Hurtling through the week; careering like a week-ending Exocet. Here we have it ladies and gentlemen, another episode of what’s been happening and frankly more important, what Three Counties thinks of it all. Grab a coffee, sit back and enjoy our review of the week.
And what a week it has been. Like a “git massive” rock, flung into a millpond, the week began and is ending on the Godzilla-like return of volatility to global stockmarkets. To those of you who didn’t read my update on the markets during the week (the question remains, why not?), better than expected economic figures from the US have pointed to the hastened increase in interest rates. This change of thinking spooked the markets – the beast likes certainty; it thrives on known knowns and abhors the opposite.
Therefore positivity can sometimes, perversely, be treated as a negative, if the mind-set is glass half empty. And the effect was dramatic. Full-tilt Liberace dramatic.
One indicator of market volatility is the Chicago Board Options Exchange (CBOE) Volatility Index, commonly referred to as the VIX. It formulates a theoretical expectation of stock market volatility in the near future, quoting the expected annualised change in the US S&P 500 index over the next 30 days. Basically if it’s high, then volatility is likely to follow. It’s known as the fear index…
The long term average of the VIX is 18.51; at the beginning of the year it was 9.77. On Monday it hit 39.94, its fourth “worst” day since the index was created in 1990. The only three other periods where the index signalled even greater alarm were the Russian crisis of 1998, the global credit crisis of 2008 and the US congressional lockdown in 2011. All of this because of good news. Really. Yep. Mental.
Yet it doesn’t stop there.
As the VIX for the last 3 years or so has been trading at historically low levels, clever people within the industry have tried to manufacture returns from this low volatility world. In steps Credit Suisse, the global financial behemoth and their “VelocityShares Daily Inverse VIX Short-Term Exchange Traded Note”, or XIV for short.
XIV. Brilliant.
“XIV” because it looks to generate returns to the inverse of the “VIX”. Genius. So when the VIX goes down because volatility is simply not present within the market, investors generate returns. And as we all know, volatility has been removed from the market forever through the work of the Cabal (read: global central banks). Volatility is dead; long live the XIV. Until this week.
As the VIX shot up, the XIV plummeted, as shown in the chart above. And it caused Credit Suisse to “terminate” the XIV. Opening at $108.36, it closed at $4.22, effectively wiping out the entire value of the holding. Permanent. Loss. Of. Wealth. In today’s world of ever rising markets, it remains a clear and present danger, as it has always been. Investing isn’t supposed to be easy, but it should be dull.
Yet if you took time to read the 193 page pricing settlement of the XIV ETN, you would have noted this absolute beauty of a line.
“In almost any potential scenario the Closing Indicative Value of your ETN is likely to be close to zero after 20 years”.
…
This is happening today. This is real life. This isn’t pre Credit Crisis. This is today’s world of transparency, clarity and responsible investing.
Do me a favour. Please. Know what you are investing in. Please.
But it’s the weekend. And it’s a special weekend. Its pre-Valentine’s Day and as such, this week’s playlist has been created with this in mind. So get the fire roaring. Comb the sheepskin rug. Pour the Krug and enjoy the moment.
Because I never take my readers for granted. Only a fool would take you all for granted. Just because we have a blog today, it can be gone tomorrow. And that’s one thing that you never in your life ever have to worry about with me, is if I’ll ever change towards you because, readers, I love you. Yeah, I love you.
Just the way.
You are.
