Trade Idea Generation. the process of writing and thinking..LETS DO IT

[DcifrThs]

Ok guys, it's been a while since the last one of these but as i do it, i think it makes sense to have everybody chime in.

my motivation now is to write about a 3-5 page economic overview of the world and then parse out and precisely define some trade ideas as a result.

a friend of my father owns a 1bil global macro fund around where i live and he says he isn't hiring researchers now due to lack of senior people capacity to give attention to new researchers. i would like to show him that i don't need that much attention and simply give him something, whether he wants to consider me or not, that shows my abilities.

the first step to writing a SUCCINT, CLEAR, and IMPRESSIVE outlook/trade idea summary is brainstorming and picking the best ideas.

what follows is the brainstorm i had yesterday mad late at night and this morning before a recruiter interview in the city.

i also wrote some of this on the train from where i live to grand central and back.

it is VERY short hand but you can get the idea of what the brainstorming session is like.

please comment on ANYTHING you want and feel free to add whatever you want. we will all learn a TON from this i hope.

outline:

- bullet point trade ideas.
- economic overview.
- tying economic overview to trade ideas
- dealing with likely correlations/portfolio construction aspects of each idea.

ideally i'd like to walk away from this with 3-5 great ideas and about 10 decent ones (maybe more).

here are my thoughts brainstorm thoughts in shorthand:

- Short TIPS long 10yr??. bet that BEI will fall. Inflation is right now expected to be higher than in a long time due to low and falling dollar, economic weakness and the fed’s most recent 50bp cut. Impact of lower foreign demand for US10yr (rate rise). Perhaps long TIPS short 10yr? bet that inflation will be higher than priced in.

- Look at jpy/usd. Jpy/aud; jpy/nzd; jpy/eur. Carry trade unsustainable. China less likely to fall than US in terms of economic growth. Affect on Japanese CA? exports to china still strong while exports to US fall due to falling consumer demand? Counter point that jpy is so low vs. these four currencies that much lower would drive up fundamental flows into the yen. Further, interest rate diffs are responsible for 46% (Bernstein decomposition) of returns on currencies. Japanese rates can’t get much lower whereas US/AU/NZ/EUR have much room to fall if economy does poorly so very good bet here. These four are likely highly correlated though so treat possibly as 1.5 bets etc.

- Maltese lira (new place for investment, large demand, large exports) vs. euro as joining EU comes closer (jan 08). Long lira short euro? How will this play out as time of joining draws nearer? How much of this is priced in?

- Eurro vs. pound. UK and euro so tightly tied. UK far more likely to have housing affect consumer spending. Flow through to EUR though. How much? Enough for a long EUR/GBP bet?

- Overall USD. Dual deficit country. Interest rate diffs w/ rest of world? How much more likely to fall than, say japan. In addition to JPY/USD bet JGB vs. US10yr. long 10yr short jgb.

- Industrial production data/cap.util. consumer spending/corporate profits (mean reverting) growth data in US vs. euro vs. UK vs. china vs. japan

- Commodities, dependence on china/US. Ethanol craze too high? True greenery of ethanol vs. govt subsidies.
o Bet on uranium vs. oil. How has spread done historically. Uranium vs. natural gas…especially in Europe where Ukraine is at the hands of Russian demands. New pipeline in via sea? How would that affect demand for uranium vs. natural gas?
o What about oil overall. Not much room for increased supply and china growth even if it falls to 8% is still a huge demand factor. Copper may still rise despite US slowdown as china is biggest factor there and new production coming online won’t be likely to surpass growth rate of demand for the metal.
o Platiunum/palladium vs. gold spread. Probably blown out as gold has increased a ton and I don’t know what has happened with platinum palladium. How close are these historically (PPvs. G). is it now wide? (many demand factors for gold vs. platinum) has it gotten too wide? Short gold long platinum if it has.

- Diversification of SWFs away from US$ and US10yrs (look at last foreign purchases of us securities and how it is has changed over past year? What is likely future change?). what happens here with commodities if prices fall for oil exporters.not likely though given overall global demand.

- Interest rate diffs: US/UK, US/China

- Chinese bond market, possible implications: inflation since sterilization in china has been issuing of govt bonds to reduce inflationary impact of FX reserves. Would this increase likely inflation (reduce spectre for Chinese growth long term) or reduce inflation (and thus allow more comfortable growth w/o overheating)

- Corporate spreads. for individual companies within the same industry, a diff trade between those w/ very high int’l exposure and those with high degree of domestic exposure. Long CDS of domestic short CDS of foreirn (bet that insurance cost of 10mil of debt of foreign will fall vs. domestic insurance cost)

- Corporate spreads in general. Profits at 40 year high, possible decrease in consumer spending. Debt markets functioning poorly…what to expect in terms of corporate profits. How well do corporate profits track performance of debt? Financing costs of banking sector may cut still into profits of citigroup and the like. Is there a trade here?

- 3mo euribor/libor vs. short rates. Bet that they return to normal. Long 3mo euribor/libor short 1 mo euribor/libor. Where to get data to show as chart? (time vs. spread or time vs. 3mo euribor/libor US/UK/EUR denomination vs. 1mo same)

- emerging market debt. Peru's free trade agreement (FTA) with the US could add 1% to growth already at 8%. this could also give security to investors in peru. there is also a prospect for columbia and panama FTAs with panama much more likely than columbia but less likely than peru. so what do the current columbian, panamanian, and peruvian debt spreads over UStreasuries look like?
o approval in peru/panama could divert trade from columbia. so possible diff bet long peru/panama debt short columbia debt
o EAFIT study if both approved (peru/panama) could take 2.2% off GDP in columbia and lose 400k jobs

- candian bonds vs. US. commdity based economy trades highly w/ USA. outlook for loonie possibly stronger so long as CA improves as a result of similar commodity prices and overall stable global outlook

- australian wheat prices took .75% points off AUS growth in 06-07. BIIIIIIIIIIG draught going on there. worst in a century. contributing to high wheath prices globally.






ok so that is where i stand now.

over the next week i'll filter and compile these into a tight memo of 3-5 pages.

i'd also love to get some data so i know what is going on out there.

hope we can all learn a ton from this.

Barron