STAGNANT VOLATILITY AND INVESTMENT CHOICES
The fear factor of the markets has existed since the end of April. Greece was at the top of the headlines, May 6th Flash Crash, the crash of the Euro, a double dip US recession, bad S&P 500 earnings, a crash in Chinese real estate, overheating in China, treasury rates showing deflation… I guess I am at the point of saying, “Go ahead and topple already”. I do not really mind seeing crashes in markets, because crashes provide opportunities. What I do mind is a chronic state of fear. Volatility has remained elevated for over 4 months, and we have little more than a 14% correction while retail and institutional investors continue to sell out of equity funds.
The issue at question is whether we have a greater day of reckoning coming. The treasury market would say that we truly do. With a 10 year treasury yield of sub 2.5%, the bond market is prepared for terrible days ahead. Stubbornly, equity markets remain dislocated versus their yield based compatriots. At the same time, I have suggested that it is hard for me to believe that the dividend yields on blue chip S&P 500 companies would be cut, which would make them very cheap compared to their very own bond yields.
What does not help our cause is the election cycle during the fall, a persistently negative employment situation, and the notoriously volatile fall months.
Is 30% really much different than 34%? Three months of Fear.
The chart above only illustrates that the prediction level for volatility has remained elevated. A 34% volatility level suggests a daily standard deviation of 2.14% whereas a 30% volatility level suggests a daily standard deviation of 1.89%. In reality, the 10 day annualized volatility hit a high of 37.86% and the 30 day realized volatility hit a high of 32.53%. That was in the height of the “European Crisis”. Since then, realized volatility has faded while implied volatility has remained elevated.
(A very slow decline in Vol)
So if you would like to make a bet, I suggest five strategies:
- Sell Volatility under the premise that everyone has a heightened sense of fear since the terrible market action of 2008
- Go long equities because an 8% earnings yield or 5% dividend yield on the top 100 dividend payers certainly beats 10 year yields on corporate bonds
- Buy treasuries because a 2.5% 10 year treasury yield will look phenomenal under our deflationary Japanification
- Short equities and buy physical gold because the whole financial/fiat system is unraveling
- Hold onto your cash and watch all of the fools chase fool’s gold
To me, 3 seems ridiculous knowing Bernanke’s mindset, 4 makes it seem like I would be better off investing in a bunker with ammo, 5 exposes me to the Bernanke mindset, 2 exposes me to the mentality of 3-5, and 1 seems like a way to take advantage of 2-5.
Surly Trader( whose blog I love) missed a few.
#6. Buy as much AAPL as you can, at any price. Then wait.
#7 Attempt to High-frequency trade, by hitting the buttons very fast on your E-trade account. Its the future.
#8 Structured products. Anything that guarantees significantly above risk-free returns, without the downside of course, is eligible. Opacity is key. And the guy selling it must be well dressed, and not a loser.
#9 Numismatic gold coins. Often go on sale between midnight and 3 AM on my TV (various channels). Some compelling deals can be had, from the looks of the trustworthy elderly salespeople. Old people rarely lie. Limited upside, but nothing like having those coins when one goes to Bartertown to buy chickens and oil.
#10 Vanilla Money Market account paying .78% With just 6 million liquid one can count on a steady 4 grand a month.
“With a 10 year treasury yield of sub 2.5%, the bond market is prepared for terrible days ahead.”
I do not understand why…does it mean that with cheap financing corporate bonds will follow this trend?
Or has this some relations regarding asset allocation? Meaning as rates are goind down, fear is growing, people will exit equities and look for bonds which will put some pressure on the down side?