Tuesday, 28 June 2011 06:07

As Requested By Our Constituency: Trade Setups and Examples Based on BoomBustBlog Research Designed to Capitalize on the Coming Eurocalypse Featured

I have received several requests for trading recommendations and advanced setups. Since I am not a trader (or at least not one of the best traders) I have refrained from offering such. Well, now we have several members of the community that are stepping up to offer their expertise and opinion. I will be posting their combined contributions as Eurocalypse. Here is some information on the credit trader below.

...As I said I have traded mostly on the fixed income markets. What I mean by that is:

  • government bonds, euro-area, (or before it existed, peseta, lira, french franc,...), Sweden, Denmark, UK, US, Japan
  • short term interest futures in those markets  Euribor, Euro$ etc...
  • bond futures & options in those markets (tnotes, gilts, bunds, btps, jgb.
  • swaptions & caps & floors
  • inflation linked securities (US TIPS, Euro-CPI linked, etc.
  • G7 FX & options

I did not trade credit, or mortgages. I did trade on CDS on sovereign names (the stuff which is blowing up as you predicted :-) )

In my best years, i managed more than 10 billion euros equivalent of bonds (and the corresponding derivatives)

I was doing 'proprietary' trading, in contrast with 'flow trading" - flow trading is quoting to clients (pension funds, banks, insurers, hedge funds...), and basically stuffing and frontrunning them - or in contrast with exotic derivatives book where you stuff the client selling complex products he doesn't understand and he cannot price by himself ;-)

On average, I made for the firm more than 30M euros a year. Return on asset not that big! Those were the years where you had to be leveraged to make money due to low vol!  I was doing mostly "relative value", picking pennies with "hedged" strategies. So not a big trader like Brevan Howard and co, but I was not in the minor league either. I must say im quite proud of having stuffed a few times the likes of GS, JPM, DB and co....

And I'm proud of you to, my friend! Cool

I also ran the asset-liability department of a French bank so I saw also the other side of the business with all the accounting shenanigans, and I know how banking CEOs run their company...

I have to say the curious thing seen from far away from the screens, is that banks seem tight to sovereigns, but in the end, they should share the same fate and I tend to believe if we have big failures, we will have a domino effect, even affecting the strongest banks. The whole system is f$cked up!

I actually disagree slightly here. The banks are literally quite leveraged into the sovereigns (the European banks even more so, but they're all leveraged enough to blow up 3x over if a serious credit event occurs). Thus, the banks will not share the same fate as the sovereigns, but a fate much worse!!! The reason why anyone was even able to be convinced to buy the banks was because Bernanke and his minions funneled trillions of dollars of rescue efforts into the banks, gouged from public coffers. This is the reason why the sovereigns are in the state that they are now - reference Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe:

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns


This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.


There are no additional trillions to give to the banks,thus its relatively safe to say that some of these banks may have to actually trade on fundamentals some day - and that could get very ugly.

The trade which should make the most sense, is to short financials vs the indexes, but even if there should be much more to come, (in real crisis, all banking shares should converge towards 0) it must have moved so much, I guess technicals are key, if not, risk of being short squeezed...

If/when short selling of financials becomes forbidden [like in 2008 as this blog was racking up deep triple digit gains], you can still do it by buying... 

Yes, we will be having some very interesting stuff coming up this summer. I have responded to the requests to dig deeper into the US and European banks and I will try to deliver the first of the refreshes by the end of the week.


I will be adding additional commentary throughout the day as well as a look at at European bank from an equity trader's perspectve.


Last modified on Tuesday, 28 June 2011 08:45

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