The Credit Crisis Financial Stocks Short Journal

Discussion in 'Journals' started by Daal, Aug 14, 2008.

  1. 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 swaps–their own regulators make them do it. If banks can’t 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. That’s when you head for the bomb shelter.
     
    #1961     May 24, 2010
  2. Daal

    Daal

    #1962     May 24, 2010
  3. 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?
     
    #1963     May 24, 2010
  4. m22au

    m22au

    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.


     
    #1964     May 24, 2010
  5. Was this guy actually around in Q4 2008?
     
    #1965     May 25, 2010
  6. 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.
     
    #1966     May 25, 2010
  7. Daal

    Daal

    These two have very different maturities so its not an apples to apples comparison
     
    #1967     May 25, 2010
  8. Daal

    Daal

    #1968     May 25, 2010
  9. Daal

    Daal

    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
     
    #1969     May 25, 2010
  10. 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.
     
    #1970     May 25, 2010