Investorwalk

More Thoughts on the VIX

On 7/15 the SPY closed at 93.26 and the VIX closed at 25.89.  Since then they are +4.6% and -8.3% respectively.  The last time the VIX traded at 24 the SPY was trading almost 30% higher than today.

So, volatility is expensive historically, but cheap if you only started paying in the middle of September, 2008.  Market momentum is up and the VIX is not getting crushed.  What does that tell me?

Non-market maker professionals are buying calls.

Higher VIX

Today's a big up day (SPY +2.66% as I write, and going higher) and curiously the VIX is up a like amount, a fairly unusual event.  Not impossible, not unheard of, just unusual.  Thinking of volatility as the price of insurance, buyers don't think big moves are done.  If I was managing a large volatility book I'd tell my traders to sell some of their upside vol (if they're long) and buy in their downside vol (if they're short).  Holding onto upside vol and staying short downside vol after a big move is an accident waiting to happen.  Doesn't mean Mr. Market is headed lower, just the pain is not worth it if it does.

For buy and holders, ignore this message.

Tracking the Bailouts

The Pew Charitable Trusts has created a very helpful website tracking and cataloging all the bailout activity.  Well worth a look.

Subsidyscope.com

Risk Goes Up, Price Goes Up

In Dan's post yesterday he presciently offered CSCO as an alternative to GM as a member of the Dow.  Well done, Dan.

He also wrote:

More concerning to me is who would be willing to lend to GM/Chrysler and potentially even Ford in the future considering the strong-arming that the Government has undertaken which has basically thrown rules of law out the window much like Italy has done in the past with companies such as Parmalat.

Political risk is alive and well (was it ever dead and gone?) and will be part of our investing landscape for, well, forever.  "More regulation" is the new "less regulation" for its political potency, vacuousness notwithstanding.  Here's a potential lame opening joke for a conference of political economists:

    Q: When is the quantity of regulations dispositive?
    A: In an election year.

But Dan's statement about future lending is less prescient, not because he lacks imagination or foresight (Dan enjoys copious amounts of both) but because the price of money has already gone up for companies Mr. Market thinks are of interest to this, or future governments.

GM Execs Sell GM Shares. But Not Because They Think Shares are Going Lower

Six GM executives sold, according to MarketWatch, "what was left of their personal stakes" of their common equity in the company.  Fair enough, can't say I blame them.  With its pending new ownership structure (UAW/Treasury/creditors) there won't be much, if anything, left for current common holders.  Going forward, cash flows will claimed by political, environmental and retiree demands, so being a common shareholder is, in a word, silly.

But did a company spokesperson really say the sales don't reflect a lack of confidence in GM's future?  Am I dreaming?  What do the sales reflect?

Please Don't Rely on Reuters If You Plan to Make Investment Decisions

From tonight's Reuters story called "Bear Market Still Grips Stock, Credit Markets"

The S&P rallied more than 20 percent on three occasions between 1930 and 1932 while the index overall plunged more than 300 percent in total during that period. (emphasis mine)

Enough said.

General Growth Goes BK

Got to love this quote from Thomas Nolan, General Growth's (GGP) president about its bankruptcy filing, the largest in U.S. real estate history:

“We want to come out as a less leveraged company. Our business model remains strong."

Wow.  Nolan wants to come out a less leverage company?  The business model remains strong?  Uh, Tom, you aren't going to come out of this intact, levered or not.  Your properties are going to be sold for the benefit of creditors and no new creditor in its right mind will lend fresh capital when your business model of rolling up competitors with borrowed money is DEAD DEAD DEAD.  All the wrong mind lenders are dead, too. 

Another Reason to Ignore Pundits Without Skin in the Game

Introducing one company ideally suited not to prosper in the Obama era: Textron
Daniel Gross, Slate
April 7
Textron closing price: $9.02

Textron shares up nearly 50 percent on take over rumors
April 9
Textron current price: $13.62

Even Economists Can Be Funny

The Fed botoxed Mr. Market today, the poor man sagging earlier, tired from sprinting from last week's realization the world only appears to be ending.  The world lives for one more day, at least, but it was not a good one for Ed Liddy.  Tomorrow's newspapers may carry pictures of him skewered on a pitchfork.  Or, similar to Woltz, he may wake with a bloody CDS prospectus in his bed.  Today, like all days, I woke without access to tomorrow's newspaper, the surest path to wealth.  But I do have constant updates to the Journal.  If only this author were half as witty as the eponymous contributors to WSJ's Real Time Economics:

Even today’s announcement that the Federal Reserve plans on purchasing everything in America that isn’t nailed down raised relatively few eyebrows on our end
–Guy LeBas, Janney Montgomery Scott

The Fed has decided to be the central bank that swallowed the Bank of England’s canary!
-RDQ Economics

With classic understatement comes:

At the least, no one can say that the Fed isn’t trying.
-Paul Dales, Capital Economics

Sleep well, Mr. Liddy.  This, too, shall pass.

Uptick Rule Coming Home

While bears have and will always feast upon companies with broken business models, inflated earnings and undue stock prices, short sellers don't, by themselves, make a company die.  If a company is meant to die, it will die (or at least once would).  The uptick rule exists to slow, not stop, the process so cool heads get a chance to prevail.   Why on earth the uptick rule was removed has always mystified me.  It's about the sanest regulation yet devised for equity markets.

It involves no: reporting, capital requirements or compliance outside a little intraday auditing by the exchanges and broker/dealers.  It's cheap, quick, powerful and has no sustaining effect on genuinely crappy businesses (the guy who bought from a short on a downtick was bidding anyway).

Three cheers for the return of the uptick rule.