A View from the Trenches, November 2nd, 2009: " Hope for the best, fear the worst"
Please, click here to read this article in pdf format: www.sibileau.com
The week is starting on bad news. To begin with,
last Friday’s close was horrible in equities. Not so much in credit,
where spreads did not widen more than they had on Wednesday. However,
the overall picture is fragile, from a technical perspective. I am
attaching this morning a graph of the VIX Index (source: Bloomberg),
which measures the implied volatility of the S&P500 Index options.
You can see that the recent spike is indeed relevant. Is this
necessarily bearish of risk assets? No, not necessarily, but given the
situation the world is in, volatility is expensive and usually demands
a discount…
The other not so good news is the bankruptcy of CIT. This should not
surprise anyone, to be fair, but the truth is that unfortunately it is
taking place in not so good a week. It should not matter, because in my
view this correction is still manageable.
In short, all I want to leave with you this morning is the
following: As long as central banks and governments of the G-8 “play it
cool”, quiet and do not screw up with unnecessary hostile rhetoric, the
market should take profits, the late longs should get their lesson and
things should get back to normal. Normal these days includes lots of
leverage, because if there is anything interesting about this leverage
crisis is that the world is trying to get out of it via more leverage.
Therefore, any minimal suggestion that signals a hike in interest
rates, or the need for higher capitalization of financial institutions,
or tougher regulations that destroys flexibility in the financial
markets is going to derail the healing process started last March. It
will not be weaker fundamentals, animal spirits or educated fear. It
will be politicians not doing the smart thing that will lead us from an
overdue correction to a new crisis.
Personally, I don’t give a lot of probability to a catastrophic
scenario, because it is hard for me to believe that so much political
reputation will have been put on the line to arrive to November and
make a false move that brings down the house of cards. But I always
hope for the best fearing the worst…
The comments expressed in this
website and daily letters are my own personal opinions only and do not
necessarily reflect the positions or opinions of my employer or its
affiliates. All comments are based upon my current knowledge and my own
personal experiences. You should conduct independent research to verify
the validity of any statements made in this website before basing any
decisions upon those statements. In addition, any views or opinions
expressed by visitors to this website are theirs and do not necessarily
reflect mine. My comments provide general information only. Neither the
information nor any opinion expressed constitutes a solicitation, an
offer or an invitation to make an offer, to buy or sell any securities
or other financial instrument or any derivative related to such
securities or instruments (e.g., options, futures, warrants, and
contracts for differences). My comments are not intended to provide
personal investment advice and they do not take into account the
specific investment objectives, financial situation and the particular
needs of any specific person.