The Credit Crisis Financial Stocks Short Journal

The Yellen speech shows a few things
http://www.frbsf.org/news/speeches/2009/0728.html

-She is aware of the Rogoff study financial crisis, bernanke and most at the Fed are probably as well. Where they get their rosy forecasts I have no idea
-She expects core inflation to below 2% for 'several more years', this tells a bit what the Fed is likely to do
-She dismisses the John Hussman theory that gov bond printing is as inflationary as money printing(currency or bank reserves). Only in the case of monetization she would join that camp

I'm yet to fully understand hussman bond printing theory but I've been putting some thought into lately to see if I 'get it'. The data already supports his theory but I'm yet to understand it from a pratical level
 
The way I structured my Fed Futures trade I should gain about 15-20% of my networth if the fed does nothing in the next year or so(thats on top of other gains). My worse case(that is still resonably possible) scenario, if they go in a hiking rampage I should lose about 20-25%. Of course there is the chance they go in ultra hiking mode and I drop 50%, but thats like beyond a black swan. Furthermore that assumes I wont see the hikes coming before the market.
The real probabilities here are 90%+ that I pickup 15-20%. Of course I'm still pounding myself to take on more size but the real risk is not fed hiking(Its very hard to see that happening) but actual perception of hiking by the greenshooters like after the 'great' employment report. Back FFF contracts dropped something like 40bps, thats almost double the daily margin requirements.

With the usual crowd of bluffing hawks at the FOMC I always run the risk the greenshooters will buy into their garbage.
Also I need to add that in many hiking scenarios I still make money or break even, that happens because the contracts are already pricing in some tightening
 
Here are the arguments for a V shaped recovery
http://www.ft.com/cms/s/0/3c4c37ba-7c51-11de-a7bf-00144feabdc0.html

1-"History provides abundant evidence that the deeper the recession, the stronger the bounce" - Well the IMF research with a somewhat large sample contradicts this, financial crisis have 2% GDP growth during the first after they are over, syncronized recessions 3% growth. We have both so I'm assuming 1% growth

2-"Asian is already on V mode".
That doesnt seem to be very relevant since Asia didnt had many RE bubbles, no banking crisis, no zombie banks. Plus global trade is still going down(CPB data)

3-"Companies laid off too much"
80% of the credit growth was non-bank funded, when that imploded the economy needed to adjust to a 'new' normal. That means laying people off. Finance, RE and autos are all at a new world.
Hours were cut and part-time work is more widespread, one could make the argument that not enough layoffs were made since people are using those tricks to avoid more layoffs

4-"The 9.5 per cent US unemployment rate is also viewed as an obstacle to recovery. This objection ignores the many contrary examples of high unemployment rates and subsequent recoveries, not least in the US. Thus in 1982, US unemployment hit 10.8 per cent, yet GDP soared at an average annual pace of 7.7 per cent over the next six quarters."

History is a bad guide here, that recession didnt had banks as in trouble as they are in now. Credit growth is highly dependent on them and this unemployment is hurting their credit standards. Furthermore the consumer is more levered and this unemployment is hurting confidence


5-"If unemployment is one half of the bearish consensus, de-leveraging is seen as the other main obstacle to recovery. Yet increases in private leverage never play a significant role in recoveries. Indeed, since 1950, US private sector borrowing ex-mortgages has declined an average 0.1 per cent of GDP in the first year of recovery, with non-financial business borrowing declining 0.6 per cent of GDP"

This is an interesting data that I was not aware
 
Quote from Daal:


5-"If unemployment is one half of the bearish consensus, de-leveraging is seen as the other main obstacle to recovery. Yet increases in private leverage never play a significant role in recoveries. Indeed, since 1950, US private sector borrowing ex-mortgages has declined an average 0.1 per cent of GDP in the first year of recovery, with non-financial business borrowing declining 0.6 per cent of GDP"

This is an interesting data that I was not aware
More...

But I believe it can be countered. This data suggests the spending and investment was fueled by a decline in the personal and corporate savings rate. So as I said before, betting on a V shaped recovery is betting the savings rate is going back to 0%. Or the some kind of great corporate investment boom will start(who will finance it?revenues are falling and liquidity is key as people got debt to roll over, people wont be eager to burn cash opening new factories right now)
Government spending could rise but state and local spending is on a decline, the federal gov is struggling to counter this

Maybe a large tax cut that is spent could create something that resembles a V shape recovery, but that is unlikely given the democrats political tendencies. Plus there is little hope the cuts would be spent as this has not been the historical US experience
 
Just liquidated my C corp bonds I had
Purchased at 77c on dollar and sold at 87c plus interest. Interestinly enough when I posted about this idea I was met with wide spread skepticism yet when I had a short idea I didnt face much resistance. The shorts mostly went into trouble after and the bonds took off(they got as low as 55c, 25% YTM for some). This exposes one flaw I found in my trading. Correctly using contrarian information, paying attention to contrarianism has usually cost me money, in this case it would save me some
 
"The decrease in real GDP in the second quarter primarily reflected negative contributions from
nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment,
private inventory investment, and exports that were partly offset by positive contributions from federal
government spending and state and local government spending. Imports, which are a subtraction in the
calculation of GDP, decreased."

Some of the 'improvement' in GDP declines reflects a decline in global trade, hardly a good thing. The bright spot was

"Real final sales of domestic product -- GDP less change in private inventories -- decreased 0.2
percent in the second quarter, compared with a decrease of 4.1 percent in the first."

So if there is an inventory buildup coming, this would help GDP(that quote essentially says GDP ex-inventory changes is flat). The problem is to get that inventory build
 
A point Rosenberg
"The market is really trading higher on momentum because if truth be told, valuation metrics seem very stretched, with the trailing P/E on operating earnings (the earnings that are adjusted to take out everything that is bad) now at 24x; and on reported earnings, the multiple, believe it or not, is north of 760x."

This is why the market HAS to fall a lot at some point, this market is trading on fantasy an actual macro bet that will endup badly, only the momentum and feedback loops can keep it this high this detached from reality. This market is on track to became the largest bear rally ever(beating 29-30), it might very well become but peoples insanity wont go forever because reality will hit them on the face
 
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