MBCC Trading Highlights 1st December'22 - What leads to cross asset arb, where are the opportunities, why does it work and when?
Commodity flows are VERY different from Equity flows. At some level and point (getting a tad bit philosophical) they do converge, but there is a lag and cause effect. We have spent years developing the cross asset arbitrage models, it is not as straight forward but at a very macro level, it does work, but not for every stock as some stocks are pure and some are not.
Commodities are dictated by physical market flows and driven purely by demand/supply and inventories at any given point in time. There are host of arbitrage and flow games which makes it even more fun and opaque to a lot. Equities are the least sophisticated of all asset classes as they are pushed and pulled by Long/Short Hedge Funds, Long only Institutions/Pension funds, Derivatives, OTC and quantitative arbitrage/algos and so much more. They get distorted from time to time, but they “do” finally catch up as they have to, but dislocations happen. Therein lies the opportunity as they are also always late to the party!
Our goal at MBCC is to identify those mispricings and capitalise on those opportunities, when one asset class is overvalued and one is undervalued for the same theme. We do not necessarily go long/short as it is not about capturing the arb per se, but about capturing the same theme! That is what our models do, it is picks up future trends, it models demand (something the sell side is NOT good about doing as it assumes everything is linear), and then tracks inventories in real time.
Notice why Oil Equities are falling every day even though Oil has stabilised? Well we know why and why it is happening now. Our model takes all the factors that drive equities/commodities and cross asset dynamics into account. We rotate capital, long and short, around these assets to capture the % moves as they present themselves.
We also discuss Gold and Silver today. Why are they up, what is driving it? What are the physical flows telling us, is this a year end thing or start of a new trend? The answer to this can save you 20% or so….
Commodities are a timing game, analysts tend to make sensationalist calls at the lows and highs, but flows always find a way!
Sign up as we outline our NEW trading ideas for 2023! December is a great time to tee up as themes dislocate into year end but we don’t care about year end marks, we care about % gains!