Monday, March 19, 2012

Self Inflicted perpetual fear: How quickly things can change?

Self Inflicted perpetual fear: How quickly things can change?

80% chance of QE3, now ~ 30%.  Interest Rates and Stocks are booming, correlation is rewarding stock pickers with multi year lows when just a few months ago, it was at multi year highs.  So what happened, how did we go from headline to headline, 30 handle swings to a parabolic SPX graph that resembles apple?

LTRO, Greece, PSI, EURUSD mentions in MSM have also collapsed.  The spotlight is on global growth, free money til 2014.  Now rate hikes are priced in 2013?  Are we running out of stocks to buy?  Financial stocks have in some cases doubled from the lows just set less then 9 months ago.  We could go on, but we will come back to our core thesis of de-levering and short long dated vol as what we usually do here at PFG.

Some claim the sunshine is to blame for the optimism or the lack of a winter, others point to the great data coming from the US.  Most are skeptical however and looking for the  “I knew it” moment when SPX will fall 15 handles and they won’t be short it or have any gamma on.  It probably will get bought by the dippers and the story will repeat till 2014.  Vol is going to party like it’s 2004.  Welcome.

But wait...Irans oil/bomb/war...Election Year, Greece still has..., where are all these new jobs...., Who will buy the MBS paper....I see line ups at open houses again....everything is over-extended for perfection.  The fact is that it’s been 4 years since Obama came into the Lehman mess and we are well on our way to finally building a foundation and corporates actually are fine and have cushioned themselves well for a possible attack.  Yes, they will still fail, a few might even succeed, but overall the market seems to comfortable with taking risk with a promised low interest till 2014.  Ben has given retail its own version of the LTRO, start reading the memo and use it.

1. The power of the FED is clear.

2. Hey wait a minute, why should I fund the ZIRP?

3.  What seems as optimism might actually be a “I have no choice to buy stocks and real estate”  Mr Black Swan

4. Long dated vols are collapsing 5. Vol traders are having fun playing the slide to take advantage of levered etf flows and perpetual fear in the market

6. But no one is allowed to be short.  This is tough one to take to management, we are approaching last years lows fast
7. The NEW NEW thing in Vol, sell the old problem, buy the new problem.  This trade will be big in the second half of this year.  Sell Euro, Buy Asia vol
8. The challenge the FED faces