“The once-disgraced darling of equity bears (TVIX) is making a comeback, with daily volume jumping fivefold to 9.4 million shares a day since 2013.” TVIX is a 2X Short-Term Volatility ETN “designed to generate twice the daily return of a gauge of tracking futures on the Chicago Board Options Exchange Volatility Index.” Here’s the problem: TVIX is an ETN product (“overseers create and redeem shares in the open market based on the level of demand from buyers and sellers”) with a tendency to get a bit off track (in 2010, demand for TVIX was much higher than its “overseers” could support, which forced TVIX “as much as 89 percent away from the index it was created to mimic”). Here’s another problem: “people are getting comfortable now with volatility as an asset class and the revival of the TVIX is probably a sign of that.” Meanwhile, Northern Trust has done some great research about market volatility and portfolio hedging: “We believe there is no ‘magic bullet’ available through hedging the portfolio via either options or through trading volatility. Instead, we encourage investors to shift their thinking from ‘protecting your portfolio against volatility’ to ‘reducing your sensitivity to volatility.’ (i.e. asset allocation)” Furthermore, “we think investors are best served by reducing their sensitivity to the volatility through proper strategic asset allocation, not by chasing the newest volatility reduction tool.” Meanwhile, stock picking might also be making a comeback: “macro headlines have grown more scarce this year. As a result, correlations — the tendency of individual stocks to trade in the same direction — have declined and more investors are shifting toward active management.” Furthermore, “ETF usage typically increases when macro issues dominate and correlation increases since ETFs are a convenient way to move money quickly and shift beta exposures efficiently.”
Calculating The Economic Costs Of A Sanctions War With Russia
“Iran-style retaliation from the West, which would include freezing Russia’s foreign reserves, banking assets and halting lending to companies, is being treated as an unlikely worst case…Still, officials are calculating the economic cost of a sanctions war with the West. ‘If Russia begins to answer sanctions with sanctions, it will be a pure loss for the country…more than 40 percent of consumption is imported goods.’” Putin doesn’t appear to be backing down, however: “‘In the modern world, where everything is interconnected and everybody depends on each other one way or another, of course it’s possible to damage each other — but this would be mutual damage,’ Putin told reporters March 4.” “Mutual damage” aside, here’s 4 reasons why Russia will keep the gas flowing into Europe: 1) “Russia’s weakening economy is heavily reliant on exports of oil and natural gas, with energy accounting for roughly 70% of annual exports,” 2) Demand for natural gas is waning with the changing seasons, 3) “A warmer winter in Europe has allowed countries to build their reserves of natural gas, leaving them better able to cope with any short-term supply disruption,” and 4) European leaders are looking for any excuse to diversify away from Russian energy.
Here’s an interview with San Francisco Fed President John Williams; notable quotes: Re: Jobs and Weather “It’s pretty clear that the report would have been even better without the effects of the unusual weather. So looking ahead you would expect a report that’s even stronger.” Re: Tapering “My own view would be to continue the tapering at the pace that we’ve been doing” Re: Wages “Wages tend to lag a bit so they’re not really a great leading indicator…I wouldn’t want to wait around to see compensation growth pick up.” Re: Inflation “If you have to create a little bit of inflation above your target for a little while that’s exactly what monetary policy should do.”
Copper’s recent plunge in market value may have more to do with the Chinese banking system than you think: “Chinese lenders, especially in the nonbank or ‘shadow’ sector, often allow copper to be pledged as collateral…’As financial conditions tighten, copper is liquidated when loans are either defaulted on or can’t be rolled over, which can lead to worse financial conditions as companies’ collateral loses value,’ Paul Hickey at Bespoke Investment Group explained in a report. ‘This was the exact same effect that hit the entire U.S. household sector in 2008 when house prices fell, although it’s important to note that a crisis that severe in China stemming from falling copper prices is hypothetically possible but not likely in our view.’”
“U.S. companies authorized $80 billion in stock buybacks last month, a 32% drop from last year’s record-setting amount but also the third-strongest February on record.”