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.