Search This Blog

Sunday, December 14, 2008


We are now at a very interesting point in time. This upcoming week should provide some fantastic data. Not only do we have some interesting earnings being reported (GS, MS, NKE, FDX, etc.) but we also get to see the FOMC decision and the CPI data. Plus who knows what news will come out of Washington with regards to the auto bail out or any other stimulus plans. This week will likely set the tone until inauguration. I read an interesting stat lately that I felt was worth sharing, in the past 12 months the Fed’s assets grew by 146% the ECB by 58%, the Swiss National Bank’s by 74%, and the BoE by 158%. I find it somewhat funny that we are solving the problem of excessive leverage by leveraging. One can’t help but wonder when long-term rates will raise and inflation will once again be a fear (I guess it is just a function of how talented the Fed has become at putting its collective feet on and off of the accelerator).

Goldman Sachs recently came out with their top trades of 2009. I have pasted a brief overview below, enjoy.

TRADE #1: Long Chinese A-shares at 2,079, target 2,600 Despite the uncertainties in the global equity picture, the scope for a sharp increase in China’s A-share market this year, which is down 70% from its peaks in October 2007, is quite real. While the Chinese economy is heading towards its worst slowdown in many years, the policy response, both on the fiscal and monetary fronts, is also set to be aggressive. Broader quantitative easing and the kind of renewed USD weakness that our FX forecasts show would probably also help this Dollar-linked market.

TRADE #2: Long/Short EM FX Differentiation Basket at 100, target 106 in spot (plus carry) This basket, with 20% long EUR/PLN, 30% long EUR/CZK, 15% long EUR/TRY, 20% short US$/MXN, 15% short US$/BRL, seeks to take advantage of valuation differentials in EM currencies as well as different degrees of vulnerability to further deleveraging. At this stage, we view Eastern European currencies as most vulnerable. LATAM currencies, on the other hand, have seen disproportionate depreciation moves lately and the economies seem less exposed to ongoing tensions in the credit markets based on various metrics of leverage and banking system health.

TRADE #3: Short Dec-11 crude oil futures at US$67.97 target US$ 60 The global recession has put sharp pressure on oil prices, which will likely extend to long-dated oil contracts, as typically occurs during cyclical downturns. With long-dated oil at very significant premiums to front-month crude, there is substantial positive carry and plenty of evidence that this dynamic has not yet fully taken hold. One consequence is that integrated energy stocks (and the broad energy sector) may see renewed relative and absolute pressure.

TRADE #4: Long US 30-yr current coupon Fannie-Mae MBS, target 4.0% As ‘unconventional’ monetary policy measures in the US, and perhaps elsewhere, begin to kick into gear, the mortgage borrowing rate is likely to become a more explicit focus of any new policy measures. With this in mind, we recommend buying current coupon Fannie Mae 30-yr MBS. The 5% coupon trades at a yield of 4.7% on current pre-payment speed assumptions. This corresponds to a spread of over 300bp over the 5-yr Treasury yield (roughly comparable duration on current prepayment assumptions). Our target is 4%. An alternative is to enter Dollar ’Rolls’ at an implied repo of 2%.

TRADE #5: Sell credit protection on Sweden through 5-yr CDS at 148bp, target 60bp
As investors have become more concerned about Sweden’s banking sector’s exposure to the Baltic countries, and Eastern Europe more broadly, the 5-yr Swedish sovereign CDS has gone from 13bp (or flat to Germany’s) at the end of September to 148bp currently
(Or 100bp over). Even accounting for the sharp slowdown in economic activity and our banking team’s estimates that banking losses from exposure to Eastern Europe could reach 3.0% of GDP over the next few years, Sweden’s credit fundamentals are solid. The government is expected to run close to a balanced budget position, after a string of surpluses; gross public debt is a meager 30% of GDP, less than half the Eurozone average. The current account position is a healthy surplus (in excess of 7% of GDP) and external liabilities are tiny.

TRADE #6: Long the Wavefront housing basket at 58.97 for a target of 70
Our Housing basket is a relative trade, pitting homebuilders and other housing related areas of the US equity market (appliances, furnishings, house wares, autos, electronics) against a broader set of cyclical areas of the market. We expect to see residential investment growth bottom in Q4 2008, and, with the Fed focused on quantitative easing in the mortgage and agency space, we think stabilization and sequential improvement in the data (even if not outright strength) will prove supportive for this relative equity trade, even if the broad cyclical picture remains weak.

TRADE #7: Long Cable (For those wondering Cable is the exchange rate between the U.S. dollar and the British pound sterling. The origins of this term are attributed to the fact that in the 1800s, the dollar/pound sterling exchange rate was transmitted via transatlantic cable.), at 1.48, for an initial target of 1.65 a large part of recent Dollar strength has been the result of forced deleveraging flows. As these flows abate, the Dollar should weaken on the back of continued large current account deficits. And if the US administration continues towards more aggressive quantitative easing policies and succeeds in raising inflation expectations, that too could be Dollar-weakening. Alongside this, we are of the view that much of the weakness of the UK economy and banking system is now priced. Moreover, the exceptional easing of financial conditions due to fast
BoE rate cuts and unprecedented trade-weighted Sterling weakness create upside risks to the UK economy.

I am particularly inclined to believe in trade #7 as I think the dollar is grossly overvalued purely due to the fear in the market place. Once people realize the world is all equally hurt and it is not ending, they will trade out of the dollar (and dollar debt) until yields rise to an appropriate rate commensurate to the risks associated with the US Government and economy.

One interesting stock that I think could make an intriguing trade should it fall from its current levels is De La Rue plc. They are a UK based printer of banknotes. I believe this is one of the more interesting equity based ways to profit off of all the balance-sheet growth currently occurring in the world. De La Rue, traces its roots back to 1813 and was originally listed on the LSE in 1947. De La Rue specializes in the supply of cash-related printing and systems services to both central and commercial banks. The Security Printing & Paper division prints currencies, passports and other documents requiring security features. It has 50% of the outsourced banknote printing market (10-20%). It is also the largest independent producer of banknote paper (30% market share). The cash systems division supplies cash counting, sorting and dispensing equipment for the banking industry. It has a 27% stake in Camelot, which has the license to run the National Lottery until February 2009. So this company should benefit from a few trends: global balance sheet expansion, lottery participation (which increases in tough times), and the need for consistent and increased global ID protection/management services. Over the past five years the company has extensively restructured. It has returned more than $1+Bn to shareholders. They even sold a commercial cash systems business to The Carlyle Group for about $600m. Analysts currently expect the company to earn around $100m of net profit for 2009 which equates to a forward P/E of around 11x (this by the way is well below its historical average in the high 20s). On an underlying basis (excluding legacy central costs not disposed with Cash Systems), De La Rue trades on around 10x EV/EBIT and 13x PE for Mar 09E. Unfortunately the stock has held up fairly well YTD, should this name come down substantially from its current 850 pence price I suggest investors take a serious look.

No comments: