Thursday, January 19, 2012

Taking ⅓ off the table: YTD Performance and Visual Recap of Global Volatility Levels

Taking ⅓ off the table:  YTD Performance and Visual Recap of Global Volatility Levels

We are going to unwind ⅓ of our gamma fund (gamma will also expire tomorrow) and keeping our vega fund the same, currently with average short vega of 2.5y.

Fund Changes by 1/3YTD Performance

We learned last year, moving in thirds was the best way to enter and exit into positions.  Our vega fund has performed well YTD (approx 2.3 vega points) and we continue to believe in lower long term volatility.

Our gamma positions that expire tomorrow were the worst performers (-2%) as it would have been cheaper and easier to simply buy dips and not pay 13 vol, what proved to end up realizing ~ 8 vol close to close.

1. VIX drifted downwards and is now below 20, we see some value in owning short dated gamma from a risk reward basis, however best left to single stock pickers, rather then SPY.  From this 5 year graph below (right to left) if we are entering the ever feared 2004-2007 vol world, things on the vix can get a lot worse.

Globally, from the Sept highs, long dated vol has collapsed on average 10 points

2.  We are removing ⅓ as we believe we still have plenty of performance left in our trades, but we want to keep a bullet to add more.

Tuesday, January 17, 2012

Back of the Napkin: Why are stocks being chased? US Stagnation is forcing risk into portfolios. The market will sell-off on good news

Back of the Napkin:  Why are stocks being chased?   US Stagnation is forcing risk into portfolios.  The market will sell-off on good news

Most folks are now in mild agreement that the US is looking a touch better internally and the best of crowd externally.  The demand for USD$ assets has continued and the money has poured right into risk assets, with financials benefiting the most.

So the large question remains in the face of 100$ earnings this year, why is the market expanding the multiple it’s ready to pay in a bad macro picture?  Last year, it was happy paying 12.5X and now paying 13X?  Answer - you have nowhere else to go.  Money earning interest in the bank will not cover a single expense with a society being forced to take on income targeting.  This manipulation is gearing portfolios into riskier assets.  Whatever the chase, dividends, corporate bonds or beaten up names, you have three choices depending on your cash pile. Keep in mind, people are going into the "blue chip multinational dividend stocks" while the other names are suffering a lack of selling. Just 20 stocks accounting for 40% of the SP500 index rise

1)Large Pile of Cash
Pick your spot on the UST curve

2)Medium Pile of Cash
½ in UST, ½ in Blue Chip Dividends

3)Small Pile of Cash
Stocks + Continuing Claims

Because most folks are in situation 2) or 3), stocks will continue to benefit from US economic stagnation.  Gold and Financials are up about 9% YTD, EM Risk Out-performance 2.3% and risky duration is still flat over UST -which confirms investor 1) and 2)

This is not the first time we have seen the risk of losing money < risk of missing making money takeover, but this is now being superceded by individuals being forced to adapt the following equation

Savings + risk = income targeting

So how does income targeting get replaced?  Job growth.  This will remove the pressure for additional risk into the equation and the markets should have a healthy sell-off.

Thursday, January 5, 2012

Is the EUR.USD vs SPX telling us something? A long lost kiss never seems to fail

Here is a look at the EURUSD cross vs SPY over different time periods.  In a major crisis, as we had with Lehman, this spread was almost 50% wide, but flat if you held till today.  Since then each Euro mini crisis blip has had an extreme of 25% wide and equities eventually got to an extreme and tumbled to kiss the EUR levels.  The last 3 month time period is sitting at 15% wide (equities over).  Historically, you should buy when equities are under and sell when 25% over

5 years with Divs, you are flat - but in a crisis, it can easily be 50% wide (SPX Under)
2 years with Divs, 20% wide (SPX Over) , and it never got wider until now (26%) , in fact Equities tumbled to kiss it in November/October 2011

1 year, you are flat, they found each to kiss, ~25% wide max (SPX Under)

3m, 15% wide, this is widest observation (SPX Over), a kiss would mean equities could seriously fall, but we could easily rally another 10% before we hit a recent extreme

5 days ago, 3% wide, continuation of widening

But why is this happening now, we described it in our earlier post, but it has become clear now why auctions are bringing these EUR.USD gaps on.  Here are the details. In addition, we can also see that concerns in EUR are much higher then SPX from the Var Swap spreads - de coupling?