Despite having over a 70% cash position at present, I still remain highly skeptical of the marketplace. Although I am happy to see things dive down another 4% on the major indicies (2% on the TSX), the root causes of this mayhem have not been addressed at all yet. I still highly suspect there is more to come. There will continue to be gut-wrenching rallies up and crashes down and today is an example of a crash down. The next two hours of trading can change everything, but the mid-term trend is clearly down. Although mathematically volatility is “up and down”, it strongly correlates with a down market when buying volatility futures!
However, when looking at the numbers, today’s dump feels less liquidity-inspired than the previous dump (where everything was getting thrown out the window if there was a bid). I do notice that certain fixed income products have been able to outperform (by falling less) and also Canada has fallen less unless if you are invested in the natural resource sector (commodities have been hammered). Typical defensive issues (e.g. consumer staples) have also fallen less than commodity-linked products.
My entire premise for this market drop is a combination of a grave concern on a macroeconomic scale (i.e. a pending devaluation of the US dollar) with a deleveraging of portfolios – you can only borrow at 1-2% and purchase income-oriented securities for so long before the capital value of such income-oriented securities suddenly take a plunge and then you have to deal with the margin call of the decade to truly pay for it.
While we are on the topic of interest rates, Canadian short term implied rates have also projected a chance of a rate cut by years’ end:
| Month / Strike | Bid Price | Ask Price | Settl. Price | Net Change | Vol. |
| + 11 SE | 98.780 | 98.785 | 98.755 | 0.025 | 5322 |
| + 11 OC | 0.000 | 0.000 | 98.725 | 0.000 | 0 |
| + 11 NO | 0.000 | 0.000 | 98.805 | 0.000 | 0 |
| + 11 DE | 99.020 | 99.030 | 98.910 | 0.110 | 16290 |
| + 12 MR | 99.120 | 99.130 | 99.000 | 0.120 | 21771 |
| + 12 JN | 99.150 | 99.160 | 99.010 | 0.140 | 11273 |
| + 12 SE | 99.140 | 99.150 | 98.980 | 0.170 | 4853 |
| + 12 DE | 99.130 | 99.140 | 98.950 | 0.190 | 2782 |
A December BAX rate of 99.02 corresponds to a rate of 0.98%, which should be compared to a 1.18% rate for 3-month Bankers’ Acceptances – the markets are predicting a higher chance of a rate cut than not.