The Credit Crisis Financial Stocks Short Journal

Quote from ralph00:

Dec 2011 FF futures now at 99.735.

I initiated my position in these during the sell-off following the Sept NFP. My purchase price was 99.47. I recount this not to point out what a great trade this was, but to illustrate how dramatic the move in price has been over the past 4 weeks basically a year's worth of gains in the space of 20 trading sessions.

I don't know whether the recent trend in financial markets is ending or changing yet, but the last 5 weeks have to rank up there as one of the more remarkable periods ever - huge and perfectly correlated moves in a number of asset classes.

The trade now is not to just to bet on a reversal, but to seek out the asset class where the option on reversal is the cheapest - SPX options, VXX, AUD, TBonds, Oil, Beans, ... I don't know. My rudimentary analysis says SPX options are overpriced compared to some of these other things. I remain long VXX calls and AUD puts. I'm pretty sure I'll be out of my Dec11 FF futures before the NFP tomorrow morning.
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I don't mean to imply that today's NFP will mark some sort of inflection point ... I don't think it is. More likely, the inflection point will be the official QEII announcement or maybe a GOP landslide in November. However, some of these options are so cheap right now, that it is silly not to have a position just in case the trend changes earlier than I expect.
 
It's not just Bullard having cold feet, interestingly. We obviously know about Hoenig, but more recently it's been Kocherlakota and Fisher coming out as not totally sold on QE2. Against them, in the red corner, we have Evans and Dudley.
 
Quote from ralph00:

I don't mean to imply that today's NFP will mark some sort of inflection point ... I don't think it is. More likely, the inflection point will be the official QEII announcement or maybe a GOP landslide in November. However, some of these options are so cheap right now, that it is silly not to have a position just in case the trend changes earlier than I expect.
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Yeah I think QE2 is looking like a classic buy the rumour, sell the news setup. And so many markets are trading off it - stocks, bonds, gold, currencies, even oil. So much so, that September and so far October, traditionally weak months for the market, are showing record strength.

All I can say is that if assets have a big sell off on the day of the QE2 announcement next month, watch out below. It would also be absolutely hilarious to see the look on Bernanke's face if that happened.

Which things do you think would have the biggest reaction if this in fact played out?
 
Quote from Martinghoul:

I'm with GoC here. Yet again, I have to conclude that ZH is/are (a) total idiot(s). To suggest that this trade somehow is a no-brainer because it worked so well is, how do I put it, completely retarded. For all the indiscriminate abuse of the term "tail risk", the article totally disregards all sorts of tail risks that you take on when you do the equity put/CDS trade. The fact that these risks didn't materialize and the trade may have worked doesn't matter. So, yet again, ZH's reporting is breathless, shrill and inaccurate. But then what else is new.

GoC, CDS are collateralized derivatives, so not much credit risk there. Boaz blew up on CDS basis trades, but it wasn't the CDS leg that was the problem, it was the bond leg.
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Ah I thought he didn't get paid because a bunch of his CDS contracts were with Lehman? Hence leaving him with the long bond legs and no CDS hedge to cover the collapse in values. But yeah I agree that the credit risk nowadays is pretty low, people are aware of the possibility of another 2008/2009 so it probably won't happen.
 
Quote from Ghost of Cutten:

Yeah I think QE2 is looking like a classic buy the rumour, sell the news setup. And so many markets are trading off it - stocks, bonds, gold, currencies, even oil. So much so, that September and so far October, traditionally weak months for the market, are showing record strength.

All I can say is that if assets have a big sell off on the day of the QE2 announcement next month, watch out below. It would also be absolutely hilarious to see the look on Bernanke's face if that happened.

Which things do you think would have the biggest reaction if this in fact played out?
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Hard to say. I'm looking at charts across a number of different assets and they all the same. Someone who knows more about options than I could probably do a serious analysis of puts on a dozen different assets - copper, AUD, oil, tbonds, NFLX, a cloud computing stock, ... - and figure out which are the cheapest. Might be best just to buy a basket of these. The trouble, of course, is time decay, which is totally brutal. Maybe there is a way to offset this buy selling calls ...
 
So its come to this - we now have Fed members on CNBC on NFP Friday so that they may immediately comment on the report like they're that idiot Mark Zandi or something. Seems pretty fucking inappropriate to me.
 
Quote from Ghost of Cutten:
Ah I thought he didn't get paid because a bunch of his CDS contracts were with Lehman? Hence leaving him with the long bond legs and no CDS hedge to cover the collapse in values. But yeah I agree that the credit risk nowadays is pretty low, people are aware of the possibility of another 2008/2009 so it probably won't happen.
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Nah, even if the contract was with Leh, it was collateralized, so the losses he'd have suffered on Leh were to do with transaction costs associated with trying to replace the risk in a liquidity-impaired mkt. Which is why, these days, most cpties over-collateralize derivatives.

The infamous basis trade which blew him up was an RV type of setup where he was long the bond and long CDS. Obv, it's sort of an "arb" if held to maturity. However, mark-to-market losses can be unbounded, which is exactly what happened in 2008. Specifically, when balance sheet/capital is scarce, everyone wants to sell bonds, 'cause they're balance sheet intensive and hard to fund. The CDS leg doesn't follow, which means that your basis trade kills you dead.
 
Gross: 2y UST might not have much term premium left
http://noir.bloomberg.com/avp/avp.h...//media2.bloomberg.com/cache/v28j0GOwJSbE.asf

I agree with this, ever since LEH failed I would look at Fed futures implied probabilities and laugh at it because in my view the hiking chances were typically too high(Often ridiculously high). Right now looking the pricing at seems pretty close to fair value(if not there already), specially when you consider that the market might change its mind and you get a chance to loadup at lower prices if you light up now
 
I don't know if anyone has been following this foreclosure fiasco, but the mess continues to grow. I wonder if it has the potential to rock the markets ... According to Denninger, the endpoint is that MBS are shown to be worthless, and much of this stuff is put back on the banks who will then be forced to actually recognize the losses and thus collapsing the system again.

He's written a lot of stuff about it. Here's one ...

http://market-ticker.org/akcs-www?post=168499
 
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