Fear. Not.

Wednesday, September 06, 2006 | 05:49 AM

That's the clever headline from Monday's Ahead of the Tape column in the WSJ. Justin Lahart points out the increased complacency, as measured by options pricing, since the beginning of the Summer:

Vix "Remember way back in June, when investors worried that markets around the world were suddenly becoming much riskier? Well, they don't seem all that worried anymore.

One popular measure of risk, the CBOE Market Volatility Index, in June hit its highest level in more than three years. But it's back down again. Better known as the VIX, the index is based on the prices investors pay for "call" and "put" options, which allow them to buy and sell the S&P 500 at set prices. Investors often use such options as protection from market volatility; moves up in the VIX show investors are willing to pay more to avoid risk.

Other indicators are moving in the same direction. Emerging-market stocks and bonds -- risky securities that fell into a deep funk in mid-June -- have bounced back. And in the corporate-bond arena, investors seem downright ebullient. "Now, almost any company can borrow any amount at close to historically low levels for almost any purpose," says Brian Reynolds, chief market strategist at brokerage firm M.S. Howells.

The culprit for this lack of worry? In addition to the rally, which has seen the SPX tack on almost 10% since the June lows is the Fed. Early summer had investors worried about more central-bank interest-rate increases. But with the Federal Reserve "pausing" in August, investors believe (falsely in my opinion) that the biggest risks have been removed. The thought process is that rates are "historically low, and companies have lots of cash on their balance sheet."

There is a widespread expectation of a soft landing; I've even heard some CNBC pundit discussions of a return to a Goldilocks economy. We doubt both outcomes. The less complacent do not have to look too hard to find potential flys in the ointment:

"But some pieces don't fit this picture anymore. Metals prices -- which are driven in part by the same global flows of cash that drive interest rates -- plummeted in June and remain depressed. And the housing market seems to keep sinking, even though long-term interest rates have come back down.

In the past, low long-term interest rates have led to a pickup in mortgage applications for home purchases. But the Mortgage Bankers Association index of mortgage applications for such purchases fell in late August to its lowest level since 2003. Maybe the world is still riskier than investors want to believe."

"What, me worry?" will eventually turn into "WHAT? Me worried!" My question isn't if but when. And judging from the skepticism I've been hearing, I'm betting its sooner rather than later. . .


Fear. Not.
WSJ, September 5, 2006; Page C1

Wednesday, September 06, 2006 | 05:49 AM | Permalink | Comments (9) | TrackBack (0)
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You make fair points. I would offer the following for discussion however:

Last month a huge (COT long) bet on the 30 year correctly called the recent low yields there. They have now reversed to an aggressive short there. This, combined with a new aggressive LONG position on the short (2 year) treasury, suggests the Commercials expect a reverse in the inverted curve. A positive yield slope, with oil prices falling back could be a frightening elixer to the (record) shorts. The missing ingredient to a break higher (imo) is leadership in the banks. Nothing like a positive slope, and the prospect of rate cuts to attract flows there -- perhaps from the enegry space. Follow through in Tech would also tip the scales to a new Bull run. This is certainly a variant view in my opinion.

Posted by: JGarcia | Sep 6, 2006 6:26:07 AM

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