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Vix Vacation - War Room 08-31-2016

What does the current level of the VIX say about markets as we reach the end of summer 2016? And why have markets been seemingly impervious to events like ISIS attacks, Brexit, Zika, and more?

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Vix Vacation - War Room 08-31-2016

  1. 1. Vix Vacation 31 August 2016 War Room
  2. 2. HiddenLevers War Room Open Q + A Macro Coaching Archived webinars CE Credit Idea Generation Presentation deck AccountabilityScenario Updates
  3. 3. Market Update Wall / Main Street Disconnect Vix Vacation Scenario: Headline Risks Vix Vacation UPDATED
  4. 4. HiddenLevers MARKET UPDATE
  5. 5. Market Update sources: HiddenLevers, MarketWatch, NYTimes, LATimes, FT Fed = Institutional Paralysis Obamacare Chronically ill ? - Now acknowledges USD rising on global flight to safety - Admits it doesn’t have tools for low inflation world - Multiple policy makers suggesting break with mandate - Knows 3D challenge but raising rates anyway New S+P sector Real Estate
  6. 6. HiddenLevers WALL / MAIN ST DISCONNECT
  7. 7. Record VIX futures via ETFs, all time highs Vulnerable to headlines + geopolitical blips Record MF/ETF outflows Surrendering hedges, diving into equities Valuation multiples down + earnings up Disconnect: Most Pronounced in History sources: HiddenLevers, Bloomberg, $3.7 trillion restored to US equities since Feb lows  +20% US = one of few global bright spots Record VIX shorts Main Street Wall Street
  8. 8. Disconnect: Aug 2015 VIX Spike – didn’t stick sources: HiddenLevers Fed rhetoric = hawkish. Fed behavior = dovish. This has muted any VIX spike. Shanghai Crash
  9. 9. Disconnect: Headlines Don’t Matter None. sources: HiddenLevers, Economist, CNN, Marketwatch, UMD Global Terrorism Database (Boston Marathon, Charlie Hebdo, Westgate Shopping Mall, Ankara Train, Nice) Major Terrorist Attacks ZikaHurricane Sandy Ebola Scare Shanghai Crash One-time events do not move the market. Events that affect growth of global economy move the market. 2nd Oil Crash/ Growth Fears Econ Growth Fears
  10. 10. HiddenLevers VIX VACATION
  11. 11. VIX Vacation: VIX 101 sources: HiddenLevers, CBOE What is VIX? Market volatility over next 30 days measured by options. How is it calculated? VIX observes 100s of SPX puts and calls to measure "implied" volatility on options expiring in one month. VIX + Portfolio Volatility VIX is NOT the same as historical volatility, which is based on how the S&P actually performed. VIX + Equities? VIX and equities move in opposite directions over 80% of the time.
  12. 12. VIX: Historical Perspective sources: HiddenLevers FEB ‘91-OCT ’97 VIX below 25 S&P +58% APR ‘03 – AUG ‘07 VIX below 25 S&P +65% DEC ‘11 AUG ‘15 VIX below 30 S&P +76% Volatile VIX S&P -7% Volatile VIX S&P -16% Volatility clumps together. Bull Markets coincide with extended low VIX periods.
  13. 13. Volatility: Comparison to MDD + Stress Testing source: HiddenLevers. *Using Fed Stress Test 2016 scenario S&P500 5y Volatility 12.5% MDD -13% S&P 500 – 5 Year Stress Test Risk* -43% S&P 500 – 10 Year S&P500 10y Volatility 18.5% 10y MDD -54.6% Stress Test Risk* -43% Volatility changes with timeframe. Stress tests provide stable + realistic view of tail risk.
  14. 14. Volatility: Misleading for New Funds sources: HiddenLevers. *Using Rising Interest Rates and Fed Stress Test 2016 scenarios BOND Volatility 3% MDD -5.6% Stress Test Risk* -11.7% MOAT Volatility 12% MDD -14% Stress Test Risk* -38% New funds lack sufficient data to rely on traditional risk stats. With no real downturn since 2011, stress testing can fill this gap.
  16. 16. When do Headlines Matter? sources: HiddenLevers Impacts Economy SurpriseBrexit 9/11 Impacts People OKC Bombing Hurricanes Katrina + Sandy FOMC Decisions Terror in France Ebola SARS Epidemic Caitlyn Jenner Impact on Economy + Surprise Factor = Market Impact FX Rates
  17. 17. YAWN: Global Pandemic source: HiddenLevers, Little to no Impact on US markets from Zika Market impact disappears with virus Impact likely regional to pandemic Impacts travel industry
  18. 18. SHRUG: Terrorist Attack in US Markets recovered from 9/11 crash by October source: HiddenLevers, Barchart ISIS attacks zero impact 11Sept MDD -11% priced in govt insurance for terrorism
  19. 19. BAD: Conflict in Korea source: HiddenLevers, North Korea = saber-rattling S.Korea now #11 economy Initial drops Korean War -11% Gulf War -14% Wars help US economy 1950-53 US-Korean War S&P = +40%
  20. 20. Scenario: Headline Risks Yawn: Pandemic Shrug: US Terror Attack Bad: Conflict in Korea VIX 35 S&P -10% VIX 30 S&P -9% VIX 15 While the travel industry would feel the impact of a pandemic, it’s unlikely to cause meaningful market impact. SARS killed 750 in 2003 but had no lasting market impact in Asia. 9/11 caused an S&P decline of 11% over one week, but markets recovered within one month of the attack. The Korean war led to an 11% S&P drop in June 1950, followed by a quick recovery. Korea is a major economy today, so some impact could be felt without major US involvement. S&P FLAT
  21. 21. Vix Vacation – Take Aways Main Street fears don’t impact markets Low VIX lacks predictive value in bull markets Headline Risks matter when unexpected + impact economy Use stress testing + not volatility, to judge portfolio risk 10yS&P