[DcifrThs]

Another idea (from reading the economist) is to start thinking about CDX.

this is a crossover credit default swap index (BAA or the credit grade on the boarder between investment grade and junk) in based on North american & emerging mkt companies(though i forget the composition. you can, however, pick a more specific index from the many they have etc.)

in june, spreads blew out a bit to close to 150-200 bps above treasuries. they got as low as 100bps above treasuries before the february mkt hiccup (and they then jumped to over 200).

i have to check but if they've come back down to anywhere near 100bps i'd look to start a short at a signal of -20% to -50% depending on how close to 100bps the index CDSs are trading above treasuries.

for those that aren't 100% clear, a CDS is a derivative that pays when an underlying instidution default's on ints debt. so then economic growth is good or demand for these instruments is high, these spreads tend to come in. when risk aversion increases or when underlying institution (typicaly company) balance sheets are at risk, they should blow out.

this is another one of those things where the upside is huge and the downside is small b/c they can't reasonably be priced below 100bps above treasuries since that is just ludicrous pricing and indicates irrational demand for them (possibly for hedging reasons for certain hedge funds/private equity groups)

so i'd want to short the spreads here at near 100bps above treasuries. the lower the spread the stronger my signal.

Barron