Monday, November 14, 2011

Why the volatility curve passes on recent optimism. PFG speaks to the longs.

Why the volatility curve passes on recent optimism. PFG speaks to the longs.

The recent market optimism surrounding the departure of PM’s around Europe should hardly be any reason to celebrate. Recall that many CEO’s parachuted out (ML, Countrywide, etc before the storm)  Nothing is fixed, no debt absolved.  As we mentioned before, vol of vol continues to be unprecedented and it’s shadow will show up in the real economy.  Last week was no exception.

1 .Last week, we closed at the purple line, vol didn’t hit a new low as the market printed fresh highs for the week

So who is excited about the spot cash markets in SPX and EUR?  Recent Survey

1. Long clients are not being “forced to sell” they are starting to believe this “The market has absorbed plenty of negative news, why would I sell?”

2. Long clients have stayed underweight - “Buying the dips has always worked, so why stop now?” Yes, but you are averaging up.

3.  When asked why are you ignoring the daily facts - Funding stress, lack of consistency from Europe, etc?  De-coupling arguments hit you fast and furious!  Basically we have started to believe a Europe implosion, ring fenced or not is not going to impact SPX

4. Year End Rally, Window Dressing, Santa Claus Rally, etc - Hero’s don’t win in financial management.

Well, the vol market is not buying it, preciously because there is no edge in any of these arguments.  To actually see a formulated thesis that can capture the whole Europe situation, from the long or short side, is simply horseshit.  The timeline is firstly impossible and a headline driven market will not give you a chance to go back to the drawing board.  You will be immediately offside and be pressed to make a move. No need to bore anyone with just how high spreads are in Europe to baseline Bunds.  But these are actually real facts, painful and very telling of how quickly trillions of debt can get re-valued, forcing capital raises, funding stress, etc.  Remember, the bond markets dwarf the equity markets many many times over.  Yes, it’s not easy to say how or when the market could crack, but the path undoubtedly has been paved that gets worse everyday the problems are pushed into the future.

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