management, All rights reserved.

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