BAC and C Need More Money?? But Didn't Ken Lewis say...

The markets are still struggling for direction. As I mentioned last week, the earnings just haven’t provided that bit of uumph we were hoping for. While we’re down today and things such as the misses from US Steel, Daimler certainly haven’t helped the tape. The real reason in my view is the worry surrounding BAC and C having to raise more capital. The Journal has the leak and it’s not pretty, especially when you consider this is as a result of the Stress Tests which as we know, weren’t very stressful. Plug in some realistic scenarios and the numbers would become increasingly sobering. Now while Ken Lewis did again and again state that BoA would not need to a capital increase, surely not even the most trusting of souls could have believed this…right? Still, there is a disconnect between the market and reality at the moment, so if Ken Lewis says so, why not run with it. You’ll get burned eventually (soon), but in the interim, you can make some money.

Both Macro Man and Zero Hedge talk today about FX vol and in particular Yen Vol. Now JPY has rallied which is usually a surefire risk aversion sign, yet vols haven’t really rallied. In fact all risk assets have sold off, the resource currencies, beta equities are down and the defensives have a bid as do bonds, but there hasn’t been much of a move in the VIX. Zero Hedge recommends buying FX vol and I don’t disagree (as it’s simply a risk proxy and I am bearish) but I would say this about vols in general; I don’t think we’re going to get back to anywhere near the lofty levels we had in Oct/Nov 08. In February and early March, when the market was falling out of bed, VIX didn’t get much above 50. During that period, while I thought we were due a rally (nowhere near this sustained admittedly), the signs of capitulation that you would ordinarily have looked for, i.e. elevated vols, just weren’t there. So while I think the market goes lower, and may well break the previous lows, I don’t expect vols to rally anywhere near the previous highs. For one I think the market is long downside protection but also the shock factor has been removed from the market. We know what we’re dealing with now (if not yet quite how to deal with it) and the issues that appear are reoccurring ones, not new themes so the panic levels aren’t as high. So while I’d be long vol here, I’d put on a call spread and finance it by selling some say, 50 strikes. I’m not an options guy by trade so if someone has more insight, I’d love to hear it. That’s just my thoughts.