Ok, have a question for you. I think we are both in agreement that credit risk spreads are just too narrow, in la la land. What do you think are the best trades to play a widening. There's the old TED spread, buy 13 week TBs/short EDs, and I guess one could figure out some kind of long UST, short LIBOR (considered AA rated I believe?). Or if you felt like me there were two trades in motion: wider credit risk spreads, and a wider yield curve, or even a third, wider spreads for agencies versus treasuries, one could buy a UST 2 year or even a 13 week TB, and short the 5 or 10 year agency. I'm interested in the mechanics too, to ensure people are alert to the sizes, etc. : for instance 2yr TNs trade in $200k amounts, and US agency notes in 100k, so one would have to equal the amounts.
Final question, do you think USTs are really AAA rated ? I don't <ng.> Of course no credit agency would ever downgrade them. What would it take, twin deficits of 13%, 15% of GDP, for another year, two? Is there no limit to what rating agencies would ignore?
Lots of good questions and thoughts.
1) credit spread risks are truely insane. On the very day Global Crossing was running out of money (just a few days ago) it got bailed out by the bond market somehow at good rates too. More money than they asked for. That is how totally insane it is.
2) I can not make heads or tails out of the TED spread. Although I like treasuries (I really do not play them), and there is a very real of the FED pausing here and the treasury market revolting. If there was a play I think it would be something like long June 05 ED and short June 05 treasuries. It is conceivable that both win. If I was inclined to hedge, that would be it.
3) A safer way to play for what you think is insanity (a FED pause) would be to buy June ED 97.00 calls for 7.5 (IMO that is a very good play). Last year at this time you would have had to pay 20 points minimum for those things, if not 30 (only 20 bps out of the money with 6 months to expiry). A likely big winner on any pause between now and April. One could short a few treasuries I suppose as a hedge and pick up a bunch of those calls for cheap. I got some for 6.5 a few days ago. At that price there was almost ZERO probability of the FED pausing between now and June. PS I also have some from 14 as I thought they were a bargain there too. An appropriate FED pause gets you 40 or perhaps even 50 points back. Who knows. Even 20 would look good.
4) ED calls are far safer than futures in case there is a blowup (doubtful IMO but it could happen. Even Heinz agrees with that statement).
5) March ED futures probably are low risk. Actually if you look at both March and June they do not seem to want to go down here (they do not seem to want to go up either). All in all, the COT data looks pretty good on Eurodollars too. There could be a very strong over-reaction on a pause. I would think that would be good for gold and silver. At any rate, If I get a big pop, I am not sticking around on all of them. The last set of calls probably goes off quickly.
6) Speaking of gold and silver... The action looks hopeless since this is supposedly the strong period of the year. What I think happened is with the Bush win, the strong period was shifted up by a month. We also had people gaming the ETF launch then taking profits. I also think there was purposefull smack down of gold and silver by someone.
7) Another problem with gold and silver is the very real possibility of a rate cut in the UK. That will lend a lot of support to the US$ IMO. I am sure Greenspan would love to get a pop in the US$ before announcing a pause. There might be one hell of a currency whipsaw if the UK cuts before Greenspan pauses (if greenspan pauses, but I think he will if we get one more set of bad housing starts and job data).
8) As we have discussed per Brian Reynolds, there is a very real chance for a continued M&A activity lending itself to more stock mania. Perhaps this runs until every company has taken all their cash and stupidy used it to buy back shares at these absurd prices.
9) I would guess there would be at least an initial huge pop to the upside if the FED pauses. Perhaps it will even mark the top. Big gap and crap as everyone realizes what a phony recovery this all is.
10) I almost forgot. No, the US should not be AAA rated. Odds of an eventual default are reasonably high. But I feel that way about the EU and the UK as well. That could easily be 10 years off. No way to time it, not now anyway. Too far out and too much credit needs to be destroyed first IMO.
Those are my thoughts and as you can see there are a lot of cross currents.
Mish |
