The CBOE Volatility Index took center stage last week with very dramatic action Monday and Tuesday.
It’s official, the equity market is in the middle of a panic. You can find a lot of pixels devoted to explaining why the market went down, or at least trying to explain what happened. It could have been the unraveling of the short volatility trade, the Wall Street Journal blamed risk parity later in the week, rising rates are always relevant, perhaps increased deficits (soon to be 5% of GDP?) were to blame? Or maybe the market went down because it stopped going up, which is to say it might have been no reason at all that sent the market down.
A panic can be thought of as a fast decline and 10% in a couple of weeks is most definitely fast. If you are over the age of 31 (52% of fund managers have less than nine years experience), you have been through more of these panics than you can remember. Not only that, there will be many more fast declines that you will soon forget. The nature of fast declines is that they cause an emotional response like what were seeing in the media, Twitter and perhaps in conversations with your clients. The historical tendency of these fast declines is that they resolve quickly, meaning a few weeks or less. The best thing is to simply stick to whatever investment process you chose when emotions were not in play. This is useful for advisors to hear and for advisors to remind their clients about normal market behavior and despite what it might feel like, there is nothing abnormal here. That is not a prediction about whether this turns into something much bigger, it probably won’t but if it does, that will be normal market behavior too.
The declines for the broad indexes last week were in the five percent range but at the low on Friday they were down in the eights, again just for the week. To our comments above, that is the epitome of a panic or a fast decline. In a series of Tweets on Tuesday, we wondered whether the huge jump that day meant the event was not over. Just as large declines are signs of emotion, so too are large gains like the one on Tuesday and maybe on Friday too? We obviously don’t know but we would have preferred a close on Friday that was plus or minus 50 basis points not a gain of 149 basis points (for the S&P 500(NYSEARCA:SPY)). The indicated strong open for Monday (as of 8am ET) keeps alive the possibility that this event is not over.
The CBOE Volatility Index took center stage last week with very dramatic action Monday and Tuesday. Monday, the VIX(NYSEARCA:VXX) jumped over 100%, bringing an end to the one way nature of the short volatility trade. VIX had been going down for so long that a couple of the exchanged traded products became very popular for their massive gains. You may have heard the story of a Target employee to turned his life savings into a $13 million fortune by shorting the VIX via one of the ETPs. On Monday the VelocityShares Daily Inverse VIX Short Term ETN, one of the two big ETPs had an event acceleration, effectively terminating the product. Per the prospectus, a single day rise in VIX of 80% would allow the issuer to cancel the product, which they are choosing to do. There were other funds to similarly blow up and there were estimates floating around of several trillion dollars in various short volatility trades that all blew up at once and that amount was enough, some say, to contribute to the decline in equities.
To the extent interest rates are part of the equation in contributing to the decline, the yield on the Ten Year US Treasury Note bounced around last week, falling a couple of basis points to 2.82% and the Two Year Treasury fell nine basis points to 2.07%. If interest rates do have a seat at the table, it is over concerns of inflation appearing in wages, every so slightly, and TIPS breakevens, which in turn could force the FOMC’s hand with rate hikes this year.
Metaurus Advisors launched two funds that pair together (sort of) to offer an unique exposure. Similar to separating a bond into interest only and principal only instruments, Metaurus separates the S&P 500 into dividend only and price only instruments. This is done with futures contracts and the funds will generate K-1s. This might sound familiar to an investment trust from the late 1980’s created by Americus Shareowners Service Corporation that separated 27 large cap stocks into dividend and price components that were called primes (dividends) and scores (price). Some of the companies these were available for included Amoco, DuPont and American Home Products. The primes traded like bonds and the scores traded like options. We will be curious to see if that is how the Metaurus products trade.
How did Peter Thiel obtain New Zealand citizenship?
According to his 2012 book, Zero to One, his purpose is more than making money and extends to escaping limits of both the human body and social rules. An interest in lifespan extension,musing whether freedom is compatible with democracy, and support for artificial island habitats free from the constraints of traditional government and laws have led critics to caricature him as a Bond villain for the internet age.
Seems very relatable.
Were you stunned at how quickly it ended for Isaiah Thomas in Cleveland? ESPN has some thoughts:
None of the other players on this list had anywhere near Thomas’ pedigree before their fall. World B. Free, a high-scoring and colorful one-time All-Star, might come the closest. But he was already 32 by the time the Cleveland Cavaliers let him go as a free agent as part of a youth movement in 1986-87. Free was unsigned until joining the Philadelphia 76ers in late December 1986 and played 20 miserable games that season, his second-to-last in the NBA.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Zerohedge, Bespoke Investment Group, CME Group, ESPN