lurkerlurker
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I'm not too sure where to post this, but this board seems the most appropriate place. Moderators please feel free to move it if necessary.
I am starting this thread in order to distil ideas to help us all profit from what could potentially be the biggest move of the year. Those of you who trade equities, indices, forex, and especially fixed income will know a great deal about the debt crisis. We have the US sub-prime issue, and the highly leveraged junk bonds (remember the Bear Sterns funds?), not to mention a large Yen carry trade. What I would like to discuss here is a strategy for trading this, using a combination of government bonds (to profit from the flight to quality), currencies (buying yen before the carry boys bail), and indices (shorting the large caps such as the Dax and Dow when it becomes apparent the liquidity has disappeared - note that tech heavy indices might be more prone to a hit due to the poorer P/E and actual cash flow of these firms).
I would like to split this discussion into three main areas:
First off, the credit spreads between junk bonds and treasuries are widening. The cost of borrowing is increasing, and institutions are finding it more difficult to raise finance. There will be a great reduction in the M&A activity which has been keeping equities so high. Second, Moody's and S&P have already downgraded some bonds, and may continue with other covenant lite products. Banks and funds holding these junk bonds will be forced to sell, and the merchant banks have already started bailing some out. Remember Long Term Capital Management? Then we have the issue of the foreign investment in US T-bills, the record yields, the effects on equities,etc. This will happen again in a more magnified fashion when this all collapses, with the flight to quality increasing the price of treasuries.
The indices will come off, part of the Yen carry trade will unwind sharply, FX will be destabilised, funny things may happen to the gold price, and billions will be moved quickly to safe investments. We don't know how much is held in credit derivatives, who has the exposure, or if they are able to meet their obligations, but the counterparty risk alone may be sufficient to cause serious shockwaves in the financial markets.
I am inviting suggestions and discussion with a view to devising the following:
A comprehensive trading strategy which indicates when these markets are about to move, and takes appropriate positions. I would like this geared to spreadbetting as much as possible, as you can deal in small size and short quite easily, although I will understand if you all want to speak to actual futures trading. Also, if we could devise something which could be traded comfortably with a few thousand as margin - we don't want positions (and brokerage) for 50 instruments.
This strategy could be as simple (hardly likely) as waiting for a move of X points within Y time in an instrument, at which point simultaneously sell GBPJPY, EURCHF, USDJPY, Dax, SPX, while buying T-bills, bunds, and gilts. Perhaps do some options stuff as well, buying puts on the indices before they get expensive, calls on gold, what have you. What about spreads? We could go short on Banks, and Long on the FTSE?
I'm happy to contribute to ideas and keep the discussion going, however I have never managed a position so complex - I am relying to some extent on the knowledge of other members here in formulating a strategy which ensures we have a high probability of success profiting from these very unusual circumstances.
Small pipe dream to finish: we (for once) have an advantage over the institutions. We don't have to trade, and if we do we can choose the time, size, and direction. They have billions in borrowed currencies, highly leveraged junk bonds, covenant lite loans, etc which they simply have to shift if markets dictate or Moody's/S&P passes wind. We know their positions to an extent (the Bear Sterns thing, Morgan Stanley pulling the bond auction after bids were going in at 30% of face value, etc). We understand the markets to an extent also. When will they be weak, what instruments will they need to unload, how will that affect price, and how can we profit from that while managing risk in turbulent times?
A worthwhile challenge I would say. How will we pull this off?
I am starting this thread in order to distil ideas to help us all profit from what could potentially be the biggest move of the year. Those of you who trade equities, indices, forex, and especially fixed income will know a great deal about the debt crisis. We have the US sub-prime issue, and the highly leveraged junk bonds (remember the Bear Sterns funds?), not to mention a large Yen carry trade. What I would like to discuss here is a strategy for trading this, using a combination of government bonds (to profit from the flight to quality), currencies (buying yen before the carry boys bail), and indices (shorting the large caps such as the Dax and Dow when it becomes apparent the liquidity has disappeared - note that tech heavy indices might be more prone to a hit due to the poorer P/E and actual cash flow of these firms).
I would like to split this discussion into three main areas:
- Leading indicators - what news and instruments will we watch for to know that a large move is imminent, and how will we get on board quickly
- Which positions to take in which instruments, to provide leveraged exposure to the good side of the issue, with some clever hedging to bail us out if it all goes wrong
- Entries, exits, technical analysis, fundamentals, trade execution, discipline, position sizing, pyramiding -all the operational stuff.
First off, the credit spreads between junk bonds and treasuries are widening. The cost of borrowing is increasing, and institutions are finding it more difficult to raise finance. There will be a great reduction in the M&A activity which has been keeping equities so high. Second, Moody's and S&P have already downgraded some bonds, and may continue with other covenant lite products. Banks and funds holding these junk bonds will be forced to sell, and the merchant banks have already started bailing some out. Remember Long Term Capital Management? Then we have the issue of the foreign investment in US T-bills, the record yields, the effects on equities,etc. This will happen again in a more magnified fashion when this all collapses, with the flight to quality increasing the price of treasuries.
The indices will come off, part of the Yen carry trade will unwind sharply, FX will be destabilised, funny things may happen to the gold price, and billions will be moved quickly to safe investments. We don't know how much is held in credit derivatives, who has the exposure, or if they are able to meet their obligations, but the counterparty risk alone may be sufficient to cause serious shockwaves in the financial markets.
I am inviting suggestions and discussion with a view to devising the following:
A comprehensive trading strategy which indicates when these markets are about to move, and takes appropriate positions. I would like this geared to spreadbetting as much as possible, as you can deal in small size and short quite easily, although I will understand if you all want to speak to actual futures trading. Also, if we could devise something which could be traded comfortably with a few thousand as margin - we don't want positions (and brokerage) for 50 instruments.
This strategy could be as simple (hardly likely) as waiting for a move of X points within Y time in an instrument, at which point simultaneously sell GBPJPY, EURCHF, USDJPY, Dax, SPX, while buying T-bills, bunds, and gilts. Perhaps do some options stuff as well, buying puts on the indices before they get expensive, calls on gold, what have you. What about spreads? We could go short on Banks, and Long on the FTSE?
I'm happy to contribute to ideas and keep the discussion going, however I have never managed a position so complex - I am relying to some extent on the knowledge of other members here in formulating a strategy which ensures we have a high probability of success profiting from these very unusual circumstances.
Small pipe dream to finish: we (for once) have an advantage over the institutions. We don't have to trade, and if we do we can choose the time, size, and direction. They have billions in borrowed currencies, highly leveraged junk bonds, covenant lite loans, etc which they simply have to shift if markets dictate or Moody's/S&P passes wind. We know their positions to an extent (the Bear Sterns thing, Morgan Stanley pulling the bond auction after bids were going in at 30% of face value, etc). We understand the markets to an extent also. When will they be weak, what instruments will they need to unload, how will that affect price, and how can we profit from that while managing risk in turbulent times?
A worthwhile challenge I would say. How will we pull this off?
