- Goldman Sachs reiterated their conviction buy list rating on Chicago Bridge & Iron (CBI) and raised their price target to $30.
- Longbow research upgraded Bucyrus (BUCY) to a buy with a $75 target.
- The VIX fell below 20 breaking an important support level.
VIX – CBOE Vix index – The year end equity rally is prompting investors to lower their level of fear for next year’s market performance. It’s typical that thin markets create perhaps an illusion of optimism and when the bears have no fodder to get their claws into, they just go back into the woods and bide their time. The volatility index slipped convincingly to below a reading of 20 for the first time since August 2008. After a round of broker upgrades yesterday, the optimism sparked by the passage of healthcare reform, the latest spark of optimism is coming from the unusual angle of rising bond yields. A surge in yields accompanies a lack of investor demand for the safety of government bonds. U.S. yields have moved from 3.16% at the commencement of the Dubai World crisis to 3.75% today as investors jump ship from bonds to stocks. The economic outlook appears brighter and the final straw would be the removal of monetary policy. As ever markets are swift to discount such a move. In the vix options market today an investor appears to have bought between 20 and 25,000 put options in the expectation that volatility will stay lower before contracts expire in January. The premium paid today of 1.50 at the 22.5 strike implies a breakeven for the trader at a reading of 21 on the volatility index.
- Some cautious trading was seen in shares of FXI, the Chinese index fund after bubbly comments from Chinese leaders:
FXI – iShares FTSE/Xinhua China 25 ETF – Chinese equity prices measure by the Shanghai composite index slipped 2.3% overnight and it seems that investors are alone in missing out on the global rally. The irony here is that the role of the Chinese authorities has helped rejuvenate the global growth argument and this is helping investors elsewhere put faith in domestic measures enacted by their own governments. At the vanguard of Chinese measures is a boon in bank lending, which has seen some money flow heavily into property and stock markets. A warning today by Chinese central banker, Zhou Xiaochuan over the importance of reserve lending requirements as a policy tool sent a reminder to the markets that the government doesn’t want to inflate a speculative balloon. One option trader today bought a calendar put spread, which appears to take advantage of the recent downturn in fortunes of the FXI exchange traded fund. With its shares trading unchanged at $41.37 the investor appears to have bought 10,000 put options expiring in May and sold the same amount at the August contract. Both involve the same at-the-money $41.00 strike price and the additional premium received from the sale of puts at the August strike nets the investor a 1.25 premium. Assuming that the overall trend gets back on track in 2010 the investor would retain that credit. Should Chinese shares stumble the investor is protected in the near-term and could put a position to the put seller at expiration in May.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.