The Credit Crisis Financial Stocks Short Journal

I agree wholeheartedly with you and Gross about needing to predict what the government will do.

I had a similar conversation with a non-trading friend a week ago, when I was lamenting how different 2009 has been compared to 2008.

I am getting increasingly interested in your interest rate trade - like you said "shaking hands with government" is a smart move.

If you don't mind my asking, at what price, and on approximately what date did you buy the 99.00 calls?


Quote from Daal:

Gross says this is the new normal, in order to do 'macro analysis' you will need to predict what the government will do because they controlling a bigger share of market outcomes(even more in the future). This is why I need to buy Robert Rubin and Hank Paulson's book, so I can understand better their roles and the US government(Already read Greenspan's and Bernanke's). Maybe I need read Clinton's too, I dont know.

I'm also 'shaking hands' with the government by being long eurodollar calls(dec 2010 99.00), they are up almost 50% so far, I'm gunning for 300%(and 3000% if US goes to negative rates like Sweden and maybe the UK). If I reach that it will be my best trade(risking 10% of my networth there). Predicting government policy and 'shaking hands' will probably be a cash cow in the next few years
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I'm long the dec2010 GE calls(not related to the stock) from 0.125
3m libor is being manipulated by the government through all the monetary base printing, bailouts and implicit guarantees that no big bank will fail. It now stands at 0.33%(100-0.33 = 99.67 likely expiration for the eurodollar contracts). I wrote about this a while back in the journal
Note that since this is based on 3m libor, it embeddeds 3m expectations for monetary policy, so dec 2010 actually its a call on Mar 2010 OIS and libor, but there is no meeting in Feb and the Mar meeting its almost always after the futures expiration so I'm making a call that the fed wont raise rates will Jan 2011 and if libor blows up, the government will do a new round of manipulations and bring it back down
 
I am carrying a bit of risk in those calls, there are a few things that can go wrong and they expire worthless, if I'm correct though I will make a lot.

The long fed futures up to Jul 2010(when the fed stops using unusual and exigent authorities) exp I consider a less riskier , but I cant buy options there so I'm stuck with the underlying which I already own quite a bit even after my delevering. So I carry fluctuation risk

And this is my core bet, long fed futures in the 6-8 month range(which historically go up in easing cycles http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1003471)
long the eurodollar calls. I probably dont even need to short equities or put other trades here I could just stick to these and do well in the next 15 months but I need something to do in my free time
 
The biggest risk to my trades is this
http://www.bloomberg.com/apps/news?pid=20601039&sid=aJw8axBDQwa4

However I believe this guy is incorrect on betting on V. He says "L, U never happened, W only once", the problem of course is that he is looking at the US economy only(which hasnt had a significant financial crisis since the 30's). The IMF study on financial crisis shows GDP growth in the first year of recovery of financial crisis is on average 2%, 3.5% in synchronized recessions.
We have both and in a mature economy(which grows less). 1-2% sounds like a likely for 2010, and this assumes no double dip or significant 'relapse of financial conditions'
L happened in Japan which shared a similar issue as the US(credit and housing bubble). U happened in the IMF fin crisis samples. So this guy is looking at the hear view mirror(which had savings rates going down and borrowing up, effectively pushing problems down the road) and getting confidence from that

If a V happens the stock market will be simply fairly valued(unlikely to post significant gains from here given the contrarian signals and overboughtness)
The fed wont hike while using 'unusual and exigent' authorities 95 times out of 100 in my view. So I will just consider myself unlucky and take my loss on eurodollars
 
The four-week average of seasonally adjusted new claims rose 4,000 to 571,250, the highest in eight weeks
http://www.marketwatch.com/story/initial-jobless-claims-down-4000-to-570000-2009-09-03

Gold approaches $990 an ounce as dollar weakens
http://www.marketwatch.com/story/gold-approaches-990-an-ounce-as-dollar-weakens-2009-09-03

The krona also fell against the dollar after the Stockholm- based Riksbank said it will keep borrowing costs at the same level “over the coming year.”
http://www.bloomberg.com/apps/news?pid=20601083&sid=ay6jNFtjgYU8
 
FWIW Jim Grant (who has been hitting the ball out of the park in 09) is strongly in the 'V' shaped recovery camp. He thinks bonds and eurodollars are big sells.

I wouldn't pay a lot of attention to anything coming out of PIMCO. Gross is a better card player than I, and i can't imagine him giving any useful info across the table.
 
Quote from ralph00:

FWIW Jim Grant (who has been hitting the ball out of the park in 09) is strongly in the 'V' shaped recovery camp. He thinks bonds and eurodollars are big sells.

I wouldn't pay a lot of attention to anything coming out of PIMCO. Gross is a better card player than I, and i can't imagine him giving any useful info across the table.
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Jim Grant is a Fed basher, those people tend think their opinion on what the fed SHOULD do is what they WILL do. Did Jim grant predict fed funds would tumble from 5.25% to 2%?I bet he didnt, meanwhile Bill Gross and Paul Mcculey were back in Dec 2007(when the rate stood at around 4.25%) discussing a "2 handle on fed funds", back then this was unthinkable to most(commodities soaring, CPI soaring, gold flying). Did he then predict rates would go bellow 1%?I bet he didnt as well

Confront him with the fact that the fed raises the rate on average 14 months after unemployment peaks, he will probably come out blasting and say its a bad idea to wait that long. Well buddy, others people opinion are meaninless, the FOMC opinion is what matters

The last deflationary cycle(03-04) the fed took almost 9 months once the core CPI bottom to hike, so he is essentially arguing for inflationary pressure in 2010, which is ridiculous(And there is another dovish argument for the colection)
 
That cycle it took the core CPI to jump from 1.1% to 1.9% yoy and the CPI from 1.7% to 3.4% yoy for the fed to put the first hike and there wasnt a credit crunch
The last crunch it took five years from the first cut to the first hike(and the core CPI never dipped bellow 2%, it stood above 3% most of the time)), this suggests first hike is in 2012!
Keep in mind it would have taken MORE than 5 years had the fed not tried to implement a 'new strategy' that greenspan outlined in his book of antecipating rate hikes, I doubt they will be playing around with antecipatory hikes with the core CPI below 1%
 
ISM services show
-90% of the economy still contracting
-Inventory rebuild nowhere to be found, it actually got worse(from 47 to 43)
-Employment still contracting
-The ISM Non-Manufacturing Inventory Sentiment Index in August registered 67.5 percent. This is 5 percentage points higher than the 62.5 percent reported in July, indicating that respondents still believe their inventories are too high at this time. In August, 38 percent of respondents said their inventories were too high, 3 percent said their inventories were too low, and 59 percent said their inventories were about right.

That would be some strange V shaped recovery, no wants inventories for this Kudlow GDP boom that the stock market forsees
 
USD flat since early June yet gold is on the $1k march again. I've been linking gold since late 08, mainly because as a play on QE and as protection against devaluation(which Bernanke saw as the solution to the 30's deflation)
Most of my assets are in USD, I use gold and silver in my basket to hedge against a falling dollar. Gold continues to rise even in the absence of a major catalyst, impressive
 
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