Friday, March 14, 2008

Fear and the Flight to Safety

There are many ways of thinking about the current credit crisis, but today I thought I’d offer a visual depiction of one that I’m fairly certain has never been posted anywhere else. The chart below shows the ratio of the VIX to the yield on the 10-Year Treasury Note. By way of commentary, consider this to be a loose proxy for fear divided by the propensity of investors to flee to the safest investment alternatives. Needless to say, the graphic shows that the ratio is currently at levels seen only during extreme crisis or panic market environments.


Anonymous said...

i have been follwing IRX and TNX as well and find them a nice proxy for fear. Last night i read a blog that nailed this new TLF as a FED attempt to bail out a Prime Broker who was short treasuries and long the toxics. Makes me wonder if we are seeing a short squeeze in treasuries and that BSC is the squeezie and if so, how does one unwind such a postion???
P.S. have you had an opportunity to review questions from your last post??

Anonymous said...

can't see the right side of the chart your posted (can still only up to 2006).


Bill Luby said...

dowoper8tr, I'm afraid it's going to be all hands on deck for the rest of the session. Any research and analysis is going to have to wait for the weekend, at least.


I'm afraid my graphics are not compatible with all monitors. Sorry for the inconvenience.

The easiest workaround is to right click on the image, highlight "Copy Image Location," and paste the link into a new browser window.

I hope this helps.



Anonymous said...

Looks like everyone is comparing the current issues in the financial markets to those of the past, and saying it can't get much worse. This is only true if one of the past events (in the last 50 years or so, like LTCM, S&P loan crisis, Asian crisis, etc.), was indeed the worst.

But we don't know that. I wonder if it ever crossed anybody's mind that this could potentially be the biggest crisis yet? And if this were to be the case (I certainly hope not), who's to say that it can't get much worse before it gets better?

Bill Luby said...

I think it's crossed a lot of minds, Tom. Each day I get closer and closer to accepting that 100 year flood thesis. Whenever I think of the headline risk to my portfolio over a long weekend, I think about it even harder.

The put to call ratio and AAII bull to bear ratios are at the type of levels that would support a 100 year flood type of event and even today does not 'feel' like a bottom.

Ironically, I think many investors suspect that it can get a lot worse when we find out -- once again -- how little the Fed can do on Tuesday.



Unknown said...

Thanks for introducing me to the TNX... had not realized that it (and the IRX) have options. Not that I would want to trade them -- the markets are some of the worst I've ever seen (0 bid, 5.00 ask, lol). I'm not fond of the markets for TLT, IEF, or SHY, but they are much better by comparison.

Noticed earlier today that MAR IV for BSC was over 400%, APR IV was over 300%, on the heels of its > 40% drop... how interesting that Bear makes the market bearish, no? But my gut feeling is that such irrational-seeming levels could be a prelude to a hard bounce.

And at the risk of sounding too sanguine, I don't buy the 100 year flood scenario, not yet. The VIX would have to be a lot higher than it is now, even after a 5+ point rise.

Maybe I'm out of touch... that BSC was forced to seek help is certainly bad news for them, but I think the Fed, by bearing the risk of losses on the loan to BSC thru JPM, is clearly showing it's not going to let the big banks (investment or otherwise) collapse, at least not without a fight. When (or if?) Mr. Market comes to grips with idea that this Fed is willing to make bold moves to protect the financial industry, today's fear might be seen as a missed opportunity to bargain-shop.

Ugly, ugly day today, but when nothing's working and my indicator stocks are a sea of red, when it looks like everyone is dumping everything without regard to quality to raise cash, when my own account is bleeding red for the day, I'm (strangely) wired to see it as opportunity.

But what do I know.... as I've posted before, I have a terrible sense of direction (and market sentiment).


Unknown said...

The other thing that makes me a little suspicious is that I usually get fills like crazy on days like today, at aggressive prices (i.e. favorable to me).

So far today, nary a fill... so I have to conclude that, for whatever reasons, the MMs are not motivated to take the opposite side of my trades, even for the moment that it would take to hedge it off.

Now I just have to figure out what that means (if anything). :)


Unknown said...

Highest close for the VIX today since 2003 according to Bloomberg (and my chart)... does it mean that it's now relevant again? :)

Finally got a few fills around the close, though not at aggressive prices. Still not sure what, if anything, it means...


Mike P said...

To Bill and Anon--
The graph issue has NOTHING to do with the monitor, just browser. (I have a Mac and had the same issue.) All I had to do is drag my browser window wider until the whole chart showed up. (Once it did, boy, did I see Bill's point!)
Thanks to Bill for doing this--my first visit to the blog.

AS to the chart, we obviously had a double top developing earlier, now are feeling the results. My (limited) experience with those tells me it's ten to twenty percent down, then up again.
Interested in any other DT stats or experiences from others.
Thanks again!

Unknown said...

re: BSC

dowoper8tr's thought that BSC may have been the squeezie seems to have been borne out by the announcement earlier today that it will be bought out at the firesale price of $2/share.

But the pre-market action reaction (e-minis down 30, though they were down as much as 40 last night) makes it official -- I just don't understand Mr. Market today.

The BSC situation is tragic, especially for BSC longs... but of the big investment banks, it was the most exposed to losses from the subprime crisis. When we look back on this, will we be saying that this was the capitulation we had been waiting for?

But as significant than the Fed's support of JPM's rescue of BSC, are the bold, aggressive moves they are taking... by cutting the discount rate and opening the discount window to include primary dealers, they are addressing the liquidity squeeze (which in part took down BSC).

Should be a volatile session today.... gotta go!

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