Feb

22

DuncanIn addition to the birthday of my better half tomorrow, another important date comes next week. No, not PPI or GDP. Rather, Feb 27th will mark the one year anniversary of Vol. I remember it well. We met after four down days and a nice down open, I throwing all caution to the wind. Then came the worst day since 2001, down some 58 S&P — and still no worse day since then, despite some perilous moves. Vol has never really looked back since then. The trigger that day was not subprime, credit, bank losses, the Fed, or housing. Merely a big down open in China after some huge gains. And what a year it has been for Vol. After nearly a 60% increase on that day alone, it went on to triple over the summer and fall, and now settle around double where it was a year ago. I would like to raise a toast to our good friend or fierce enemy, Vol. What a year it has been. Can't wait to see where we will be a year from now!

Wil Kenney remarks:

I for one know my brow sweats a little more as Vol increases, and from time to time that can be frightening.

James Bitumen replies:

There is nothing wrong with Vol, nor is it to be feared. It is what it is. There is nothing wrong with a rising market, nor is there anything wrong with a declining market. Change outside of a rather longstanding pattern is only that, change.

The market is no different today than what it was a year or two ago. It's simply removing levels of leverage one level at a time — we are at the exactly same spot. There are more levels to be removed. The key to trading the market is identifying where and when these levels will be removed from the system.

We are in the process of a credit bubble unwind. An institution owns an asset — no debt. Global rates at historic lows following the late-90s equity bubble deflation, 9/11, recession. They borrow against the asset at very low rates (just like the housing nightmare we are seeing not just in the US, but UK, Spain, etc.), and toss the free money into various asset classes all over the place — emerging market equities, Google, hedgefunds. What is considered equity to the asset manager is simply borrowed money. Borrowed money on top of borrowed money. The problem: economic growth never before has been so tied to asset price growth (housing primarily — ~30% of US workforce is tied to real estate). This is why the Fed has been so fiercely content to hit the ease button: They need to pump in liquidity in order to support asset prices, which they hope will protect bank balance sheets that have ballooned.


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4 Comments so far

  1. Anatoly Veltman on February 22, 2008 6:30 am

    Great topic — and a timely one! The point range on most indices for the entire 30-day period since Jan.23 barely exceeds the point range of that one Jan. 23 session. I remember same date in 1987 had like effect on Vol.

    Ranges have little choice but blow-out, with one full week to go on February calendar. Thursday saw Treasury yield-curve trading as violent as never before, on a day of no releases and no Fed-speak. Currencies and commodities are quite wound-up as well…

  2. gabe on February 22, 2008 11:20 pm

    not to worry, the “gliteratti” did even better:

    “The client, who spoke on condition that he not be named, says he became irked with Goldman late last year after suffering losses in a basket of stocks aimed at the wealthy.

    The portfolio bought U.S. mortgage lender Countrywide Financial Corp. at the end of June for about $35, then sold it in mid-August for about $18, the client says. Goldman Sachs also bought Ambac Financial Group Inc., the bond insurer, in late 2006 at $87 and sold it in November at $25, he says.”

  3. Dan Powell on February 23, 2008 10:46 pm

    Interesting how the market shift came within a day or two of this predicted turn:

    http://web.archive.org/web/20030223010359/www.armstrongdefensefund.org/martypei/buscycle.htm

    It’s not the first time, either, although I suspect many “specs” will have the customary knee jerking in the customary way to dismiss this as just another in a series of billion-to-one coincidences.

  4. ArcSineDistribution on February 24, 2008 12:05 am

    According to James Bitumen, Vol is what it is, the particular value is irrelevant. As someone who makes or loses money by buying and selling Vol at times of my choosing, I find this statement naive and unhelpful. Would Mr. Bitumen tell wheat farmers (or consumers of bread) that the recent price rise in wheat is irrelevant also? Vol is a traded price and a very important price at that.

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