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Total Posts: 457
Joined: May 2006
Posted: 2018-02-06 11:33
Any thoughts on what is driving the repricing in the markets this week?

I mean, we all know the equities are massively overvalued, and they still have a long, long way to go before they can be considered to be fairly priced.

But people don't generally wake up on a bright Friday morning, after 8 years of driving the markets to record highs, and go "oh sh.t, this is overvalued - we have to sell everything today". Based on no news whatsoever.

My personal bet would be on one big seller, triggering the nerves of lots of people who have been fearing a sell-off for a long time.

Any thoughts / gossip / insights?

"There is a SIX am?" -- Arthur


Total Posts: 368
Joined: Jan 2015
Posted: 2018-02-06 12:27
The below is unsubstantiated hearsay from some friends in rates space, so take with a grain of salt...

Japanese pensions and insurers have been loading up on duration to reach for extra yield. Up until last year, this mostly worked, because rates were going to stay 0 forever. As the trade got more crowded they kept increasing exposure to maintain the same same yield enhancement. Well, obviously this has been pretty painful so far in 2018. Finally the pain of losses in treasuries broke the camels back on Friday. There's been a major long squeeze in treasuries. As positions get liquidated, the contagion has spilled over into equities. Regardless of the specific details, it seems pretty clear that this selloff definitely originated in treasuries.

Good questions outrank easy answers. -Paul Samuelson

Founding Member

Total Posts: 5084
Joined: Mar 2004
Posted: 2018-02-06 12:46
The pensions rebal has been a point of speculation for weeks, given how overvalued equities are. Married to this has been speculation about how much within that has become risk parity. People are concerned about the institutional pressure at the long end coupled with general FED. At the short end there was discussion around removing GC from the leverage ratio calc and we saw this normalize o/n.

The better jobs / higher wages data was definitely the big nudge. This inflationary signal created uncertainty at the wrong time. In addition to pensions, and ever since '87, there is speculation around programmatic trading. While present, based on my calcs, this is always overestimated, especially since summer of '15. I do not think that there's been any meaningful delevering. On the other side, I don't think there was as much momentum-based "buy the dip" as we've previously seen, making most of these things intraday events. Instead the bottom didn't push back.

VIX had it's largest move, ever. This coming off a series of spx up / vix up moves. rates and equities were down yesterday. Double digit bps. This has people spooked. Friday option flows were choked. Yesterday was better. Pricing in FED and institutional / programmatic will take a bunch of the tension out of the shape of things.

Nonius is Satoshi Nakamoto. 物の哀れ


Total Posts: 457
Joined: May 2006
Posted: 2018-02-06 17:09
Thanks both.

It's one of those things that people throw around, but it doesn't quite add up in my mind.

Inflation => treasuries. Fine, no argument.

And then what? Inflation is high so you prefer cash to equities?

The dv01 of equities would have to be 20 for that side to work. It might just be me, but I don't see it.

"There is a SIX am?" -- Arthur


Total Posts: 432
Joined: Dec 2008
Posted: 2018-02-06 20:49
Ronin- thanks for your patience with my stupidity

Is DV01 for equity well defined?

Is it appropriate for stocks w/out distributions/dividends?

Does it capture the many impacts of inflation on an operating company's performance beyond the cash flow opportunity cost? (inflation hits company in nonmarket space)

EDIT: minor clarifications


Total Posts: 432
Joined: Dec 2008
Posted: 2018-02-06 21:01
Rapidly compounding said stupidity

Is equityduration = Price / div the kind of calculation you have in mind?


or on a related note, there's this, err, source who points out that if debt is impaired, equity is impacted...


Total Posts: 457
Joined: May 2006
Posted: 2018-02-07 10:11
Thanks @deeds!

By dv01 I mean sensitivity to interest rates. And that is kind of my point. Equity dv01 isn't even particularly well defined, let alone easy to measure. And yet we seem to be saying that a quarter point interest rate rise (or 20-30 bp of treasury yields) is worth 5-10% of equity prices, minus inflation.

That would be dv01 of at least 20. And then add the effects of inflation, which pushes it even higher.

Like I say, doesn't quite compute.

"There is a SIX am?" -- Arthur


Total Posts: 432
Joined: Dec 2008
Posted: 2018-02-07 12:24

Ronin - I see your point.

Parking the question about how interest rates impact equity in detail, it seems an assumption of linear or smooth response underlies the expected response of the equity markets.

In my mind maybe there is scope for a picture that is more 'tectonic'...equity investors primed to move for a protracted period, with a kind of built up pressure leading to an overresponse.

I remember someone in the forum describing how they perceived a particular financial crisis (maybe it was peso fx crisis or argentina)...very slowly for an extended period, then very fast.


Total Posts: 2864
Joined: Feb 2005
Posted: 2018-02-07 13:36
Inflation => treasuries. Fine, no argument.

And then what? Inflation is high so you prefer cash to equities?

The usual argument goes like "Equities are overvalued, but relative to bonds the divy yields rock". Now higher inflation would mean higher nominal rates at the long end and all of a sudden dividends look a bit... less attractive. But 2y Treasuries beat divy yields for a while now so this isn't exactly news.

As for the risk parity guys, I expected them to move after the snafu in VIX. Given the rumored amounts in various short vol strategies the moves so far seem rather harmless, though.

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)


Total Posts: 10
Joined: May 2018
Posted: 2018-05-22 11:22
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