Recap major market points - Equity Bond, Variance Swap Levels, Portfolio performance and the upcoming year end rally?

Recap major market points - Equity Bond, Variance Swap Levels, Portfolio performance and the upcoming year end rally?


Equity Bond - Set it and forget it.

PFG is setting up the  SPY Dec 2013 (2.2y maturity) 75/90 Call Spread.  This trade will pay ~15% pa if the market is above 900 and we break even at 860 on maturity.  With the tax treatment better for long term capital gains vs interest payments, we find that taking large cap diversified risk with such a high “implied coupon” over a high yield corporate is a far superior trade.  The only reason this exists is due to high volatility/correlation, which we believe will come down.  The key to this trade will be to enter on sell offs.  The four week graph is below.

Another way to think about this is that you are paying 73% for today’s market level, 2.2years forward.



Variance Swaps - Continue to be stubborn, why?  CHINA

As we can see below, the graph speaks for itself, the market continues to price in fear into all parts of the curve, globally.



Portfolio Performance - flat weekly return

We have not got the instant payoff as on our other short term vol bets, however PFG continues to believe in the thesis and will continue to hold the short strangle.



Year End Rally?

In spite of what seems to be extremely wobbly market for us folks who watch it everyday, the market is practically in the same spot since the start of August.  Since then, the Euro Sov story has been recycled about a few dozen times daily and the US data, which is still bad, stopped getting worse. The economy is being reflected well by the global stock markets, we are simply bumping around till better clarity is found.  However, during this time, the market has faced redemption's and PM’s are reporting increasing large cash holdings and EM funds have had pure outflow (see graph)


So then the large question is what if we enter risk - on?  A large pile of cash will need to find a home quickly, especially if PM’s are going to be marked to year-end?  Are we setting up for a major stock market rally?  Simply put, this market is transferring solid assets from the weak hands to the strong as we shift through the de-levering process.