The Credit Crisis Financial Stocks Short Journal

Quote from ralph00:

I've talked to a couple of brokers about them. At the big houses, I'm hearing $10M minimum account size to start buying CDS. At a couple of places I've never heard of, its more like $1-$2M.

The other great idea I'm hearing was from Jim Chanos' interview the other day. He's shorting Aussie commodity producers on the idea that China is Dubai times 1000. If China does go kablooyee, all of those Aussie rate hikes baked into the cake are going to turn into rate cuts. Call options on Aussie short term rates actually falling are probably cheap, dirt cheap. IB doesn't offer these. I'm in the process of researching brokers and pricing for these things.
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You might be a wee bit late to this party. There's been some rallying going on recently (20bps in the past 5 days).

You can look for 90-day bank bill futures (Aussie equivalent of Eurodollars). There's an options mkt for these, if memory serves, although liquidity ain't anything to write home about.
 
I know. I was in a frenzy to buy some of this stuff in early November. However, its the sovereign CDS prices that have blown up in the past few weeks. The corporate CDS (at least the ones I'm interested in) haven't moved much.

I'm aware of the Aussie 90 day bills. As you said, there isn't much liquidity for the exchange traded stuff so it seems a non-starter. If I look to the OTC markets, I can probably do whatever I like. ML has indicated a willingness in the past to take on some trades for me and I plan to be contacting them in the near future for some pricing on these options.
 
Fed Evans is dovish
http://www.cnbc.com/id/34509754
http://www.bloomberg.com/apps/news?pid=20601068&sid=aYucpBCGWkSQ

Although he did made on interesting comment that extended period means 3-4 FOMC meetings. This would be almost the same as 'considerable', so I'm not sure he is correct

"The extended-period language to Evans signifies about three or four Fed policy meetings, he said. “I don’t see an urgent need to recalibrate” the central bank’s stance, he said."

In any event, even if he is right this means that my Jul ZQ bet will make money. Yet the contract is down this morning after going down yesterday, efficient markets my ass
 
That's because what Evans says is irrelevant. Markets make opinions and the Oracles at the Fed are no different. If the economy keeps improving, stocks continue melting up, and the 10 and 30 year bonds continue to get literally destroyed, the Fed will tighten sooner and with more force than is expected. If the 10 year is at 4.75 come March, the Fed will tighten 50bp before July - book it.
 
Quote from ralph00:

That's because what Evans says is irrelevant. Markets make opinions and the Oracles at the Fed are no different. If the economy keeps improving, stocks continue melting up, and the 10 and 30 year bonds continue to get literally destroyed, the Fed will tighten sooner and with more force than is expected. If the 10 year is at 4.75 come March, the Fed will tighten 50bp before July - book it.
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I disagree. The fed 'tends' to follow the market but that is not necessarily so. I speak from experience, back in 2008 I had built a ZQ position and then Lehman Brothers went into bankruptcy. One day later it was FOMC day, the market was pricing in 100% chance of a .25 cut plus chances of a .50 cut, stocks had the worst decline since 9/11, largest bankruptcy in US history, USTs soaring, I was damn sure the fed was going to cut rates, like totally sure.

The Fed meets and holds rates steady at 2% saying inflation(the economic data) is still high. A simple example where the data trumped the market, I'm sure one can find examples where the opposite occured but since the data is likely to be on my site next year(UR high and core inflation low) I already got the odds behind my back

Plus $140 oil and a commodity mini bubble didnt put the 10y inflation market forecast much out of line(peaked at about 2.6%). I like my chances betting against a scenario where inflation is low, credit is tight and yet inflation expectations explode for no reason
 
I think we can admit that fall 2008 was one of the more unique periods in fnancial market history. We can throw out that example as an outlier. In any case, the Fed was completely wrong in not following the market there - and they quickly became aware of that and lowered rates to zero over the next 8 weeks.

Another example might be summer 2007, when some of the subprime crap began hitting the fan. Several Fed guvs were trotted out to say they saw no reason to lower rates. The markets disagreed - taking front month FF futures and eurodollars way higher (rates lower) despite what the Fed heads were saying. Within days the Fed began lowering rates.
 
A more pertinent example was Japan in (IIRC) 2004-05. The economy started growing, real estate had it's first up year for over a decade, and the Nikkei rallied 60%. JGBs lost 13 big figures in a few months, and Euroyen futures tanked over 100 basis points. What did the BoJ do in response? Absolutely nothing - the rate didn't change so much as a single basis point.

Euroyen longs would have taken nasty losses for a while, but ultimately they were proven right and buyers lower down made a big score. The market was totally wrong. A similar scenario could easily happen in 2010 with the Fed and Fed funds, to dismiss that possibility is blinkered and ignores market history. Fed Fund and Eurodlar longs need to be prepared for a market growth scare and shorts need to realise that the Fed could keep rates this low for 2-3 years, even if markets expect growth.

Anyone who says X or Y *will* happen is displaying a level of certainty that simply doesn't exist in the economy or the financial markets.
 
That's why being long eurodollar calls for Dec 10 or Mar 11 is a good trade. Being long eurodollar or ff futures not so much.

If you believe that short rates are going to stay low for longer than most expect, get long the call options. It'll mostly insulate you from the 'Fed tightening' scares that are sure to come a couple of times/year - including the one that seems to be developing right now.

That 'scare' in JGBs and euroyen was from summer/fall of 2003, if I recall. I'm pleased to say that I caught some big chunks of that move down in JGB prices in that wonderful summer. I remember being down at the beach with no internet connection. I would call my broker each morning and get the good news on what JGBs had done overnight. I would then spend the rest of the day telling my pals I had become a Yen millionaire overnight. :)
 
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