Intervention Speculation

The recent risk-on rallies have been attributed to the potential for strong central bank intervention… That is a scary thought – that all of our investment hopes are pinned on the brilliant actions of politicians and central banks. We (the smart investors) believe this to be the case because Spanish government bonds shot to record high yields, therefore governments must intervene in a big way to fix it (right?!):

Most of the European countries with problematic amounts of debt are currently facing higher costs of debt, recessions, AND forced austerity. A lovely mix. On the flip side, you have Bloomberg suggesting that it makes more sense for the strongest country in the eurozone, Germany, to leave the Euro. I will not argue with them, but that certainly does not seem like a low volatility scenario.

Just keep an eye on Spanish debt yields as they will give you an indication of the strength of any proposed resolution to the current crisis. Down is good, up is bad…I’m pretty sure that is still the case.

You can also watch Spain part II with Italian yields.

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Posted in Economics, Markets, Politics.

Tagged with Eurozone, Italy, Spain.

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By SurlyTrader – June 12, 2012

Noteworthy News – June 11, 2012

Economy:

The wealth of nations – Economist

Family Net Worth Drops to Level of Early ’90s, Fed Says – New York Times

Markets:

OPEC’s Pending Bloodbath – Forbes

Too Much Faith in Markets Denies Us the Good Life – Bloomberg

Bond Bubble Dismissed as Low Yields Echo Pimco’s New Normal – Bloomberg

Politics:

Germany, Not Greece, Should Exit the Euro – Bloomberg

Spain reaction: ‘This is a rescue for the rich. The poor will only get poorer’ – Telegraph

Euro zone agrees to lend Spain up to 100 billion euros – Reuters

U.S. debt load falling at fastest pace since 1950s – MarketWatch

Banks:

The Spanish Bank Bailout: A Complete Walk Thru From Deutsche Bank – Zero Hedge

Spain seeks $125 billion in EU aid for banks – CNN Money

Citi abandons plans for capital return – Financial Times

Posted in Markets, Media, Politics.

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By SurlyTrader – June 10, 2012

Hopium

It seems rather comical to me that the main headline explaining today’s strong rally cited the strong optimism regarding central bank stimulus… Pretty interesting. The US market is down 10% since the start of the small correction, so that by itself does not give Ben Bernanke a lot of ammunition to print. The US 10 Year treasury bond is still sitting at record lows below 1.7% so it certainly does not seem very wise to argue for another round of QE or bond purchases. The Fed Beige book came out today and the economic news was not all that bad, so that does not support the argument either. Are we optimistic about European central bank stimulus? How often do the Europeans surprise on the upside?

I guess I will wait and see what the wise Bernanke says tomorrow. In the mean time, I wanted to point out a divergence that bugs me a bit – the massive difference between interest rates and equities. It seems to me that a 30 year yield below the current rate of inflation would be a negative indicator going forward:

2.72% on the 30 year treasury and 1315 on the S&P 500. They just don’t seem to line up. Either treasury bonds are REALLY expensive and stocks are fine, or the treasury markets believe something that the equity markets do not…

Posted in Economics, Markets.

Tagged with 30 Year Treasury, Federal Reserve, S&P 500, SPX, stimulus.

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By SurlyTrader – June 6, 2012

Where’s the Vol?!

The S&P 500 is down about 10% from its early April peak. The majority of this decline happened in May, but it has happened without a strong jump in realized or implied volatility. If we look at this drop compared to 2010 and 2011, we see quite the vol suppression in 2012:

In 2010 we saw 10 and 30 day volatility get in the 30-35% level. In 2011 we saw 30 day hit about 45% whil 10 day hit almost 67%. As of May 31, 2012 we were looking at 14.5% 10 day volatility and 12.76% 30 day volatility… Lackluster indeed.

The fact is that we have seen a minimal number of days with market moves in excess of 2%. This is the reason for the mathematically low standard deviation. The real question is why the moves have been so dampened? Are there a lot of equity buyers that are eating up shares on dips? Are there volatility sellers jumping in to sell volatility when vol moves upward? Is the market complacent and waiting for further Fed actions?

The pessimistic thought is that we have yet to actually experience the strong market volatility that is coming with this correction. Maybe the -10% is a prelude to something much larger?

On the optimistic side, we might say that things are not as bad as we think and the market sees through the worries. As a bit of a backing to that thought, take a look at the suggested equity allocations from wall street strategists. It is at its lowest point since March 2009:

We all know what happened after the March 2009 low.