The next Big Short (predicting the next recession)
Hi guys, I will be presenting a trade idea that is of a much larger scale. This trade idea involves predicting the next recession - something that is at the back of almost every investor's minds.
I will be proposing an open trade at 45.06, which is represented close to the fibonacci 0.786 level, a stop loss at the 51.94 level (which is close to the previous high), as well as a conservative take profit level at 40.22 as represented by the fibonacci 0.618 level as well as a second, more risky take profit at 20.51, which is represented by the previous low.
The reasons for the next recession can be summed up by the following statement: a bubble in the fixed income market.
1. Ultra low interest rates by government bonds push yield-hungry investors to corporate bonds, which offer a much higher yield.
2. This leads to the cost of borrowing to fall for these corporates, which in turn provides more capital for the companies to conduct share buybacks, thus artificially pushing the prices of stocks up (which is why we see the S&P 500 testing new highs despite cash flows out of the stock market and into cash and bonds being the highest since 2008)
3. Lesser transparency and covenants by these companies as there is inelasticity and a fall in bargaining power by lenders for corporate bonds.
4. The fallen angel risk as well as the credit downgrade risk has been rising and is at an abnormally high rate at the time of writing, reflecting that companies' debt to equity ratio is increasing.
It is only a matter of time that companies will start being unable to repay or refinance their debt, and this will be exacerbated by a mass sell-off of CLOs in the event of a fall in consumer sentiments in the bond market, therefore increasing companies' cost of borrowing and rendering them unable to refinance and repay their debts.
I am open to any criticism and I humbly accept that my opinion has many caveats. Do let me know if you guys have any opinions on this trade idea.
Cheers!
I will be proposing an open trade at 45.06, which is represented close to the fibonacci 0.786 level, a stop loss at the 51.94 level (which is close to the previous high), as well as a conservative take profit level at 40.22 as represented by the fibonacci 0.618 level as well as a second, more risky take profit at 20.51, which is represented by the previous low.
The reasons for the next recession can be summed up by the following statement: a bubble in the fixed income market.
1. Ultra low interest rates by government bonds push yield-hungry investors to corporate bonds, which offer a much higher yield.
2. This leads to the cost of borrowing to fall for these corporates, which in turn provides more capital for the companies to conduct share buybacks, thus artificially pushing the prices of stocks up (which is why we see the S&P 500 testing new highs despite cash flows out of the stock market and into cash and bonds being the highest since 2008)
3. Lesser transparency and covenants by these companies as there is inelasticity and a fall in bargaining power by lenders for corporate bonds.
4. The fallen angel risk as well as the credit downgrade risk has been rising and is at an abnormally high rate at the time of writing, reflecting that companies' debt to equity ratio is increasing.
It is only a matter of time that companies will start being unable to repay or refinance their debt, and this will be exacerbated by a mass sell-off of CLOs in the event of a fall in consumer sentiments in the bond market, therefore increasing companies' cost of borrowing and rendering them unable to refinance and repay their debts.
I am open to any criticism and I humbly accept that my opinion has many caveats. Do let me know if you guys have any opinions on this trade idea.
Cheers!
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.