Do What Feels Wrong, Citi's Credit Strategy For 2012 - News and Current Events | futures io social day trading
futures io futures trading


Do What Feels Wrong, Citi's Credit Strategy For 2012
Updated: Views / Replies:241 / 0
Created: by Quick Summary Attachments:0

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors – all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you don’t need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 
Thread Tools Search this Thread
 

Do What Feels Wrong, Citi's Credit Strategy For 2012

  #1 (permalink)
Quick Summary
Do What Feels Wrong, Citi's Credit Strategy For 2012

As strange as it may seem, the current market environment of highly correlated risk assets and surge/plunge movements in prices does indeed lend itself to the contrarian view that Citigroup's credit research group has to 'do what feels wrong' in 2012. This has proved very profitable in the last few months and they warn that the consensus view that 'its okay to miss the first leg of the rally, I'll catch the second' may be a losing proposition as the current chase we are seeing in the last few days (and saw on 11/30 for example) exemplifies the rapid one-way shifts in credit, equity, and in fact every asset class at the merest hint of solution (or problem). Citi lays out five scenarios for 2012's credit market (and the concomitant equity markets) basing their opinion on market (VIX and rate level and vol movements) as well as fundamental (the economic surprise index we have been extensively discussing), and technical (issuance and trading volumes) and see spread compensation for default as negligible and mostly prone to systemic risk which should disappear in the low probability 'very bullish' scenario. The highest probability scenario is continued sovereign stress (or a decade of deleveraging), which we agree with, and a very range-bound trading market as systemic risk remains high (though not cataclysmic) with the floor on secular spreads notably higher than pre-crisis levels. We do wonder though when we see spreads 'switch' regimes from reflective of systemic risk to reflective of fundamental (recessionary slowdown) cyclical risk.



5 Scenarios for Spreads in 2012




Our base case for corporate spreads must be cognizant of both the likelihood that Europe is slowly resolved, at best, and that the equilibrium level of spreads going forward is likely to be higher than during past credit cycles in order to reflect greater vulnerability and a secular deterioration in liquidity. As such, we envision spreads trading within a relatively wide range of 160 to 220bp throughout much of 2012, provided the Eurozone remains intact – a big qualification.



At 240bp, Citi’s US Broad Investment Grade Index (US BIG), looks cheap under the base case scenario. In fact, we see a high probability of generating excess returns of at least 380bp (240bp of carry, 20bp of spread tightening) and the potential for 840bp should spreads end the year at the tight end our range – which seems unlikely given the volatility fourth quarter elections may create.



Our basic approach to spread forecasting involves dividing the index spread into two categories: the compensation for default risk and the compensation for non-default risk. To do so, we appeal to macroeconomic default forecasts. In particular, Moody’s has been providing a one year forecast for each rating’s category every month for the last five years. We apply that forecast iteratively to generate default probabilities for each ratings category and then use those probabilities to determine the worth to investors in basis points (Figure 12). The compensation for non-default risk is then calculated by subtracting the spread compensation for default from the current spread of the high grade index.





Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).




Focusing just on the non-default spread compensation in high grade can be very instructive. We find that this series of spreads can be easily modeled using five variables: the VIX, the level of 10-yr swaps, the volatility of 1-yr swaps, high grade trading volumes, and Citi’s economic surprise index (Figure 13). The first three of these variables are the biggest drivers (in addition to being the most statistically significant) and their values tend to capture changes in systemic risk.





Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


When forecasting then, having a view on volatility and rates can go some way to determining where high grade credit should trade when assets prices are so highly correlated – as they are now. Moreover, since the spread compensation needed to protect against default is so low (we figure just 5bp), nearly all the spread one sees in the market is compensation for systemic risk, not fundamentals. This conclusion shouldn’t come as a surprise to investors, as it is equivalent to saying a resolution to Europe’s ills could be worth 80bp.



More formally, we outline five scenarios for spreads in 2012 (Figure 14) along with some indication of how probable we think each is.





Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).






Consensus among investors seems to be “it’s okay to miss the first leg of the rally, I’ll catch the second”. Ultimately, this strategy could prove ill judged. It is our contention that the current risk on/risk off trading environment will make it difficult to capture any potential relief rally, and that spreads will ultimately plateau at a much higher equilibrium level than before. In other words: There may not be a second leg to the rally - at least not in 2012.



For some time now, the best strategy for taking advantage of spread volatility has been to do what feels wrong. We continue to think abiding by this rule will prove profitable. Our range of 160bp-220bp argues for buying high grade bonds when the index is trading wide of 220bp – as it is now – and gradually selling as the index tightens toward 160bp.



More on ZeroHedge...

Reply to share your thoughts on this current event.


Reply



futures io > > > > Do What Feels Wrong, Citi's Credit Strategy For 2012

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Jigsaw Trading: TBA

Elite only

FuturesTrader71: TBA

Elite only

NinjaTrader: TBA

Jan 18

RandBots: TBA

Jan 23

GFF Brokers & CME Group: Futures & Bitcoin

Elite only

Adam Grimes: TBA

Elite only

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
As Graduates Return Home, Economy Feels the Pain Quick Summary News and Current Events 0 November 17th, 2011 05:50 PM
Citi, Deutsche Bank paying $165.5M in accord kbit News and Current Events 0 November 14th, 2011 07:38 PM
Is This Lehman All Over Again? No, But It Sure Feels Like It Quick Summary News and Current Events 0 August 18th, 2011 05:20 PM
Citi Hackers Made Off With $2.7 Million kbit News and Current Events 0 June 27th, 2011 02:23 PM
NinjaTrader strategy with wrong ADXVMA values GentleTrader NinjaTrader Programming 1 August 16th, 2009 09:37 PM


All times are GMT -4. The time now is 04:14 PM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-15 in 0.07 seconds with 19 queries on phoenix via your IP 54.90.92.204