The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
- Start date
Yep, all sorts of downside being bought in Dec10 dollars, so Dec10 LIBOR/OIS is arnd 6bps wider on the day. Everyone scared, although nobody knows what of (all sorts of funny rumors abound). Especially, given that the LIBOR fixing has been going down steadily.
Well the outright risk level is independent of the method of trading. Nothing to stop him taking 1/3 of the risk. Then he'd be down 3-4% this year instead of 10%+, and would probably still be in the game.
I think the US is likely to have a slowdown rather than a recession, and if they do have a recession it will be a nominal one like 2001, not a nasty one like 2008 or the early 90s. IMO low GDP growth for quite a while is more likely than a second crisis. I think housing will slowly deteriorate, with prices falling or stagnating for several more years in most areas. I think EU debt will continue to cause problems, China will slow down, Australia and Canada's housing bubbles will pop. I think a weak banking sector, easy central bank policy, and low inflation will continue for the foreseeable future.
My main macro positions are long gold, short British pound & Euro vs Yen & dollars, long Australian rate futures.
IMO a plausible scenario is a standard 6-9 month bear market of 20-30%. That gives a target of 850-970 on the S&P some time in Q4 of this year, which coincides with the seasonally poor Sep-Oct period.
All it would take is some more bad newsflow out of the EU, or China wobbling, or even Australia's housing bubble beginning to pop.
Double dips are pretty rare historically, IMO even if we get one, it will be like 2001 i.e. a phantom recession. More likely is just very sluggish growth as the excesses get slowly worked off.
A further factor is that all the potential macro bearish themes are not domestic. Usually it is major domestic dislocations that cause true bear markets e.g. 1929-32, 1974, 2000-2002, 2008. Foreign dislocations can cause minor bear markets or short-lived panics, but have never caused a secular bear market in the USA.
Taking all these things together, IMO the realistic worst case is something like 1998, 1987, or 1977 i.e. a 20-30% fall that is fairly short-lived. It would be worth starting research on a stock investment buy list in case that happens in the 4th quarter this year.
After the 1932-33 rally, bank stocks had a long-term secular decline in the 1930s. Ditto for most tech stocks after the dot.com bust - 2003-04 saw huge gains, but most then went into a slump for the rest of the decade (with one or two exceptions e.g. Amazon). Japan had a bubble peaking in 1989-90, and after the first major bounce from the lows, it too slumped and stagnated throughout the 1990s all the way to 2003.
Housing and banking stocks were at the cutting edge of the boom and bust recently. They had a monstrous rally in 2009 and early 2010. If the historical pattern of bubble sectors crashing, having a huge rebound for 1-2 years, then stagnating long-term, is going to recur, then they are probably sectors to avoid now.
Stagnating markets like this tend to grind lower over time, rather than crash, so they are probably not a good 'short and hold'. But shorting them on rallies and covering during periods of negative sentiment could be a nice approach. Now that they are no longer selling anywhere near the "potential bankruptcy" valuations of early 2009, banks and housing stocks could also serve as a nice short hedge for any long positions one takes in more promising sectors.
Quote from ralph00:
The sad thing for US taxpayers, is that when someone buys a share of BAC or WFC, they get a free out-of-the-money put. The put is written by the US Govt and it never expires (unknown strike price, maybe about $2 or $3), on the off-chance that the banks have a solvency crisis.
I've been shorting more EURs lately too, against USD Yen and Franc(though if the defaults start I expect something to blow up in the swiss banking system). I lost some money on the rally(covered gradually) but I believe I will make it back
I differ from the pundits on the target, some expect everything to magically end when the eur reaches parity. I have no idea where the floor is but I suspect its quite lower than expectations(like stocks in 2008)