Correction Protection on S&P 500 gets pricey
This short post by the Asia Times caught my eye. The title sums it up perfectly and the charts presented show the “powder keg” as Doc put it that the markets are sitting on…
Click here to visit the Asia Times website.
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Out-of-the-money options with a strike price 10% below the current level of the S&P 500 are getting pricey. The difference between the implied volatility of 12-month puts on the stock index with a strike at the money and a strike at 90% of the current value has risen to nearly 4 points, compared to 3 points a year ago.
That’s a nerdy way of saying that stock investing has become a loser’s game: with so much price appreciation to lock in, investors will pay up for insurance against a correction.
Volatility still isn’t especially high by historical standards.
The extra cost for deep out of the money protection, though, suggests that if the market corrects, it will correct hard and fast.
I’ve been a bull on Palladium for years, but when it broke the 751 level last month, that sent off a warning bell to me that the chart had been damaged. If the PMs do correct down further this year, it could drag on Palladium.
In the mid to long term I am still very interested in Palladium, and as mentioned at length in the last few weeks, it has been marching to the beat of its own drummer, and not really tracking that closely with Gold/Silver or the Base metals. Pd is a nice portfolio diversifier.
I did add to my shares of Stillwater Mining today on the dip, as I see it moving up towards $18 by year end.
There is good coverage on Greece in the
Telegraph.co.uk
It looks like Greece manage to come up with interest payment and a promise of economic reforms. To which the ECB responded by increasing slightly the line of credit to Greece.
Greece, however, is still walking a fine line between what the ECB wants and Greek citizens will accept.
Instead of re-installing the Drachma, perhaps they could devalue the Greek Euro against the rest. All Greek Euro cash coins and notes in the Eurozone and all bank accounts in Greece could be devalued by perhaps 30% and the Greek Euro would be worth 70 Euro cents. This in fact is another form of bail-in, in a way. Greek debt would be devalued by that much if it was allowed to be denominated in Greek Euros. Then at some point, the Greeks could exchange their Greek Euros for ‘proper’ Euros at this exchange rate or at a floating exchange rate at any time they wanted.
In fact, the Greek Euro could simply be separated off and allowed to find its own market level without any formal devaluation or pegged level’s being imposed.
Then, at some point, Greece could re-enter the main Eurozone at a suitable exchange rate and the whole game would start again until the next devaluation, which would be inevitable.
Ditto for Italy, Spain, Portugal, etc.
I had this idea ages ago but unfortunately, it could cause bank runs unloess it is announced as a surprise and even if it is announced as a surprise!
Furthermore, it does not solve the actual problem of the divergence between the PIIGS economies and Germany, which is a continual process, meaning that such splits in the Eurozone will likely happen every so many years.
When you think of the damage done to the UK economy around 1992 when the British Pound was stuck in the Exchange rate Mechanism pegged at 2.95 Marks plus or minus a few percent, the current problems are so much greater. The UK had about 12% unemployment and a near collapse of its housing market at least partly due to a surge in interest rates in an effort to keep the pound pegged at an artifically high level. The Pound was probably only about 20% overvalued from its market level, at the most and there was a way out of the peg.
Now, there is no way out of the ‘peg’ because it is permanent for the PIIGS countries that are locked into the Euro and their currencies may be 50% or even 100% overvalued at this point. No wonder their unemployment is or has been 30% overall and 60% for the youth. (For comparison, male unemployment in Germany was about 33% in 1931 and we all know what happened next.)
According to BBC radio, Greece is trying to negotiate a temporary dropping out of th Euro, but not the EU, a reduction of exchange rates, then re-entry into the euro.
There is, of course, no mechanism, as this time in the EU playbook for such a move.
The Greek problems have hit euro exchange rate; hence the rise in the dollar.
If Greece fails negotiate the above transition, which would actually wipe some value off the assets of rich people, it is projected that the Greek economy will stagnate for two decades.
Greek citizens have withdrawn over a billion euros out of Greek banks in the last week and moved assets into real things. E.g. Car sales up 28% so far last month.
Only 2 decades CFS?
It’s interesting. I think that Greece, Italy, etc. basically need to devalue their currencies by a given amount every decade – just as they used to when hey had their own currencies. There was not any big cultural change in these countries as serial currency debasers when they joined the Euro around year 2000.
So, even if they are bailed out, the problem will recur another decade or so down the line. In fact, the problem is likely to recur during EVERY decade, as long as they stay in the Euro. The imbalance between their currency value versus what it ‘should’ be will continually increase and destroy their economies and cultures, unless they get out. The longer they stay in , the more damage will be done. They are basically on a one way ticket to the Third World and in continually deepening depression. They cannot stay sufficiently competitive within the Euro unless their entire wage and cost structures continually go down over time. I think this is what has been termed ‘internal devaluation’ but what it essentially means is continual deflation in wages.
Briefs from Snotto (snobbish Otto)
>Good Entry Point For Gold Right Now
>Gold is “Dirt Cheap” — Price Could Reach $10,000 per Ounce
>Buy Gold “Right Away” Says …………
>Jim Rogers expects higher gold, and …….. does too!
>Why Gold Looks Better than the S&P:
>STFU
http://incakolanews.blogspot.ca/2015/04/marc-faber-on-gold.html
-collapse is closer than it appears in the mirror
-NIA (not investment advice)
I think what we have learned from this week is that the reasons why gold should rise are rarely strong enough to really help gold rise.
It does make sense that it should have risen, but it was short lived, why? The reason is as always…suppression. War in the middle east…suppression. Negative rates throughout Europe… Suppression. Currency wars…suppression.
Gold price suppression is the reason why you should not trade gold. Gold suppression by definition means that gold is cheaper than it should be. Buy bullion, sit tight and wait. It may be a short time, or a long time, its impossible to time.
I agree Gabriel that the fundamentals don’t seem to have any relevance at face value, due to the trade keeping gold lower. Eventually “truth will out” as they say.
Really Gabriel? Then how about sugar? Was sugar suppressed too? And cotton, oil, copper, aluminum, iron ore, corn, wheat, soy and on and on. PLEASE MAN!!!
Can’t any of you geniuses understand that most commodities fell together and that when they rise they will also move as a group? Until now Precious metals have functioned as commodities where traders were concerned.
That will change in the future……but that time is not here yet.
This is supposed to be the strong period for the markets they already appear to have topped out with every rally getting sold off quickly. The summer could be quite rough and volatile.
Yep but this year the summer doldrums may not be so dull.
The supreme leader of Iran calls Obama a liar.
He’s obviously slow on that call.
The intelligent people of America Have known that for years.
So what do you say now Mr. Moriarty?
I told you, so.
The Iranians will stall and stall until they have a nuclear bomb, or are bombed by Israel or the U.S.
Unfortunately with the latest generation of centrifuges, which are an order of magnitude better than the earlier version Iran had been using, Iran is only months away from having nuclear capability.
and the Supreme leader would be correct……..
Watching “The Trigger Effect”.
A pocket full of silver rounds would really be helpful, eh? Ya think?
https://www.youtube.com/watch?v=9FkHWvPgKzU
‘Tis i again, Sir Irwin.
I just finished watching the film ot its conclusin
On behalf of Siskel & Ebert, I give it 2 thumbs up 🙂
–LFP
Irwin:
As i type i’ve paused the film @ 1.17.xx of 1.34.xx.
Damn good. You have more? Please post ’em.
Thanks!!
—LFP
Just when I think you guys may be right and gold is going down, I look at palladium and it is up quite strongly today. I know PMs don’t all march in lock_step, but I am heartened by the resilience of Pd.
As to the near-term future; who knows? Long term, fundamentals dictate price increases.