Was just pondering the question of why most macroeconomists employed by investment banks continue to give positive news during downturns and how most forecasts of recessions' extent and time of ending are flawed.
Since the beginning of this mortgage mess, most analysts continue to say things like financial stock has bottomed out etc. or the worst is behind us...Interestingly, the earnings expectations for , say, S&P 500 continue to decline. For instance:
*Q2 2008 estimates have been marked down significantly- around 12-15%
*Q3 2008 and Q4 2008 earning estimates have only been lowered by 2-4%
I won't be shocked if Q3 and Q4 turn out to be worse than expected and stock prices fall! In my mind there are two reasons for such behavior
1) People are unable to see an "unexpected negative shock"- tautological but that's the point! I think this is the climate of unexpected NEGATIVE shocks and they will continue to occur
2) People talk their book- most investors are long and want this to end. Thus they talk about what they HOPE rather than what will happen..
View and Trade Ideas (horizon is 3 months unless specified otherwise)
1) Stocks:Short financial sectors and Short US, UK stock markets in general. Long Bonds for now.
2) skew, tails and vol: I like being long vol, skew and tails. When VIX < 25 great opportunity to buy 3m/6m vol.
Trade: I like being long vega and long gamma via 3m 10/25 delta puts and short the 10 delta/25 delta calls. i.e. buy the downside risk reversals. Exposed to skew and wings. They shall be valuable.
Why:In a range bound but drifting downwards market the risk reversal is not a bad way to get long stuff. you can sell out your position in times of panic and make decent money.
3) International: Long Brazil and Australian stock market and short China and India markets.
Trade:AUDUSD. That has been a steady train! Expect resistance around parity. So I like 3m call spread 0.97/1.0 strikes
4) Hurricane payoffs: Long Gold and Long Oil (hope for a hurricane payoff). Again, Risk Reversals are a decent way to do this.
5) Watching short GBP and EUR vs. USD. Not convinced time is now but time is coming to get long the dollar
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4 comments:
with inflation expectations sky high would you not consider going long cash?
bearish environment for bonds in general going foward i feel
Your take on the South African Rand?
I would consider getting long cash if I thought Central Banks were going to correct inflation RIGHT now. I think there will be political pressure to not raise rates... the real long position is long commodities...
write in common men's language for wider readership
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