Armored Wolf Notes Ukraine News With Skepticism, Questions Citigroup

Armored Wolf Notes Ukraine News With Skepticism, Questions Citigroup
By United Nations Cartographic Section; Alex Khristov. [Public domain], via Wikimedia Commons

The past month has brought “dramatic” global developments, according to an Armored Wolf investor letter reviewed by ValueWalk.

Ukraine situation news read with skepticism

In Ukraine, fund manager John Brynjolfsson says “We read the news and analysis with an air of skepticism, as the situation is far more complex than identifying white hats and black hats.”  ValueWalk has previously reported that components in the Ukraine national government have engaged in persecution of Jews in the country.

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Brynjolfsson looks at the Ukraine issue from a much broader perspective than is the current popular outlook. “The geopolitical implications of Ukraine are far broader than a single city, province, country or region,” he wrote. “The ramifications span the US, Europe, China, and Russia (obviously)…pretty much every country and every person on the globe.”

Turning point in Fed policy?

The fund, with close to $1 billion under management, has strong opinions regarding the US Federal Reserve and its tapering operations as well. Noting Fed Chairwoman Janet Yellen’s recent comments on the trajectory for tapering, the letter said it defines a turning point in Fed policy. “There is a BIG difference between a vague inferred plan, and a specific timeframe that crystallizes the first fed rate hike as occurring in July or August of 2015,” the report noted, then hinted at the potential trade: “Historically turning points in Fed Policy translate into hundreds of basis points of yield changes.”  Note that yesterday ValueWalk reported the second largest speculative short position in the Ten Year Note.

China’s “economic growth statistics fall off a cliff”

In China, the report notes they have seen “economic growth statistics fall off a cliff,” amidst an environment where regulators are “experimenting” with allowing bond defaults, which is close to a tongue in cheek comment on the communist country’s transition to free markets.  The letter goes on to justify bears questioning housing prices, and the degree of leverage in real estate, banking and provincial guarantees throughout the Asian nation. “Best case is that China is negotiating a juggernaut by alternately tapping on the brake and accelerator. The below chart suggests, which is a weighted index of Chinese statistical releases, relative to Economists Consensus Forecasts, this will be challenging.”

Wrapping up the geopolitical outlook, the letter turned to crude oil, noting that uncertainty surrounding events in Ukraine “will result in a more benevolent US posture relative to exploration, drilling, pipeline infrastructure, and even exports.” 

Difficult month for commodities

The fund noted that March proved a difficult month for commodity investors as it pointed out three drivers of the difficulty.  “First, excessive investor sentiment, still hanging over from the end of last year, continually pulled current prices back towards lower fundamental levels,” the letter said. “Second, macroeconomic data remained relatively weak and mixed, confounding expectations about the state of the global business cycle. Finally, both the Fed and the ECB signaled their intention to curtail monetary policy accommodation and gradually move to normalize interest rates, albeit over extraordinarily long time periods ahead.”

Citigroup need for better management?

Looking into the recent US Federal Reserve stress test, the letter pointed to Citigroup Inc (NYSE:C)’s failure in light of strong capital positions of the bank and this “represents a significant failure of management to anticipate areas of regulatory concern,” the letter said. “At worst, it indicates a need for better internal risk management processes and modeling. We think that management issues and risk processes are fixable, but Citi’s franchise is not easily replicable.”

The fund took three portfolio actions, looking to buy in their “short European periphery” position and extending duration in the Eurozone, closing their long gold position and outright selling their US WTI overweight position. 

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)

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