Wholesale Repositioning

Lotsa stuff to go through today....

First, I took off the VIX trade on Friday. This has been a great winner, one of my best in several years. However, there are a couple of reasons to book it:
- Value. The VIX has come a long way, and it hasn't gotten much above these levels except in true crashes like 1987 or 2002. Of course we might be going into one of those (who knows?), but I'm not willing to bet on it.
- Fundamentals. Until last Friday the Fed was staying out. In fact Poole said as much as "screw you" to the problem. That has now changed. Whether or not they will have the will or skill or bullets to fix the problem is a question mark. But at least they are trying. So it's probably going to be more of a two way situation until things clear up. (BTW the market was almost unchanged this week, once again.)
You may remember that I first put the VIX on as a hedge and then decided to ramp it up as an independent position, a big one. Taking it off leaves the position unhedged. I sold some S&P index futures to compensate. This is purely a hedge; I'm not betting the market will fall.

Loans: I put on another trade, unrelated to commodities. The price of bank loans in the secondary market has fallen sharply. Why? Just another fallout of over leveraged hedge funds.
Now bank loans are very senior obligations. In the event of default, they almost always recover 100% of their value. Yet AAA loans are going for 90 cents on the dollar. This is nuts. To make it even juicier, there are closed-end loan funds that are selling for a 15% discount to NAV. I bought two of these, EVA and BGT. I really believe in this trade, so I hit it hard. Note that loans have already recovered somewhat from their lows (click on the picture to enlarge). Data is from Markit.

Railroads: Finally a commodity-related trade. There are a lot of reasons to be bullish on US railroads, and they all don't have to do with Warren Buffet of Chris Hohn. I'll go through the details next week. I bought Burlington and Chessie.