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The Black and Blue Sammy Skew


I can't hear you!


Out of the blue and into the black
They give you this, but you pay for that
And once you're gone, you can never come back
When you're out of the blue and into the black

(Neil Young)

Good morning and welcome back to the summer snack. It's been a slow week in the city of critters and Hoofy and Boo are feelin' some jitters. While Sammy enjoys his time in the sun, directional types are having no fun. "I've honestly smiled more at the dentist," said Boo to his fellow ursine apprentice, "I'm starting to think that something momentous will spring from this thing of latent portentous!" Will today be the day that wakes up the tape or are we gonna have to map an escape? We'll know soon enough as we ready to thrill and ready anew for a romp through the 'Ville.

Last night, after enjoying a special Summer Stage (Mountain Girl stole the show), we gathered for Succofest and talked tape while celebrating his birthday. John and I, having known each other for 15 years, have come to rely on these weekly melds to gain perspective and share insights. As most of you know, Succ has been trading volatility since 1984 and I've never met a better risk manager. When he speaks of compression and a disconnect in derivative pricing, I tend to edge to the end of my seat and listen up.

As a function of the vacillating S&P range (since November) and the more recent sideways slither, volatilities have dropped to decade low levels. There's a certain irony to the fact that a lack of movement would cause concern but that's exactly what's happening. With less motion in the minxy ocean, traders around the world are increasing the size of their bets with hopes of capturing returns. That "compression" isn't a catalyst, we know, but the risk of an unwind increases with each passing press. Just ask your average convertible fund manager how his quarter has been to get a sense of the "performance volatility" percolating in the system.

The question, of course, is two-fold. When will the spring get sprung and, perhaps more importantly, in which direction? Brian Reynolds of MS Howells & Co. has done a tremendous job of educating us on the structural influences and they seem to be giving Hoofy a wink. That, coupled with Pepe Depew's "under the hood" look, are constructive inputs to balance the imbalances that concern Boo. What we must remember, and this is important, is that the risk has increased-not decreased-as a function of the underlying environment.

For my part, I've been actively monitoring our tea leaves for clues nestled in the muck. The banks remain a huge tell (as the tickle BKX 100) as a break above this level would be a notable feather in the bovine cap. Market breadth has stagnated of late and a skew in either direction would offer a similarly snazzy guide. Other tells in my universe are the CRB (310 is the over/under) as a liquidity proxy, the small caps (Russell 655 is an all-time high) and the cyclicals as they probe the 200-day (735). And, of course, how (and if) these inputs are actionable are subjective to your particular time horizon and stylistic approach of risk-management.

We power up this frisky pup to find Europe mixed, the dollar jiggy anew (DXY 89.40 is the recent high), metals sleeping and crude a kitten's whisker away from $60 beans per barrel. As tomorrow is another sleepy summer Friday, we must respect the potential that liquidity may dry up as traders head for their $50,000,000 beach front cabanas. We'll figure it out over on the Buzz, my friends, and so lemme hop the fence and join the critters for the daily dance.

Enjoy your journey today.


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