G3 Recap 4-26-11

Main Items:

  • US Consumer Confidence improved to 65.4 in April vs 64.5 expected and 63.4 previously.
  • Richmond Fed Manufacturing Index declined to 10 in April vs 20 expected and previously.
  • The budget deficit in Greece for 2010 was 10.5% of GDP, significantly higher than the forecast from either the Greek government or EU authorities. Ireland had a deficit of 11.9% of GDP, Spain had 9.2%, and Portugal had 9.1%. (~0.5% worse than estimated)
  • JPM Earnings Recap – We have received earnings from 29% of the SP500. On average, 77% of the companies have topped St views w/the average beat (on EPS) being 5%. Materials have seen the largest average earnings beat (13%) and financials were #2 (8%). We are furthest through the financials earnings reporting season (45%). While the bulk of the financials topped St EPS forecasts, the stocks have actually traded poorly as the upside came from credit and not top line strength (i.e. loans, revs).

Overseas:

  • UK CBI Business Optimism improved to 9 in April vs 10 expected and 7 previously. CBI Trends Selling Prices increased to 36 from 33. The CBI survey reported a surprise surge in the percentage of manufacturers citing plant capacity as a constraint on output from 16% in January to 29% in April – the highest since 1988. The percentage working below a normal capacity level, meanwhile, fell to 55%, the lowest since July 2008
  • Swedish jobless rate increased to 8.1% vs 7.8% expected and 7.9% previously
  • South Korea Consumer Confidence improved to 100 from 98 previously.

Commentary:

  • Treasury realized volatility hit a 13 month low today – the lowest since the end of QE1. This has taken down Treasury implied volatility down to the lows as well, as proxied by the MOVE index:

    While is clear that ‘fair value’ for vol should be higher, (model outputs suggests it is 2 sd’s cheap per chart below) the problem is that long vol mean reversion trades tend to lose money due to time decay. However, with FOMC tomorrow as well as the Bernak’s first FOMC press conference, there is a reasonable chance we get some sort of a surprise. This suggests that going long treasury vol over the next few days is a reasonable bet.

  • The adage ‘sell in May and go away’ has not been good advice over the past decade. While average S&P returns in May since 1960 have been below the mean, since 2000 it has been above. It is notable, however, that in both samples, the S&P has historically been weak in the months of June and July.

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2 thoughts on “G3 Recap 4-26-11

    1. Hi Sid – perhaps you are right. I am a bit more sanguine about equities IV, however, given that historically they have been less sensitive to the FOMC than rates at this stage of the cycle. Given that both are low, I think rates vol is a better bet.

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