Ellington is bearish HY credit

http://www.valuewalk.com/2015/11/ellington-management/

“There is a silver lining to all this doom and gloom,” the hedge fund writes. “Despite all of these warning signs, the window of opportunity is still wide open, with market prices and implied volatilities now back around where they were before the market swoon during August and September.” In particular, the fund looks to

Ellington cites opportunities in single name credit default swap derivatives, with a particular mean reversion trade in mind.

The S&P LSTA Leveraged Loan 100 Index, which is a total return index designed to track the performance of the largest institutional leveraged loans, has declined almost 5.9% since June, while the CDX HY S24 index has declined by only 0.1%. These indices, which measure similar risks, tend to move in tandem. Most of this divergence has taken place since late September. In October alone, CDX HY S24 returned 3.5%, compared to -0.6% for the S&P Leveraged Loan 100 Index. This outperformance coincided with by far the strongest month ever for high yield ETF flows.18 Using single-name CDS data, we are able to separate out the components of this outperformance since June to better understand whether we think it will revert. Nearly a third of this outperformance (1.23% of the 4.05% difference) is a move in the basis between the CDX HY index and its constituents.

Ellington calls the move “purely technical, reflecting an unusually large premium at which CDX HY currently trades to its constituents.” The differing trading levels “has historically mean-reverted, especially when the basis is greater than 1 percent of net asset value.” Today the variance stands at to 2 percent of asset value. The conclusion the report makes is “two factors are at work: not only has single-name CDS outperformed the leveraged loan market, but the CDX HY index has outperformed single-name CDS.” When prices mean revert from their historical averages, a counter trend is often anticipated, particularly when fundamental performance drivers haven’t materially dislocated. “The price differential creates a large wedge between CDX HY and leveraged loans, which supports our thesis that synthetic corporate credit is especially overpriced today.”

Latest Odey

Odey:

http://www.valuewalk.com/2015/11/odey-stock-crash/

"$2.5 billion Odey Asset Management OEI MAC fund was down 17 percent halfway through October 30 and -23.7 percent year to date. The causation for the pain is a long / short ratio that is significantly leveraged short, an unusual position when compared to the mean average long / short equity hedge fund strategy."

"“Stan Druckenmiller stunned investors in New York recently by announcing that he thought we were already in a bear market for equities,” Odey says, ominously pointing to a market near record highs. “I suspect people will look back on this time and see it as the last opportunity to get out.”"

"Before a crash, “the first thing that goes is a market is breadth, which narrows,” he told investors on a recent podcast to investors. Market breadth, measuring the number of advancing and declining stocks, fell under 30 on Aug 21, indicating more names were negative than positive. “We broke last Sept lows,” he said, indicating trouble for the market.

“On 21st August 2015, the Dow Jones, the FTSE and the global market index gave the first sell signal since 2007 and confirmed that we are now in a bear market,” he wrote in a September monthly report to investors. The resulting rally since the downturn reflects just how bearish participants were on that day. “Only 16% of shares were still in a bull market, down from 48% only a month and a half earlier.”"

"China will be the catalyst for the market downturn. China has run out of policy options."

"When would we buy the S&P? At 10x EBIT or 1452"

"We expect the Yuan to fall by 30%"

"Odey says that while the 2008 crisis was solved by low interest rates ultimately, “this downturn will only be solved by capacity getting written off.” This is a point in the very distant future. In the near term he recommends watching corporate credit spreads reveal that there is a credit tightening taking place, “which is wholly not what the central banks want to happen.”"

- Argument isn't persuasive. Merely says that monetary policy has been overly accommodative, which is resulting in poor capital allocation, and will chaos as the easing is withdrawn.