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Thursday, 14 December 2017

Lost in Jackson Hole, volatility and the Buffett bounce

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

I’m getting bored of using the words “staggered” and “perplexed” but I was once again staggered and perplexed by a TV journo this morning who put the rather minor sell-off of the Dow down to markets being worried that Federal Reserve President Bernanke was going to use his speech at the Jackson Hole jeans-and-T-shirt offsite to talk about growth and that he was not going to announce QE3 which “everybody” had been expecting.

I’m not quite sure who that “everybody” is. I have not come across anyone of average market experience or more who seriously thought QE3 was out of the freezer yet, let alone on the front burner. Mind you, I don’t talk to that many people in the equity space – life is too short to waste it in that way – but when I do, I am “staggered and perplexed” by how little most of them understand of the bond markets and of the way in which they both drive and respond to central bank policy. Mind you, I did catch one loud American speaking from the floor of the NYSE – we all know the type from CNBC – who poignantly remarked that the Fed had no desire to “give a sugar pill to the boys down here”. Touché!

Volatility villains

I see that France has extended its short selling ban on financial stocks until November 11 while Spain and Italy have extended theirs until September 30. I wonder if by Christmas it will be compulsory to buy them?

As we look upon the extreme volatility in equities and are  “staggered and perplexed”, I tripped over a rather unusual piece by Sinead Cruise and Douwe Miedema of Reuters who look for an explanation in the banks’ expectation of a quiet August. Their “villain of the piece” is the variance swap which pays off if the market remains quiet and volatility therefore remains low. The variance swap is in effect a short position on volatility. Once markets began to gyrate, the variance swaps got blown away and holders’ frantic hedging activity in fact vitiated the already tricky situation. They conclude – with the help of some market professionals – that it is not, as politicians would like to believe, the naughty hedge funds which are causing volatility by shorting equities (both in single stock and in index formats) which is causing the enhanced volatility, but the attempt by more mainstream players to garner a bit of added performance from betting on a quiet August market.

Incidentally, fans of technical wizardry might want to take a look at the Fibonaccis on the VIX as we opened through the 31.2% retracement of the recent high, which should have sparked a rally but the market disregarded the way-point and merrily sold off again.

Buffett’s bounce

Meanwhile, it would be churlish not to acknowledge that the Sage of Omaha (the Beeb in its eternal wisdom re-dubbed him the Oracle of Omaha this morning – standards, chaps, standards!) seems to agree with me on the subject of Bank of America with the minor difference that he agreed to the tune of US$5bn. Some wag dropped me a line after the announcement of Warren Buffett’s investment in the bank which read “5 down, 195 to go”. Cheeky!

As the stock opened at US$8.85, Buffett was already heavily in the money but it finally closed at US$7.65 which represented a gain of 9.44% on the previous close. That gain translates into 5 points on the Dow which otherwise lost 170.89 points (1.51%). I would not like to speculate on how much the index would have shed if the three component banks – JP Morgan, Amex and BofA – hadn’t enjoyed the fillip from the Buffett action.  

So we go into the long weekend in the UK not really knowing a lot more than we did a week or a month ago. Predictions on where markets go from here remain as certain as the toss of a coin. I was taken aback by an interview with the chief equity strategist of a Swiss private bank who was asked for five reasons to buy stocks, which he did, only to then end with the assertion that his firm forecast that the markets would be lower at year-end. Give me strength!

Alas, it is that time of the week again. All that remains is for me to wish you and yours a very happy and peaceful weekend – and a long one where appropriate. May all our central bankers and especially Jean-Claude Trichet have lots of fun hiking in Wyoming as hiking at the Fed, the BofE and the ECB remains most definitely not an option.      

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