The Insolvency Approaches

Published on: July 20th, 2020

Raoul is eyeing the shift from the “Hope Phase” to the “Insolvency Phase” as the evidence continues to stack up that the next phase is upon us…

Comments

  • BF
    Brad F.
    22 July 2020 @ 19:16
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    • DR
      David R.
      24 July 2020 @ 09:32
      Dead link. Please re-post! Thank you.
    • IB
      Ivan B.
      26 July 2020 @ 02:22
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  • RG
    Razmig G.
    21 July 2020 @ 17:04
    Hi Raoul, What if the same scenario as in March plays out? Sharp drop & massive rescue & more of the driect money for people to spend. Won't Trump & Powell (he's got vested interest too) do everything to keep things afloat for the elections? Also worth considering that the Fed has anticipated the insolvency & has a plan ready for this. For sure they won't intervene at ATHs & will wait for things to drop and using negative market abs virus sentiment for their advantage to step in. So that criticism of their intervention will be minimal if any. Thanks
  • AW
    Andrew W.
    21 July 2020 @ 15:18
    RP: To echo a question below, TGA bal hasn't been put to work yet. Couldn't a juicing by Mnuchin delay your hypothesis to after November? That's a lot of cash they're sitting on, and what are the chances they won't use it in the secondary market before the election? I can't imagine they'd want to leave Biden with that kind of gift.
  • MC
    Mike C.
    21 July 2020 @ 12:42
    Thanks Raoul, What happens to risk parity strategies when the UST 10y yield goes to zero? Referencing Mike Greens model simulations. Mike seems to think this is when "computer says no" happens (ie they break down). Would love to do a deeper dive. Timing looks interesting. Thanks.
  • IB
    Ivan B.
    21 July 2020 @ 10:15
    I agree it's a great analysis, succinct and logical, makes sense. There's a tiny problem... markets have not been logical at all in the last few months. There's a lot of talk in the comments below about Fed saving the day again, but what about Robin Hooders? If Fed doesn't have moral right to buy stocks when they are ATH (again, perfectly logical) then Robin Hooders will if you believe this narrative and PA in Hertz... It's not a criticism of the analysis rather sharing my struggles making logical senses out of illogical markets...
  • MA
    Muhammad A.
    21 July 2020 @ 06:20
    I don't think there is a world where AT&T is allowed to go to zero regardless of whatever the debt burden is. The bailout will come long before that happens. To me it seems like the Long Tech / Short Financials is the trade here. Even if this pans out as Raoul expects, the low debt tech sector will outperform and financials (esp. regional banks) will continue to suffer. This analysis needs to be accompanied with the importance of a company like AT&T in the US, especially in an environment where they are bailing out everything left and right. I think this goes the way the HYG trade did earlier this year. You get a step down in Oct., right before the election and they get money from the govt. for free just to keep people on the payroll and we worry about this in 2021. Fed will help print collateral for any company that is a systemic risk and backstop the bonds, which will reduce spreads, while fiscal will backstop any and everything and provide enough cash to avoid the debt holders from calling an event of default and we chug along.
    • RR
      Raj R.
      21 July 2020 @ 07:44
      i think you are right about Fed backstopping systemically important institutions. Ray Dalio big debt crisis has called this framework out for the Fed to pursue in the future.
  • MC
    Michael C.
    20 July 2020 @ 19:37
    What is it about GE and T that makes them stand out from F on your BBB list? Have you taken into consideration the likelihood of govt. bailouts of certain industries over others?
    • RP
      Raoul P. | Founder
      20 July 2020 @ 23:35
      Just the charts and their size, really.
    • BP
      Brett P.
      21 July 2020 @ 06:32
      What a world we live in where a primary concern when thinking about an investment is trying to figure out if the gov't is going to move against your position.
  • BG
    Barry G.
    21 July 2020 @ 03:07
    Great work, Raoul. I have been following this narrative for a few months. I thought you would have had Ford included and maybe GM. You have mentioned these several times; why have you left them both out?
  • CS
    C S.
    21 July 2020 @ 02:42
    As a side issue, with respect to that Citi data and your view on banks generally - I have an Interactive Brokers account. Got quite a bit of cash on hand still, and the USD for example are parked in Citi by the brokerage. I've CAD in Canadian banks and AUD in Australian banks, through IB too. My question is, what measures have you taken regarding protecting whatever cash you have on-hand? Cheers.
  • SS
    Shanthi S.
    21 July 2020 @ 01:39
    Thank you Raoul.
  • AB
    ANDRE B.
    21 July 2020 @ 00:39
    Hey Raoul, thank you for this great piece! Two questions: 1 - Could you provide stop-loss levels for those willing to short GE and AT&T now? 2 - What about EM banks such as Russia and Brazil? Best!
  • HM
    Hazvinei M.
    20 July 2020 @ 23:58
    Thanks for the update. I think it was telling that your last point, referencing volatility. Not sure if you consider the VIX a trade, but today it broke a key inidicator, went below 0 on the %B for VIX daily. Could VIX calls be part of your short strategy? There is a storm on the horizon, and doesn't look like the VIX gap from March gets closed just yet.
    • RP
      Raoul P. | Founder
      21 July 2020 @ 00:07
      I struggle with VIX as you need to be so right on the timing or you get killed. Im not short term enough to get that right but I know many of you like trading VIX/
  • KS
    Karin S.
    21 July 2020 @ 00:04
    This is a dumb question, but how did Raoul say to short GE and T when it's time? Not buying puts, did he say futures?
    • RP
      Raoul P. | Founder
      21 July 2020 @ 00:06
      Haven't decided but owing to the long nature of the trade, it would likely be outright short the stock, if you are able to.
  • CL
    Cyril L.
    20 July 2020 @ 20:04
    Great update Raoul. I understand you're looking at the BBBs from a top-down perspective, but more from a bottom-up perspective the one thing I would mention is that PE funds have a lot of dry powder and could bid for assets from some of these names to take advantage of the discrepancy between public and private valuations. KKR was even rumoured to be looking at taking Walgreens Boots wholly private a few months ago. Now large LBOs are not an easy thing to do right now, but contrary to what some people think the debt markets are not frozen at all - leverage would have to be lower but if PE firms can buy at an attractive price they can probably make the equity case work, at least in their models. They won't bid in a crash, but if indices hold up and it's just these names breaking lower, I could see that happening. Jumbo deals tend to happen in the latest stages of the cycle. I haven't looked at GE but a colleague of mine has and he thinks they still have many more assets they could sell - the sum of the parts is greater than the whole - and are unlikely to be downgraded to junk. That's a risk for shorts, likely manageable, but something to be aware of for the smaller names in that list. The largest ones (Ford, AT&T, Citigroup, etc.) are out of reach for PE so maybe safer.
    • RP
      Raoul P. | Founder
      20 July 2020 @ 23:34
      Yes, Im sure there will be spin offs, etc but Im also sure the PE funds would prefer to buy out of Chapter 11 or when the markets have more fear.
    • CL
      Cyril L.
      20 July 2020 @ 23:51
      That would make sense but that's rarely their MO apart from the few that have distressed expertise (e.g. Oaktree). And there is a long road from BBB to Chapter 11. Not saying we won't see any of these companies go into Chapter 11 - that would be consistent with your view on depression, certainly - but that should be the exception rather than the rule and/or drag on for quite some time. And there are drawbacks to waiting for Chapter 11 - the induced stress can cause lasting damage to the assets. They usually prefer to buy outside of the max volatility periods - much cleaner, and more visibility on the financing. Maybe because they need to manage their LPs' nerves as well. Lastly, they don't get paid as much (if at all) on capital committed but not invested. So sure they might hold off if they're really scared about the outlook, but they have strong incentives not to.
  • JW
    J W.
    20 July 2020 @ 20:01
    There is a simplicity and elegance to this reasoning that is difficult to deny.
    • RP
      Raoul P. | Founder
      20 July 2020 @ 23:35
      Yeah, but it has to work! The SPX just keeps going up, even though the banks keep falling. I'd rather they were both headed in the same direction...
  • JM
    Jake M.
    20 July 2020 @ 22:05
    Hi Raoul, I know you are on the watch closely for us monitoring all the signals. Should we be expecting new trades in the (near?) future from you in the form of shorting troubled companies like AT&T?
    • RP
      Raoul P. | Founder
      20 July 2020 @ 23:34
      If they confirm, yes...
  • JG
    Johan G.
    20 July 2020 @ 18:20
    Thanks Raoul, I am with you, my only concern is the 1,5Trillion USD in the TGA and we are approaching election. If the markets start breaking can they manage to kick the can down the road one more time?
    • RP
      Raoul P. | Founder
      20 July 2020 @ 18:24
      The banks don't seem to be concerned about TGA, just the headline indices with the bubble stocks but lets see, as ever.
    • JG
      Johan G.
      20 July 2020 @ 18:41
      Strange world, in Norway residential real estate continued up as the country reopened on the back of lower interest rates on mortgages. Market is presently hot.... And our biggest bank came out with Q2 record results because of higher margins and lower than expected loss provisions. Shares bounced 10%.....
    • SN
      SAT N.
      20 July 2020 @ 23:18
      Trump has married his success to stock market prices. Trump is more anti-China than Biden. If you are China, what would you do?
  • JI
    Janne I.
    20 July 2020 @ 18:28
    What happens if the FED says that they are going to be buying stocks? Another bounce back to new highs?
    • RP
      Raoul P. | Founder
      20 July 2020 @ 18:40
      It would be politically very hard for them to announce that with markets near all time highs...
  • B
    Benjamin .
    20 July 2020 @ 17:58
    Great update Raoul, thanks. Super frustrated by these range bound markets, ready to put some risk on!
    • RP
      Raoul P. | Founder
      20 July 2020 @ 18:02
      I hear you... the picture is shifting but so very slowly! It is summer after all...

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He retired from managing client money at the age of 36 in 2004 and now lives in the tiny Caribbean island of Little Cayman in the Cayman Islands. Previously he co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world. Raoul moved to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe. In this role, Raoul established strong relationships with many of the world’s pre-eminent hedge funds, learning from their styles and experiences.

Other stop-off points on the way were NatWest Markets and HSBC, although he began his career by training traders in technical analysis.

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