VIX, the “price of risk”…why has it risen 53.6% (see below) since the 10/21 equity peak, when SPX has declined a mere 5.9%? We think it has less to do with actual price risk (30 day realized SPX volatility is 20.45 vs. VIX at 30.69; similar relationships are observed in FX/FX options (UUP))…and more to do with an anticipation that illiquid market conditions begin earlier this year than the usual mid December time frame. We saw several smaller strategies, all solidly profitable and above High Water, close their books last week; Galleon’s unwind and the gate lifting at a well known multi-strat focus many on “business over investment” decisions.

To remain with your convictions, consider collars (buy put/sell call) as a low/no cost way to stay invested as the correction continues.

Spike in the VIX

As October ends, the focus moves to global central bankers pondering monetary easing “exit strategies”, with the FOMC to speak on Wednesday 11/4.

Given this context, it is no surprise that, along with the oil sensitive TRAN index, the small cap Russell 2000, a liquidity play, has led the downside (see below; RUY not making a new high in October). Expect asset markets to remain rangebound between this week’s extremes until FOMC, with our sense being that psychology had changed such that the Fed will have to explicitly state that it is not pondering exit strategies (we think this unlikely) in order to stop the developing asset price correction.

Risk is no longer cheap and defense (or downside profit!) is a function of spending some YTD P&L and trimming gross. Love to share ideas…

Russell 2000's Broken Trendline

MysteryHedgie reflects on an emerging, potentially troubling picture…

Connecting the dots between the surprising drop in the US consumer’s confidence (see chart, 47.7 vs. 53.5 expected, troubling as Christmas shopping approaches), the drop in BIDU post earnings, the break of the trendline in the TRAN Index and a bounce in TLT from support (yesterday’s note) is a loss of economic and price momentum, mo that has built steadily since the dark days of March. Oil’s stickiness near $80 makes things worse. In all, it increases the odds of the largest correction since the rally began, with macro (stocks and commodities soft, bonds and US$ rallying) correlating tightly again. Most vulnerable are the biggest winners and most “crowded” positions…NDX, gold, $NZ, FXI, EWZ, XRT. Let’s talk about defense at your convenience….

If Santy Claus Don't Call, The Bears Will Be At Broad And Wall

MysteryHedgie notes two prospective trades…

Two trendlines; if they break; take the trade.  Many (ourselves included) have documented the weakness in the TRAN index since Oil broke through $80 last week;  fewer are talking about the concurrent weakness in bonds (see TLT below), also stung by $80 oil.  TRAN and TLT are both near trendlines which, if broken (below 3750 in TRAN, 93.50 in TLT), have the ability to change the market’s psychology toward growth prospects in 2010. 

Given the traditional month end bid and the end of normally volatile October, it is less likely that these levels get broken, but if they do, underhedged books will be quickly adjusted.                                            

TLT Sits On Trendline

Oil….the break above $80 has at least temporarily severed the link between strong commodities/weak US$ and rising stocks, a  very dependable correlation for most of 2009.  It could also be posited that the US$’s break through 1.50 Euro is raising concern as global bankers consider supportive action, as was the case in Brazil yesterday.   We have seen  consistent buying of protection in Airlines (rarely traded issues) and other Transport names throughout the day.   As the VIX bounces from    

hitting an intraday low of 20.10, the scratched and broken record is heard one more time before being taken off the turntable….”Risk is underpriced!”                            

Oil Gushes

MysteryHedgie Notes VIX On Support:

Goldman Sachs, Google, Bank of America, General Electric.  Two upbeat earnings reports, two decidedly less so.  The common thread is that since the peak of risk taking in late 2006, volatility in corporate earnings, economic performance, and asset prices has risen, albeit with highs (fall 2008) and lows… Looking at the below chart of VIX, we believe another low to be at hand. 

Examine your positions carefully, and where it makes sense to do so, add an element of optionality, whether for protection (we see US$/carry themed positions, Gold, EFA, EWZ, MOO, NZDJPY vulnerable to profit taking) or for leverage/enhancement (selected technology exposures, healthcare, investment themes correlated to rallying laggard commodities such as cotton and lumber). 

Thoughts?

VIX at suppport...?

MysteryHedgie is not surprised that gold has called “timeout”…

Gold’s pause for a second day isn’t surprising. Throughout the last year of this 10 year bull market, Relative Strength readings over 70 (see below chart) have marked temporary peaks.  Different is that it is occurring while the US$ is generally weak and equities retain their bid.  This divergence has caused a subtle shift in our Desk order flow;  we see  option/protection buying across a broad macro spectrum, FXA (Aussie $ ETF), DBA (Agriculture ETF), TLT (bond ETF), and SHY (1-3 year US rate ETF).  Takeaways:  Options represent value  across a broad spectrum of assets; rotation in an otherwise firm tape (note the buying of laggard large cap Drug stocks) is  possible, and managers can expect to see performance from both longs and shorts in the days ahead….                         

Gold Calls Timeout

INTC’s upbeat words and renewed M&A in the tech sector generally have increased the probability of a volatile upside thrust to global equities as the positive seasonal bias takes hold. We reiterate our idea of 10/8’s note that upside calls, many of which are trading below realized volatility, represent great value/limited risk ways to play for year end acceleration as SPX is primed to test its downtrend line from 2007 (see below).

Interestingly this morning, gold is flat in a positive stocks/weak US$ tape, contrary to the recent correlations. As was the case in late 1999, a technology led equity rally may have the “psychological power” to reallocate funds from other asset classes and other equity sectors.

SPX in an uptrend

It's Miller Time, says Barron's. Huh?

Lose 72% in 18 months and make the cover of Barron’s…  Is this a great country or what? 

Barron’s gushes about Miller’s rebound.  Read my “ciphering” below for more on that:

DON’T WRITE OFF Bill Miller quite yet.

The aggressive manager of the Legg Mason Value Trust, whose remarkable run of success preceded a more recent patch of dreadful yearly returns, is again near the top of his peer group in 2009. Through last Thursday, the Value Trust (ticker: LMVTX) was up a whopping 37.52% so far this year, putting it in the fifth percentile (top 5%) of all large blended-fund returns. It’s an amazing about-face from early March, when his fund had lost 72% of its value in a matter of about 18 months.

So let’s run the numbers.  If Miller was off 72% at his nadir, then:

• that’s 28% of his high water, so
• add his astronomical 2009 returns of 37.5%, thus
• 28% * 1.375 -> Miller’s at 38.5% of his high water mark, and
• In plain English, he’s still off 61.5% from his high!
• He’ll need to post three additional stunning 37.5% years just to recover his losses. (38.5% * 1.375 *1.375 *1.375 = 100%).

Here’s a “Growth of $10,000″ chart for Miller’s fund:

"Growth" of $10K in Bill Miller's Value Trust. (Click for more...)

Now remind me again why Bill Miller’s a genius? 

Without a a 100% objective risk management process, it’s not a matter of if, but when, you will blow up.  Beating the S&P for 15 years means nothing if you’re below where you started from 10 years ago.  In inflation adjusted terms, his results are much, much worse.

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I am posting this for a friend as an experiment to see who we can find via social networking. 

If you qualify, send your resume to the email address below.  Don’t bother me or you will make yourself persona non grata.  I mean it.

DIRECTOR OF OUTREACH COMMUNICATIONS

The Company

The company provides investor and shareholder relations for China-based, US-listed companies. As a premier corporate communications firm, the company maintains offices in New York, Florida, California, and Shanghai, China.  The company has positioned itself as an industry leader and has built a reputation for delivering tangible, measured results through a team of dedicated, experienced and performance-minded professionals. Over the next several years, the firm plans to accelerate its growth while continuing to offer innovative services to its client base.

The Opportunity

A motivated, high-performance leader who will assist with client management responsibilities while focusing the majority of their efforts on effective outreach to fund managers, sell-side analysts, brokers, high-net worth investors, family offices, and various financial publications. The role includes arranging non-deal road shows for clients, which consists of frequent travel throughout the United States and Canada for both meetings and investor conferences. Acting as a liaison, this role demands a strong communicator who will be a value-add during all client interaction, including the associated follow-up and due diligence requests.

The Candidate

The candidate will have at least five years experience in the financial industry, serving as either a licensed retail or institutional broker or sell-side analyst. This person should understand all aspects of a business plan, in addition to a Company’s financial model and statements, and be able to communicate this data clearly and concisely to professional investors. This position requires a relationship-oriented individual who holds themselves accountable for execution and meeting strict timelines, while maintaining the highest level of integrity. Dedication to improving the client’s image and communication capabilities is a must. International experience and exposure to China not required, but favored. Conversational or fluent in Mandarin a plus, but not required.

Starting Salary: $110,000/yr plus equity participation and bonus opportunity

Location: New York City.

STRICTLY NO PHONE CALLS.

Send resume via email to hciprofessionals@gmail.com.