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Juan Toro

Exchange rates are in turmoil. This week there are some historical highs and next week we might see others (probably on the same currencies). The Dollar is at historical lows relative to the Euro and the pound. You get now 1,36 dollars per Euro and 2 Dollars per each sterling you have in your pocket.

This turmoil seems that is better explained by a US dollar problem: low growth and high external deficits in the US. Moreover and related with these arguments there is an expected reversal of the returns on each currency. The monetary/interest rate cycle is expected to reverse, with the Fed probably lowering rates (despite the stubborn and firm resolution of the Fed against this market view) and the UK and Euroland going towards further hikes. In the UK higher than expected inflation is motivating higher rates. Whereas in Europe –though inflation seems contained- the activity figures released recently show a higher level of growth than expected.
But looking at this a bit deeper, there seems to be more structural reasons that sustain and explain the current trend. We previously referred to the Dollar/Pound current exchange rate as a historical high though this is actually not true. In 1945 the British pound was pegged to the dollar at $4, being devalued twice in 1949 and 1967 to $2.8 and $2.41 respectively till its flotation in 1972. Since then it depreciated slowly till the oil discovery in the North Sea. It then stabilized for a while till the Soros’ attack on the pound that pushed it to $1.57. But recently, it has gained the attraction of many asset allocators because of the long and stable expansion that the UK has enjoyed since 1992. This has given the pound the status of reserve currency and 12 % of world government deposits are now held in pounds. So its recent trend seems to be justified both on short term movements as well as long term expectations.

Continue reading 'The Dollar, the Euro and the Pound: Structural changes or short term movements?'

Javier Vega

Un ex alumno me escribió hace un mes el siguiente correo:

“Queria consultarte una cuestión que me tiene un tanto "loco", relacionada con compañeros mios del departamento de Inversiones Inmobiliarias, que se dedican a analizar inversiones en inmuebles. Básicamente, seleccionan el activo y lo analizan para ver si es interesante en términos de rentabilidad.

La cuestión es que viendo sus modelos de valoracion, no me cuadra (para nada) la tasa de descuento que aplican (en torno a un 4% - 5%). ¿Porqué no me cuadra? Pues basicamente porque, entiendo que yo como inversor en ese producto, voy a pedir una rentabilidad mayor que la que me pudiera dar un bono de telefonica (por ejemplo), y siendo un tanto conservador, yo como inversor en este tipo de activos pediria (no se...por decir una cifra), un 8% - 9% de rentabilidad anual (more or less)...Si a esto le añadimos el coste de la deuda posible, haciendo un coste medio ponderado, pues me saldria mayor que ese 4%-5% que aqui utilizan...

Mi pregunta es ¿cómo valorarias estas inversiones? ¿a qué tasa descontarías los flujos?”

Continue reading 'Astroc y estar en el filo de la navaja'

Juan Toro

Some economists are worried in the UK because of the high consumer price index growth, well above 3 %. They are also very unhappy in relation to what they believe to be the main drivers of this inflationary process: high liquidity expressed as a high growth of a monetary aggregate (in this case, M4 which represent a wide measure of money). They are expressing an old view much stressed by Milton Friedman: inflation is mainly a monetary phenomenon and too much money in the economy is generally translated into a high inflation rate.

Continue reading 'Friedman is back in the UK'

Juan Toro

The UK economy is heating up with effects on foreseeable interest rates increases and exchange rates. May be this could be a lesson for others. The reference inflation figure has overshot the target set by the Bank of England (BoE) and the pound is now trading well above 2 dollars. As a journalist reports: “London will be empty of Americans and Florida full of UK shoppers”.

Continue reading 'When inflation forces you to write letters:'

Juan Toro

Por Jaime Pozuelo-Monfort. Ingeniero de Telecomunicaciones, máster de Ingeniería Financiera por la Universidad de California-Berkeley

La sofisticación de los mercados financieros y la importancia creciente de los mercados de crédito en las economías del primer mundo están creando una demanda creciente de profesionales formados en las disciplinas de la economía financiera y las finanzas cuantitativas.

Continue reading ' La formación financiera en España'

Juan Toro

Bearn Stearns has launched what it supposed to be the first Hedge Fund clone for individual strategies within the fixed income arena. The name of the clone is MAST and trades back and forth the spread of the two swap spread against the ten years swap spread. Entry and exit level are described very succinctly in terms of some moving average crossovers. For the 10 years period of the back test they have reported a return of 5,1 per cent over Euribor after fees and with a Sharpe ratio of 1,76. That is not bad performance and the return to risk ratio is pretty good.

Continue reading 'Another hedge fund clone'

Juan Toro

The much waited employment report was released in Good Friday with almost of the markets closed and traders on holidays. Still there was a strong reaction to a very healthy number than takes away any possibility of interest rates reductions from the Fed. Greenspan prediction must wait at least one more year given the low unemployment rate reported this Good Friday. Farm payrolls came in at 180 000, well above the 130 000 analyst consensus. Moreover, there were upward revisions in the previous month’s releases and the February number was revised upwards to 113000 from 97000. The unemployment rate dropped to 4.4% (4.395% being precise).

Continue reading 'Mixed numbers and the US economy seems healthier'

Juan Toro

WTI- Brent future option spread is trading at a 3 dollar discount, meaning that the front Brent future contract is $ 3 more expensive than it corresponding WTI contract. Generally WTI is a more expensive oil because of its gravity and sulfur content and the Brent contract trades at a discount over the WTI. In the last week since the Iran hostage crisis the Brent-WTI has widened breaching the three dollars. This width is large by historical standards and probably many investment firms have been caught in this widening. Mostly those doing convergence trades has seen how the spread widened and did not corrected from unusual deviations. Few reasons explain this divergence: a) the Brent is more affected to oil disruption from Iran; b) the congestion at Cushing in Oklahoma were the WTI is delivered ; c) the strike in the Fos-Lavera port.

Continue reading 'The WTI-Brent spread'

Juan Toro

The recent spike in oil prices has been pretty steep in a very short time. May 07 WTI (West Texas Intermediate) prices closed at $ 66.03 on Thursday. But what is more worrying is that the May 07 Brent settled almost two dollars higher. Several reasons seem to predict moves above $70 as we saw last summer.

Continue reading 'Oil´s spike'

Juan Toro

Workers at the Port of Fos-Lavera, close to Marseilles, have been in strike for about two weeks. This event has been unnoticed in the press though it is difficult to distinguish the effect of oil prices due to geopolitical tension in Iran with the effects of the strike in the Fos- Lavera port.

Continue reading 'An unnoticed strike'