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Extrapolating Equity And Credit Via The VIX
Extrapolation exercises are fun, even if mostly futile and usually ending in tears. Nonetheless, as the VIX continues collapsing compliments of the dollar carry trade, we provide some observations from the latest bullish converts. It would appear the memo David Bianco received has made its way around the BofA vacuum tube network to the Merrill Lynch Credit Strategy team, headed by Jeffrey Rosenberg, which has thrown in the glove on cautiousness:
Belatedly, Bullish. We shift from cautious to cautiously optimistic to start the last part of the year on credit. Our third quarter strategy (underweight High Yield, overweight High Grade) anticipated a correction that never came. Liquidity – the ability to refinance debt – stands as the largest determinant behind the improvements in credit markets and with the ultimate source of that liquidity – aggressive global central bank policy accommodation and quantitative easing – unlikely to end any time soon, the liquidity trends supporting continued tightening in spreads, albeit at a much slower pace than those experienced to date, likely remain.
Caution is now officially uncool: next steps are an exponential market ramp and the inevitable repeat of what happens when bullish readings hits 100. Until then, compliments of a BofA that is eagerly awaiting the release of Rakoff's and Cuomo's decisions on whether or not their boss ends up doing some hard time, yet still has some control over the last foolish marginal buyer, here are their simple forecasts on the S&P, IG and HY indices as a function of a VIX, which had forgotten that the world practically ended a year ago. Less than 365 days after the Lehman bankruptcy, all is well. Until, as all cycles, it isn't, and the play begin anew.
Yet while BofA may or may not be right about the direction of the market, the one useful data point is the observation of how much each VIX point translates into in terms of the S&P (roughly 20), High Grade (19 bps) and High Yield (45 bps)
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It's like saying if we extrapolate the rise in the equity indexes over the last 6 months we will reach DOW 100,000 by 2013.
Tough break for the USD, though, on that model.
Just take a nice helping of FNM, FRE, C and enjoy the ride.
Denninger and Dick Bove (Bloomberg link)
Absolutely their will be a failure of scale within five years. We cannot stop it. The debt service far exceeds the carrying capacity of underlying economy to pay.
We must have further blowups and significant down cycles.
http://market-ticker.denninger.net/archives/2009/09/12.html
"...It would appear the memo David Bianco received has made its way around the BofA vacuum tube network to the Merrill Lynch Credit Strategy team, headed by Jeffrey Rosenberg, which has thrown in the glove on cautiousness: "
Wonder if this came from Ms. Krawchek who is hoping Judge Rakoff and Cuomo prevail so she can work her Citi wonders on the BAC/ML enterprise?
Dave R. and Richard B. must be happy that they are in new digs.
Look at the COT, and it looks like someone's looking for a dollar rebound in a meaningful way next week.
Nice catch, that coupled with the short increase in the pm's tells a nice tale.
off topic
Bank launches probe into parties at foreclosed Malibu mansionhttp://www.reuters.com/article/businessNews/idUSTRE58B0DE20090913?feedTy...
Christ, that's annoying. Post things that are relevant, will ya? You're almost as bad as Cetin.
Missing Link... 25% of what is on the threads may not be 100% relevant to the topic but interesting none the less... sometimes threads do take interesting tangents... and you just have to go along for the ride... you can learn a lot that way.
I guess they wanted to know what it feels like to live 'la vida loca' in Madoff's ole gangster hideaway. Sorta like drivin' around in Al Capone's car.
Now we need to help them and all the rest of their bankster chums get a feel for living in Madoff's current diggs.
Ahh, who am I kidding? Beautiful dreamer....Wake unto me...
Time to go short is near.
Too many idiots are converting to blind bullishness. Once the elevator is too full with fat lazy leeches, the bottom will fall.
Been playing that card for a while. Agree, my tax
free New Hampshire land is waiting for me.
Millsfield, NH - no property taxes!
No Marla tonight. Allow me to present Mike Oldfield's
mega hit Moonlight Shadow. Love this song and still
it creeps me out.
http://www.youtube.com/watch?v=8YyiFhfzQRA&feature=related
FYI - sister Sally does the singing. Mike tried all the
big names but no one had the voice.
And I was there that year in Europe, when this song
was like an obsessive drug. It was everywhere.
It was played every 10 minutes. It had to be. People
needed the fix.
Thank you for the excellent link.
Pete
I follow the VIX everyday as part of my trading activities. It is a lagging indicator of stock market movements IMHO. Moreover, it's a weighted indicator, so it doesn't truly reflect the S&P 500. Extrapolate all you want to convince folks of your conclusion, but the underlying premise is false. This is another bull cheerleader report preaching to folks that are unsure or undecided.
Interesting point Lionhead... after reading countless reports on the VIX over the last year... and watching it move... I also question its predictive abilities... it seems more responsive to index actions imho.
Even the VIX is a play toy. The volatility boys are trying their hand at catching the next vagina that walks in the door. They are the dick boys, the uptick guys. Several times a day they look up, and seeing gods like GS and MS and JPM, they know their protected. Not so fast. We are watching – G MONEY. Your end Is coming soon brother…?
MN, as this last leg of the SPX has been put in, the VIX made a standard a-b-c corrective. I think it's going to be in a trading range for awhile until we get a black swan event to shake it out. It would be far more useful if we could see the volume/weighting as part of the analysis. If anyone has that info it would be most appreciated.
Here's a simple chart of the VIX; note the RSI levels indicating a slight upward bias that's been corrected back down:
http://tinyurl.com/qys2p5
No predictions appear to me. ;)
regression and normal probability works really well.....in a math lab or perfect environment. the problem is when people get in the way. the study is trash, and r squared sucks anyway, as if that even matters. and if you dont know anything about stats, let me save you the trouble, don't bother with it.
Excellent point blackebitda. Markets are not linear and regression, deviation and such are imperfect tools to try and capture tops/bottoms. Just for that reason, I don't use them as they're flawed when human behaviours move way outside such parameters.
Case in point, this chart of M2 M3 money velocity; at an extreme deflationary point currently.
http://tinyurl.com/qyjsve
LehBro is out, it's rather funny:
http://www.wisevid.com/view_video.php?viewkey=mymvtbs0gvvkw0a61616#
http://www.youtube.com/watch?v=4TovqogviVU&feature=channel_page
Dedicated to Marla:
http://www.youtube.com/watch?v=6ZNl4Vh5wsM
It's all good
I just lufff low vol, since it enables me to hedge
real cheap. Tape is incredibly strong, however
underlying is low turnover. with low vol I can be wrong
a lot of the time at low cost and will rake in the
big money (which I deserve) when this ponzi-setup
breaks.
Use the vol, don't fight it or moan about it.
Like Orca says the vol is low and there have been a lot of articles written about why it is no longer as useful an indicator as it once was but I am sure it will spike when the time comes.
When it does spike, duck and roll everybody!
Merril is like the fat kid on the playground and whenever they start talking candy like this its time to give them a wedgie, not unlike the one forming on the DX.
What is interesting is that your graphs (the last 2) are showing signs of clustering near the bottom which could imply a bottom is being formed right now rather than further moves down.