David Goldman w/an interesting thought. First he correctly calls out the Germans for making a bad situation worse by banning naked CDS, since banks are forced to use these to hedge their sovereign exposure. If they can't use them, they have no choice but to reduce their position. Second, he says that once LIBOR hits 0.75%, it no longer makes sense for banks to own 2 year tbills (this is the favorite part of the curve for banks playing the carry trade). This would spell serious trouble for the US bond market. http://blog.atimes.net/?p=1481 unless LIBOR hits 75 bps, in which case head for the shelter May 24th, 2010 By David Goldman Who knows what evil lurks in the hearts of men, said the Shadow of 1930s radio fame, and who knows what garbage lurks in bank portfolios? If Greece and one or two other of the PIIGS were to reorganize some European banks would fail. The interbank market has seized up. This is badly exacerbated, to be sure, by the idiotic decision of the German government last Tuesday to ban credit default swap trading in European sovereigns. What that means, according to industry sources, is that all the German banks are frozen with the positions they held a week ago. Their position resembles that of the Bismarck after its rudder was disabled in the great World War II sea battle. It happens that banks hedge their country exposure with credit default swapsâtheir own regulators make them do it. If banks canât use credit default swaps to lay off sovereign risk, they will reduce positions. If LIBOR continues to creep up and reaches, say, 75 bps, it no longer will be economical for banks to own US 2-year notes. In that case the US Treasury market will be in trouble. Thatâs when you head for the bomb shelter.
Interesting presentation about Spain http://www.businessinsider.com/guide-to-the-spanish-debt-crisis-2010-5#-1 I was actually short BBVA most of last year, I gave up as that stock would NOT stop going up. Now that thing is back at my original short price and I'm considering playing their bubble/gov debt problem that way
Goldman is now talking about just shorting the 2 year. http://blog.atimes.net/?p=1483 This is his logic as I see it: 1. Banks fund themselves at LIBOR. 2. One of the things banks do w/these funds is ride the yield curve, and the favored spot on that curve is the 2 year bill 3. If LIBOR rises above the 2 year, banks have no incentive to buy the 2 year 4. Therefore you should short the 2 year if you believe LIBOR will rise by another 25 bp or so. Any comments or critiques of this?
I'm better at trading FX and equities than debt markets, however for what it's worth: If you are looking to short 2 year T-bills based on the belief that LIBOR will rise by another 25 bps, then wouldn't it be simpler to place a trade that has a higher correlation with the movement of LIBOR? ie, if LIBOR rises by 25 bps it is possible that T-bills don't decline as per the Inner Workings article. Whereas if you sell LIBOR at 51 bps and buy to cover at 75 bps, you have a winning trade.
Yeah, I slept a few hours on it and I can't make sense of the logic. In fact, to me it would be a stronger argument that the rise in LIBOR/OIS spread would make 2 year USTs more attractive, not less.
This is an interesting post that raises the question of whether the US can 'turn japanese' without demographic issues http://motherjones.com/kevin-drum/2010/05/japans-lost-decade-not-really-lost
One potential investment idea as a result of the BP oil spill is to play the trend towards decreased offshore drilling. The pressure will be huge to over-regulate this activity and in some cases just flat out ban it. As a result the US will have to turn to Canada and canadian oil sands. I'm not an expert enough to try to stock pick this so I plan to just to stick to the benchmark. The oil sands ETF that trades there is CLO, symbol on bigcharts is CA:CLO However, commodities might go down some more from here, stocks also well. But I'm building a buy list to go shopping once global equities look like they bottomed
UTS.TO I purchased this last summer. Sold it a few weeks back. Plan to repurchase if it survives this current wave of de-leveraging. Its strictly speculative.