Wednesday, November 9, 2011

Set it and Forget it - Sell Skew, receive a credit and protection for 2 years! - Market Next Steps.

Set it and Forget it - Sell Skew, receive a credit and protection for 2 years! - Market Next Steps.

Recently upon watching the market ping-pong around our 1250 market fair value, we started laying out very cheap portfolio protection trades.  Another trade which forces you to buy the market at 732 in 2 years from today is the SPY Dec 20 2013 125/100 1 by 2 put spread.

We recently started to build a position in this trade as we feel that our 732 break even is an acceptable risk and the skew is rich.  If the market rips, you keep your credit.

PFG believes in the next following steps for the market

1. Lack of positioning into year end will take the market closer to 1175 - our range is 1175/1225 year end.

If the market makes a leg down, we don’t imagine sell side desks are going to stand up and be committing capital at these high levels in the market, thus pushing more orders into algos, taking the market lower in a grinding fashion ending with a high volume gap down.

2. Longs are nervous and are also baffled with the markets performance - however avg buy in is lower, so no need to hit eject.

“If you are the first one out, you are not panicking.”

3. 2012/2013 will see lower spot and lower vol - a painful double dip, PFG prefers to call it an “Economic restructuring”

As we pointed out in our early September white paper on the de-levering consumer, commodity raw inputs are simply not available on the cheap.  With oil pushing to 100$, we cannot see how a already stretched pocket book can continue to spend.  Everything must slow down, deflation will be forced via low economic participation.

4. High Oil prices will bring us out of the “economic restructuring”

With the fed the continuing to feed excess capacity, we still have 10 suppliers where the efficient market says 4.  High Oil prices will squeeze the weak hands out of business as they cannot pass it on, the market will toss out the excess capacity as we reset to this normal.  

5.  Japan playbook is still ruling bond markets

I took an interesting look at prices from 1915 to today - what is our current long bond rate?  You won’t even be able to watch a movie, get a hot dog or grab a beer

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