Big Short trading edge

[semperfrosty]

The movie on Netflix, The Big Short was a nice example of edge trading. They spotted a structural flaw and positioned trades to take advantage of it. I had to watch it a couple of times to get past the drama and see the concept. The movie overstated how "in the pocket" the rating agencies were. In the real world the cdo ratings were lifted by buying insurance from companies like AIG to reduce default risk. A poor bond rating could gain double A status just by buying enough insurance to reduce the default risk by 1 or 2 percent. CDO's have been created for car loans and credit cards as well. I imagine some hedge funds are trying to short car loan cdo's now and we'll doubtless here of huge performance in the next year or so.
If anyone has trouble understanding the complexity in the movie I recommend watching The Flaw on Amazon Prime. It also helps to understand how this edge is still in existence today.

I mention this because too many traders are dependent on Technical Analysis to trade. Edges are the bread and butter of trading. The more of them you can use, the better your results in trading will be.

Good post and a celebrity appearance!

 

[vanzandt]

The age of free money is gone. PE is scrambling to raise cash, if you were a string puller at retirement, sovereign wealth, or endowment funds would you fund an outfit to invest in overvalued farm land or unproven startups today, right now? Valuations are at absurd levels. No easy money around anymore. The top dogs slowly come to the realization that the only way for their bidders in political positions to avert a revolution of the middle class men is to tame inflation and to make life again relatively affordable. That means higher rates for a much longer time, potentially more hikes if OPEC has its way (which is impossible to reliably predict). The only way to raise more cash is by paying absurd borrow rates which some PE outfits are now doing at 19% and 20% cost. How quickly are their investments generating such ROI? At some point that debt comes due and then what? Most of those loans at such high rates are medium term in nature at best. There was also an interesting article on bbg the other day. If you have a terminal you should be able to easily find it. Not sure it was posted on bbg news for pure news subscribers.

Yeah that makes sense, but where does the crisis come in? Do we really care if Silicon Valley can no longer fund robotcatlitterboxes.com with 1% money?

 

[Sprout]

Yeah that makes sense, but where does the crisis come in? Do we really care if Silicon Valley can no longer fund robotcatlitterboxes.com with 1% money?

bruh, it's robotcatlitterboxes.ai now

 

[Sprout]

The movie on Netflix, The Big Short was a nice example of edge trading. They spotted a structural flaw and positioned trades to take advantage of it. I had to watch it a couple of times to get past the drama and see the concept. The movie overstated how "in the pocket" the rating agencies were. In the real world the cdo ratings were lifted by buying insurance from companies like AIG to reduce default risk. A poor bond rating could gain double A status just by buying enough insurance to reduce the default risk by 1 or 2 percent. CDO's have been created for car loans and credit cards as well. I imagine some hedge funds are trying to short car loan cdo's now and we'll doubtless here of huge performance in the next year or so.
If anyone has trouble understanding the complexity in the movie I recommend watching The Flaw on Amazon Prime. It also helps to understand how this edge is still in existence today.

I mention this because too many traders are dependent on Technical Analysis to trade. Edges are the bread and butter of trading. The more of them you can use, the better your results in trading will be.

Where are such exotic instruments available to trade? Aren't these products only available to the Institutional category of traders? As retail, we don't have access to even view these products do we?

 

[vanzandt]

bruh, it's robotcatlitterboxes.ai now

Excellent point!

 

[M.W.]

It's mostly contagion that I fear more than single players failing. The entire funding chain is linked.

Yeah that makes sense, but where does the crisis come in? Do we really care if Silicon Valley can no longer fund robotcatlitterboxes.com with 1% money?

 

[acrary]

Where are such exotic instruments available to trade? Aren't these products only available to the Institutional category of traders? As retail, we don't have access to even view these products do we?

No, we don't have direct access to the products. I wouldn't have tried to trade them anyway due to counterparty risk of the illiquid product. If the company went bankrupt then you couldn't close your position and you wouldn't get any of the profits. For me the best product to trade is the stock of the loan originators. I wouldn't short a stock, but instead I would buy puts on the stock. As defaults increase, the originators will have a harder time selling the loans to someone else and their capital will get tied up. In the movie Morgan Stanley admitted to holding 15 billion of cdo's. I'm sure their stock took a big hit.

When I saw car delinquencies hit a post pandemic high I looked at the loan originators. Ally Financial is the largest car loan originator in the US. It has solid Financials now but it's margins are falling.
As car delinquencies continue to rise I expect the losses will pile up along with hits due to resale problems of the repo'd vehicles.

In the homeloan market, people that can't afford the 30 year loan rate will start buying adjustable rate mortgages with a 3 or 5 year lock. If these loans become more common keep an eye on loan delinquencies as the default rate could rise in the coming years.

 

[Sprout]

No, we don't have direct access to the products. I wouldn't have tried to trade them anyway due to counterparty risk of the illiquid product. If the company went bankrupt then you couldn't close your position and you wouldn't get any of the profits. For me the best product to trade is the stock of the loan originators. I wouldn't short a stock, but instead I would buy puts on the stock. As defaults increase, the originators will have a harder time selling the loans to someone else and their capital will get tied up. In the movie Morgan Stanley admitted to holding 15 billion of cdo's. I'm sure their stock took a big hit.

Interesting strategy

When I saw car delinquencies hit a post pandemic high I looked at the loan originators. Ally Financial is the largest car loan originator in the US. It has solid Financials now but it's margins are falling.
As car delinquencies continue to rise I expect the losses will pile up along with hits due to resale problems of the repo'd vehicles.

Originators don’t hold the underlying debt. They’ve made their money and maybe some are servicing the loan. On a default they repossess, auction for lion’s share and get a deficiency judgement.

Other than reduced volume on originating loans, not sure where you are seeing the risk with these companies.

In the homeloan market, people that can't afford the 30 year loan rate will start buying adjustable rate mortgages with a 3 or 5 year lock. If these loans become more common keep an eye on loan delinquencies as the default rate could rise in the coming years.

Since mortgage apps at all time lows, what the market is telling us is that folks aren’t moving and letting go of low interest loans.

The reduction in inventory plus AirBnB are keeping prices buoyant.

Maybe it’s the calm before the storm but we seem to be in uncharted waters.

 

[MarkBrown]

i think my head just exploded with fundemental overload lol

 

[murray t turtle]

i think my head just exploded with fundemental overload lol

%%
LOL I seldom look @ news or talking snake news during the day.
ALLY may get some help from from the FED, more than a 200day moving average.
They could rejoice [sarcasm LOL] in that they are beating TGT\DIS by a long shot[2023 YTD]
Paul Tudor Jones noted> 20 years ago, 10 year car loans may not be the best idea.
Chickens can+ do home to roost. Nothing like a good price chart