That’s the clever headline from Monday’s Ahead of the Tape column in the WSJ. Justin Lahart points out the increased complacency, as measured by options pricing, since the beginning of the Summer:
"Remember way back in June, when investors worried that markets around the world were suddenly becoming much riskier? Well, they don’t seem all that worried anymore.One popular measure of risk, the CBOE Market Volatility Index, in June hit its highest level in more than three years. But it’s back down again. Better known as the VIX, the index is based on the prices investors pay for "call" and "put" options, which allow them to buy and sell the S&P 500 at set prices. Investors often use such options as protection from market volatility; moves up in the VIX show investors are willing to pay more to avoid risk.
Other indicators are moving in the same direction. Emerging-market stocks and bonds — risky securities that fell into a deep funk in mid-June — have bounced back. And in the corporate-bond arena, investors seem downright ebullient. "Now, almost any company can borrow any amount at close to historically low levels for almost any purpose," says Brian Reynolds, chief market strategist at brokerage firm M.S. Howells.
The culprit for this lack of worry? In addition to the rally, which has seen the SPX tack on almost 10% since the June lows is the Fed. Early summer had investors worried about more central-bank interest-rate increases. But with the Federal Reserve "pausing" in August, investors believe (falsely in my opinion) that the biggest risks have been removed. The thought process is that rates are "historically low, and companies have
lots of cash on their balance sheet."
There is a widespread expectation of a soft landing; I’ve even heard some CNBC pundit discussions of a return to a Goldilocks economy. We doubt both outcomes. The less complacent do not have to look too hard to find potential flys in the ointment:
"But some pieces don’t fit this picture anymore. Metals prices — which are driven in part by the same global flows of cash that drive interest rates — plummeted in June and remain depressed. And the housing market seems to keep sinking, even though long-term interest rates have come back down.
In the past, low long-term interest rates have led to a pickup in mortgage applications for home purchases. But the Mortgage Bankers Association index of mortgage applications for such purchases fell in late August to its lowest level since 2003. Maybe the world is still riskier than investors want to believe."
"What, me worry?" will eventually turn into
"WHAT? Me worried!" My question isn’t if but when. And judging from the skepticism I’ve been hearing, I’m betting its sooner rather than later. . .
>
Source:
Fear. Not.
JUSTIN LAHART
WSJ, September 5, 2006; Page C1
http://online.wsj.com/article/SB115740967915253149.html
Barry,
You make fair points. I would offer the following for discussion however:
Last month a huge (COT long) bet on the 30 year correctly called the recent low yields there. They have now reversed to an aggressive short there. This, combined with a new aggressive LONG position on the short (2 year) treasury, suggests the Commercials expect a reverse in the inverted curve. A positive yield slope, with oil prices falling back could be a frightening elixer to the (record) shorts. The missing ingredient to a break higher (imo) is leadership in the banks. Nothing like a positive slope, and the prospect of rate cuts to attract flows there — perhaps from the enegry space. Follow through in Tech would also tip the scales to a new Bull run. This is certainly a variant view in my opinion.
In the past, low long-term interest rates have led to a pickup in mortgage applications for home purchases. But the Mortgage Bankers Association index of mortgage applications for such purchases fell in late August to its lowest level since 2003. Maybe the world is still riskier than investors want to believe.”
Falling mortgage rates did nothing to sooth the rapidly declining housing market in the early 90’s.
Home Buyers Holding Off Despite Low Interest Rates
By THOMAS J. LUECK
Published: October 27, 1991
http://query.nytimes.com/gst/fullpage.html?res=9D0CE1D7153BF934A15753C1A967958260
DESPITE a steep decline in interest rates that has brought fixed 30-year mortgage loans to below 9 percent for the first time since 1977, home buyers are holding back across most of the nation in what experts say are stubborn fears that job cuts and other recessionary pressures will persist.
Elsewhere in the nation, home sales have declined steadily at the very time that interest rates have dropped most sharply.
-jb
Northern NJ Real Estate Bubble Blog
IMF predicts risk of global slowdown greater. See FT headline today (on line)
“Now, almost any company can borrow any amount at close to historically low levels for almost any purpose,”
OMG I’ve heard that before, word for word almost! In 2004! From my mortgage brokerer when I was considering buying a house! Just replace the word “company” with “homebuyer with good credit”.
I totally agree. looks like we’re heading for a recession.
Here are the views I see proposed in the mainstream financial media:
—bullish
—kinda bullish
—sorta bullish
—maybe a bit o’ weakness, then bullish
—maybe 5-10% downside, then mega-bullish
No one, ‘ceptin’ Barry and a few others, can imagine in their most vivid nightmares a scenario whereby beloved stocks fall more than 8-10%.
Even good ol’ Don Hays is apparently pulling back his bullhorns. Yet his idea of safety is 90% equities instead of 100%. LOL.
I have no idea what will happen. But it gives me pause to hear nothing but blue skies ahead, even if we get a brief, but cleansing, shower in the short-term.
Here’s a prediction: hundred dollar bills will fly out of my ass. Now THERE’s a variant view.
I actually blogged about that trend (falling mortgage rates NOT boosting home purchase activity) several days ago. Of course, this week, purchases popped a bit. But the latest stats show about an 8% decline in 30 year FRM rates and 1-year ARM rates (from their recnet peaks in late June/early July) … and roughly an 8% DECLINE in home purchase apps at the same time (was more than 11% before this most recent week’s pop).
You can read more my blog, if you’re interested. And Barry, keep those updates coming — I really enjoy ’em.
Hey
If I had ANY confidence that the Fed would not raise rates in the face of continuing increases in their favorite lagging stats (core CPI, PCE, etc)….. I would be in the market (to some degree)
As it is…… no way.
NO way.
The Fed is a disaster waiting to happen.
I think I shall sit on the side-lines and watch….. until I know they can’t mess it all up.
Until then: buyer beware.
PS: their fave lagging stats ARE going to increase.
…..place your bets (carefully)
“Metals price rises not speculative, says IMF.
Challenging the popular concern that speculators have lain behind much of the surge in commodity prices since the beginning of the decade, the IMF said its own assessment showed there was virtually no evidence to support the claim. ”
Yea, and Santa Claus and the Easter Bunny are real too, added the Commodity Futures Trading Commission !