Kamikaze

April 24, 2013

Cantor puts out some solid material from their equity derivatives strategy group of Cecchini, Lorenzo, and Elmihdawy.  In this issue they pray for the Japanese elderly…

Below are a few quotes before the download:

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“It’s difficult to overstate the ferocity of the Bank of Japan’s (BOJ’s) $1.4 trillion QE program. It is roughly 2.3 times the U.S.’s most recent easing relative to GDP, and it is broader based relative to assets targeted, including an (already achieved) explicit stock market price target. The BOJ is buying roughly $75 billion/month versus the Fed’s $85 billion/month, but the Japanese economy is roughly $5.7 trillion in GDP versus $14.9 trillion in the U.S. The BOJ action also dwarfs the BOE’s program, and it is a different animal than anything the ECB can contemplate. Keep in mind that the ECB cannot engage in fully sterilized QE like the Fed, BOJ and BOE. In our opinion, the BOJ’s QE program is an unabashed plan to devalue its currency and boost exports under the auspices of deflation fighting; it should be of great concern as the catalyst for an overt global currency war.”

“In sum, we suggest:

1) Long bar belled options strategies (see Chart 1 of Appendix);

a. This approach is a hedge against missing upside returns while recognizing that markets on steroids can have strokes at any time.

2) Sell the Korean Won versus the U.S. dollar;

3) Buy vertically integrated Japanese exporters; specifically, we like call spreads on Toyota (TM);

a. Buy July 120/130 call spreads for $1.15 to make $8.85 for a 7.5:1 payout;

4) Hold the Aussie dollar versus the U.S. dollar (reversing our prior short bias);

5) Buy U.S Treasuries;

6) Pray for the Japanese elderly.”

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