Comparing VW to the Finance Industry



What can we say about yesterday's ugly price action?   While it seems to Macro Man that the VW episode is very, very unlikely to be the cause of a secular downturn in equities (while important, they are hardly systemic)  they have certainly provided the extra bit of oomph that the market needed to emphatically confirm the break of the SPX wedge to the downside.


As astute observers have pointed out, yesterday's weakness came amidst a relatively muted move in the VIX; if punters, pensions, and PMs were really scrambling to replace downside hedges that expired last week, one might reasonably expect that implied volatility would have done more than shrug its shoulders and given a half-hearted "whatever."


So on the one hand, we have a market that's technically and seasonally set up for further weakness ahead, and on the other hand one in which putative option buyers are either already long or simply can't be bothered.  For choice, Macro Man will go with the chart and suggest further weakness ahead, though his predilection is generally to fade price action based on idiosyncratic, non-systemic issues like VW.  It's just as well he's in a position to patient.   Another 100 points or so in the SPX and it will finally be a dip that he feels like buying.
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Anonymous
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September 23, 2015 at 8:29 AM ×

MM usually your comments are insightful but I don't think I know a single pension scheme that uses front month puts to hedge risk assets. Maybe in the US but certainly not in EMEA.

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Nick
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September 23, 2015 at 9:33 AM ×

I go with the chart as well. What would be fascination is the oil breaking out on the upside today/tomorrow in a significant way and if it is going to be noted in Yellen speach on Thursday. I think what chnaged is decisiveness of fed, as you pointed it out, so normal correction is in order. As for vol, is ins't the smaller uptick normal, considering theta bleed over the past month? I wonder what Nico thinks.

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LongOnlyEquityGuy
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September 23, 2015 at 11:53 AM ×

Citing from Markit's Eurozone PMI Comment today:
"Further robust expansion is signalled for the start of the fourth quarter, with growth of new orders hitting a five-month high in September. Inflows of new business hit a five-month high in services and held close to August’s 16-month high in manufacturing."

http://www.markiteconomics.com/Survey//PressRelease.mvc/a1d5eaff1ae0476e814b383d770e7067

What it the economic cycle in the developed world is not about to collapse?!

I am not denying serious EM issues, but I cannot find one recession in history that was triggered by EM problems.

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Leftback
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September 23, 2015 at 11:58 AM ×

Anyone got a nice Jetta they want to sell? :-) After the fines and the recalls and retrofits, nobody will remember this in two years.

LB thinks we are getting closer to the end of this correction event, but as the late great Yogi Berra would often say at the time of the Fall Classic, "It gets late early this time of year". RIP, Yogi, and thanks for the aphorisms.

LB is "domiciled" in the US, but has roots in the UK, and is globally oriented [insert jokes here].

Too early for Victory Laps, but the view espoused by some here that Yellen would end up having to "Do a Carney" (huff and puff about rates, then back-track into "watchful waiting", as though inflation was prostate cancer) is really beginning to get some traction. That's obviously a lower USD outlook, should be good for a bag full of despised risk assets, including commodities, EM FX, gold miners, European equities, domestic REITs and all things Brazilian. We're always early....

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Leftback
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September 23, 2015 at 12:01 PM ×

Anon @8:29, perhaps, but pension funds do dabble in a variety of interest rate hedging strategies, often quite inexpertly...

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winginit
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September 23, 2015 at 12:20 PM ×

I can only agree MM, feels like further weakness lie ahead. I am aware I sometimes over react but I think this VW ordeal might be serious. I think European carmakers should be worried, not only in terms of selling their diesel cars in the US. I think Ford and GM won’t let this opportunity pass and grand lobbying against European cars lies ahead.

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Macro Man
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September 23, 2015 at 12:24 PM ×

@ first Anon, yeah I know, I inserted 'pensions' in there for alliterative effect. Mea culpa.

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Benn
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September 23, 2015 at 1:32 PM ×

In august15 lots of pensions and asset managers were buying 1-week or 1-month S&P puts... the bosses were on vacation and the junior guys just wanted to survive until they got back... that was a big contributor to the low-liquidity gamma squeeze that took 1-month variance briefly to 50.

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Anonymous
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September 23, 2015 at 1:55 PM ×


FT: methinks we should see equity lows around the end of this month; there is still a residual amount to be sold by risk parity, a few longs will fear carnage come october and earning season and everyone (except present company, of course) will be surprised by the october rebound...
However, I agree with MM; we could see anything between 50 and 150 points lower on spooz before that.

Though, on a note of caution, maybe too many JBTFD waiting for the last D which won't materialize ?
I guess we need some expert to give us an idea of the mindset of that crowd....

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washedup
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September 23, 2015 at 2:09 PM ×

The reason VIX won't rally as much as it did in the 2nd half of august is because market selloffs are just not that great a surprise anymore - markets get used to new paradigms fairly quickly - VIX is now telling is that we allegedly have a new 1900-2000 range to replace the old one, and it has no reason to cross 30 unless it breaks down below the old lows - look at the behavior of VIX post the initial high in august 2011 - very similar.

And yes, some of it happens because of positioning - when every research form is out declaring that 'vol will stay elevated for months' u can rest assured that is an automatic dampener - just remember VIX has been down at 12 or 13 at price levels much much lower than here - it will take some continued nasty shocks to keep it this high for longer.

The EZ data has been very decent - their problem is that the strong dollar gift may stop giving very soon, and there isn't much there other than currency induced levitation.

Left - glad to see u off the hammock and juggling knives again - right there with u (actually ahead of u) on REITS - Ilike mortgage REITS much more, in line with my view we are setting up for bull steepening if the US data merely stays ho-hum.

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Anonymous
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September 23, 2015 at 5:04 PM ×

Yesterday was the second day they dumped VOL into the close...even with overnights still chaotic.

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Anonymous
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September 23, 2015 at 8:21 PM ×

If my memory serves me well it is usually that quiet in this space just before the move higher, what is it going to be this time around?

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Leftback
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September 23, 2015 at 8:41 PM ×

Too many former bulls on the TeeVee are now very bearish, like that Josh Brown tool. Not many new customers for vol buying due to people loading up on Sep and Oct puts in August. Vol sellers waiting in the wings to give Mr Shorty the business.

We put some more toes in Europe today. Not that negative on Spoozi, she's just not my favorite lady right now.

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Anonymous
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September 23, 2015 at 8:57 PM ×

That proved to be the case every single time over the past 6 years, aren't we due a healthy correction? Where is Nico by the way?

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Anonymous
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September 23, 2015 at 9:26 PM ×

On a weekly and monthly charts spx does not look good at all

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hipper
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September 23, 2015 at 9:28 PM ×

I think the consensus makes a lot of sense here. DAX carnage might not be over just yet which will be augmented by dame Janet holding off from October with continuum of goldilocks data, transmitting through weakness in DXY and SPX which needs to cover some fresh air below. Meanwhile adding REITs and EZ equities on further weakness. I can sense the rerun of "whatever it takes" getting closer which would result a face ripper once SPX is done with the re-pricing/settling to new channel event. Even if it doesn't come there's got to be value here anyway barring any Q3 earnings catastrophes.

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Anonymous
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September 23, 2015 at 9:48 PM ×

Correct me if I am wrong but seems to me the debate around here re us eq is whether to buy it around here or wait for another dip of another few percentages. I do see that currently vol is being sold, the curve is much friendlier than it was a couple weeks ago and the bear-bull flashing a contra signal. However without going into too much details on macro front, we (our model) have seen a cyclical peak two months ago in economic activity, the unemployment mirage will most likely not get solved as it is chronic or more politely structural...and allow me not to get into the buyback bonanza etc. I don't see it far fetched that we will see a slow bleed lower with lower vol to say 1700s in spoos, after all its just a 20 or so percent correction. I am holding onto my shorts in spx and ftse for now.

nonrandomwalker

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Anonymous
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September 23, 2015 at 11:07 PM ×

Dax and rest of europe bounced into Draghi hoping for something new. There's nothing immediate coming from them, he was clear on that. Topped out on that. End of Q ramp maybe...

Any expectations for Yellen tomorrow? I think she goes hawkish to test response.

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washedup
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September 24, 2015 at 12:00 AM ×

I think Yellen will be told to play up the idea that the US economy is A OK and that the not hiking thing was a delay and an exercise in 'risk management' (whatever that means) - so yes hawkish with the expectation that the market loves it if u want to put it that way, but I am beginning to feel this horse (aka the market) may, perhaps, just be beginning to hate the jockeys (aka CBs) no matter what they do, and therefore their best course of action would probably be to do no harm by shutting the f up and going away for a bit. As anyone with a toddler at home would tell you, a tantrum is rarely resolved through an engaging conversation.

Nonrandomwalker interesting that you thought activity may have peaked couple of months ago - I certainly don't think anything other that employment data has been great, and we all know that can be a lagging indicator for cycle turns.

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signalman
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September 24, 2015 at 2:55 AM ×

Can someone connect the dots for a newbie like me? Why would a decrease in the VIX imply a decrease in the SPX?

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