Birmingham , Alabama bankrupt? Who else will follow?

Muni Bond Spreads were wide for a reason
The word is that Mr. Paul Maco, formerly of SEC said that "I don’t think there’s anyone who has been involved in the swaps and derivatives market to the extent that the Jefferson County (Birmingham, Alabama) sewer system was.”
Apparently these positions means possible bankruptcy for Birmingham, Alabama. This is serious and does indeed prove the point about credit crunch being only "half done." This lends credibility to the reports of municipal bonds having spreads one could drive a truck through. Basically, wall street knew that many of these municipalities were exposed to toxic credit derivatives, and the fact that due to the current recession -that no one saw coming in the boom times when the bonds were being issued, these cities/boroughs will have lower revenue in the coming years than imagined/planned.

I am just wondering which other city/respectable organization will follow and yield the next round of text book business cases ?

Lehman and the financial stocks are in trouble again :).... Goldman shorts continue to rake it in. I would stop out around 150. GS was trading at 180 when I suggested the short...

Trading Strategy: I feel that in this environment of "bad news" followed by recovery the best method is to "range trade" with low amounts and stops of 1310 on the topside for the S&P and around 1200 on the downside.
Similar trading ranges may be established for currencies/favorite stocks. My only suggestion is to trade using small amounts unless you have a very strong view....
you are likely to get whipsawed and if you are not used to it, get emotional and tense...

Hedge Fund Performance this year and what it tells us

Foreign Exchange, Commodities and shorting the equity markets is where the money is this year :)

I am enclosing the hedge fund performance year to date in various categories

* Naturally funds shorting the market have made money.
**What's more interesting is that Global Macro has come back in a big way (it had been dying slowly through the last 10 years).. I take that to mean that commodities and FX have been making money. Even in I Banks those two are among the top money makers in this terrible year....
Also worth observing is that Equity neutral has made money. Stock pickers have had a field day... Contrarian trading strategies have also made money.

Strategy	Last Month	Year to date Return	Last Year
Hedge Fund Index	-3%	-2%	1%
Convertible Arbitrage	-2%	-8%	-7%
Dedicated Short Bias	3%	15%	17%
Emerging Markets	-3%	-6%	1%
Equity Market Neutral	0%	4%	7%
Event Driven	-3%	-4%	-2%
Distressed	-3%	-4%	-4%
Multi-Strategy	-3%	-4%	-2%
Risk Arbitrage	0%	3%	6%
Fixed Income Arbitrage	0%	-4%	-2%
Global Macro	-3%	6%	15%
Long/Short Equity	-3%	-4%	0%
Managed Futures	-4%	10%	14%
Multi-Strategy	-2%	-4%	-3%

Inflation rises - a positive for the dollar?

Inflation is high
The Labor Department reported Thursday that consumer prices rose by 0.8 percent last month, twice the 0.4 percent gain that economists had been expecting.

Bullish dollar, bearish stocks
I see this as bullish for the dollar as the market will price in Fed Rate Hikes sooner rather than later and combined with the bad news in the financial sector (yet again!) bad for the stock market. I think that euroland will have lower inflation as will other countries who havent cut rates as aggressively as the US. Hence the dollar will climb.....

The volatility numbers on currencies-my trading view
The 1 week implied volatility i.e. the options market's estimate of the expected movement in the next coming week for EURUSD has risen to 11.50 % while the realized volatility was 14.63% last week. Interestingly, implied volatility has been paying for itself for the last 20 days- the pnl of selling1 week straddles has been negative. While the gamma sellers will jump into the market and probably the realized gamma will go down, I think there is a trade here that combines the dollar view and the gamma view- a risk reversal. i.e. I think the EURUSD upside volatility is worth selling and downside is worth buying. Volatility will die if the Euro climbs back up so the EUR call you are short won't be worth very much and volatility will rally if the dollar gains in which case your option will be worth something....

Overall market
I still think credit card companies and other luxury goods that may be affected by low credit are vulnerable.

US market M&A recovering- word on the street

Companies are voting that dollar is cheap and euro is overvalued and the financial sector is coming back to life

The Financial sector seems to be coming back to life. The word on the street is that
here has been a notable revival in announced M&A deals over the last two months. The value of announced M&A deals has been recovering notably in recent weeks.


Cross-border M&A flows have surged, with US companies the largest target across regions, while the euro area has been the largest source of inflows into the US.

Expect US to recover more quickly than Europe and the dollar is cheap right now...

Data Summary
Dollar finally stops falling (and in my opinion it is time to get long)
Oil slides and Breakeven inflation rates falling hard
Liquidity and credit spreads: Both Ted and corporate spreads widen
Corporate Issuance: Slowdown in debt issuance continues
M&A and Buybacks: Cross-Border M&A at new high

So there is still a possibility of a liquidity crisis since the Ted Spread and the Corporate Spread is still wide, either the corporations think that the interest rates are likely to fall even more or they think the risk premia is too high at the moment or they just don't have great ideas to invest in! My guess is that it is the last two reasons. Probably a lot of companies will go through cost cutting projects and eventually find good projects to invest in.... Naturally this doesn't apply to all sectors.

Time to go long the dollar here?

Dollar Rising
I think the time to go long the dollar is approaching/here. USDJPY usually falls when the stock market falls, today the market opened a little lower on Freddie Mac news but USDJPY gained from 108 levels to 109 levels. This tells me that there are a lot of shorts out there who will be feeling the pain. Also, the dollar has gained against the Euro...
The market is betting on the European Central Bank and other banks wanting to cut rates in the future and the Fed holding them steady or to raise them...
the last days have seen the dollar rally a lot.

Currency Volatility is Lower which means low priced options
Also front end currency volatilities across the board are low again... EURUSD volatility is nearing 7-9% levels from double digits.


Trades: Long spot with 3- 4% stops won't be a bad idea. An out of the money European Option, if you think that volatility will increase as dollar rallies. The European option strategy will make a positive return since spot will go in the favor of the trade and volatility may increase on surprise announcements of macro figures in Europe/Japan.

Second Strategy: Another strategy could be to just buy spot and then use barrier options as an add on to increase your leverage substantially. The tricky thing with barrier option is that if your barrier is touched even once the option becomes worthless. However, this knockou characteristics is what makes them cheap in the first place! Additionally if your barrier is in the same direction that you make a profit, i.e. imagine you get long USDJPY spot at 109 levels and your barrier option becomes worthless in a month at 115.10 spot level. If the option touches 115.10 you will have made a lot of money from your spot position! If spot stops at 112 then you will still make a lot of money from the barrier and from the spot. If USDJPY falls then you will have lost less money than you would have paid otherwise for a European Option. I am not suggesting that a barrier option is "cheaper" - it is usually fairly priced but that the barrier may be the appropriate option to express your view.

IF YOU HAVE QUESTIONS PLEASE POST THEM HERE

Central Bank Actions

These days Central Banks are in the spotlight and they are driving the markets. Below is a little table showing the eventful weeks ahead. The FX, Equity and Bond markets will all be hanging on to each word of the Central Bankers!

Central Bank	Next Meeting	Last Change	Current Interest Rate
Bank of Canada	Sep 03 2008	Apr 22 2008	3%
Bank of England	Aug 07 2008	Apr 10 2008	5%
Bank of Japan	Aug 19 2008	Feb 21 2007	0.50%
European Central Bank	Aug 07 2008	Jul 03 2008	4.25%
Federal Reserve	Aug 05 2008	Apr 30 2008	2%
Swiss National Bank	Sep 18 2008	Sep 13 2007	2.75%
The Reserve Bank of Australia	Aug 05 2008	Mar 04 2008	7.25%

My Fav. Economic Indicator Series: Today is VIX

Thanks for the feedback folks. Your comments have helped me decide the direction for the blog. I am going to have some daily updates about what's going on and at least on a weekly basis I will have some trade ideas. Also, I will answer questions whenever I don't have too much to write about or when a situation lends itself to a particular question.

My Favorite Economic Indicators:
I am researching links between macroeconomic variables and hedge fund returns. Naturally, the examination resulted i me revisiting my old friends ( the indicators) and some new ones. I will cover economic indicators for a few days. Today, I talk about VIX

VIX: Approximates the expectation of the volatility i.e. how much movement (going up or down both count for movement!) in the S&P 500 stock market index is expected. Naturally, there is more movement expected in more volatile times. Some people call it the "fear" index. If there is a lot of movement; the market is up one day and we think the worst is over; the market tanks the next day with news of yet more writedowns by banks and we get nervous. This uncertainty makes people unlikely to want to buy stocks. Also, when such "shocks" (in the form of bad news) occur people naturally get less optimistic about the future growth of companies. The stock market is forward looking and less optimism about future growth lowers the prices! Thus typically there is a negative correlation between an increase in VIX and the stock market levels ( and returns).
Range: When VIX jumps above 30 really bad times are here. If you are brave enough you can take a long position and make money. However, remember the market could continue to go south and bottom picking/catching knives can be dangerous!
Yahoo Finance Symbol: ^ VIX
Why I like it? : VIX tells me what the options traders think about the stock market. Currently, the U.S. stock markets are moving the world and VIX is a good predictor of what will happen to the FTSE, BSE, Nikkei, CAC40 etc.
VIX and Currencies: When VIX increases, typically the high interest rate currencies ( example NZD, the New Zealand dollar with interest rates around 8% , will drop in value and the low interest rate currencies (JPY- the Japanese Yen with rates 0.5% ) will increase in value. There are a number of reasons for this phenomenon.
a) Many hedge funds like to borrow in the low interest rate currencies and "invest" in the high interest rate ones and it is called the "Carry Trade". When there is panic and fear in the financial markets then speculative positions are unwound quickly.
b) Fundamentals: There is many times a reason for the panic! When economic fundamentals are weak ( our economy now is a good example) then investors may not want to invest in that particular country anymore. Investors may conclude that there could be runaway inflation and the possibility of a currency crisis is increased.

The Blue line = S&P 500 and the Red line = VIX levels. So you can see the negative relationship.

more to come....