Another Volatile Week

August 12, 2011

"The United States must cure its addiction to debts."--Chinese national paper

One thing is for sure, the brokerages and exchanges should be having a great quarter as volatility and volume have both spiked in the past few weeks. S&P 500 volatility (VIX) spiked from a rather mundane sub-20 level at the end of July to as high as 48 last week. While still well below the record highs set in 2008 after the Lehman Brothers bankruptcy, as you can see below the VIX hit one of its highest levels in the past decade this week.

How volatile has the S&P been? The chart below shows a nearly 20% decline from the late April highs and about 18% from late July through Wednesday.

Ironically, just as the environment seems to be deteriorating into an abyss, we get a couple of pieces of better than expected economic data, and one really weak one. Yesterday weekly unemployment claims came in at 395K, below the 405K consensus. While still extremely weak, the better than expected claims continued a trend of SLIGHTLY better claims. As one analyst said, it’s like getting a D on a test when you were expecting an F. This morning advanced retail sales came in at 0.5%, in line with estimates, however, ex-autos sales were up 0.5% vs. expectations of 0.3%. Additionally, the June results were revised up from 0.1% to 0.3%. The University of Michigan Consumer Confidence index came in well below consensus this morning, and took the wind out of the market by falling to 54.9 from 63.7 last month and consensus of 62.0.

Europe, showing that they aren’t afraid to repeat the mistakes of the past, have temporarily banned the short-selling of financial stocks as authorities attempt to restore market confidence. Belgium, Spain, Italy and France have imposed short-selling bans on financial stocks. The US attempted this during the peak of the financial crisis with little overall impact.

The US Postal Service has announced that it wants to lay off 120K above the 100K expected to retire over the next four years. Officials are working on a proposal to Congress that will break union contracts, slash payroll, and end health and retirement plan contributions. “We will be insolvent next month due to significant declines in mail volume and retiree health benefit pre-funding costs imposed by Congress.” I hope no one goes postal over this decision. Personally, I think we could privatize mail delivery, take the billions we lose on the postal service each year and use it to enable the 15% of Americans without access to electronic bill pay to hook up to the service.

APAC markets closed the week mixed, with no major movers last night outside of the Kospi, which declined by 1.3%.

Bonds have rallied during this volatile month. The yield of the AA+ rated 10-year US treasury bond is now 2.26%, but almost broke 2% last week. Mortgage refi activity has jumped in response to the corresponding decline in mortgage rates. Ironically, the yield on the 10-year bond in France has jumped to 12% in spite of its AAA rating. Oil prices have also plummeted, and estimates are that the ensuing drop in gasoline prices could be the equivalent of a $150 billion tax cut. So let me get this straight-the Fed adds liquidity, energy prices rise, and consumer spending slows? Then, they end their liquidity program, energy prices drop, and consumer spending (see retail sales above) rises? Time will tell, but this could be more evidence countering the Keynesians dominating our leadership in DC today.

Americans, typically a positive bunch, are showing some unusual pessimism as 68% feel the worst is yet to come. According to a McClatchy-Marist poll, this is the highest level of pessimism since last September.

To steal a phrase from the Depression, things are tough all over. In the State of Illinois, the budget crisis is so bad that officials are saying they no longer have the funds to bury the indigent (after they die, of course). They have begun putting the bodies in potter’s fields as a way to save money.

Yields are so low that 100-year bonds are coming back. The University of Southern California (USC) just sold a $300 million, 100-year issue while Mexico is looking to double the size of their offering for the same term. I’d love to buy a new issue and hold it to maturity.

Have a great weekend

Ned