Daily Speculations

 

The Great Goose Greek Call

 

(Sent 4:52 p.m. Wednesday, June 04, 2003, this post from Mr. E struck us as one of the most insightful we've read, then and now. – Vic Niederhoffer 6/20/2003)
 
 We noted today that volatility in the Nasdaq was rising as the index was rising, and that volatility in the S&P 500 stabilizing as the market kept rising...
 
 There are reasons why this is happening:
 
 Importantly, certain classes of investors are being forced to buy securities as opposed to having a sincere reason to do so...
 
 That means liquidity is one-sided.
 
 In bonds, a survey that only pros see had shown that the major debt players were way short duration a month ago...in history this had rarely happened...and when they all found out they had the same position it caused an avalanche of buying...
 
 Today the big rise in mortgage applications, of +13%, has additionally put the fear of God into the big funds who are laggards...and talk of 3% government Treasuries was as rampant as "beans in the teens" was for soybeans a few years ago.
 
 The fact the bond market rallied was even more remarkable as major pension funds are short equity duration, If one goes back to Sept. 21, 2001, and looks at the ratio of S&P 500/long Treasuries, both dollar-weighted and euro-weighted, you will see that a fund with 60% stocks and  40% bonds is now easily 50/50%...
 
Some state funds are being forced to switch, and they have been sucking up bond liquidity the past few days, which makes the bond rally remarkable...
 
 Hedge funds have also switched to "high speed" long to add to the liquidity misery of these giant pension funds...all one has to do is look at the surge in the Russell vs the S&P to see the massacre going on...
 
 Stat arb, cvt arb and long/short stocks are getting killed as well, as the cost of being short is now the full cost of the dividends and those who lend the securities are sure to want them back on ex date...
 
 This means the universe of stocks that you can be short is FALLING, adding further to the misery of the blogshorts and other non-professionals...
 
 Finally, the dollar has energized the mutual fund industry as 30-40% of all hedge funds still haven't reported results, which may confirm the pain from relying on the advice of amateurs...
 
 But there are some great Goose Creek developments coming...
 
 As we enter the preannouncement period in the next few weeks, the fiscal underpinnings will be tested...after a three day rally from June 14-16, the market will be ready to end its BARBECUE of the shorts...the hot blogdogs will all be eaten up...the pension funds will have made their switches, the prop desks who used the carry trade (short yen long Treasuries short the dollar) to produce all the gain at J.P. Morgan etc will be sated, and volatility will be rising, and it will be time for some rest and fishing at Goose Creek...