When you are in the business of buying and selling volatility you can get sort of cynical about whether volatility is a thing, and whether it is appropriate to buy and sell it. We talked earlier today about the fact that if you have a client who doesn’t care about something valuable, then you should buy as much of it from him as you can; you can guess where I learned that. It is superficially persuasive to tell a customer “you don’t get any benefit from the volatility of your stock so you should just sell it to us,” but ultimately you can’t eat volatility. You eat buying low and selling high, and so you rigorously translate the customer’s sale of volatility into buying low (from the customer) and selling high (to the customer). Science!
So I started reading this San Francisco Fed note about “uncertainty” with a certain amount of skepticism. Reuters describes the finding as “Uncertainty over the economic outlook has added between one and two percentage points to the U.S. unemployment rate since 2008,” and you might reasonably say “shut up, uncertainty hasn’t increased the unemployment rate, expectations that things will be bad have increased the unemployment rate through perfectly unsurprising self-fulfillingness.” Managers don’t stop hiring just because they think things will be pretty good, but with a small chance of a delightful surprise. It’s the drift, not the variance.
The SF Fed’s note does not entirely dispel that concern; it measures “uncertainty” based on a Michigan consumer survey that “has polled respondents each month on whether they expect an ‘uncertain future’ to affect their spending on durable goods, such as motor vehicles, over the coming year,” and I suppose each consumer can make his own choice about translating “uncertain” into “scary.” Here is that uncertainty graphed against the VIX and I submit to you the differences are instructive:
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I blame spring break both for the lack of news this week and for the fact that what news there is revolves around trading glitches. Apparently spring break has cleared New York not only of responsible adult bankers and traders taking their kids to Disney, but also of responsible adult trading computers who are off doing God knows what, leaving the callow analyst computers alone to man their desks. And no one should be surprised that they got a few things wrong on their first day in charge.
Away from BATS, the glitchy news is in TVIX, a 2x levered short volatility ETN issued by Credit Suisse. And the craziness here seems to be caused not by robots on the fritz or fat fingers. Here is the story:
Credit Suisse Group AG (CSGN), under pressure to restore order in an exchange-traded note tracking U.S. equity volatility, said it will start resupplying the market with shares today after cutting issuance off in February.
Stock will be added to the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), or TVIX. The security, designed to track Chicago Board Options Exchange Volatility Index futures, has whipsawed investors for the past month, climbing 89 percent above its asset value and plunging 29 percent yesterday before Credit Suisse’s announcement. It fell another 19 percent to $8.23 at 9:56 a.m. New York time today, extending its retreat since Oct. 3 to 92 percent. [When I looked it was swinging wildly around in the $7.50ish area, which is a bit under its $7.83 NAV as of yesterday, go figure.]
Creating shares in the ETN will help bring the security back in line with its so-called indicative value, the price implied by futures on the CBOE gauge, said Alec Levine*, an equity derivatives strategist at Newedge Group SA in New York. Credit Suisse’s first round of share issuance is intended to lower the cost of borrowing the note, a step that may aid short sellers who yesterday helped cut the premium by 66 percent even as owners of the security were burned.
“Lending out shares is an attempt to drive down the premium,” Levine said yesterday in a phone interview. “When your product isn’t trading anywhere near NAV, it’s the market telling you that it’s a broken product.”
So that’s sort of a hilarious way to put it. “If you offer widgets at a suggested price of $29.95, and people are reselling them at $56, that’s the market telling you your widgets are broken.” Not … exactly. Read more »
If you’re in a certain line of work, and I bet you are, then your main concern about things like the Volcker Rule and increased capital requirements for banks is that they might reduce your comp. If you’re in that line of work, you’re also probably the sort of person who has a higher than average aversion to having your comp reduced. However, you’re also the sort of person whose comp everyone else would be happy to see reduced, because you make too much already you greedy jackass.
That poses a quandary because nobody’s all that interested in hearing your arguments against the new rules, even if they’re good arguments and not 100% about your own personal remuneration. One thing you could do is get proxies to make your arguments. If you think that the Volcker Rule will reduce liquidity in foreign government bonds, you could suggest to foreign governments that it’s really important that they lobby against the rule on your behalf. You did that. Good work. Let’s see how it turns out. If it turns out well, the next step would be to get other clients to say “well, we want liquidity in our [stocks/bonds/rate swaps/whatevers] too,” since that would then be a more compelling argument.
I think that’s what’s going on in this sort of amazing FT article, but something has gone terribly wrong: Read more »
If you read only one thing about ancient fire management methods and modern volatility, it should be this report by Chris Cole of Artemis Capital Management.
There is much goodness here that others have discussed. But perhaps the most interesting for the current world is the move from positive to negative serial correlation in stock prices over time. (Positive serial correlation means that stocks are more likely to go up the day after an up day, negative that they’re more likely to go down on the day after an up day, and zero that yesterday’s performance is not predictive of today’s.) Serial correlation peaked in 1971, floated around zero-ish from 1980 to 2000, and is now strikingly negative:
As Cole says: Read more »