Wednesday, January 16, 2008

2007 Year End Thoughts Going Into 2008

THE FOLLOWING ARTICLE DOES NOT CONSTITUTE A SOLICITATION TO INVEST IN ANY PROGRAM OF CERVINO CAPITAL MANAGEMENT LLC. AN INVESTMENT MAY ONLY BE MADE AT THE TIME A QUALIFIED INVESTOR RECEIVES CERVINO CAPITAL'S DISCLOSURE DOCUMENT FOR ITS COMMODITY TRADING ADVISOR PROGRAM OR DISCLOSURE BROCHURE FOR ITS REGISTERED INVESTMENT ADVISER PROGRAMS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

The long and winding year of 2007 has come to a close... In the annals of trading, this is one “vintage” that will be remembered for some time as the year re-introduced the concept of investing risk and volatility. Unfortunately, some trading programs didn’t survive, and surely, the remaining players are breathing a sigh of relief.

Exactly one year ago, we at Cervino Capital were advocating caution and making noise about the badly skewed risk-reward equation, especially in the equity markets. This is documented here in our blog.

In the early part of the year, we traded small and with little conviction, mostly getting frustrated. Such strategic frustration, however, allowed us to overcome the expected change in volatility that started in February and that is still continuing now.

Several other aggressive money managers who also trade options were not so prescient and are no longer managing. We do not say this to “rub it in” but to remind us all, including ourselves, that investing in the futures market is a tricky game.

Leveraged strategies must always be treated with kid gloves, and risk management should be the first priority—that is our philosophy. By sticking to our convictions we believe that, for the prudent and patient, robust investment returns will follow in due course.

At the risk of trying to forecast the future, these are the potential investment themes that we expect may develop in 2008:

US dollar rebound. While the structural weakness of the dollar will be an established theme for some time as a result of numerous bad fiscal decisions made by politicians and consumers alike—when everyone is leaning one way, expect the opposite. The need to repay our debt may spur a rally.

High volatility. Volatility should be here to stay. This measure of risk is cyclical in nature, and as we continue through this period of credit contraction and risk reassessment, it is reasonable to expect a protracted cycle of high volatility.

Energy leadership. Given the continued imbalances of supply and demand, energy will maintain its position of market leadership, with interest in alternatives and carbon allowances continuing to grow too. Even in the event of an economic slowdown, we believe that the price of crude oil will remain high, and energy needs will remain a predominant factor.

Gold strength. With the Fed between a rock and a hard place, and the investment community walking the tightrope between housing/credit deflation and growth stimulation, gold will prove to be the most comfortable “global value benchmark.”

Nationalization of losses. Wall Street’s new credo seems to be: “privatize profits, socialize losses.” We fully expect bail-out plans to be implemented for the ‘rationally irrational’ (or is that, ‘irrationally rational’?) risk takers in the housing market.

Sovereign wealth funds. This is the new significant player in the game, and they are likely to change the market landscape as much if not more than the influence wrought by the hedge funds. Generally, this development is positive, but the markets should demand more transparency.

As a final prognostication, we’re hedging our bets that 2008 will be at minimum another interesting year, and we look forward to trade it. In anticipation, Cervino Capital launched a Commodity Options Program in July 2007, and is now offering a 2X leveraged version of its Diversified Options Strategy.

Our goal is to produce risk-adjusted returns utilizing strategies that enhance portfolio diversification by taking advantage of the situations we highlighted above.

- Davide Accomazzo, Managing Director

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