Tuesday, October 07, 2008

The four stages of the global financial crisis

As this crisis has evolved over the years, I find my set of tabs in firefox has changed. The evolution of this set of things-to-watch is mildly interesting.

  1. The first place to focus on was US housing construction. US housing was clearly in stratospheric territory. Once the US Fed started raising rates, and Mortgage Equity Withdrawal became less important, trouble was going to come about in US home construction. In this period, I watched the DJ US Home Construction Index.

  2. By mid 2006, it was clear that big damage had taken place in this industry index. (E.g. see this article in Business Standard in September 2006). The next shoe to drop was the firms that had financed homes. Hence, my focus then shifted to US housing finance companies. By mid 2007, it was clear that big damage had taken place in this industry index.

  3. Now the question became: where in the world of financial firms does the damage go? My focus then shifted to the DJ US Financial Services Index. And, by this time, it was clear that there were deep problems in the money market, so I started watching the TED spread. At first, after the death of Bear Stearns in March, US Financials bounced back and it looked like the trouble would subside.

  4. And then, after the death of Lehman, the real question became: what would this do to the broad US economy. Now we're all down to watching the S&P 500 and VIX.

With VIX at 58, isn't it time to be shorting VIX? (You might like to see this slideshow on the global financial crisis, from a few weeks ago).

9 comments:

  1. Short VIX ? Whats your time horizon, Boss?
    Anovymous1

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  2. is hedge fund make any key roll in u.s.a financial crisis?

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  3. You probably can't unless you are connected. Did they allow shorts on this one? Too lazy to check this out...

    Even if you could, there is a possibility of no payout. Read on...

    If you met all the reqs, they would squeeze you where it hurts by instantaneously lifting the overnight or maintenance margin.

    It is liable for a horrendous short squeeze.

    I wouldn't touch the VIX in these conditions because the MarketMaker's desperately need all the revenue they can get. Don't feed them.

    A better option is go long on certain stocks which would do well much later. Wait for the right time to do that. You will not get the fills at the absolute rock bottom anyway, those fills are for the big boys. Get them on the way up, and you have confirmed with some juju that they are absolutely going up.

    This is pure gambling territory.

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  4. The real question is now what were the regulators were doing thru out this period in US.??? Why Board of Directors of Lehmann allowed such dubious practices which cost trillions & still we are just waiting for some more bad news.

    What was the role of statutory auditors especially big 4 fims, who were the Auditors of all these big Banks and institutions..??

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  5. I thought the asset managers (and funds) - as holders of theses bonds would be next after the investment banks (who built the securities and held the lower tranches and NIMs) and Insurance (who wrote CDSs). Did the market skip them ? How about the pension fund managers who were long these securities ?

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  6. I hope your short VIX position has stopped out..in a short time horizon.
    Anonymous1

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  7. Thanks Ajay, It will definitely be helpful to all of us to get a clear look of what changes are happening recently.
    this is the nice information shared with us.

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