Gerry Sullivan

GM Leaving the Dow (Soon): Likely Replacements

Maybe Honeywell comes back. Or Eaton. Something industrial.
Google is too high priced, it would have 20 times the weight of Microsoft.
Financials were a mistake for the Dow going back to when American Express became the first financial to be included in 1982.
Citigroup might stay in.

Encouraging Similarities to the End of the 1973-4 Bear Market

The "golden cross" took place in March 1975. In March 1978 the S&P was at the same level or lower. In 1982 it was marginally higher.

At the end of 1965 the S&P 500 was around 94. It was barely higher than that in August 1982, more than 16 years later.

That is the market we are probably in, maybe half or 2/3 of the way through a period of large movement but little real increase in stock
prices.

It takes a long time.

That Was Ugly

Build a room that is a square with 40 feet on each side. Draw a line dividing the room in half. Paint the floor red on one side and green on the other. Stand in the exact center of the room.

Now, you are holding 13 golf balls. Let them drop and measure their final resting place. You will observe about the same results as the
second half performance column.

A Critical Market Juncture (Again)

Years ago, at the peak of their power, the NYSE Specialists might have been able to move a stock intra day. More often they profited by taking large blocks of stock when a stock halted and reopened lower and then feeding it out at higher prices.

They also made money from the spread, usually 1/8 or 1/4.

Those days are long gone. Most NYSE listed stocks also trade in 8-10 other places. There are much tighter spreads and much less opportunity for the Specialists. Their last big payday was when the NYSE went public.

Sometimes a Bear Is Just a Bear

Part 2, another bear:
2000-2003...cause: excessive valuation
2007-?........cause: leverage, oil

Excessive valuation might be added as a factor to the current bear market if we consider that financial company earnings were greatly inflated by gains in the last few years that are now being written off.

There is nothing new. Reminds me of the time when Samuel Goldwyn saw a sundial on one of his movie sets. He asked what it did and was told that it allowed people to tell the time from the sun. He replied; "what will they think of next."

Sometimes a Bear Is Just a Bear

Yes, this is just another bear. Look at 3 past bears:
1929-1933...cause: excessive valuations and leverage;
1973-1974...cause: excessive valuations and oil;

VIX and Sectors: One-Day Snapshot

Comparing the IV on the SPX and the Sector SPDRs is a bit of apples and oranges. The SPX options are Euro exercise and the Sector SPDRs are American. The SPDRs (and SPY) trade on the Friday immediately preceeding expiration, the SPX only establishes
the settlement price at the open, but doesn't trade. That difference affects the IV calculations.

The SPX index erodes a bit every day when individual components go ex-dividend. The SPY and sector SPDRs actually own the underlying stocks and accrue dividends.

Even more interesting, the Sector SPDRs all go
ex dividend the Thursday before expiration. That creates distortions that are not properly accounted for in the IV formulas.

For instance, if the XLF is at $24.10 at the close on Thursday
June 19, a holder of XLF Jun 24 puts and XLF Jun 24 calls will
probably exercise the calls to capture the 20 cent dividend and then
exercise the put the next day to unload the stock.

This tendency is more visible in the puts and calls on SPY. The SPY will go ex-dividend for around 64 cents. Look at the puts and calls at the 138 strike. Compare to the 1380 strike puts and calls on the SPX.

VIX Implied Volatility Surges

Options on VIX are unique in several ways:

***At the money calls are normally higher
priced than the at the money puts.

***Expected VIX prices over the next 3 months plotted
as a Bell Curve would be very skewed. Perhaps a low of
15 and a high of 35.

***Because the exercise method is European the
options often trade at prices where if you bought
an option and exercised it immediately you would have
a locked in profit. But, of course you cannot.
Example right now is the VIX July 40 put trading at
16. 40-16 = 24, but the closing VIX was 19.55.
The put is 20.45 "in the money" but trading at 16.

***With other European style expiration options it is possible
to lock in the full "in the money" gain prior to expiration. For instance, a holder of SPX July 1450 puts cannot exercise until July 18, but the holder can lock in the profit by buying the SPY ETF or
SPX index futures. The VIX option holder doesn't have such a possibility.

I come to 2 conclusions:
First, with the peculiarities of VIX options the IV formulas may not be correct.
Second, with the VIX at 19.55, the July puts and calls are priced with an expectation of a July expiration VIX of approximately 23.75. (Look at the VIX Jul 20 calls and VIX Jul 27.5 puts.) The expectation is for a higher VIX at the July expiration.

Better To Be Lucky Than Smart: The Bear Market is Over

It really depends what the US/World economy does. In 1929-30 and 1973 there were sharp declines followed by strong rallies that recovered more than 50% of the loss. In both cases the market then went much lower because of economic problems.

1987-88 and 2000-03 followed different patterns. They were bear markets but the economy in both cases was nowhere as bad as 29-33 or 73-76.

At this point we don't know what we have here but an investor has to allow for the possibility of a steep decline and new lows after this rally is exhausted.

Why Did the Mortgage Market Go Out of Control?

Great explanation.

I think that something similar is going on with all the Master Limited Partnerships that are being created. Wall Street has figured out a way to restructure these assets and sell the pieces at a higher price in the new structure.

Most of these assets have been around for years as parts of pipeline companies like Texas Gas Transmission and Northern Natural Gas. Now they are being sliced and diced into new companies to be
sold, mostly to retail investors.

The outcome is very predictable.

Meredith Whitney Threatens Severe Deflation For Your Portfolio

Both previous comments are correct. Citi stock stayed in a range because of the reported earnings, resultant low PE, and high dividend yield which was considered to be very safe.

We now know that these earnings were largely fiction. The dividend has been cut.

Someone coined the phrase "gathering pennies in front of a steam roller." That is what Citi was doing.