Aqumin Volatility Newsletter 09/07/2011 $GLL, $UGL

Have we seen this before?

Sometimes I yearn for the good old days. I think I am old enough now to look back 15 years or so and fondly remember when a crisis or bubble had a beginning, middle and an end. The USA invented Brady
Bonds for Latin American debt in the 1980’s, fixed that. The Mexican Peso crisis in the mid 1990’s was mostly a collapse in the price of TMX (at the time one of the biggest traders on the CBOE) and Treasury Secretary Rubin (he handled the 1990’s flare ups rather well) rode to the rescue on the currency with guarantees. Brazil had inflation issues but moved to fix them with substantial policy changes. We had a great Biotech Equity Bubble in 1991-1993 when no one would buy a stock that made real money. The Asian Currency crisis in the late 1990’s help set up the current prosperity of today in that region. It was a good lesson that you don’t want to borrow too much in another currency and should make subsequent policy adjustments accordingly. The point for our current market volatility is that still, a year or so in, there are really no substantial policy adjustments in the Euro Zone (PIG austerity?) that market participants are buying. Let’s see how that play’s out in the market’s underlying volatility right now.

One thing I like doing is using simple arithmetic setups with different volatility measures to get a sense of what is happening behind the bigger indicators. In the AlphaVision™ Landscape below running on the Bloomberg Terminal I have set up a landscape using 10 Day Historical Volatility (HV10) minus the 30 Day Historical Volatility (HV30). If a name is moving more over the last 10 days than the last 30 days it will show up in green on the right of each GICS Sector. Building height is the total return for the week (up is negative in this case) when I pulled up this 3D quote screen Tuesday afternoon.

The first thing you notice is the Landscape is mostly red for the 750 or so names that trade 500 call option contracts or more. This means that the HV10 is less than the HV30 for most of the active listed names that trade options. As I commented last week, the crisis is slowing down in terms of Historic or Realized volatility recently but still near the peak of last year. What surprised me was that so few names had accelerating HV10 yesterday and barely a handful had HV10 15pts higher than HV30 (which is a level through observation I like to note). For the ETF group, both the UGL (ProShares Ultra Gold) and the GLL (ProShares UltraShort Gold) had rocketing levels and were leading ETF’S and very near 15pts higher. If I had a hard screen at 15pts, I would have missed these names using traditional screening techniques.

Now what does this mean? With the two levered Gold ETF’s leading the uptick in HV10 money is concentrating in these underlying contracts even more, pushing the Realized Volatility levels around. The gold trade is even more so the on again, off again way to manage risk for the average investor and the underlying volatilities are starting to show it. Euro Crisis solved gold in the tank, Euro Crisis on more of the same and higher with more Realized Volatility. Tough to believe we have turned gold into an early 1990’s Biotech stock but it is starting to trade that way. Almost 20 years later, same crazy activity but different names. Who knew?

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Aqumin Volatility Newsletter 08/26/2011 $BAC, $HPQ, $JPM

“You were always on my mind…..”

Ah the sweet sounds of Willie Nelson. Not so sweet is the mess we have following the S&P Downgrade of US Sovereign Debt. After a one week layoff in posting, although I do look at the market every day, there is plenty to look at in the aftermath of the downgrade. I am going to call this G7 (lump in the USA now) Debt problem, for however long it lasts, the New New Era. As opposed to the New Deal which saw a contraction of credit (after the Crash of 1929) and expansion of fiscal stimulus, we have an expansion of credit and fiscal stimulus. The New Deal was not kind to stocks, but great for government bonds as the real yields plunged to negative numbers (sound familiar?). The difference is after the 2008 Crisis we got lots of credit through TARP and various monetary pops from the Fed. No doubt Fed policy makers learned from The Depression to keep the money taps open. I think the problem now is Europe did not go through the serious bloodletting that the USA did in 2008. Besides the US debt downgrade, not much has changed in the last 3 weeks or so (not that the debt ceiling resolution or other economic news has been that great). Let’s examine 10 Day Realized Volatility during the era of New New to see what we can see.

First here is a short primer on the Financial Crisis of 2008 and 10 Day Realized Volatility. In the Aqumin Time Series Landscape below the Dow Jones Industrials are laid out like standard bar charts side by side to read an actual volatility impression of the market. Time is moving from January of 2008 on the left to today (just out of sight). It is easy to pick out outlier patterns like this. Dark Green bars are over 80% Realized Volatility for the previous 10 Days. White is near 50% and Dark Red is below 20%. The Financial Crisis in 2008 is pretty easy to spot. Note that it was really two, 3 month periods of extended volatility. BAC topped out at about 311% 10 Day Realized Volatility when things got really nasty.

 

Also note how Realized Volatility collapsed as the financial crisis tailed off. Stocks stopped moving while market participants scratched their heads as to what was going on. The next phase of the New New Era is last summer’s meltdown from Greece and other higher risk nations in the Euro Area.

 

I have a Money Center bank like JPM topping out around 56.45% for a 10 Day Realized Volatility. If you note the Dark Red area just to the left of the JPM flag, 10 Day Realized Volatility was very low and that Euro Crisis was about a double on average for the 2 month span of higher numbers. The Euro band aid and QE2 seemed to hold things together as volatility in the Dow receded a bit.

Now we get the S&P shocker below which I believe added the US officially to Sovereign Debt pile in people’s minds. Notice the giant spike in 10 Day Realized Volatility as the market literally melted. Stocks might climb a wall of worry but they fall off a cliff in a panic. As of today we are about 50% off of the 10 Day Realized Volatility highs of early August but near the same level as the peak last summer as you look across the DJIA stocks. Just compare the relative levels now with the picture above. I have JPM highlighted at around 47.735 10 Day Realized Volatility. Also note the last few days as most of the building are inching back up. The leader in the corner is HPQ (after trying to get out of the personal computer business and feels a lot like IBM in the early 1990’s) and next comes BAC. BAC now has the Berkshire Hathaway put going, and while I can’t pretend to know how Mr. Buffet operates, that BAC Preferred Stock purchase might be a subtle way of Warren telling the President, “Leave the banks alone, we still need them!”

 

Now back to Willie’s song, You were always on my mind. The market volatility is coming from policy problems the G7 governments can’t seem to fix, which is how I read this Time Series Landscape. The tools are there but the politics and problems linger and having the USA tossed into the mess brought things from the back of the mind to the sell button. JPM seems to have slowed down a bit and is trading well under the 10 Day Realized Volatility of last summer. I think a little less relative volatility means a more stable outlook and you might want to selectively sell, controlled long bias type option premium in there. HPQ will have a hard time seeing 10 Day Volatility get much higher than it is right now and you can trade that accordingly. BAC has the Buffet put on so it is probably not going out of business even though the market priced it that way 5 days ago.

Sovereign Debt worries are on my mind, so I don’t do anything that big and wait for the next shoe to drop in our New New Era.

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Aqumin Volatility Newsletter 08/09/2011 - $CAT, $BAC, $MCD

Put a Collar on your CAT

As I write this volatility report, I realize the Equity Markets have had what psychologist must dub a Nervous Breakdown. Where things were already on a knife edge and some event comes along and the mind falls apart. I view the S&P downgrade as something like that. There was thin confidence in governments of late and now someone said they need to get their act together. This was a surprise? Imagine if S&P did this in 2006 with Mortgage Backed Securities? Congressmen would have screamed at them for killing the American Homeowners dream. Either way, Sovereign Governments will have to spend less (or better collect revenue) because economies only generate so many dollars. The Politicians should thank S&P for giving them cover to do the
$1 Trillion per year in cuts that is needed. The change in spending alone will give the patient (market) the confidence it needs to get rolling again.

So what did this do to market Implied Volatility? It went through the roof and you don’t need a 3D Landscape to tell you that. When the S&P 500 moves at 5% per day, the VIX is going to soar and stocks are going to move in lockstep. So let’s go back in time to 2 or so weeks ago, prior to the breakdown and perform some hypnotherapy on the Dow and see what we see.

Anyone with a Bloomberg Terminal or a decent downloadable data feed can run AlphaVision™ for Excel. This chart setup is an expanded Time Series unique to Aqumin and provides a new way to chart market data. I have loaded the Dow 30 stocks in rows and measured the relative performance of each name. The Green Spikes are a 45% over performance and the Dark Red spikes are 30% underperformance. The rows are ordered by the relative performance starting from best (to worst). The best was CAT and the worst was BAC.

At this point you say big deal. I can see that in my Dow spreadsheet. Even if you did not know CAT was the Dow leader this year, BAC is not much of a surprise (it does look like capitulation now). However, with Aqumin’s 3D landscapes you can spin the charts around and get a new view below. The view now is definitely not how market participants can look at charts. You can see the last 2 weeks of all the charts at once. CAT is moving back very quickly to the pack even if the story has not changed. That is the market selling everything and possibly the best holdings more to raise cash.

CAT road the global growth story best all year since it sells the trucks that mine everything hungry emerging economies want. Its fall has been stunning (on an absolute basis) and the market is quickly relegating it to look like all the other names in the Dow. The relative performance is almost back to MCD (#2). Things are a little to fresh to just go out and buy the name. But CAT, properly fitted with a 3 month+ out option collar looks like a way to run when the name resumes with a bolt. The outperformer once will be the outperformer again and an option collar adds a trading piece should things get uglier in the short term.

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