Global Macro Trading Journal
- Thread starter Daal
- Start date
Indeed, good trade...
Illustrating yet again that, in the famous words of Del Boy Trotter, "he who dares, wins".
Illustrating yet again that, in the famous words of Del Boy Trotter, "he who dares, wins".
Anybody looking at buying longer-dated Treasuries here? I'm eyeing TLT or ZB for a trade entry in the next few weeks.
Rationale for the trade:
1. Technicals: The recent bear leg has extended to a degree that has almost invariably been followed by a bottom, consolidation, and rally to prior/new highs over the past decade. The main exception was a huge spike in late 2008 that ended up retracing fully (similar outcome here would get us to low 120s on ZB).
2. Fundamentals/valuation: Short rates are at zero and most likely aren't going anywhere for several years at a minimum. The main fundamental risks here are a sudden unexpected outbreak of CPI inflation forcing the Fed to raise rates (figure probability <=10%) or an equally sudden pickup in earnings/GDP growth reducing the appeal of Treasuries (prob. <=20%). I would say the odds are 40-50% of continued 'new normal' bump-along and 20-30% of an unexpected downturn, either in the economy generally or just in the stock market. Both are bullish for Treasuries and in the latter case we can easily revisit the prior highs.
3. QE tapering seems unlikely to be a bear point. Technically, tapering has been anticipated for quite a while now and is therefore likely priced in. The pattern during past QE episodes has been that bond prices fall when the programs are announced/implemented, so there's no reason they can't rise when the taper is announced. Fundamentally, tapering won't affect ZIRP at the short end. To the extent that equities are negatively affected by the taper, if at all, this should be bullish for bonds.
Entry possibilities: On TLT I'm looking at entering on a break above 108 with a stop at 101.50, a minimum target at 121 with 130 in the cards if the economy or stock market stumble - so reward of 2-3.5x initial risk. Not great at this point, and ZB looks technically dicey here. It would be unusual for bonds to V-reverse so quickly, so for the moment I'll be monitoring for another retest towards the recent low.
Rationale for the trade:
1. Technicals: The recent bear leg has extended to a degree that has almost invariably been followed by a bottom, consolidation, and rally to prior/new highs over the past decade. The main exception was a huge spike in late 2008 that ended up retracing fully (similar outcome here would get us to low 120s on ZB).
2. Fundamentals/valuation: Short rates are at zero and most likely aren't going anywhere for several years at a minimum. The main fundamental risks here are a sudden unexpected outbreak of CPI inflation forcing the Fed to raise rates (figure probability <=10%) or an equally sudden pickup in earnings/GDP growth reducing the appeal of Treasuries (prob. <=20%). I would say the odds are 40-50% of continued 'new normal' bump-along and 20-30% of an unexpected downturn, either in the economy generally or just in the stock market. Both are bullish for Treasuries and in the latter case we can easily revisit the prior highs.
3. QE tapering seems unlikely to be a bear point. Technically, tapering has been anticipated for quite a while now and is therefore likely priced in. The pattern during past QE episodes has been that bond prices fall when the programs are announced/implemented, so there's no reason they can't rise when the taper is announced. Fundamentally, tapering won't affect ZIRP at the short end. To the extent that equities are negatively affected by the taper, if at all, this should be bullish for bonds.
Entry possibilities: On TLT I'm looking at entering on a break above 108 with a stop at 101.50, a minimum target at 121 with 130 in the cards if the economy or stock market stumble - so reward of 2-3.5x initial risk. Not great at this point, and ZB looks technically dicey here. It would be unusual for bonds to V-reverse so quickly, so for the moment I'll be monitoring for another retest towards the recent low.
Any thoughts on the Czech Koruna (CZH)?
I created a dedicated thread (with additional thoughts) here:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=279739
I created a dedicated thread (with additional thoughts) here:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=279739
Nice opportunity in a OTC merger play
AAMRQ is worth:
AAMRQ = LLC*1.582-22.56
This formula comes from JPM research using the merger documents, using the closes yesterday AAMRQ is worth $14.65, stock closed at $12.
AAMRQ is a pink sheet stock that is non-marginable (hard to bet big), the big funds don't trade it so it is inefficiently priced. I'm long a fair amount from yesterday, I plan to sell a bunch into a gap up and morning run but keep a certain portion for the merger play.
I'm going to be long AAMRQ and short anywhere from 1.5 to 2 times the same amount of shares in LCC. It is a low risk profit because of the inefficiency of AAMRQ
I calculated AAMRQ beta (slope to LCC) and the result is 2.1 (for every 1% that LCC moves, AAMRQ moves 2.1% in the same direction), correlation is around 67% (for daily closes). that's where I'm getting my 2 times the amount of LCC from. The 1.5 I'm getting from the formula
1.6-1.7 is probably ideal, so for every 100 shares of AAMRQ I own I think I will short 165 shares of LCC.
If LCC goes bellow $14 then AAMRQ is worthless, I lose $12 a share on AAMRQ but gain $15.67 a share ($9.5 x 1.65) on LCC.
If LCC continues to rally, I lose on the short but gain on AAMRQ. Overall I will capture that $2 a share from the AAMRQ valuation difference.
If AAMRQ were a listed stock this discrepancy would never occur (even with the risks involved, I will be hedged a fair amount of risk by shorting LCC)
If anyone have any comments (m22au?), let me know
AAMRQ is worth:
AAMRQ = LLC*1.582-22.56
This formula comes from JPM research using the merger documents, using the closes yesterday AAMRQ is worth $14.65, stock closed at $12.
AAMRQ is a pink sheet stock that is non-marginable (hard to bet big), the big funds don't trade it so it is inefficiently priced. I'm long a fair amount from yesterday, I plan to sell a bunch into a gap up and morning run but keep a certain portion for the merger play.
I'm going to be long AAMRQ and short anywhere from 1.5 to 2 times the same amount of shares in LCC. It is a low risk profit because of the inefficiency of AAMRQ
I calculated AAMRQ beta (slope to LCC) and the result is 2.1 (for every 1% that LCC moves, AAMRQ moves 2.1% in the same direction), correlation is around 67% (for daily closes). that's where I'm getting my 2 times the amount of LCC from. The 1.5 I'm getting from the formula
1.6-1.7 is probably ideal, so for every 100 shares of AAMRQ I own I think I will short 165 shares of LCC.
If LCC goes bellow $14 then AAMRQ is worthless, I lose $12 a share on AAMRQ but gain $15.67 a share ($9.5 x 1.65) on LCC.
If LCC continues to rally, I lose on the short but gain on AAMRQ. Overall I will capture that $2 a share from the AAMRQ valuation difference.
If AAMRQ were a listed stock this discrepancy would never occur (even with the risks involved, I will be hedged a fair amount of risk by shorting LCC)
If anyone have any comments (m22au?), let me know
Because AAMRQ is non-marginable you have to put down 100% of the value of the stock to hold it, so even I won't bet big (it would hurt my ability to put other plays). The big funds can't juice it up their returns by going all-in, if they did they would have to sell other positions. I don't think they trade pink sheets anyway, on yahoo finance AAMRQ doesn't even have a institutional holder listed
"If LCC goes bellow $14 then AAMRQ is worthless"
I say worthless but JPM was talking about how the stock could have value even in the case that the merger didn't happen, he said the fair value would be $3.5 as old stock holders get a stake on the new AMR.
I plotted the fair value data (from the formula) and in the past AAMRQ stock had traded even at a premium to that, after the DOJ suit it frequently traded at a discount (in the first few days it was still at a premium, guess people saw that there would be value even without the merger) as it should. Now, without the suit I don't see any reason why it should be at a discount, maybe a small one but that's it.
They expect to close the merger in the first half of next month
I say worthless but JPM was talking about how the stock could have value even in the case that the merger didn't happen, he said the fair value would be $3.5 as old stock holders get a stake on the new AMR.
I plotted the fair value data (from the formula) and in the past AAMRQ stock had traded even at a premium to that, after the DOJ suit it frequently traded at a discount (in the first few days it was still at a premium, guess people saw that there would be value even without the merger) as it should. Now, without the suit I don't see any reason why it should be at a discount, maybe a small one but that's it.
They expect to close the merger in the first half of next month
http://hiepsfinance.com/2013/07/20/follow-up-on-aamrq-stock-price-analysis/
AAMRQ=1.582*LCC â 22.96
"If you have the Disclosure Statement dated June 5, 2013, itâs on page 486 out of 510 pages. The estimate is $7.699 b."
http://hiepsfinance.com/2013/05/14/...-stock-a-curious-case-of-stock-piggy-backing/
AAMRQ price = 1.582*LCC price â 22.56
****
While is it likely that AAMRQ is lower than where it should be if the merger was to close today, there are risks.
The main ones being:
* the creditors' claim pool is not a fixed amount, so you're relying upon your (or someone else's) estimation of what it is
* If the spread between AAMRQ and LCC doesn't close, then you're left holding the AAG (manditory convertible) preferred, and you have to wait 30/60/90/120 days in order to get the AAG common stock to sell. As you know, the main value from AAMRQ is not AAG common stock, but the preferred stock to be issued once all creditor claims are satisfied.
generic risks:
* buyin of LCC short position
* short interest payable on LCC short position
AAMRQ=1.582*LCC â 22.96
"If you have the Disclosure Statement dated June 5, 2013, itâs on page 486 out of 510 pages. The estimate is $7.699 b."
http://hiepsfinance.com/2013/05/14/...-stock-a-curious-case-of-stock-piggy-backing/
AAMRQ price = 1.582*LCC price â 22.56
****
While is it likely that AAMRQ is lower than where it should be if the merger was to close today, there are risks.
The main ones being:
* the creditors' claim pool is not a fixed amount, so you're relying upon your (or someone else's) estimation of what it is
* If the spread between AAMRQ and LCC doesn't close, then you're left holding the AAG (manditory convertible) preferred, and you have to wait 30/60/90/120 days in order to get the AAG common stock to sell. As you know, the main value from AAMRQ is not AAG common stock, but the preferred stock to be issued once all creditor claims are satisfied.
generic risks:
* buyin of LCC short position
* short interest payable on LCC short position
I'd say the profit potential takes care of the likelyhood that JPM is wrong, they could be wrong in a good way too (pool is smaller than they think)
The issue with having to hold the AAG is a concern only in terms of the margin requirement in my account, I won't be able to bet big because of that but since its a low risk transaction I would consider that as some kind of low risk CD. Better than earning 0%
Not that concerned about LCC buyins, IB has 1M shares to short and the stock is not really a short seller favorite. The big funds might short it but I think they are actually playing it from the long side (most of them won't arb OTC)
The borrow rate is 1.5% a year slightly offset by the 1% credit rate (0.5% after fees) of AAMRQ
I think I will be long 1 AAMRQ and short 1.6 LCC untill the spread gets down to -6 to -9% (-18% right now, yesterday at $10.90s low $11s, it was the buy of a lifetime), then I will take profits