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Il Redivivo

22 August 2017 by pdonnat

Some Sterling credit investors took a hit today with Provident Financial Plc October 2019 bond trading lower 30% while the equity was down 70%. The company is a specialist in sub-prime credit. The CEO resignation, the dividend suspension, the operating loss on home credit business and a FCA probe were enough to trigger “a sell first, think later”. The very specific nature of this company worth 5B GBP 2 years ago, has not triggered an early warning on the state of the UK economy. The credit index market open stronger. However, the credit market under-performed the equity market. In Europe, some hedging activity was reported on Italy. Italy CDS is closing 6 bps wider at 143. Italian bank CDS have been better bid consequently. Silvio Berlusconi may partner up with other parties to push up for a new currency. Losing the Euro is a great risk for people with low income and pensioners. This idea has sealed the defeat of the far-right party in France. Nevertheless, Italy is facing many challenges. The market has just been reminded that each year there is a crucial election somewhere in Europe.

Brand Value

21 August 2017 by pdonnat

Most historical auto manufacturers stocks are discounted with price earnings ratio between 5 and 7. The market discounts the huge diesel deception. Moreover, the equity valuation does reflect some skepticism over their capacity to survive the engines’ revolution as well as the self-driving game changer. However, these manufacturers own priceless gems: brands. Jeep - part of Fiat Chrysler Automobiles NV - is supposedly worth more than its owner itself. Great Wall Motor Co., a Chinese SUV manufacturer, is interested in buying the Jeep division. Fiat has just declined. The CDS tightened by 14 bps and should trade below 200 bps quickly. There are many iconic brands, there is one new brand. The latter is looking overvalued and while the others are looking undervalued. What car you drive, what watch you wear are defining who you are. Not sure everyone wants to be a TAC (Tesla Apple Client). The success of Peugeot with the DS Brand is another example of heritage value. The auto sector is offering a lot of investment opportunities.
Meanwhile, the credit index market was unchanged. The activity was subdued and the reported volumes low.

Plan B

18 August 2017 by pdonnat

Credit indices were again very weak during the whole trading session. The investment grade European credit index is noticeably an under performer. European credit index players have been caught off guard. Their consensus was on a “grind tighter” into the September roll – a smooth tightening of the index -. The 20th of September, six month will be added to credit index protections. Historically, hedging activity reduces ahead of the roll. Selling protection ahead of the roll has been a winning strategy over the last few years. The recent price action has upset this mechanical plan. They are too many buyers of European credit index protection. The index is now very expensive to buy compared to the cost of its members. Moreover, the cost for hedging its members is also very expensive versus the cash instruments they are refering to. European credit index protection should be a sell. Popular in the market today, a plan B was offered to "play safely the roll effect": buy September receivers options. The option expiry is the same day of the index roll, the double witching for credit indices. The receiver options are still cheap. The implied volatility repricing is contained. Plan B looks attractive.

What ETAS Says?

17 August 2017 by pdonnat

The Epidemic Type Aftershock Sequence (ETAS) model is used to estimate a time-dependent probability of earthquake occurrence. In this model, each event triggers a new event and so on in a continuous sequence of possible chocks. The US president twits are offering a new field of application for this model. The intensity of the market movement is a good measure of the intensity of each event. The unpredictable is indeed predictable.
The credit market was not immune to the US tensions. The US investment grade index was wider by 3 bps at London close and kept widening afterwards up to 62.5 bps. The credit indices are now trading at the widest level over the last month. However, the implied volatility is still offered at 1.5 bps per day. We have not yet seen a full repricing of the volatility. The volatility sellers have nerves of steel and an accurate ETAS model.