Cruel Mistress Market

It seems to be that Mistress Market, in her infinite wisdom conspires to lose as many people as possible, as much money as possible…before ultimately turning around and saying “you know what? You were right, if only you’d held on…”

A case in point is Volkswagen, now the spread has been creeping in since the mid 90s wides of late October. Everyman and his dog had the trade on, and it was so compelling, but when, last Friday, VOW was down 15% (27% at one point) and the Prefs were only down 6%. Was anyone left in the trade to benefit? I doubt it. Perhaps there is a moral victory and a healthy dose of schadenfreude in the form of Porsche’s marked turn of fortunes but any such victory is surely hollow and has ultimately proved pyrrhic to many.
With this in mind, is there anyone left on the short side to benefit from this risk off we’ve seen? We noted the pick up in wariness across risk indicators over the last couple of weeks and in particular the fall in China (now down 17% in 2 weeks) and the Baltic Dry and at last this has followed through to developed markets. The VIX is up 15% today, we’re running out of earnings beats and cost cuts to keep us buoyed and there is a bearish element lurking in the market. Even Matt Nesto on CNBC declared “It would take a cure for cancer to get this market up today.” Abbey Joseph Cohen has called the end of the recession, the manufacturing report came in better (although it’s only c100 manufacturers in NY State) and neither could move the Marché.

Now we’ve been here before, remember mid July? But maybe this time is different. I don’t know. It would make sense to me that a multiple expansion based rally without sound underlying economics comes back to earth. It’s not that I’m a perma-bear I just don’t think you can extrapolate a couple of quarters of earnings beats into a rosy future, especially when the beats aren’t coming organically and the estimates have been hacked down so low to be knee high to a grasshopper. I’m more of the new normal, slower for longer frame of thought and in that regard, I can more easily rationalise the move downwards. So is this time different? Who knows but given the moves from our leading indicator, China, it gives me more conviction that this down move could be more prolonged. China did not move like this during the July headfake. However, Mistress Market is unyielding (no means yes to her) so this could all turn around in the blink of a macro number. How would I play it? MacroMan recommends puts and I’d have to agree, ok the VIX has rallied hard but it’s off a low base and you know your downside. And for sure, if you’re wrong, it will be far less painful that 40 lashes from Mistress Market for being short, especially if naked.