vix vacation
TRANSCRIPT
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Vix Vacation31 August 2016
War Room
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HiddenLevers War Room
Open Q + A
Macro Coaching
Archived webinars
CE Credit
Idea Generation
Presentation deck
AccountabilityScenario Updates
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Market Update
Wall / Main Street Disconnect
Vix Vacation
Scenario: Headline Risks
Vix Vacation
UPDATED
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HiddenLevers
MARKET UPDATE
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Market Update
sources: HiddenLevers, MarketWatch, NYTimes, LATimes, FT
Fed = Institutional Paralysis
Obamacare Chronically ill ?
- Now acknowledges USD rising on global flight to safety- Admits it doesn’t have tools for low inflation world- Multiple policy makers suggesting break with mandate- Knows 3D challenge but raising rates anyway
New S+P sectorReal Estate
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HiddenLevers
WALL / MAIN ST DISCONNECT
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Record VIX futures via ETFs, all time highs
Vulnerable to headlines + geopolitical blips
Record MF/ETF outflows Surrendering hedges, diving into equities
Valuation multiples down + earnings up
Disconnect: Most Pronounced in History
sources: HiddenLevers, Bloomberg,
$3.7 trillion restored to US equities since Feb lows +20%
US = one of few global bright spots
Record VIX shorts
Main Street Wall Street
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Disconnect: Aug 2015 VIX Spike – didn’t stick
sources: HiddenLevers
Fed rhetoric = hawkish. Fed behavior = dovish. This has muted any VIX spike.
Shanghai Crash
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Disconnect: Headlines Don’t Matter None.
sources: HiddenLevers, Economist, CNN, Marketwatch, UMD Global Terrorism Database (Boston Marathon, Charlie Hebdo, Westgate Shopping Mall, Ankara Train, Nice)
Major Terrorist Attacks
ZikaHurricane Sandy
Ebola Scare
Shanghai Crash
One-time events do not move the market. Events that affect growth of global economy move the market.
2nd Oil Crash/Growth Fears
Econ Growth Fears
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HiddenLevers
VIX VACATION
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VIX Vacation: VIX 101
sources: HiddenLevers, CBOE
What is VIX?Market volatility over next 30 days measured by options.
How is it calculated?VIX observes 100s of SPX puts and calls to measure "implied" volatility on options expiring in one month.
VIX + Portfolio VolatilityVIX is NOT the same as historical volatility, which is based on how the S&P actually performed.
VIX + Equities?VIX and equities move in opposite directions over 80% of the time.
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VIX: Historical Perspective
sources: HiddenLevers
FEB ‘91-OCT ’97
VIX below 25
S&P +58%
APR ‘03 – AUG ‘07
VIX below 25
S&P +65%
DEC ‘11 AUG ‘15
VIX below
30
S&P +76%
Volatile VIXS&P -7%
Volatile VIXS&P -16%
Volatility clumps together. Bull Markets coincide with extended low VIX periods.
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Volatility: Comparison to MDD + Stress Testing
source: HiddenLevers. *Using Fed Stress Test 2016 scenario
S&P500 5y Volatility 12.5%MDD -13%
S&P 500 – 5 Year
Stress Test Risk* -43%
S&P 500 – 10 Year
S&P500 10yVolatility 18.5%10y MDD -54.6%Stress Test Risk* -43%
Volatility changes with timeframe.Stress tests provide stable + realistic view of tail risk.
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Volatility: Misleading for New Funds
sources: HiddenLevers. *Using Rising Interest Rates and Fed Stress Test 2016 scenarios
BOND Volatility 3%MDD -5.6%Stress Test Risk* -11.7%
MOAT Volatility 12%MDD -14%
Stress Test Risk* -38%
New funds lack sufficient data to rely on traditional risk stats. With no real downturn since 2011, stress testing can fill this gap.
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HiddenLevers
SCENARIO: HEADLINE RISKSUPDATED
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When do Headlines Matter?
sources: HiddenLevers
ImpactsEconomy
SurpriseBrexit
9/11
ImpactsPeople
OKC Bombing
HurricanesKatrina + Sandy
FOMCDecisions
Terror in France
Ebola
SARS Epidemic
CaitlynJenner
Impact on Economy+
Surprise Factor =
Market Impact
FX Rates
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YAWN: Global Pandemic
source: HiddenLevers,
Little to no Impact on US markets from Zika
Market impact disappears with
virus
Impact likely regional to pandemic
Impacts travel industry
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SHRUG: Terrorist Attack in USMarkets recovered from 9/11 crash by October
source: HiddenLevers, Barchart
ISIS attacks zero impact
11Sept MDD-11%
priced ingovt insurance for terrorism
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BAD: Conflict in Korea
source: HiddenLevers,
North Korea = saber-rattling
S.Korea now #11 economy
Initial dropsKorean War -11%Gulf War -14%
Wars help US economy
1950-53 US-Korean War
S&P = +40%
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Scenario: Headline Risks
Yawn:Pandemic
Shrug:US Terror
Attack
Bad:Conflict in
KoreaVIX
35S&P
-10%
VIX
30S&P
-9%
VIX
15
While the travel industry would feel the impact of a pandemic, it’s unlikely to cause meaningful market impact. SARS killed 750 in2003 but had no lasting market impact in Asia.
9/11 caused an S&P decline of 11% over one week, but markets recovered within one month of the attack.
The Korean war led to an 11% S&P drop in June 1950, followed by a quick recovery. Korea is a major economy today, so some impact could be felt without major US involvement.
S&P
FLAT
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Vix Vacation – Take Aways
Main Street fears don’t impact markets
Low VIX lacks predictive value in bull markets
Headline Risks matter when unexpected + impact economy
Use stress testing + not volatility, to judge portfolio risk
10yS&P