Tuesday, May 9, 2017

Volatility it's like 1993 all over again

The VIX (volatility index) has not seen such low levels in nearly a quarter of a century...24 years to be exact.  Looking at the market something strange is afoot; the price rise of the SPX has been concentrated in a few big stocks (Google, Apple, Facebook, Amazon etc) whereas the rest has been languishing in "nowhereland".

What is going on; gold is in the forever band of US$ 1,200/oz, king copper dropped down (granted no one knows why), and oil is back screwing around the mid $40/bbl and so the economic hard data (PMI etc etc) are fading and also doing very little to encourage the market.  In fact, until a few days ago, the SPX and consumer sentiments were the two outliers, until late last week when consumer sentiment started tanking -- joining the ranks of hard data and other stuff.

The question is what's going on; could it be central bank liquidity that has no where to go, and has selected these hyper stocks as a good store of value (better than Treasuries?) what is making the market so relax and all the indicator that the global economy (aka USA USA USA) are not being the engine of growth everyone hopes it will be/become?

Maybe investors are taking the view that after the success of congress to repeal Obamacare (not so fast there nelly!) and the implied tax reduction, that a massive cut in corporate taxes, and repatriation of off shore cash will lead these mega stocks to declare massive dividend to their investors.  On that scale the billions accumulated offshore would come home!

The rest of the SPX (underlying stocks) are not doing too good -- in fact, nearly 20% are below the annual high, and a good percentage are below their 200 day average (trust me an important technical threshold).  It would be intersting to strip the US companies that hold large off-shore cash balance from the SPX, and see what happens to the index then?  My expectation is that the ex-mega SPX would be in the doldrums too!

The low volatility flies in the face of the hard data: the Chinese are very concerned with debt expansion -- and have begun forcing back to bring back off balance sheet item back on board -- with massive liquidity compression.   The Chinese have been concerned for some time that their economic expansion has been done, on the back of ever increasing debt loads, a situation they know is unsustainable -- that should lead to slower Chinese growth (massive impact on primary resources pricing -- including copper, oil steel, etc etc).

The game in Korea is getting more than a little intersting, Japan seems to be sinking back into deflation, again, after its latest attempt at inflating the economy via debt has failed...again -- in the face of aging and decreasing population (by 2040 Japan's population will be equal to that it had in 1965 -- but average age will be over 45 -- in 1964 9% of the population was over 65, by 2040 it will be near 40%).  In Europe, despite Macron's recent success, the problem remain: Ridiculously high youth unemployment, and general unemployment above 15% for most of Europe (there are exception in Germany and the UK).  Politicians and the population want to retain their historical gains, but have no idea how to move the ball forward.

In America, a 8 year expansion is running out of breath, from the retail to the automobile sector the trend seems to be exhaustion -- those borrowing have terrible FICO scores, which means that losses will be experienced. The idea that 5% or even 6% growth is possible if taxes are lowered is ridiculous in the face of America's skewed income -- its not the millionaires of Greenwich that fill the malls! Employment is dong ok-"ish", but the real measure of unemployment U6 is telling a very ugly story, with unemployment and underemployment nearer 10% than 4.4%, and wages stagnant.

No the answer has to be that institutional investors are taking a punt on Trump's tax cuts that will generate, before the end of the year, massive cash repatriation from the Mega companies (Facebook, Apple, Amazon etc) and that's the only play in town.  All other aside pale in comparison and hence the very low market volatility -- either holding or selling their non-megas, hence their lower prices either below their year high or even worse their 200 day moving average.

The low volatility has to be driven by these factors, institutional slowly liquidating their non-mega position, and with the low liquidity, price trends are downward, while the demand for the mega never stops rising.

Note:  No position in Apple, Amazon, Facebook, Google -- also to be added to the mega are GE, Microsoft -- also no position there


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