Go Ahead—Gamble on a Calm Market. What Could Go Wrong?

Jun 7, 2018

Jeff Bergstrom

Jeff Bergstrom


Lead Stories

Go Ahead—Gamble on a Calm Market. What Could Go Wrong?
Randall W. Forsyth – Barron’s
Party like it’s 2017? Speculators are once again betting the stock market’s return to low volatility will persist despite the array of uncertainties it faces.
Unlike last year, however, when amateurs piled into complex and risky exchange-traded funds that moved inversely to the VIX—the Cboe Volatility Index on options on the S&P 500—it’s professionals who have ramped up their short positions in VIX futures and options contracts his time.

****JB: A fool and his money are soon parted.

Betting Against Volatility Can Be Risky
Gunjan Banerji – Barron’s
Investors are once again betting against market volatility, returning to a lucrative trade that blew up spectacularly in February.
Some brokerages are recommending that clients use options to bet on slowing or surging markets through exchange-traded products, using options to wager on swings in the Cboe Volatility Index, or VIX.

Shorts against Tesla’s stock lose more than $1 billion
Michael Sheetz – CNBC
Investors betting against Tesla lost more than $1 billion Wednesday as the company’s shares rallied the most in over two years, according to estimates from financial technology firm S3 Partners.

Betting on Crisis, Hedge Funds Short Italian Bonds
Landon Thomas Jr. – NY Times
Bernd Ondruch, a hedge fund executive, attended a conference in Rome last year put on by Italy’s populist Five Star Movement.
Five Star politicians, including the group’s founder and current leader, pondered such radical cures to Italy’s economic woes as restructuring its enormous debt and establishing a currency in addition to the euro.

‘Short Vol’ Trade Returns Among Hedge Funds
Gunjan Banerji – WSJ
The resurgence of volatility that dominated the U.S. stock market in early 2018 has already vanished. And some investors are betting tranquility will continue in equities.
Investors including hedge funds have increased wagers that futures contracts tracking the Cboe Volatility Index will fall. The gauge, dubbed the VIX, measures expectations for equity price swings over the next month.

Not Enough Time On Clock To Sell Volatility, Morgan Stanley Says
Cormac Mullen – Bloomberg
Time is the enemy of the volatility seller, according to Morgan Stanley.
The level of implied volatility is too low and the time it takes to generate sufficient income from volatility-selling strategies too long for investors to profit from taking a negative position on price swings, strategists at the bank including Phanikiran Naraparaju, wrote in a note to clients this week.

Veteran Investor Says Second-Longest Bull Market Has Room to Run
Ben Bartenstein and Tatiana Darie – Bloomberg
Malcolm Polley has witnessed his share of market crashes during three decades of asset management. He doesn’t expect another one soon.
The 55-year-old investor expects the second-longest bull market in history to continue for at least another year, propelled by strong earnings growth and a fiscal stimulus package that should help offset rising interest rates. He predicts that the S&P 500 Index, which has gained 3.2 percent so far in 2018, will climb by at least 10 percent this year.

As Fear Seems To Recede, Some Indices Post New Highs And Volatility Ebbs
JJ Kinahan – Forbes
The question going into Thursday might be what Wall Street can do for an encore in what so far has been a heady week for stocks. Global stocks followed Wall Street’s lead and moved mostly higher overnight as attention starts turning toward the G7 economic conference that begins in Canada tomorrow.

Is Bitcoin The New Volatility Gauge?
Jeff Malec – Seeking Alpha
“Bitcoin is becoming the new VIX,” said Brian Stutland, President of Equity Armor Investments on CNBC’s Options Action segment as the markets were taking a tumble last week. His evidence? The very short 6-month window showing the correlation between the VIX Index and Bitcoin, as well as the assumption that investors that are pulling their money out of the market and putting it into Bitcoin:

Exchanges and Clearing

Two Asian stock exchanges tussle over market data
The Economist
BUYING and selling shares in India is not for the faint of heart. Its own central-bank governor reckons equity capital is taxed up to five times. Never fear. There is a well-established alternative. Investors can just as easily buy financial instruments that track share prices but are not themselves shares. Such “derivatives” are used across the world to mirror markets in everything from platinum to pork bellies. But they also raise awkward questions: can the exchange that generates prices by matching buyers and sellers stop a rival using the data to create its own derivatives?

Deutsche Bank to Trim Coverage in Asia Equities Business
Cathy Chan – Bloomberg
Deutsche Bank AG is cutting onshore sales and derivatives coverage in individual markets across Asia-Pacific as part of a restructuring of its equities business in the region, according to a person familiar with the matter.
The move will involve unspecified staff reductions, the person said, requesting anonymity because the changes haven’t been announced. The German bank plans to focus on its larger clients and its electronic equities business in the region, according to an internal memo seen by Bloomberg News.

Deutsche’s dwindling market cap belies still-huge global footprint: McGeever
Jamie McGeever – Reuters
Perhaps the most remarkable aspect of Deutsche Bank’s dramatic fall from grace over recent years is that it’s still Europe’s largest player in world financial markets.
The question is whether Germany’s biggest bank, with its share price cratering and a derivatives book nudging $50 trillion, can continue to shrink that footprint gradually, smoothly and with minimal market disruption.

CME Group Announces Corn Futures Open Interest Record, Surpassing 2 Million Contracts
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced Corn futures open interest reached a record 2,006,600 contracts on June 6, surpassing the 2 million contracts milestone for the first time. The previous record was 1,995,835 contracts set on June 4, 2018.

Regulation & Enforcement

Goldman Sachs Reignites Public Outcry for Abolition of Short Selling
Jung Suk-yee – BusinessKorea
A public outcry for the abolition of short selling has been rekindled by the failure of the Seoul branch of Goldman Sachs to settle short selling transactions.
Financial authorities seem embarrassed as they have been lukewarm about abolishing short selling. Officials have claimed that there has been no naked short selling.

US And Germany Spar Over Clearing
US and German regulators argued over how third-country central counterparties houses should be supervised as the clearing of euro derivatives may have to change after the UK leaves the European Union.
The European Union has proposed that systematically important clearing houses that clear euro derivatives have to be located in the trading bloc after the departure of the UK. The Brexit unit of The Institute of Economic Affairs has estimated that three quarters of euro clearing takes place in LCH, the London Stock Exchange Group’s CCP.


Volatility as an asset class: Interview with Marshall Gause, Geneva Fund Partners
Eurex Exchange
For the volatility asset class products, the year 2018 has been interesting.
Earlier in the year in February, the CBOE Volatility Index (VIX) surged 115.6%, its largest one-day rise on record as panic selling hit the U.S. stock market. Tuesday, February 6, 2018, the European markets sank and the region’s equivalent to the VIX – the VSTOXX – followed suit with its biggest one-day surge since the Sept. 11 attacks in 2001.

Bullish VIX Trades from Yesterday
Russell Rhoads – Cboe
Yesterday VIX finished the day at 12.40 which is the lowest close since late January. The June VIX futures dropped 0.40 to 13.65 and the July contract closed at 14.50, down 0.25 on the day. With VIX at the lowest levels since before the market action in early February, we actually saw some bullish VIX spread trades come into the pit at the Cboe Options Market.

Odds of a Pullback Are Growing
There wasn’t much change in the market Wednesday. Once again breadth was good. And as you know good breadth keeps the McClellan Summation Index rising.
Right now it will take a net differential of -1900 advancers minus decliners to reverse the Summation Index from up to down. Typically once it gets to -2000 or more we consider the market short-term overbought. So a day with decent breadth on Thursday and/or Friday would get this particular indicator to an overbought condition.


US short-termism: Dimon’s delusion
Financial Times
“Great quarter, guys” exclaim the analysts, one by one, on many company earnings call. Why the surprise? Usually on the earnings call three months earlier, the chief financial officer will have told them what the revenue and profits would be (often sandbagged so the company can beat modest expectations). So-called earnings guidance has become standard practice for some companies hoping to massage investor expectations.

Hedge funds aren’t all they’re cracked up to be — here’s why
Peter Hodson – Financial Post
I am old enough to remember when hedge funds were ‘cool’. They were part of an exclusive club: hard to get into, great returns, low risk. Investors would talk about their hedge funds and investment at parties, with others hoping to get an introduction to the fund so they could get great investment returns too.
This all ended, of course, with Bernie Madoff’s huge hedge fund scam. But even before this, I always wondered what the big attraction was with hedge funds. Nowadays, pretty much anyone can start a hedge fund, and rules have changed so that it is easier than ever to buy them. But why would you even want to? Let’s look at five reasons why hedge funds might not be the great investments you think they are:

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