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Volatility is Smiling

The Credit Suisse Fear Barometer has dropped like a rock since the beginning of May:

This has little to nothing to do with implied volatility dropping and everything to do with the shape of the implied volatility curve.  In this case, the 1 month 10% out of the money call option implied volatility has risen from about 12.4% to 14.4%.  This extra 10% out of the money call premium has made 10% out of the money puts more affordable even though the put cost hasn’t changed:

This might get at the renewed sense that we are going to have binary outcomes in the near-term.  Either the Fed is going to reinforce its commitment to quantitative easing and the market shoots up OR the Fed is going to hint at a pull-back in quantitative easing and the market is going to fall off a cliff.

This manic behaviour definitely played out today in the S&P 500.  When the Fed indicated its commitment, the market shot up in the morning.  When the thought sunk in that the Fed might prematurely scale back its purchases, the market pulled back sharply:

2.3% range doesn't quite compare with silver but we are getting there

Up is down, right is left.  Nothing matters except for how long and how much QE is going to be pumped into the system.  Economic news only influences traders’ thoughts on whether it will shorten or lengthen the life of quantitative easing.  The only thing that can be certain is that before all is said and done, at least one bubble will be inflated and at least one bubble will burst in the aftermath of our central bank experimentation.  Japan seems to be a likely and volatile candidate.

 

Posted in Markets, Politics.

Tagged with , , , , , , , , .


Gold Stocks: Its Time To Be BRAVE!

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Posted in Markets.


Explosive Silver

When an asset trades in a double digit percentage range within a day, I tend to take notice.  The central bankers might have (temporarily) extinguished all volatility in the equity markets, but they certainly seemed to ignite fires in the commodity markets with silver being the recent spastic asset:

I heard someone say that the drop in silver/gold is a rotation out of those asset classes and into equities because faith has been restored in the markets and global economy.  I find that statement comical.

It is often the case that we witness volatile prices in different asset classes before something bad happens.  Just how long can the game of musical chairs continue, that is the market timer’s question.

Posted in Markets.

Tagged with , .


Noteworthy News – May 20, 2013

Economy:

The 1 Percent Are Only Half the Problem -New York Times

Is Wal-Mart in Trouble? – Slate

Labor Costs, Inflation Expectations, and the Affordable Care Act: What Businesses Are Telling Us – Federal Bank of Atlanta

Velocity Achieved in U.S. as Growth for Two Years Seen in Poll – Bloomberg

Brazil isn’t growing—so why are Brazilians so happy? – Economist

The humble hero: Containers have been more important for globalisation than freer trade – Economist

Markets:

What Stock to Buy? Hey, Mom, Don’t Ask Me – New York Times

Just How Useless Is the Asset-Management Industry? – Harvard Business Review

Gold futures sink below $1,400 an ounce – MarketWatch

After a decade of decline, it’s time for the dollar to have its day – Telegraph

Politics:

Taxes on some wealthy French top 100 pct of income – Reuters

If The Economy Will Collapse When The Fed Stops Printing Money Then Lets Keep Printing – Slate

A Simple Graph That Should Silence Austerians and Gold Bugs Forever – Atlantic

Banks:

Rogue banks remain too big to fail: Our view – USA Today

Regulators on alert as US banks boost commercial loans – Financial Times

Posted in Economics, Markets, Media, Politics.


One Last Gasp

Markets go hyperbolic more often than we would like.  The only predictable fact is that markets cannot continue to go hyperbolic indefinitely.  I got a lot of flack for doubting the ability of bitcoin to continue its rocket trajectory, but in all bubbles comes a burst.  The burst is usually more noteworthy than the rally.

The Nikkei is our newest darling:

The most interesting question is whether this is the beginning of the unraveling for Japan.  Their 10 year yield has gone from 44bps to 85bps in a matter of a month and their stock market is overheating.  Is this the result of effective central bank intervention or the spasms before the collapse?

Posted in Economics, Markets.

Tagged with , , .




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