Submitted by Bill Blain of Mint Partners
If this is the end of the world, then I’m disappointed. Stock markets collapse? Nope. Volatility to record levels? Nope – back to zero.. Bond Market Bear Crisis? Hardly. Equity selloff triggering Bond Market Contagion? A limpid cough, nothing more. High Yield meltdown? Some minor selling pressure…
Does this mean its safe out there? Last week we had the biggest stock market decline in 2 years, last few days it’s been the strongest rally. If you bot the dip – congratulations. If you sold – then I know how you feel. Huh…
This morning markets will be weighing up a slightly less robust performance in Asia overnight, but generally markets feel less pressured. Fears that the start of the Year of The Dog would be accompanied by a Chinese bond rout have not materialised. I even had time to read a few outlooks on Italian Elections and how they may impact Europe yesterday – I must admit I am no wiser; Italian politics today would be familiar to Caesar, Crassus and Pompey.
There is a fascinating story on Bloomberg: VIX manipulation costs investors billions, whistle-blower says. It suggests algo traders were moving VIX by posting fake quotes – spoofing. “Billions in purportedly ill-gotten profits have been scooped up by “unethical electronic option market makers,” says the whistle-blower. CBOE says the charges lack credibility… Really?
Some chartists say we are in a stabilising phase, others that the US market bounced off a key point (200 day Moving Average), and is headed higher. Difficult to call – I’d be surprised if markets simply roll over, have their tummies tickled, resume their remorseless rise and act like nothing happened. It did. The coffee has been drunk and we are wide awake. It feels more likely markets will remain choppy for a while, either establishing new ranges or staging a breakout – up or down? Which?
Looking at US stocks, my colleague Ara Levonian on the BGC floors of Mint Tower, says we need a further 9% decline to get back to fair valuations – ie 15.5x earnings. However, we swimming in a rosy economic conditions with a positive growth outlook – doesn’t that justify higher valuations especially when US corporates have so much repatriated money to put to work.
A number of fund managers are on the wires predicting renewed volatility come March, hinting the last two weeks was a just a minor tremblor, a foretaste of the big quake to come. Consensus seems to be early March for renewed stock unpleasantness – darn.. I’ll be on the slopes!
We’ve building a number of scenarios for what happens next and constructing a threat board. Two aspects that concern us are de-linkage and contagion. Its interesting to watch how different markets de-correlate from each other; for instance the strength of EM in recent weeks and ponder why? Global growth.. weak dollar, and how vulnerable these might be to contagion if a new crisis bites?
A large number of clients have been asking about ETFs in recent days – we’re all concerned about structured, levered, synthetic ETNs and other stuff bound for the Toxic bin.. We suspect they will prove a clusterbomb of pain. However, we’re more confident of the real ETF market – funds backed by product and proper managers - and that’s where opportunities may lie. Back in 2008 many CLOs and structured notes were thumped by illiquidity effects – values tumbling post crisis. Ultimately, most proved absolutely solid. We’re think much the same thing for the right ETFs in stocks and (selectively) bonds – if a crisis were to strike, look at discounts to NAV, figure out the illiquidity discount… and we reckon there will be value.