10 Days ago we posted on this blog that bond volatility was completely in the toilet. In fact, it was the lowest level we had seen in 2 years. You can read the piece here. We thought that the TLT might simply continue to drift lower. In fact just the opposite happened. Take a look at the pop in TLT Vol that we have seen in less than 10 days.
We have the market flirting with all-time highs again today and investors should be beginning to wonder if the financial crisis is over. Asia looks ok, India ok, Latin America ok and the US recovering but in a pokey big government way. Europe is still a basket case but that is mostly due to the reluctance of a good chunk of the population to work for a living and for the governments to stop paying for it. At least short term the Euro should stay intact while the drudgery of budget discipline starts to happen. While I won’t declare the financial crisis dead there is plenty of anecdotal evidence for that. TARP was a success, Fannie and Freddie could pay back what they owe and home mortgage payments are now cheaper than rents
I know things are goofy when I have a backspread in the VIX for our Strategy Letter going into the NFP and the long side did nada today. With the VIX up around .49 near the end of the session and with the selloff there was zip for follow through in volatility. We mentioned early this week about the degree of “boughtness” (I just invented that word) in the protection products, namely index puts, VIX calls and the slow but steady increase in the TLT. Well the BOJ seemed to change all that. What the market saw as the light at the end of the QE tunnel in 2013 could easily be cast aside. The BOJ hit rates with a circus mallet and all the T Bond shorts ran for the hills. The NFP number just proved how unsteady our recovery
The VIX settled below 14 again today, selling off as the market rallied. This after it underperformed yesterday on the sell-off that briefly sent the market lower than 1550. One can see that while the S&P sold off yesterday and had a small rally today, the VIX has basically spun its wheels.
The TLT has been in a bit of a range for the last few weeks. I do not think it has broken a 3 dollar range since early March. This, is, very similar to SPX which, until recently, was spinning its wheels. Take a look at how tight the range is:
Yes I made that word up. I make them up all the time during the Pit Report. I was looking for a phrase to describe the activity, and it was hard to put things into words. Essentially market participants want return without taking risk, and then complain when they lose. The market for risk has become "sissified." The trend was started with the bailout of Mexico in the early 1990s and went to Asia, sort of hit the USA with LTCM and is now stuck in Europe where it will remain for some time. I think Europe had their Lehman moment and things got a little ugly after that. You might say TARP, but that was loan guarantees against bank assets.
Some depositors in Cyprus took a haircut this morning on the bailout from the EU. When they think about it after the dust settles is that some money is better than no money. Investors in some Spanish banks lost their equity too today so all in all some investors are taking lumps in the Euro Zone. The same thing happened to Lehman bond holders and mortgage backed security holders here from 2008 to 2011 before the market started to right itself. Lehman went through bankruptcy and some mortgage backed securities went to 0. In both cases mostly big investors were hurt as was the case in Cyprus. In a sense this is a path that has already been trodden, namely some are going lose and then move on once the debts have been rat
Today for the first time in a while the market closed on the low side of the day’s range. Selloffs happen all the time but it is fun to try to figure out what was the reason. Most of the information coming out today on the broader economy was pretty good. Jobs and manufacturing were both ok but the earnings were a mixed bag between LEN (good) and ORCL (bad). Ultimately with the market at highs it does not take much for it to sell off. Any reason is a good reason to sell if the market is trading at this level and you are long stock. That is just the normal buy and sell noise. What I want to do is show how sensitive the market is to the headline news.
The last post of 2012 is a little bitter sweet. Overall a good year for equity returns but I can’t shake the feeling that we missed something and the market is holding back. Most of the big issues of 2012 are not on the front page anymore. Much like the end of 2011 a few loose ends are hanging around. One thing I find telling is that the bond prices (measuring by the TLT) did not continue their move to outpace equities. The Fed is going to keep buying but that rally looks like it is coming to an end. The most crowded trade of 2012 is ending up around nowhere as I have TLT up around 1% YTD before dividends. Here is my last snap of equity volatility going into 2013.
For the second day in a row, we have seen the SPX break a significant 'technical' barrier. Yesterday the SPX failed to hold 1400; today the SPX on another decent sell off broke the 200 day moving average. To some this would be considered a MAJOR bearish sign. Yet I think it could be different. Below you can see a chart of the SPX and its ugly day.