Street Capitalist: Event Driven Value Investments

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Wisdom on such diverse topics as: spin-offs, merger arbitrage, post-bankruptcy equities, global macro commentary and short ideas.

Street Capitalist: Event Driven Value Investments

Mar 17, 2008

Credit Default Swaps in Today’s Markets

With today’s news regarding the Bear Stearns buyout, the markets were certainly volatile, with some large sell-offs for Lehman Brothers (LEH) and MF Global (MF). I was more interested in the performance of the credit default swaps that are held in the portfolios of Odyssey Re (ORH) and Fairfax Financial Limited (FFH). So far things are looking good and we should see both of these companies thrive as a result of the current turmoil.

Thanks to Barminov from the MSN BRK Board for posting these figures:

Odyssey RE Credit Default Swaps

I would also suggest that you visit Nick Nejad’s blog, Rational Angle to see more information pertaining to the credit default swap portfolio held by FFH, and a nice graphic of their price movements.

  • jorgan
    the market just reached a notional $58 trillion from $46t a year prior. that's not all 'smart money'.
  • jorgan
    Sparsely have access to Bloombg data. but get realtime / price discovery from 'Reuters3000 Xtra' ,now and then. You trade? why can't i find blogs of folks who trade pure Credit. Sure it's private, but anyone saavy can participate. Some market forces are clear, simple, easy to exploit. When there's discovery in liquid names --unlike situation you mention above where broad / systemic liquidty drys up--anyone can trade flow (directional account).
  • Tariq
    Oh, sorry about that. I thought you meant the company's stock, not the credit default swaps. To be honest, my exposure to credit default swaps has been only through Fairfax and Odyssey Re, so I'm not much of an expert about their liquidity or volume. I don't have any exact information on the liquidity or volume for Barclays or HanoverRe, if you've got access to a bloomberg terminal you probably could find that.

    But in general, I found this -
    David Brickman, head of European credit strategy at Lehman Brothers, said: “Generically, trading volumes [in credit derivatives] are a lot lower than they were in the summer.

    “The theory is that if people can’t trade bonds, they’re going to go to CDS [credit default swaps]. But in an environment like this you can’t get liquidity on single-name CDS either. That just leaves the indices.”

    This would make me think things have slowed down (in terms of liquidity and trading volume) in the CDS market, I know that the prices have come down since February.
  • jorgan
    sorry, meant the names. you offer quotes, so i thought maybe you may have a read on their volume + liquidity. also how large a position (depth) can be taken ?
    trade single-names or the index (CDX) ?
  • Tariq
    Not sure what you mean by deep but Barclay's indicated that they might try to buy some banks that are in trouble at the moment, so they may be well equipped.
  • jorgan
    hi, are names like HanoverRe. and Barclay's liquid and deep?
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Tariq Ali is a student at the University of Texas at Austin, where he also operates a non-profit microfinance organization called TEEXAS.org. In his investing, Tariq draws upon the knowledge and experience of the great investors of our time, including Benjamin Graham, Warren Buffett, Joel Greenblatt, Seth Klarman, and George Soros. Tariq is actively pursuing a career in finance. Find me on twitter @valueinvestr


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Current Portfolio Holdings

My current positions, these are subject to change.

  • Fairfax Financial Holdings Limited (FFH) - through its subsidiaries, is engaged in property and casualty insurance and reinsurance, investment management and insurance claims management. The Company’s business segments comprises Canadian Insurance, United States Insurance, Asian Insurance, Reinsurance, Runoff and Other.
  • Air Transport Services Group Inc. (ATSG) - formerly ABX Holdings Inc., is a holding company whose principal subsidiaries include three independently United States-certificated airlines: ABX Air, Inc. (ABX), Capital Cargo International Airlines, Inc. and Air Transport International, LLC.
  • The Mosaic Company (MOS) - is a producer of phosphate and potash combined, as well as nitrogen and animal feed ingredients. The Company operates its business through four business segments: phosphates, potash, offshore and nitrogen.
  • The Steak N Shake (SNS) - The Steak n Shake Company (Steak n Shake) is engaged in the ownership, operation and franchising of Steak n Shake restaurants. During the fiscal year ended September 26, 2007 (fiscal 2007), Steak n Shake had 435 Company-owned restaurants and 56 franchised restaurants located in 21 states.

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