October 18, 2017

Doug Kass on Options

"While options can give market participants the protection they are intended to they also can increase the degree of a counter move once it gets going as those who wrote the protection scramble to unwind their own exposure." 

- via twitter

October 16, 2017

VIX futures unwinding could exaggerate a market decline

Doug Kass is worried about the rising risks of the market and he thinks you should be worried too. Below is an excerpt from his article on Zerohedge,

These observations and, specifically, the quote I started with this morning are much like what I have been saying in my Diary -- namely, that never in history have there been so many potentially adverse political, geopolitical, economic and market outcomes.
I am not alone in this view, as Macquarie's Viktor Shvetz recently wrote: "Investors are probably suffering extreme mental exhaustion. Historically low volatilities and risks, coinciding with high valuations, would make anyone nervous."
So, with volatility at record lows, the S&P 500 climbing to new heights and the Nasdaq higher in 10 of the 11 trading sessions, why do I think the risks associated with a "flash crash" are multiplying?
It is market positioning -- something I and others rarely consider in our market analysis.
Today, speculators have breathtakingly large short positions in volatility futures, so that a relatively small spike lower in the averages, for any reason, of 3% or so could drive volatility much higher and demand (covering) of VIX futures. (The largest S&P selloff when the VIX was under 12 was 3.5% in February 2007).
It is tautological that as volatility moves lower and stock prices move higher, risks rise.
The pain of an unwind in VIX futures could be exacerbated in the days following a woosh lower by the dominance of passive investors (quant strategies and ETFs). The deleveraging of highly leveraged risk-parity funds, in particular, represents a risk that may not be easily repaired or reversed after the initial market drop. 
Bottom LineThough large daily drops in the markets are rare, the factors that could contribute to a quick drop have increased.
Investors have been concerned about the VIX for years, but the positioning has now moved to an extreme. Such positioning could accelerate a market drop as the chances of a flash crash have escalated.
But, Dr. Minsky has warned about the risks of becoming numb to the risks associated with a period of stability amid rising asset prices; it is not only inevitably followed by instability, it inevitably creates it.
In a world in which the chances of an external market shock are rising and at a time when volatility is cratering and stock prices never decline, the risks of a flash crash caused by the one-sided market positioning in VIX futures is increasing and are at a higher probability of occurring than at any time in history.

October 2, 2017

Passive investments and low interest rates

The markets may have gotten ahead of itself and this could mean lower or even negative returns over the next five years.
"Investment returns likely have been pulled forward by central bank liquidity, low interest rates and passive investing. However, over the next five years returns may be substandard at best, but more likely, negative. At worse, we face an incipient bear market."

via realclearmarkets

September 28, 2017

These are crazy times

What Doug Kass thinks of the Fed 
The proposed Fed policy to shrink its balance sheet is a joke. As one man said. "It is like trying to diet by eating two desserts instead of three." 

On Volatility and being a contrarian
I get the feeling that things could come apart in so many places, yet volatility is at a three-decade low. These are crazy times -- and, to many, like myself, very frustrating.