Friday, December 19, 2008

Parallels Between VXN 2001-2002 and VIX 9/08 to__ ?/Commodity ETFs

Yesterday was an anomaly day for the VIX, when it fell close to 5% to 47.34 (trading down to 45 before the market tanked late in the day) but the S & P average fell 2.12%.  Reuters  Normally, I would expect a fall of this magnitude in the VIX to be associated with a significant rise in the S & P average which did not happen yesterday.  Nonetheless, I am encouraged by this anomaly  as I am by the fall in the VIX from super elevated levels.  The current pattern in the VIX is similar to the two VXN patterns in the 2001 to 2003 period, where there was a spike up to 77 in September 2001 followed by a drift back down to 37 in March 2002, and then another immediate spike in the VXN peaking at a lower level of 69 in July 2002.   The VXN then worked its way back down to a range of 20 to 30 by the fall of 2003 and continued this range bound trade for about a year until late October 2004 when it broke below 20.  This is the closest pattern to the current VIX that we have for a major index.   The VXN is going to be more volatile than the VIX and may stay in an elevated period longer.  If there is a break into the 20 to 30 range for the VIX, with an extended period floating in that range, then it may be possible for the stable bull pattern to emerge consisting of 3 months of readings below 20.   I would not use the historical pattern of VXN to make any prediction about what may happen next in the VIX.   However, since the VXN did experience major elevated spikes during the 2001-2002 period, and we have now seen one spike into the stratosphere for  the VIX,  the historical pattern for VXN does suggest a possible resolution pattern by finding a lengthy stability period in the 20 to 30 range before a start to the next bull pattern.

I am going to ease into increasing my asset allocation to commodities. I am pleased now to have more commodity ETFs to make my choices than I had last year.   I will probably add more to my UNG position before adding any shares in OIL and GSG.  GSG is already heavily weighted in the energy complex   iShares S&P GSCI(TM) Commodity Indexed Trust (GSG): Overview I will be taking only partial positions in any one trade and I will probably space the trades out over 6 months.    Some of the newer commodity index funds traded on the stock exchange can be used to add narrow positions in food and agriculture as well as the industrial metals.  These could be used to change the weighting of GSG which is the one I used last year along with DBC - DB Commodity Index Fund - DBC

Some of the newer ETFs are actually ETNs which requires some explanation.  ETN stands for Exchange Traded Notes.  Yahoo! Finance I am not going to explain the difference between ETFs and ETNs except to note that the IRS is reviewing the favorable tax treatment of ETNs and the ETNs are in reality debt issues.  Being debt,  a credit default risk of the issuing company becomes an issue.  So there are two good reasons that I have avoided them prior to now.Yahoo! Finance
 If I add an ETN to my commodity mix, it will be in small doses and the adds will likely be my last adds.  There are several issuers of these notes for narrower exposure to a particular commodity area.  The three that I have looked at so far are senior debt securities issued by UBS designed to track, after fees,  market indexes for industrial medals, agriculture and food.  E-TRACS - Exchange Traded Notes (ETNs) from UBS   Since I am just starting to build my asset allocation up from zero, I have a long way to go before maxing out.  I am in no hurry.  The reason for the declines in commodity prices is basically the same as the reason for the flight to U.S. Treasuries with both trends still in vogue. 

After reading the WSJ article about the Fairfield Greenwich Group steering investors to Madoff and charging heavy fees for their "due diligence", I would suggest the Fairfield firm may need to lawyer up for about the next decade.  WSJ.comI am sure there will be plenty of $500 to $1000 an hour Park Avenue lawyers willing to defend Fairfield and its principals to their last dime.   Maybe there would be some barristers from the Dreier firm willing to work on the cheap for Fairfield.

I certainly hope the Beanpole hits the ground running with financial oversight.
But I still hear people like Larry Kudlow, evangelicals for no regulation, espouse their ideological views about no regulations ignoring the lessons from history and all facts obvious to those less ideological that have come to light over the past two years.  Filtering information through an ideological spectrum is a recipe for stagnant and erroneous thinking.

I am glad to see Bush apparently step away from requiring an orderly bankruptcy of the auto companies as if that was something that W and Paulson could arrange in the last four weeks of the most disastrous Presidency in my lifetime, with Nixon and LBJ coming in as a close second and third respectively, to the W failed presidency.   The most positive thing that I can say about W is that he can dodge shoes extremely well, and I also believe that he is good at being physically fit for someone his age. So I do have a few positive comments about him.  I thought that Nixon would be the worst President in my life but I was wrong.  As I have said, I do not view myself as a liberal, but as a True Conservative who has almost nothing in common with those who call themselves conservatives these days. 

It is not that I believe that it is right to aid companies that deserve to fail.  I do not.  I do believe that the economy is far too weak to absorb the implosion of GM and Chrysler.MarketWatch

Oil continued its waterfall plunge in early electronic trading.  Yahoo! Finance  It looks like a was a bit premature in my buy yesterday which I certainly anticipated and this explains the small buy of an odd lot and the use of a double long using less cash, although I am sure that many would disagree with buying the double long when I still believe that further significant movement to the downside is possible.

Japan's central bank lowered its key rate to .01%.Yahoo! Finance  Free money for everybody seems to be the mantra now. 

S & P lowered its debt ratings for major European and U.S. banks including Bank of America and Goldman Sachs.

Oracle's earning report looked good to me at first glance this morning.

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