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hardnox
Advisor

buybacks are a wild card

I'd been scratching my head over whether corporations would continue to buy their own stock back while the market was getting increasingly overvalued. But the drop hasn't hurt their cash position* and they will, at some point.

 

A lot of them have actually seen a deterioration in their balance sheets, even if stock price is up, as they've readily taken on debt for buybacks and  dividends and since the GFC have preferred to keep a greater liquidity buffer. 

 

Although worth noting that increasing leverage to buy back stock doesn't improve employment or the company's long term prospects.

8 Replies
hardnox
Advisor

"subprime and short vol"

http://safehaven.com/article/45041/subprime-and-short-vol

 

The estimable Doug Noland, as he says, people were printing money by writing flood insurance on a flood plain during a 9 year drought.

 

Although please note that he posits that a blowup in the equity insurance market is a bigger deal than subprime.

hardnox
Advisor

option expiration

next Friday so some upward stability next week makes some sense.

 

The Size 18 Shoe that might drop at any moment would be news that some very large entity- hedge fund perhaps- is insolvent owing to bad short vol bets. If that were the case it would all unfold way faster than Bear or Lehman, which twisted in the wind for a while and didn't collapse until their peers withdrew financing. Another surge higher before the current crop of miscreants can get covered would probably do it quickly.

 

This moment most closely resembles the 1987 crash which was caused by a somewhat similar ubiquitous trade in portfolio insurance. The dawn of the Age of Bubbles is generally placed there because on the following morning Greenspan intervened to cover a vast margin deficit at the Chicago Merc and ever since the market has believed that the government has its back.* 

 

That action also burnished the Reagan Legacy**, as it would have been a bit different had the rout continued and the country been in recession at the end of his term. Might have even had Pres. Dukakis, as improbable as that sounds.

 

*an interesting test for free market libertarian liquidationists should the Trump presidency teeter from a financial crisis. I imagine intervention would be OK because it is the fault of Barry, Crooked Hillary and the Deep State anyway?

 

**They also kicked the festering S&L crisis on to GHWB's term and the mild recession that followed the cleanup probably let to his defeat by Clinton. That and the fact that our present Age of Squirreliness dates to that period as herds of them flocked from the trees at the end of the Cold War.

hardnox
Advisor

back in my happy place

ca. 2007-9.

 

There was a lot of denial and partisan foolishness but at least there was some sort of analytical framework to try to work through.

 

What are you supposed to say to the latest Echo Chamber meme? 

 

Yo mama, so's yo mama, yo mama......

bruce MN
Advisor

Re: option expiration

No shortage of ironies in pp. 3 that more than just sort of ring co-op with the supposed topical nature of these discussion pages.

hardnox
Advisor

you would understand

given that you followed politics back in those days.

 

In 1987 we were still in the Cold War, actually amping it up a bit. So virtually nobody complained about matters that could be deemed in the national security interest.

 

As far as the Age of Squirrels that soon commenced, nobody rang a bell to say that the stage had changed, but the old grievances and divisions came bubblin' up like Ol' Jed's crude.

hardnox
Advisor

I wouldn't breathe a lot easier

if there's a decent upward retracement next week.

 

But- and while I don't see it as the most likely scenario- if the downward push resumes quickly it would tend to indicate that some big folks are really, really hung out to dry.

 

As the old saw about short selling goes, "he who sells what isn't his'n, must deliver or go to prison."

 

Although that's so passe'.

hardnox
Advisor

curious

http://www.businessinsider.com/wall-street-is-piling-back-into-the-trade-that-blew-up-earlier-this-w...

 

Traders piled right back into the most popular short-vol instrument.

 

Time will tell, don't know what it means.

hardnox
Advisor

on first blush

the budget deal seems negative to the market.

 

The "excuse sheet" wrap up on the market correction was fear of inflation/higher rates which is probably partly true but clearly there was an endogenous cause with the unwinding of huge, risky short-vol bets.

 

The GOP majority thinks it can fool the market by not publishing a budgetary analysis but I' m dubious. The "economy" may do pretty well for a while with the Keynesian stimulus (at a point in the cycle where Keynes would not have approved) but I'm guessing "the market" has already discounted a pretty rosy scenario.

 

The Base regards Trump as an infallible business genius but I'll stick with the assertion that his timing has often been poor. He'll need to provoke ever more fear, anger and resentment in order to keep anything resembling a large and vocal minority in the fold. And he will.