VIX Crashing, Bonds Breaking (bad), the Dollar Line, 60-0.

03/24/ 2017

By John Turner
March 20, 2017

The Federal Reserve of the US raised rates for the second time in four months, and gave a good indication that two more will be coming this year. I am not sure if the Fed's AI bot (maybe IBM's Watson) wrote the press conference or told the Fed and the world how to run the world economy, but essentially that is what occurred. Commodity prices rallied as shorts covered and VIX traders once again lost as the witching hour struck on Friday and no pox or sorcery was seen. Indeed, it seemed almost machine-like, a straight heart monitor with just rhythmic beats. Apple traded $1.3 billion worth of shares at the open and wait ... the price didn't move. I imagine where the money went to didn't affect that price much either. The VIX used to be just an index showing a plus/minus view of equities etc., then over the last few years people have been trading this indicator (derivative of derivative) which like many hedge funds have produced very little - except pain and frustration. Perhaps like many indicators/indexes it loses its value once it becomes in vogue, like pet rocks.                                                             

Past performance is not necessarily indicative of future results. There is risk of loss trading futures and options. Chart source: Barcharts

As I wrote in "Death of the Bond Bull" and subsequent pieces bonds have lost their "street value" as inflation, amount and quality becomes an albatross in a world that continues to grow despite the deflationist bankers/economists. Life, like people, will not sit still as voters in Britain, the US and Europe are demonstrating. Indeed more parts of the world are in flux than ever before. I look with anticipation to better growth in India, Brazil , Argentina and many countries in Asia that don’t grab headlines (Myanmar, Vietnam). Furthermore, closer to home, Mexico is bubbling which I addressed in my article "Tequila Sunrise". I refuse to be negative about Mexico and perhaps a Trump administration is what is needed to propel Mexicans to take better more diverse control of its destination. Perhaps the centralized power of the few will be met with a new revolution, a peaceful productive growth of the middle class and a better sharing of wealth and power. I think the Peso has tremendous value here.

Past performance is not necessarily indicative of future results.There is risk of loss trading futures and options. Chart source: Barcharts

Continuing a thought about bonds, it’s important to think globally about rates and quality. Traders tend to focus on sovereign debt as benchmarks from which to trade other credit instruments. I think going forward other metrics may come into play as some bonds will trade like equities, or a commodity, volatile and attracting a different skill set. Municipals may be affected by changes in tax law and may need more help in the form of a proposed public private partnership bank platform. Creative ways to finance infrastructure growth, and create areas of high employment will take strong local and business leaders. Think nationally/globally but act and invest locally.

Past performance is not necessarily indicative of future results. There is risk of loss trading futures and options. Chart source: Barcharts

In ‘Euroland’, Uncle Draghi, under pressure from the Germans and the United States is in the midst of tapering bond purchases. Given the lack of good quality paper (think Germany) he has had to buy much of the corporate debt issued by banks and multinationals in order to spur growth, massively increasing the ECB balance sheet. This liquidity is beginning to show in growth, and inflation. The latter in Germany is starting to raise suspicion and angst.  The USA (new president) has taken the Germans to task. His administration and advisors are pointing to an unfair advantage that Germany has with a depreciated currency (I use to love trading Deutschemarks!) Talk about a border tax advantage for Germany! The weak response from the elites in Germany is that they have nothing that there is nothing to do or see in this argument given that Germany has no currency and nothing can be done with the Euro. This argument from ‘Euroland’ reminds me of Shultz from Hogan’s Heroes, “I know nothing, see nothing, hear nothing.” But this attitude, like Greek bonds, is a tragedy that they must not ignore. I think Draghi and the ECB will be forced to go from 60-0 (monthly bond buying) faster than the currency traders and bund traders think. 

Stocks continue to move higher defying all of the naysayers and value traders. Surrounded by bears in the media and long term traders, I find myself letting my Irish come out, a little contrarian and not having much of a concern on St. Patrick’s Day, maybe the bears should have a pint and relax.

Past performance is not necessarily indicative of future results. There is risk of loss trading futures and options. Chart source: Barcharts

Good Trading,
John Turner

Contact the author John Turner at jturner@hwfi.com

Be advised that trading futures and options involve substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. This matter is intended as a solicitation. This material has been prepared by a Heritage West Financial broker who provides research market commentary and trade recommendations as part of his solicitation for accounts and solicitation for derivatives trades.

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