Thursday, November 3, 2011

Are you spending? Why clarity will come in 2012 with vol of vol

Are you spending? Why clarity will come in 2012

The current vol of vol in the market is simply unprecedented.  Investors, corporations are simply dumbstruck at how to proceed.  The simple answer was if looking back on 2011, was do nothing.  2012 will force a hand, a real Euro resolution, plan for spending, growth, jobs, elections and US Debt control.  The bullish case at this point is “everyone is too bearish” and the market continues to get very oversold and structurally so bad offside, that we have large rallies timed perfectly with bad news! Can this continue?  PFG believes once the smoke and mirrors and year-end is done, no one will have a clue on how to position into 2012, conservatism will be the overall guiding factor for investing.

Current market is 1250, we see that as a fair, you are not getting this market for cheap anymore, if you missed the October rally, to bad.  We estimate 100$ in earnings, 12.5X = 1250 Index.  With consumers savings and de-levering, we estimate that 2012 will not only see weak growth, but also it will be front loaded into the first quarter.

Have a look at the vol of vol just in the past week below.  One thing that stands out is the hump about at 6months from now.  We believe that the current market volatility will be seen in the real economy around that time.  Spending will be down this year end and banks on their backs.  It will show up early in 2012.

The best way we feel to set up for this is to sell expensive market skew and be patient.  This trade is also a great portfolio protection trade, so we also anticipate demand to favor our trade to a some small degree.

PFG buys SPY March 30 2012 120/110/100 put butterfly  @ 1$ for 10X max payoff

In connection with this trade, we believe the market will stay in between 1175 and 1225 into year-end. So will look to sell the SPY Dec 30 2011 115/130 Strangle to stay conservative and collect premium into year end.

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