Category: Investment Strategies

Dr. Peng Telecom & Media Group: On Ventilator

Bond Critic May 11, 2020

Executive summary:

Summary
Geography	China
Sector	Telecommunications
Credit rating	Caa1/WR (Moody’s/S&P)
Report date	11-May-2020

Dr. Peng Telecom & Media Group Company Limited (Dr. Peng) is a guarantor of Dr. Peng Hong Kong Holding Limited, an issuer of USD500m bonds maturing 1^st June 2020 (CHEDRP 5.05% 6/20s).… Read the rest

Further Downside To The USD From Fed QE

SOM Macro Strategies July 21, 2020

Covid-19 – Part 3: The Fall Of The USD & The Rise Of EM

SOM Macro Strategies June 18, 2020

June 16, 2020 (Updated) Alan Brazil

Step 1: Macro Theme: The Sell-off In Commodity EM Assets Is A Buying Opportunity
- EM x-China equities have lagged the rebound in US and China equities
- EM x-China FX are at historical lows on a real basis
Step 2: Fundamental Economic Framework
- EM economies will be harder hit than DM economies from the Covid-19 lockdowns
- The fall in commodity prices adds to the downward pressures on EM
- Capital outflows from EM is almost twice as large as in previous EM risk-off events
- EM Covid cases and deaths seem to be accelerating vs DM countries
Step 3: Find Potential Repricing Catalysts
- The return of US QE could push commodity EM assets higher by weakening the USD
  - Weaker USD could increase capital flows to EM
  - Weaker USD could strengthen commodity prices
  - Weaker USD could provide a tail wind to commodity EM GDP
- Commodity EM countries have the capacity to deploy substantial fiscal stimulus to support their economies
- EM countries are bending the Covid infection curve using even stricter lockdown strategies relative to the US
Step 4: Find Asymmetric Trade
- Trade: Buy commodity EM FX vs the USD

Step 1: Identify Macro Theme

The Sell-Off In Commodity EM Assets Is A Buying Opportunity

EM x-China Equities Still Down over 25%

Covid-19 - Part 3: The Fall Of The USD & The Rise Of EM 5

EM x-China FX at Historical Lows on Real Basis

Covid-19 - Part 3: The Fall Of The USD & The Rise Of EM 6

Step 2: Fundamental Economic Framework

Economic Recovery Will Likely Be U-Shaped At Best Not V-Shaped

World GDP a “U” or A “W” Recovery

Covid-19 - Part 3: The Fall Of The USD & The Rise Of EM 7

Advanced Economy Look Similar

Covid-19 - Part 3: The Fall Of The USD & The Rise Of EM 8

EM Growth Could Fall Even More Than Advanced Economies

Near-term Growth Hit Is Substantial

Covid-19 - Part 3: The Fall Of The USD & The Rise Of EM 9

Longer Term Still Great And Could Fall Even More With A

Covid-19 - Part 3: The Fall Of The USD & The Rise Of EM 10

Falling GDP Combined With The Fall In Commodity Prices Led To Capital Outflows From EM

Demand Erosion Led To A Sudden Drop In Commodity Prices

Covid-19 - Part 3: The Fall Of The USD & The Rise Of EM 11

Capital Outflows From EM Worse Than In Other Events

Covid-19 - Part 3: The Fall Of The USD & The Rise Of EM 12

Compounding The Problem Was The Surge In Covid Cases In EM1

Cases Are Rising In EM While Falling For DM….

… Read the rest

Still the World’s Safe Haven?

Darrell Duffie June 6, 2020

Redesigning the U.S. Treasury Market After the Covid19 Crisis

Darrell Duffie^[1]

Graduate School of Business, Stanford University

June 6, 2020

Prepared for presentation at the Hutchins Center on Fiscal and Monetary Policy

Brookings Institution, May 27, 2020

Abstract: I review the functionality of the secondary market for U.S.… Read the rest

Update On Strategies For The Coronavirus World

SOM Macro Strategies April 1, 2020

Hi. I hope all of you and your families are well and have found something to binge-watch.

Well, I was going to send this piece out a few days ago, but every time I was ready to send it, another academic study on the virus came out.… Read the rest

It Will Be A U-Shaped Economic Recovery Not A V-Shaped One

SOM Macro Strategies April 22, 2020

My baseline view is that markets are much too optimistic about the recovery of the US and world economies. Of course, there is a reason for optimism; the infection trajectory in the US is looking better, as shown in Figure 1 on the left below.… Read the rest

The Case For Residential Mortgage REITs

SOM Macro Strategies May 10, 2020

Step 1: Macro Theme: The Case For Residential Mortgage REITs
– Residential mortgage REITs are cheap because they represent buying Resi assets at distressed levels at a discount

Step 2: Fundamental Economic Framework
- – Sell-off in residential mortgage REITs have followed the sell-off in the entire mREIT market
- – Sell-off in residential mortgage REITs reflects the impact of the dislocation in the underlying resi assets and the resulting margin calls during the last week of March
  - REITs are a leverage strategy with leverage funded with short-term repo
  - Sell-offs in the underlying resi assets driven by historical widening of spreads drove margin calls across the business models of the REIT
  - All REITs delveraged, reduced repo lines, and raised cash
- – Risk across their business models have subsided
Step 3: Identify Potential Repricing Events
- – Residential REIT pricing should improve as the headwinds abate, and reflect the improvement in the underlying asset values
- – Leveraging agency pass-throughs offers mid-to high ROEs, while the Fed has reduced repo funding pressures on REITs and given a strong bid for agency pass-throughs
- – Non-agency credit assets offer double digit yields because the market is pricing in an unrealistic repeat of the GFC HPA/default cycle
  - HPA is unlikely to fall as much given the improvements in the underlying housing market versus the years prior to the GFC
  - Mortgage underwriting has tightened, particularly in the reduction of closed-end seconds (CES), e.g.

… Read the rest