Divestor

I have been diligently scanning the markets with respect to the very volatile trading session on Thursday.

Implied volatility on the S&P 500 is still at around 36-37%, which is considerably higher than the average of 16-17% it was in the month of April. Option traders buying volatility would have done very well, but volatility spikes are just as difficult to predict as price spikes.

I find it odd that income-bearing equity tends to be trading lower, but income-bearing preferred shares and bonds are relatively stable. This could be due to the decrease in the implied future interest rates.

My long-term corporate debt issues, however, have taken quite a haircut over the past few days. I trimmed some of the position last month at yields I thought were pretty low (around 8%-8.5% for 20-year paper), but didn’t sell enough as it is now trading about 150bps higher. One of the advantages of dealing with debt (debt that you know has a very high chance of not defaulting) is that you don’t stand to “lose” that much opportunity cost by waiting – you will receive your coupon payments and wait for a better opportunity to sell when yields go lower, or accumulate if yields go higher.

The net damage report for this week is about 6%, but I do not see any reason why the intrinsic value of my portfolio has dropped any – the investments that I do have should continue to generate roughly the same projected amounts of positive after-tax cash flows. The income being produced is significant and should continue to be this way.

Today’s trading reminded me very sharply of what happened on April 4, 2000 when the Nasdaq fell by about 13% but recovered to end the day nearly flat. The CNNFN article has a few charts.

Ten days later, the Nasdaq was down 20%. The following week, the Nasdaq was up 10%.

For the next few months the Nasdaq gyrated, but peaked at the end of August before resuming its descent in September 2000, all the way until October 2002 when it plunged down to about 1200.

Is history repeating? I don’t know.

Is it a good time to be on margin? Probably not. The volatility will kill you.

May 6, 2010 was the most volatile day in the marketplace in 2010. Here is a series of pictures:

Capital was rushing into the US dollar, US treasury securities and Gold – three major pillars of stability.

Neutral were energy commodities.

(Update: This post is already obsolete – this post was written before the 9% spike down in the major indexes!)

This week is the first week in a long, long time where my portfolio has taken a dive. I suspect it has been the same for others. If right now was the end of the week, it would be around -3%. This is not a reason to panic by any means, I think my financial strategy is appropriate for myself and I have enough cash (or cash-like instruments that can be liquidated) to take advantage of a “real” downturn, especially if this Greek crisis turns out to be something significant (which I do not believe).

However, what is interesting is to see what else has dropped:

– Canadian Dollar vs. USD: down about 5%
– Crude and Natural Gas (in USD): down about 8%
– Gold: Interestingly, not much change, if not a little higher.
– S&P 500, TSX 60: down about 5%
– 5-year government bond yields: down from about 3% to 2.8%
– Implied future 3-month interest rate changes: Lower; December 2010 to 1.70%; June 2011 to 2.37%

What’s odd is why Gold (which is a commodity that got hammered during the 2008 financial crisis) has not tanked with the rest of the market. Maybe there is a fundamental psychological shift in action.

The other comment is that the consumption of fossil fuel energy is not likely to abate with the Greek crisis, and most Canadian oil-related stocks have been hit. I’ve always thought that if you are a consumer of fossil fuels (which almost everybody in society is), it is wise to hedge this with ownership in some energy-producing assets, purchased at the right price.