The market is a polarizing topic of discussion these days. Many who follow the credit markets suggest equities have room to run -- lots
of room. Most of them will point to the general malaise in the marketplace; while Main Street loosened the grip on its woogies since last spring’s fetal position curl, they struggle with the disconnect between what they see on the screens and how they feel about the real world. That, in their rose-colored view, creates building blocks in the wall of worry.
There are a few tricks to the upside trade, as you might expect. For starters, social mood and risk appetites shape financial markets. As we’re apt to say in the ‘Ville, the Crash didn't cause the Great Depression, the Depression caused the Crash. Through that lens, one could argue the deteriorating social mood discussed above is exhibit 1A in the "It'll be obvious with the benefit of hindsight" ursine argument. “Things," for lack of a better word, aren't improving for the average American.
While I'm a net seller of new paradigms, I would argue that this time is indeed different. FDR didn't know what a derivative was, nor was he dealing with an interwoven finance-based global economy. From Google
(TM) to EU-Greece
, seeds of isolationism continue to sow. That, my friends, is on the opposite end of “globalization” on the prosperity spectrum.
The question, of course, is one of timing. It's easy to say the longer this continues, the more painful the comeuppance will be
. Maybe "easy" isn't the right word; perhaps "honest" would be a better fit. Either way, what we really need to know is whether this is near-term business or if it'll cumulatively build (again) until 2012 when the schvitz really
hits the fan. A smart man once said you can game the direction of the market or the timing of the move, but rarely both.
I was asked on Friday, "Gun to head, do you think the S&P
trades with a nine-handle this year?" A back of the envelope later, I offered, "Hmm, 14% to S&P 999? Gun to head, I would say 'yes' but it's much safer if we turn the gun around."
How does one do that? In my view, "long vol" (read: positions with positive gamma
) is the best bet on the board. Some of the most lucrative trades when I ran big money
were when I traded long vol and was 100% wrong on the directional bias.
That's a different conversation then buying VXX
calls (those are horrible vehicles -- you get punked on the liquidity, tracking and the spread) and it's certainly not a stylistic approach that works for everyone. If you're an option neophyte, it likely won’t be a pleasant learning curve (be forewarned -- the pro’s feast on odd-lot public orders).
If you wanna learn more about the options arena, I would suggest reading the excellent six-part tutorial that John Succo wrote in 2003
. It's by no means a license to swing a big risk bat, but the first step towards financial success is proactive preparedness. Random Thoughts
- Remember the scene in Goodfellas when Joe Pesci says, "One dog goes one way, the other dog goes the other way, and this guy's sayin', 'Whadda want from me?'"
- That's what's emerging in Europe; Germany is pointing to an IMF-package to aid Greece and France prefers a broader European solution. While both sides insist the Euro Zone will "be there" for Greece if necessary, this week’s highly anticipated EU summit will oddly not focus on the elephant in the room.
- Sovereign spreads are again reflecting that friction, Spider. Korea (+14%), Malaysia (+13%), Germany (+12.6%), Hong Kong (+11.5%), and China (+11%) all widened overnight. These are relative moves, we know, but it’s the third session in a row they've reflected newfound doubt.
- Have you seen Hoofy and Boo's take on China Censorship?
- Meanwhile, the bond market is indicating that it’s safer to lend to Warren Buffett than Barack Obama, according to Bloomberg.
- Major snaps to Minyan Tom Clancy, who sits atop the Minyan March Madness leader board. He’s got Kansas cutting down the nets in Indy -- most folks do -- so this puppy is a long way from finished. What a weekend of triumphs and upsets, with a knowing nod to my brother’s Maryland Terps for being on the wrong end of the most crushing buzzer-beater of the tourney.
- Minyans should know The Hill and Ainsworth are the best in breed NYC sports bars. I get nothing for noting this -- my opinion has never been for sale -- so take it for what it's worth, with a side of wings!
- Note the commodity reaction to the higher greenback on Friday, which was a strong shift from what was recently witnessed. I've long believed that commodity volatility precedes equity volatility so stay on your toes.
- Remember in 2007 when we offered that credit of a different kind -- credibility -- would shape the scrape of the tape? That might again be put to the test when the Federal Reserve is forced to pull back the proverbial curtain.
- Facts of Life: Dieting boils down to two issues: how many calories you ingest and how much energy you exert. Trading is similar; profits minus losses define the bottom line. Our economic malaise is equally simplistic; we'll see higher taxes or more austerity measures.
- Greenspan is saying that regulators "failed" in the worst crisis since the Great Depression. That's like the chef who gave you food poisoning berating a waiter for a dirty shirt.
- Bobbles and Critters and Hats, Oh my! All MV tees are ten bucks -- TEN BUCKS! The funny thing (in hindsight) is that when I started the 'Ville way back when, I took down 10,000 shirts so I could qualify for a price break. It was my coin (before we had investors) so I figured, "why not?" If nothing else, nobody can ever accuse me of thinking small!
- I'm not sure there are many people out there who don't view pullbacks as, well, pullbacks. True corrections, however, must feel like something sinister is afoot. Between European haggling (Greekapalooza), the health care legislation (engine room, more debt!), social mood, mechanical influences (a LOT of shorts have been cleared from the market, removing future demand) and an underage VXO, the Pop & Drop script (above S&P 1150, then back below) remains quite viable. Take that with a grain of salt; it's one penguin’s humble opinion.
- Have a great week Minyans; let's hit ‘em hard.
Position in S&P
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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