#### dcifrths

Hi Folks,

first time reader, first time poster.

I thought it would be fun to post your trade ideas in a centralized thread that you can come back to as time passes.

Andy did a data cleaning that gave me a more complete picture than is available via MarkIt. but you can see recent data here: CDX Index History

Overall, at 75bps right now, though it is trading at more than double its level this year to june, the fundamentals of the trade look attractive:

- large potential gain if any number of indicators decrease perceived credit-worthiness of contributing companies...these range from equity base, to profit margin compression, to consumer spending.

- on consumer spending (the mainstay of the recent uptick in corporate profit margins in conjunction with globalization of labor market), the economist reported from a study that estimated that a $100 drop in housing prices leads to a$4-$9 decrease in consumer spending over a 5 year period...a similar drop in financial wealth leads to a$3-\$5 drop in consumer spending in the very near term.

- another source of risk to corporate defaults is the financials sector which provides financing for many ongoing concerns. as financing of S-T debt becomes more onerous, expensive, and hard to come by, the perceived default risk for IG companies is likely to take a hit. the main issue here imo is the degree to which contributing companies in the CDX.NA.IG index rely on, or use, S-T funding from the financials sector. good news here though is that credit market turmoil is almost always catagorically bad for companies.

- combined with the historically low default rate we've witnessed in the recent past, these positive facets of the trade seem attractive.

- risks include both downside and sideways trading of the index. either one represents a (neutral or) negative carry for your money. the downside risk i don't think is significant since corporate profit margins and equity bases are at or near record highs and both of those indicators are mean reverting and highly sensitive to labor market conditions and consumer spending. a return to 35bp spreads isn't in the cards imo. a move to even 65-70 seems unlikely in the future given the transition point we're in at the moment. the sideways trading of the index though is likely a much more serious risk as this trade is only profitable if you can earn more than your opportunity cost over the time horizon. there needs to be a catalyst that can jump start the increase in insurance costs of debt issued by contributing companies. the good news is that any given catalyst in the future is (again imo) much more likely to be a downside risk to corporate profits rather than good news that sparks a fall in debt insurance costs.

so those are some thoughts on that trade.

I'd love to hear criticisms, comments, and more importantly, other trade ideas going into the next year.

some other ones are:

1) long USD/GBP (i don't know what you all are more comfortable with but i know that terminology is typicallyt he opposite of that used by currency traders. i just think of it as when i say long X/Y i'm betting that X will increase in value relative to Y). UK, though witnessing strong current corporate investment spending is sitting on an economically tough time bomb with all the makings of a downturn: massive runup in property prices, overspent consumer, highly optimistic business spending.

2) outskirt EU currencies like those of Latvia. i'd want to think about being long EUR/LAT.

3) short commercial real estate (talked about quite a bit recently on a few major publications).

those are just some others off the top of my head.

Barron

Replies
4
Views
943
Replies
12
Views
2K
Replies
0
Views
4K
Replies
3
Views
3K
Replies
5
Views
1K