Volatility Implosion and Banking Stocks

May.20.09 | About: SPDR S&P (KBE)

As I posted yesterday morning, the big event of the day was the collapse of VIX to below 30% for the first time since Sept. 15. Falling volatility, I began arguing April 27, was the characteristic trade in an economy in which the Imperial Court set prices, arranged bankruptcies, provided financing, and determined the degree of stockholders’ dilution of the banking system. Since I predicted a “volatility implosion” of the major bank stocks, implied volatilities have fallen by half.

Here are implied volatilities vs. historical volatilities for Citigroup:

And here are the same data for BAC:

As I wrote on April 27:

After the earnings concoction served up by the banks at the end of the first quarter, and after all the contortions of the Treasury, there just isn’t a whole lot left for the market to do. The banks have settled into a zombie existence at low equity prices. They aren’t going bankrupt. They aren’t going to boom. They aren’t going to do much of anything. Zombie is as good as it gets, and zombie is stable. The market is starting to figure this out. Snooze.

I’ve been saying for months that CItigroup (NYSE:C) is a $4 stock. It traded at $3.84 pre-market this morning.