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It's Quiet Out There... Too Quiet

Tyler Durden's picture




 

What are you afraid of, exactly? ConvergEx's Nick Colas notes we all have our phobias and fears, some logical and anchored in reality and others irrational but still powerful; but for the capital markets currently it seems there is no fear. The CBOE VIX Index started the year at 14.2 and has fallen to a close of 12.9 today. That move, Colas adds, has dragged the IVs of everything from U.S. large cap energy stocks to gold to corporate bonds lower in its wake.  Even expectations for Emerging Markets equity volatility are in retreat as we start 2014. But, when near term historical or implied volatility becomes this complacent, it seems appropriate to spend a little more time pondering what might go wrong.  Markets, after all, have the entire “What should go right” side of the trade well understood and reflected in current prices. In that spirit, here is the "Top 10" list of what might take us off the rails of complacency in 2014.

Via ConvergEx's Nick Colas,

It’s quiet out there... Too quiet.  That’s the message from our monthly review of the Implied Volatilities (the “VIX of”) for various industry groups and assets classes. Perhaps domestic equity markets are simply digesting, in proverbial pig-meets-python manner, the outsized gains of 2013. Even if you are still positive on stocks, after all, it pays to understand what might go wrong.

In the parochial world of capital markets, there is only one fear: that a position will move against you.  Since most investors are primarily asset owners, this means the only fear we have is declining asset prices.  It’s as if you are locked on a plane with a bunch of snakes, spiders and dogs while flying through a thunderstorm next to someone sneezing on you and preparing to give a speech on the experience.

At the same time, such fear has been a wasted emotion for several years and especially the last 12 months.  The CBOE Volatility Index, commonly called the “Fear Index,” currently sits at 12.9.  That’s over one standard deviation from its long run average of 20 and indicates very little collective fear of a near term decline in asset prices.  And after the returns of 2013, why would you be concerned of a sharp shock, after all?

But while there may be very little ‘Fear’ in markets at the moment, anyone who sits on a trading desk or watches the tape will tell you that things don’t feel quite right.  Bonds are outperforming stocks in the U.S., with several popular fixed income exchange traded funds up about 1% year to date.  The S&P 500, by contrast,  is essentially flat.  And we aren’t getting those up openings that rally further through the day and close near the highs.  Only two days in 2014 fit that pattern out of the 13 trading sessions thus far.

Most notable, however, is just how much expected volatility has declined across the board - and not just for stocks.  Every month we look at the Implied Volatilities (the “VIX of…”) for a range of asset classes and industry groups.  The idea here is to peel the volatility “Onion” back a few layers and see which areas of the capital markets might be holding on to any residual angst.  There are a few charts right after this note, but here is a brief summary of what they show:

Nobody’s worried ‘bout nothing.  The VIX of gold is down 30% in the past month.  The equivalent measure of implied volatility for U.S large cap Energy sector stocks is down 3%.  And everything else we track sits somewhere in between.  In some sectors that makes sense.  For example, health care stocks have been good performers over the past month, so it makes sense that their “VIX” would be down 13% over the same period.

 

Consider, however, that Emerging Markets equities are down 4.9% year to date and 1.9% over the last month and their “VIX” is down 2.8% over the last 30 days.  Part of this may stem from the fact that end-of-year actually volatility is usually light, but still… Emerging Markets are hardly the ‘Trade du jour’ at the moment.  At least not on the long side.

 

U.S. consumer stocks also show a disconnect between their historical – and unimpressive – performance and the Implied Volatility imbedded in their options chain.  The Consumer Staples sector is down 1.7% year to date and the Consumer Discretionary index is down 2.7% over the same period.  You’d think that would increase demand for options-based insurance and increase Implied Volatility just as the VIX tends to rise when the S&P 500 declines.  You’d be wrong: their IVs are down 6-9% over the last month.

Worrying over the direction of equities seems to be very much out of fashion at the moment, but just as with hemlines things can change quickly.  And since complacency seems to rule the day, we’d like to close out with a “Top 10” list of catalysts that could begin to push volatility higher in the weeks to come.

1. Uncertainty over Federal Reserve Policy.  The Fed has 8 meetings a year, and it seems to want to cut its bond buying program by $10 billion/meeting.  How many more meetings before they are out of the QE game entirely and markets start to worry about higher Fed Funds rates?  (Hint: they started cutting the program last month…  It’s less than 8 meetings…)

 

2. Equity valuations.  Against a reasonable expectation of $115/share in earnings for the S&P 500 the U.S. market trades for 16x earnings.  Could it get to 18x, or roughly 2100 on the Index?  Sure.  And could it go to 15x, or 1725?  Sure.  But how much more valuation expansion can we reasonably expect?  And let’s not forget that by longer term measures such as the Shiller P/E, U.S. stocks are just flat-out overvalued.

 

3. Economic fundamentals.  Still sluggish labor market in the U.S., barely any growth in Europe, worries over Chinese growth.  Is that the recipe for further easy gains, especially when valuations already anticipate some improvement?

 

4. Expectations for top and bottom line growth are too high.  Two years ago, Wall Street thought that Q4 2013 would bring S&P 500 earnings of $31.18.  Fast forward to today, and the reality will be about $28.33.  A year ago, the Street thoughts $125/share would be a good estimate for S&P 50) earnings for 2014.  Now, those expectations are closer to $121.  Again, when valuations are reasonable (15x or less), missing earnings isn’t necessarily fatal.  But when stocks expect a lot, it is better to bring home the bacon, if you can.

 

5. Emerging markets growth concerns.  Even as the International Monetary Fund was increasing its expectations for global economy growth in 2014 on Monday, it also noted that fast money, potential inflation/deflation and better growth in developed markets could threaten emerging economies.

 

6. Complacency among equity investors/options traders.  As I noted above, investors in U.S. stock markets currently do not feel the need to pay up for options –based insurance.  On the contrary, options pricing shows unusually little concern about the near future.  The CBOE VIX Index can be a very useful contrary indicator, although historically it is a better ‘Buy’ indicator when it hits +40 than it is a ‘Sell’ indicator below 12.

 

7. Money flows aren’t all that strong for what should be a seasonally strong part of the year.  U.S. equity mutual funds showed a $3.3 billion redemption rate in the first week of January.  With 401(k) contributions starting again with the turn of the calendar, those should be positive.  And ETF money flows are just $3.2 billion so far in January.  That works out to an annualized rate of about $60 billion/year, although seasonality is always an important influence on flows (so take that with a grain of salt).  Still, that run rate is much lower than the +$150 billion in ETF flows the last 2 years.

 

. Potential rapid inflation.  Over the next year, if the current trends for labor force participation hold, most people who want a job will get one.  Unemployment among college educated people in the U.S. is already down to 3.2%.  From this point, wage inflation kicks in and shortly thereafter price levels start to rise.

 

. Potential Rapid Deflation.  The sluggish U.S. economy still generates very little inflation.  If it slows down in the second half of 2014, Japan-style deflation may be closer than most investors realize.

 

10. Geopolitical risk.  The amount of chatter about the upcoming Sochi Olympics and a potential terror threat seems to be picking up steam.  It reminds us that there are many other factors to assessing risk than just economic drivers.

You’ll note that some of these points contradict each other.  That doesn’t diminish the points made, however.  The central assumption of capital markets at the moment seems to be ‘No surprises’.  That works fine – until it doesn’t. 

 

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Wed, 01/22/2014 - 23:02 | 4357746 kliguy38
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Always ...........before it comes.....and it WILL come.........they like it that way

Wed, 01/22/2014 - 23:12 | 4357786 Millivanilli
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If Europe, Britiain,Japan, China, and the Fed reduced  the emergency measures by 20 percent tomorrow, the financial world of corruption would collapse by noon.

 

Shit isn't kept together by duct tape anymore.  Just promises of endless cheap money at the expense of the commoners.

Wed, 01/22/2014 - 23:17 | 4357799 DoChenRollingBearing
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Every morning I wake up, and usually turn on the TV to CNBC or the news.  And always with a little dread since I did that on September 11, 2001 (though with a little less dread in recent years).  WTF has/may have happened now...?

I owned some gold that fateful morning.  I own a lot more now.

Yes, I saw his List up there.  But, what if a Black Swan, by definition unpredictable and of (apparently) low probability, comes our way?  Bright and early in the morning (or like a thief in the night).

As our system gets stretched (by debt, war, wealth disparity, a sleazy popular culture, etc.), the risks grow ever higher, and the stakes ever higher as well.

Something wicked this way comes.

Wed, 01/22/2014 - 23:44 | 4357875 Vint Slugs
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I don't know, DCRB.  Not only a goldbug but an Ellison fan as well???

Maybe an old fart, but that combination pretty much legitimizes you. :)

Thu, 01/23/2014 - 01:25 | 4358024 pFXTim
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Ray Bradbury, not Harlan Ellison. Shakespeare as well apparently.

Thu, 01/23/2014 - 04:35 | 4358176 zhandax
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Do Chen, there are a couple you missed.  Of course the fed has pumped an extra trillion indirectly into stocks each of the last five years.  Now we know that corrupt Chinese officials have added almost that much into both stocks and real estate just by themselves.  We still haven't heard what other global top .01%'ers have similarly been funneling their stealings into the market.  The 10-bagger short will accrue to whoever can identify when all that stolen cash has been exhausted.

Thu, 01/23/2014 - 08:11 | 4358268 Dismal Scientist
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Stock shorts can only ever make 100%. No such thing as a 10 bagger short, unless you are trading derivatives or leveraged ETFs. Any spring to mind, Zhandax ?

Thu, 01/23/2014 - 11:31 | 4358855 Vint Slugs
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Thx. I woke up in the middle of the night thinking, "Bradbury".

Thu, 01/23/2014 - 00:03 | 4357916 Vint Slugs
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Clarifying, since I see there's another thread involving an Ellison:  we're talking about Harlan here.

Thu, 01/23/2014 - 02:59 | 4358103 Rakshas
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Yes...... 911 ....... summed up so eloquently by A-hole Dulles decades before "The American people don't read" 

Nowadays these psychopaths don't even try to hide anything anymore secure in the knowledge that toaster ovens on half price will forgive all sins......

 

Thu, 01/23/2014 - 07:52 | 4358261 Spanky
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+1

For...

The A-hole Dulles reference.

Thu, 01/23/2014 - 09:19 | 4358394 ExpendableOne
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But what of the toaster ovens?  These days, connected to the internets.

Wed, 01/22/2014 - 23:03 | 4357748 VD
VD's picture

real insiders (esp at hedge fundz [a few in CT in particular]) have been worried for quite some time.....but they keep front-running....

Wed, 01/22/2014 - 23:03 | 4357756 old naughty
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It will soon be clear...

post-davos !?

Wed, 01/22/2014 - 23:18 | 4357811 Crawdaddy
Crawdaddy's picture

Nah it has to happen after the olympics ritual.

Thu, 01/23/2014 - 01:12 | 4358010 Spanky
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During the olympics ritual is better -- the MSM can then easily ignore it for the distraction.

Wed, 01/22/2014 - 23:06 | 4357767 max2205
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It feels like times up

Wed, 01/22/2014 - 23:19 | 4357815 DoChenRollingBearing
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It has felt that way for me since 1979 (Jimmy Carter), so I am not a reliable indicator there.

Thu, 01/23/2014 - 04:55 | 4358183 Bearwagon
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1979? Man, you were late. Years!

Wed, 01/22/2014 - 23:09 | 4357778 joego1
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The world seems boring to me today as well.

Wed, 01/22/2014 - 23:18 | 4357813 NoDebt
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Pointless is the the more accurate word to describe it, I think.  When you're playing in a rigged market, there is no point to any of it.  

Wed, 01/22/2014 - 23:09 | 4357780 Cornholiovanderbilt
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I'm willing to bet the party continues until after the real 'davos' meeting in June. It rhymes with bildeberg

Wed, 01/22/2014 - 23:11 | 4357785 new game
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once the snow pack breaks loose, everything in its path...

Wed, 01/22/2014 - 23:14 | 4357794 BaggerDon
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When IT COMES, and IT WILL,,,,the banksters will not let them in or out.... . 

Wed, 01/22/2014 - 23:19 | 4357804 NoDebt
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Just shy of 5 years of nearly straight-up in the markets and still everyone has that "something's wrong here" feeling.  Why?  Because everyone knows it's fake.  All the logical arguments can't seem to assuage that gut-level response.  But listening to your gut has gotten you bloodied and bruised the last 5 years.  So the game continues to be played with a willing suspension of disbelief.  And the knowlege that it won't end until TPTB lose control, which seems quite a long way off at this point.

Thu, 01/23/2014 - 00:14 | 4357933 GeorgeHayduke
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Good point. Anyone with any ability to observe the world around them has felt that it's all bullshit for at least 5 years and more like 10+ years if they are real observant.

TPTB can only control so much and stack bullshit only so high. At one point something has to give and with the way this crap pile is stacked up, the largest economic avalanche in humankind's history may come crashing down. The interesting thought there is as this thing we currently call money turns rancid, dies and people go apeshit, the sun will still rise. The tides will come and go. Birds will fly and plants will flower. Maybe we'll all be better off if it happens.

Of course, TPTB may be able to baffle them with bullshit indefinitely. As Einstein said, human ignorance is infinite and much of the herd is comfortable there.

Wed, 01/22/2014 - 23:39 | 4357860 Cabreado
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"What are you afraid of, exactly?"

 "but for the capital markets currently it seems there is no fear."

You failed to reconcile the above,
in your own article, even.

 

Wed, 01/22/2014 - 23:55 | 4357903 BringOnTheAsteroid
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I just don't understand anything anymore. Discussions are so often framed as if nothing unusual is happening, nothing untoward, nothing out of the ordinary. What does all this talk of P/E's, volatility, job growth, earnings growth, complacency even mean when the Fed is pumping trillions upon trillions into the system. The above article mentions the reduction of QE as some cursory feed that may have some slight influence on the behaviour of the markets and the economy. QE is spoken about as a variable such as the recent snow storms in the US and the effect this may have on the economy.

Is it just me or is QE FUCKING EVERYTHING. All the rest is BULLSHIT. The Fed is pumping ONE TRILLION DOLLARS INTO THE FUCKING SYSTEM. It ain't going away without instant economic collapse. Just like the accumulation of debt people just can't get their heads around it. Out of sight, out of mind.

Let's talk about everything in terms of debt and QE and low interest rates. NOTHING ELSE MATTER ANYMORE. 

Reduce QE - systemic equity market collapse leading to economic collapse.

Reduce debt - systemic economic collapse leading to equity collapse.

Increase interest rates - concurrent equity, housing and economic collapse.

It's not that hard to understand but people are clinging to the words and thinking associated with a system that died many years ago.

Thu, 01/23/2014 - 00:02 | 4357912 Caveman93
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No reponses ...from any of the jobs I have applied to in months. Occasionally a 30 minute interview...an email. Try to follow up with another email....silence. "If I ignore him, he'll just go away". Yeah something is about to blow. Engineers are no longer wanted but 4 million jobs available? My ass!

Thu, 01/23/2014 - 01:48 | 4358046 ebworthen
ebworthen's picture

Ditto.

Zero response from jobs I an 125% qualified for.

Thu, 01/23/2014 - 02:44 | 4358088 Rakshas
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I work in the belly of the BEAST somewhere between the tonsils and the sphincter (O&G) and it is really the twilight zone out here companies building offshore rigs at a rate that nearly doubles the offshore fleet of a decade and a half ago - but the old rigs are not retiring we just keep punching holes in the ocean...... in the middle of a worldwide decline in every other industry - save O'bombing raping and pillaging that should be worrying somewhat. People call me crazy but i keep converting my paper to metal as fast as i get it.  

SA maintains Ghawar is still the best out there but they are offering absolutely retarded coin to come work there right now on O/S rigs - if it was all that onshore you wouldn't be moving offshore like they are - not suggesting they would ever try to willfully mislead anyone but..... i'm just sayin'  

 

Slightly off topic - why do we kill rabid dogs but let thieving politicians walk free?? couldn't we feed the politicians to the....... oh wait ..... I forgot about Hillary.... been done already i guess ...... nevermind

 

 

 

Thu, 01/23/2014 - 00:13 | 4357932 KickIce
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In the voice of Elmer Fudd:

Be wary quiet, I'm hunting muppets,  Of course those that refuse to bow down to servitude won't be far behind.

Thu, 01/23/2014 - 01:35 | 4358032 satoshi101
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End of HISTORY

I caught shit here a few weeks folks, but I'm one who has been watching this shit since the 1970's like  a HAWK.

We're in a new age of finance, and this ponzi print to the moon can go on forever,

And now they got all on board ... everywhere , ZH still posts bullshit about china, russia, ... USA, ... but the fact is that its all IMF circle-jerk now everybody see's IMF as forgone conclusion.

End of history, boring as hell, and no black swan on horizon. As FUKSHIMA showed you can destroy 10% of a country ( and an entire ocean ) and nobody cares and nothing happens and if that wasn't a black-swan what is,... we're in a new age, that even a black-swan can be neurtalized by the MSM.

So its print forever, either USD or IMF-SDR, with the US SPY machine watching all.

Get used to it, ... the end of history is here.

 

 

Thu, 01/23/2014 - 03:20 | 4358122 OutLookingIn
OutLookingIn's picture

Cheery sort of chap, aren't you.

Thu, 01/23/2014 - 07:27 | 4358252 negative rates
negative rates's picture

Not even close, and you don't know how.

Thu, 01/23/2014 - 09:21 | 4358399 Woodhippie
Woodhippie's picture

It seems to me that Black Swan events used to actually mean something.  Response was immediate.  Things happened.

Now, shit happens and nobody seems to care.  At all.  Nothing surprises anyone any more.

We are in interesting times.

Thu, 01/23/2014 - 01:40 | 4358037 lasvegaspersona
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Running out of gold doesn't make the top 10 list? What happens when all the gold in GLD is gone? Derivatives collapse. For me that event is a bit higher up on the list I guess.

Thu, 01/23/2014 - 01:46 | 4358045 ebworthen
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Yeah, no surprises, until the equities cotton candy casino is crashed all over again.

Wait for it...

Thu, 01/23/2014 - 08:44 | 4358319 chistletoe
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number one should be "The next oil shock" ....

 

in this case it might be primarily a "Natural Gas Shock", as it slowly dawns on the folks in New York that there is not enough gas in inventory and not enough pipelines in the ground to keep the lights and the heat on in Manhatten for the rest of the winter, not even at Goldman Sachs, and not even if they pay $100 per mcf as they did during the first polar vortex.....

Thu, 01/23/2014 - 09:12 | 4358369 waterwitch
waterwitch's picture

 

 

 

 

Many ways to shock the oil market:

  • sink an oil tanker or two in the Straits of Hormuz; 
  • blow up a pipeline or refinery in  Saudi Arabia (never could happen, right?! Just ask Putin.);
  • Mexico decides that it's futile to export any of its oil because of declining output (Cantarell is a fraction of what it once was);
  • Venezuela implodes due to food riots; etc....
Thu, 01/23/2014 - 08:58 | 4358351 Woodhippie
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"Still sluggish labor market in the US".

That's a fucking understatement.

Thu, 01/23/2014 - 09:12 | 4358374 deerhunter
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i recently was offered the same exact salary I was paid in 1985 to manage a restaurant with the obligatory 7 day 10 to 12 hour a day work weeks.  I recall an old restaurant owner telling me I was doing good as I was making 1k in salary per year of my age at the age of 30.  Think of that for a minute.  Companies paying 1985 wages in 2014 dollars.  Unemployment at 7%.  Labor participation rate lower than in the last 30 years as well.  I don't know what is coming,  but it is.  I have feral cats in my neighborhood.  All of the songbirds have been eliminated over the last two years.  There are not enough coyotes here in the suburbs to eliminate the feral cats.  I look at the bankers and in fact the FIRE industry as a whole as feral cats.  They take and take and take and give nothing back.  I think it is time for an action plan for the feral cats in my neighborhood.  How about for the FIRE industry?

Thu, 01/23/2014 - 09:19 | 4358392 esum
esum's picture

that congress will allow obumbler to use his pen..... the NSA can tell us what he says on the phone....

the new commie mayor in nuewvo york and the asshole governor of ny state.... and another artic freeze...

de blasio has the nypd focused on JAYWALKING ... he is definitely a fucking geniuis.... 

Thu, 01/23/2014 - 09:43 | 4358480 Ban KKiller
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Fascism is in control...slavery to debt is the new black. 

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