Tag: news

You just short some more…

Since December 2013, there have been more shares short than shares outstanding in VXX – the VIX ETF.

 

Currently, there are 2.5 times more shares short than shares outstanding… as oustanding collapses to six-month lows as shorts surge to a new record high…

 

and the Inverse VIX ETF – XIV – is at extremes also…

 

Basically this is how the Fed (explicitly or via its agents) can sell VIX in perpetuity. With almost 3x more short interest than shares outstanding (and yes we understand there is all that ETN creation malarkey), this is a blunt hammer approach…and as naked as it gets

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As JPMorgan additionally notes,

What is also evident from Figure 4 is that the recent rise of the ratio of the open interest of VIX put options over the open interest of VIX call options has risen by a lot less in the recent correction vs. that of August 2011. At the time that ratio had tripled to 1.2x vs. 0.5x currently. One anecdotal explanation for this discrepancy is that the vol of vol (VVIX) has spiked by so much in the most recent correction, that it reduced on the margin the incentive by institutional investors to buy VIX puts.

 

However the vol of vol had spiked to a similar level in August 2011 i.e. at 130%. A simpler explanation is that the VIX spiked at a higher level at the time, at 48 vs. 27 in the recent correction, inducing more participants to play a retracement in vol at the time. Also in August 2011, the VIX had stayed at very elevated levels for much longer, effectively until November that year.

 

 

But different to institutional investors trading VIX options, retail investors sold VIX ETFs and flocked into inverse VIX ETFs in recent weeks in similar amounts than those seen in August 2011. This is shown in Figure 5 where the 4-week flow into VIX ETFs minus the flow into Inverse VIX ETFs declined to -$1.8bn matching the low seen previously in August 2011.

 

Admittedly, this VIX ETF net flow slowed this week to -$42m vs. an average of -$580m in the previous three weeks. This reversal is mostly due to retail investors stopping buying inverse VIX ETFs this week following heavy buying in previous three weeks. In fact retail investors took some profit by selling a small amount of inverse VIX ETFs this week.

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It appears that Simon Potter's favorite trade has finally been covered – coincident that it is the week before the last POMO!!

 

VIX futures net spec position has not been long since Nov 2011

 

h/t Andy Y

via Zero Hedge http://ift.tt/1svFPo5 Tyler Durden

When someone asks you who is the biggest sellout is in the history of the CFTC, the person who allegedly “crusaded” against gold and silver manipulation, only to blame his and his agency’s gross incompetence and conflicts of interest on lack of funding, and who tirelessly preached about the dangers of HFT to anyone who cared, only to become an HFT lobbyist and advisor, one right answer isn’t the long-haired terrorist dude but his real-life doppelganger, Bart Chilton.

Then again, Mr. Chilton doesn’t care what you think of him, as he laughs all the way to the bank.

In fact, here he is at the World Federation of Exchanges 54th Annual Meeting (where he is defending HFT) telling his critics precisely what he thinks of them.

Source @WFE, h/t Ronan

via Zero Hedge http://ift.tt/1tZYeAO Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

This week we will find out the answer to whether the Federal Reserve will end its current quantitative easing program or not (click here for more discussion on this issue). Today is the last open market operation of the current program, and my bet is that it will be the last, for now. Here are my three reasons why I believe this to be the case.

 

1) Much Smaller Deficit Restricts Treasury Bond Issuance

Over the last few years, the Federal deficit has shrunk markedly as infighting between Republicans and Democrats has restricted government spending to a large degree while taxes were increased across a broad spectrum of American taxpayers. The good news is that the U.S. government is closer than in many years to running a balanced budget, although it is has been more by accident rather than through a logical approach of budgeting and waste reductions. The bad news is that deficit spending has been a major contributor to economic growth in the past and the reduction of such has been a drag on economic growth recently.

The chart below shows the level of federal spending, revenue and the deficit. I have added the Federal Reserve's balance sheet which has been a major buyer of U.S. debt in recent years.

One of the reasons, as I explained previously, that the Federal Reserve will allow the current QE program to conclude is because the shrinking deficit is reducing the number of bonds being sold by the Treasury.

"But in the economic recovery phase, the federal deficit commenced shrinking sooner than the Fed commenced tapering. There reached a point at which the Fed was acquiring more than 100% of the net new issuance of US government securities. At that point, the Fed's buying activity was withdrawing those securities from holders in the US and around the world. Essentially the Fed was bidding up the price and dropping the yield of those Treasury securities, and it was doing so in the long-duration end of the distribution of those securities.

 

The Fed has taken the duration of its assets from two years prior to the Lehman-AIG crisis all the way out to six years, which is the present estimate. It is hard to visualize the Fed taking that duration out any farther. There are not enough securities left, even if the Fed continues to roll every security reaching maturity into the longest possible available replacement security."

The chart below illustrates this point.

As you can see, the net change to the Federal Reserve's balance sheet swelled during each of the quantitative easing programs. The liquidity supplied flowed into the financial markets driving asset prices higher.  Importantly, notice the extreme level of balance sheet expansion during QE 3 which caused assets to surge in 2013. However, since the beginning of 2014, the balance sheet expansion has markedly slowed and along with it the inflation of asset prices.

Importantly, with the Treasury issuing fewer bonds due to reduced funding needs, the Federal Reserve can not keep the current pace of purchases going without the risk of potentially creating a liquidity problem within the credit markets. I am quite sure that the Federal Reserve is aware of this issue which is why, despite many bumps in the market this year, they have continued their pace of reductions without pause.

For investors this is critically important to understand, as shown above, there is a very important correlation between the Fed's QE programs and the liquidity flows that support asset prices. As that liquidity push is extracted from the financial markets, there will be a corresponding increase in market volatility. "Tapering" is in effect a "tightening" of monetary policy which historically slows the growth rate of asset prices.

 

2) Not Ending Program Could Send Wrong Message On Economy

Boston Federal Reserve President, Mr. Rosengren, recently stated that: the Fed's asset purchases have achieved their stated goal, the jobs report for September is already in and his economic forecasts have not changed.

"There has been substantial improvement in labor markets, and as a result I would be pretty comfortable [ending purchases] at the end of the month.”

"Fed Speak" holds much sway over the markets. After each meeting, as Janet Yellen gives her press conference, market participants are quick to parse her words and place market bets on what they think she is implying. Up to this point, each post-meeting confab has been a reaffirmation that the economy is improving enough to expand without the support of monetary policy. 

It is very likely that if the Federal Reserve decided to keep its current pace of bond purchases in place it would likely be interpreted that the economy is indeed not as strong as the statistical headlines suggest. Such an interpretation could lead to a repricing of risk, and a sharp decline in asset prices, that would potentially destabilize consumer confidence. This is not the outcome that the Federal Reserve is looking for.

 

3) Must Normalize Policy Before Next Recession

Most importantly, the economy is now more than five years into the current expansion. As shown in the chart below, we are now in the fifth longest economic expansion on record. This sounds great until you realize that has been achieved with the lowest level of economic growth of any post-WWII recovery.

While much of the mainstream media, analysts and economists ignore normal economic cycles, it is very likely that we are closer to the next recession than not. This is not a bearish prognostication, but rather just the realization that despite the Fed's best intentions, normal economic and business cycles have not been repealed.

The problem for the Fed is that with the effective interest rate near ZERO, one of their most important monetary tools to offset recessionary drags within the economy has been removed. The chart below shows the history of the Fed's overnight lending rate as it compares to economic growth, the market and recessions.

Historically, each time there has been a crisis, or recession, the Fed has responded by dropping the effective Fed funds rates in order to induce borrowing and lending within the economy. As stated, with the rate near zero, the Fed is trapped without an important policy tool if the economy slips into a recession in the near future.

This is why they have been so vocal about raising short-term interest rates. The Federal Reserve needs to normalize monetary policy before the next recession hits in order to have some "working room" to stem off any potential future crisis. Ironically, there is a case to be made that the Fed's interest rate policy manipulations are a cause of economic crises and recessions.

For these reasons, I highly suspect that the Federal Reserve will announce the end of the current "QE" program during their post-FOMC conference on Wednesday. How the markets respond initially will be focused on what she "says," however, going forward the "lack of liquidity" may become a much more important issue.

via Zero Hedge http://ift.tt/ZUDaO0 Tyler Durden

The Fed needs to “let the market cry itself to sleep,” warns Triple T Consulting’s Sean Keane, and can’t “keep pandering to each selloff because traders fear that the lights are going to be dimmed.”

 

 

As Bloomberg reports, Keane adds that

Each Fed response to “such market episodes” will make the eventual exit harder and more painful; it should be hoped that Fed “sticks to its plans” and ends QE

 

Few now believe Fed’s asset purchases are boosting the economy;

 

Some argue the Fed is “accentuating a distortion in the markets” that’s already having “unwelcome and unintended consequences.”

Likely that FOMC statement will offer some “palliative to the markets by making clear that ‘considerable’ period language remains”

However, be careful what you wish for…

If Fed were to delay QE’s end because of recent volatility, the market would “probably grow alarmed” that the central bank was more worried about global growth than had previously been assumed

 

Fed’s messaging would become subject to another round of market criticism and its eventual exit would become even “more difficult to execute.”

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Two words – boxed in!

via Zero Hedge http://ift.tt/ZUAkIK Tyler Durden

Have we readjusted our trading mentality to
expect volatility?  We show two charts in
this article to showcase two important historical perspectives.  First is the VIX long term chart from the
early nineties and highlighting the how many times the volatility index has
sustained activity above the 25 point range. 
Keeping in mind prolonged period periods of time that effect market
volatility and perception, we note that we initially isolate VIX above 25 into
5 periods of time (1998, post 9/11, crisis of 2008, mid-2010, and the sell-off
in 2011).  For the time being in
2014,  unless we have a prolonged period
of angst or a catalyst that will send traders and investors reeling, the
initial VIX pop to 31 was a the equivalent of a key punch error.  This is not to belittle the loss of capital
that took place recently.  We are merely
constructing an analysis of the historic VIX pricing.

The second chat we show is the historic SPX
going back to the early 1990’s.  We
highlight the significant pull backs, sell-offs, major events such as post
9/11, and the crisis of 2008.  We grouped
the 2010 and 2011 sell-off together. 
When taking the greater view and more macro approach to this analysis,
we do see prolonged periods of “somewhat” controlled and measures gains in the
overall index.  Certainly, one could
intimate that the most recent upward trend is the result of numerous QE’s from
the FED, balance sheet activity from various central banks, and the lack of
Laissez Faire from political entities.  We
have had quite a bit of “measures steps” taken on behalf of central bankers.

 

We show these graphics to perhaps prove a
different point.  The most recent
volatility spike, granted for a comparatively short time, indicated a weak spot
in the perception of the markets. What is sometimes discussed in the media and
in the circles of analysts is this notion of calculable and modeled
events. 

Granted, the macroeconomic view of late has
become a bit maudlin. Central bankers aligning themselves with politicians to
quell market concern does promote a bit of anxiety in the market place.  Put in perspective, traders, analysts,
experienced investors have been through economic downturned many times before
2014.  This is a model that has been
worked on for many years and is consistently updated and revamped to
accommodate new variables and nuances. 
This is certainly not an attempt to make light of the potential downturn
in markets as they react to potential dove tail risks on the horizon.

Do market participants prefer bad news
rather than confusing news? Perhaps this is more of a philosophical and psychological
question.  If news can be quantified and
applied to various models consisting of an exorbitant amount of variables, analysts
will be able to provide directions to traders and managers. When information is
somewhat hazy or could be interpreted in more than a few ways, the result can
be nebulous directional peaks and troughs. 
Perhaps it is more interpretation that fact that moves the markets?

Keeping all this in mind, lets circle back
to the this notion of historic volatility. 
Traders prefer consistency.  Maybe
the perception of consistency?  I am sure
that some of our readers will contend this issue by stating that traders enjoy
volatile moves on the broader market.  The
opportunity exists to take advantage of volatile moves because of access to
information and various asset classes… perhaps? While this may be true for the
larger brokerage firm that monetize jump in trading activity, an increase in
volatility does tend to promote some level of anxiety among portfolio and money
managers and mutual fund managers. 

As market participants and students of the economy
and the markets, one does tend to question whether central banker policies are
in place to support not just market jitters and price jolts, but the notion
that perception of wealth relies heavily on home prices and value of the 401K
account.  We witnessed a rather severe
positive move when the Fed Governor Bullard “commented” that the FED should
extend QE.  The markets continued their positive
trajectory. 

Traders that we speak with on a consistent
basis certainly are growing a bit weary of this perennial support from the fed
and global central bankers.  Questions
are consistently voiced as to how long can these actions carry through and how
big can the preverbal balance sheet grow. 
Maybe the better question is, what is at stake should the central banker
position become more Laissez Faire?  Will
we see the volatility enter the greater market indices?  What is the true value of the bid imposed by
the central bankers? Are traders and managers ready to take on a market without
the bid granted by the global central banks?

The general market has become quite comfortable
and dare we say, “content”, with the level of government intervention in the
overall capital market environment. 
Certainly, we began to see this take shape during the apex of the
Economic crisis of 2008. 

While looking at historical averages and
empirical evidence with respect to market direction and volatility does point
to the general perception that “we” prefer more consistent markets. Having said
this, one does question the duration of such low volatility.  Should we be expecting volatility spikes in
the face of active participation by central bankers?  Or does this stem from our desire for more
“action” from the markets?

Judging by the recent movements in the
broader markets, we are still under the spell of the QE type commitments from
global central bankers.  This no doubt
contributes to the complacency and lower volatility of the markets. 

 

Let’s not expect what is historically not
the norm.  

via Zero Hedge http://ift.tt/ZTJcyN Pivotfarm