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Slow Death

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I can offer no further opinion on this market; Minyans can read my past comments. Nothing has changed.

Volatility and option prices are extremely low, reflecting high complacency. Currently I am dying the slow death by being long volatility, losing on time decay each day and on vega as the market grinds higher and sells down relative option prices.

I am alone now in my views as our macro analyst has given up on the bearish case. He now believes that the amount of liquidity being injected into the market will not allow stocks to go down. He believes it is likely to continue to force money into financial assets.

I continue to believe, however, that eventually the resulting debt of this liquidity expansion will crowd out markets and cause significant problems in the future. This does not have much relevance in the short term, however, but we never know what will set things off or when it will occur. History shows that heavy government intervention of this sort only supports the inefficient economic processes that need to be destroyed in favor of efficient ones.

The problems are only delayed and often made more severe. Scott's piece yesterday points out that Hoover tried this in 1930. It worked for a while, but eventually the markets had to tear down the bad to build the good. Even if the government is somehow able to grow the economy out of the huge debt it has accumulated and rectify this country's capital imbalances, I believe this process should occur with some significant fits and starts.

So I continue to believe that long volatility is the right trade for our hedge fund, especially at these prices. So I continue to suffer the slow death. But the slow death can turn into a quick resurrection.

I can only reiterate that I believe people should be very circumspect here, cautious. Be concerned with conserving capital, not making a killing on the upside or downside. This is a liquidity driven market, period. History tells us to be careful.

I haven't written much because I don't know what else to say.

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No positions in stocks mentioned.

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