Well the Yen is in the can, the Treasuries are dumping and everything that glitters is a dud today. Stocks though are mostly mixed while the volatility market is about flat to slightly up in the VIX futures. As a continuation of last night’s blog I think our summer will be the Zone of Unintended Consequences. I don’t know in modern history if a currency has been able to debase it’s way to glory (see Zimbabwe, Brazil in the bad old days and of course Weimar Germany). Maybe this time it is different but the by looks of the other Asian markets today they do not like the result. Let’s get back to commodities and specifically coffee.
The market had a bit of a reversal on Thursday for what reason I cannot quite figure out. Maybe politics but the economic news all week has been ok. Today there is the big shrug on the Sequester so maybe the politics will start to seep out of the market. One could hope. One name that took off on the close yesterday was Facebook (FB). FB spent most of the day in the mid-26 level only to ignite on the close to close 27.25. It was like all the sellers went home after the whatever deal was announced with MSFT. What it left at the end of the day was a really flat term structure.
In the age of Twitter, I almost titled this “Volatility in Re-tweet.” Sounds a little like Tweety Bird, but you get the idea. With the NFP numbers out and Consumer Confidence numbers ok, the gravitational pull in equities is still up. I think the volatility pattern in the SPY is telling of how the budget battles are going to shape up. In short, I think the battle is over.
I don’t want to pooh pooh the rally we have had recently. After 3 years or so of the governments from both sides of the Atlantic trying to “manage” the economy, some of the shackles are starting to break off. Europe does not even make front page news anymore, as the Euro is making some short term highs. Mario should thank Ben. Most, if not all, of the economic data has been improving, as houses are selling, and most businesses are generating decent earnings. With the super low interest rates and giant chunks of liquidity from the Fed the US is set to grow. I don’t know what Ben is going to do with his big balance sheet, but I guess he will figure that out. One stumbling block remains, and that is level of spending by the US government. The
With earnings season just getting underway the results look pretty good so far. The SPX closed on a year high yesterday and we are .07 from doing it again today. Without the din of structural implosion coming from the Fed and ECB the market finds itself wanting to drift up. Super Mario has declared the bottom in Europe and won’t lower rates. That was most likely a shot across the bow for Bernanke saying, “We got our house in order now how about you!” That is trash talk Central Banker style. How is the volatility market handling that whole thing?
While there is posturing that normally goes on in Washington, then I guess there is another level of POSTURING when things get serious. I am now beginning to think that Beltway politicians are the most overplayed relative to their work output. I have not seen a lot of work output and they are all leaving for vacation. I hear Nero’s fiddle playing in the background.
As we discussed on Tuesday, VIX was not just pricing in the cliff, it was pricing in the non-farms that came out today. While the December contract really hasn't moved since then, the Cash Index has come in considerably. The curve closed the day basically back to normal contango, albeit a relatively flat contango.
Over the years, I have made the argument repeatedly that I think SPX puts do a better job of hedging than VIX calls, especially in low VIX environments. However, like all trades and hedges, that is not a rule but a generality. There is something strange going on in VIX that is making going long call spreads in VIX very favorable. Take a look at VIX term structure:
The FED did not do much for the market today. Judging from the lasting effects of QE3 they did not do a whole bunch the last time either. The market is rightly focused on company prospects, the global growth story and earnings. That is still a mixed bag but not as bad as it looked 4 months ago. The ECB is not really rolling out their TARP- lite plan fast enough for investors (although PIIGS bonds are trading at short term highs and lower yields). The next news from the FED will be QE3 is over and that will only happen when the fiscal situation straightens out. The no FED panacea sell off today was pretty mild when most of the earnings reports today were ok. I am sticking with my closet theory that market volatility will not slow (or we ral