Thursday, September 18, 2008

credit call summary

--Relative Valuation Trade, (annualized ret >~+ 120%) Short WM long WB since 07/23/08 and close at 09/11/08 equity: a.WM has dropped 40% up to 09/11/08, 50% up tp 09/10/09 b.WB has dropped 20% up to 09/11/08, 15% up to 09/10/09 c.We profit 20% - 35% Cash Bonds: 07/23/08 to 09/11/09 10 y bonds spread narrowed from -600 bps to 1600 bps, profit ~+7% CDS: 5y CDS spread narrowed from -500 bps to 2450 bps, profit +20% --Short AIG, (annualized ret >+150%) Short AIG since 08/17/2008 and close at 09/11/2008 a.It is a good call, as of 09/11/2008 CDS was trading up-front 12.5% + 5% b.equity dropped 49% in the week of 09/11 --Long Leh Bonds, (annualized ret -100%) Long Lehman Bonds or Short CDS on 09/11/08 is a bad credit call. Leh filed for bankruptcy on 09/15th. I did not expect government were willing to let Leh fail. b.but the crazies flight-to-quality in response to the failure of Leh proved government was wrong in its move. It is uncalculated risk. The hell was let loose and let to a prompt bailout of AIG and TARP within a week. Still, nothing could over my loss. c.The takeaway lesson: hedging risk is important; during crisis, confidence overweigh company fundamentals; --Long AAA index buy AAA index as of 09/17/2008 at 290bps, window 1 year or more a. the call has been at a loss until the end of 2008. Rising corpordate delinquencies made investors steer clear of corporate bonds. Investors are becoming more risk averse as some companies are struggling in defending their AAA ratings amid deteriorating economic condition. The financial woes raised investors' concern over GE Capital and slumping car sales drove upward the risk premium of of Toyota, two major contitutents of AAA index. AAA corporate bonds yield spread has increased to nearly 414 bps in Nov 21st. b. As I suggested in the weekly market outlook (Dec 07 and early), the yield spread is attractive and it is one of the rare opportunities to invest them. We want to take more positions now when it is reaches 350 bps or higher. --Short Treasury sell 30y Treasury as of 09/18/2008 at 4.23%, window +3ms is has been at loss, ~-10%, until the end of 2008. Due to the global flight to quality, long term Treasury dropped to the historic lowest level since 1930s, my guess. It yield reached 2.52% on Dec 18th and 10 y dropped to 2%. --We decided to close this call at loss. --Long Wachovia Credit, ( Cancelled, but a good call) short 5y senior CDS and short 10y bond as of Setp 27 th a.We canceled the deal becase WB was sold to Citi, its CDS spread plummeted. So we decide to give up the deal. If we executed the deal as of Sept 27th, we will made around 7% (11% CDS return - 4% cash bond) in one business day. ( of 10/03/2007, Wells Fargo offered 15.4 bil to buy Wachovia whole. It furthe reinfornced my judgement about the fundamental of Wachovia. I have pointed out in my blog that the company would suffer no more than $29 bil loss. Buying its credit or short CDS might be a good call. But the opportunity had only a short window, I did not catch it immediately on Friday, Sept 26th). --buy Oil at 38 on 01/13/2009 for +3m a.we blieve it will surpass $45 in the short term due to stronger demand from China for domestical demand, US and China strategic reserve -- Short 10y Treasury if the yield dip below 2.1 again on 01/14/2009 for +3m The yield is too low to be sustainable. Large supply from Treasury and concern over consequent inflation will bring its yield back to 2.5 in the short term. --Long Leveraged Loan Index at 65 on 2/01/2009 for +1Y a.attractive value, almost historic low b.the HY price is close to 65. Relative speaking, Loan has highest seniority and can be exchanged to equity during bankruptcy. c.leverage is more favored for leveraged investors than high yield invetsors. The distressed loan vlaue is more likely caused by technicals - redemption, leverage. --Long BAC at 4.7 on 02/04/2009 for +1Y a.too big to fail b.attracive value --Long CSCO at 15.8 on 02/04/2009 for +1Y a.sound company with solid foundamentals a.undervalued based on my valuation model. Its long term price will be around 24

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