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?

1. Vix Vacation
31 August 2016
War Room

2. HiddenLevers War Room
Open Q + A
Macro Coaching
Archived webinars
CE Credit
Idea Generation
Presentation deck
AccountabilityScenario Updates

3. Market Update
Wall / Main Street Disconnect
Vix Vacation
Scenario: Headline Risks
Vix Vacation
UPDATED

4. HiddenLevers
MARKET UPDATE

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. HiddenLevers
WALL / MAIN ST DISCONNECT

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. 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. 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. HiddenLevers
VIX VACATION

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. 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. 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. 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.

15. HiddenLevers
SCENARIO: HEADLINE RISKS
UPDATED

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. 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. 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. 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. 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. 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