SKEW

[jschembs]

Does anyone follow the CBOE's SKEW index? From CBOE's 2011 white paper: "Similar to VIX, SKEW is calculated from the price of a tradable portfolio of out of the money S&P 500 options. This portfolio constitutes an exposure to the skewness of S&P 500 returns and its price encapsulates how the market prices tail risk...The probability of a return two standard deviations below the mean gradually increases from 2.3% to 14.45% as SKEW increases from 100 to 145."

 

Going back to 1990, previous peaks occurred in June 1990, October 1998, and March 2006. Currently nearing a multi-year high approaching 140.

 

I don't buy into the bubbles everywhere view of the world, but there certainly is some ridiculously priced sh*t (social media, SAAS, big data, 3D printing) that could see some 2+ sigma drops (on highly volatile assets) and still not be "cheap" according to more traditional metrics.

[Guest wellmont]

as long as interest rates are near zero and fed is "easy",  I can't see that stuff dropping. and the economy is getting better. so this is a dangerous time to be short imo. in fact I think 2014 could see much more overvaluation in those kind of stocks. See Dinans interview on cnbc the other day. He makes a pretty compelling case that 2014 will be continuation of this year.

[jschembs]

as long as interest rates are near zero and fed is "easy",  I can't see that stuff dropping. and the economy is getting better. so this is a dangerous time to be short imo. in fact I think 2014 could see much more overvaluation in those kind of stocks. See Dinans interview on cnbc the other day. He makes a pretty compelling case that 2014 will be continuation of this year.

 

Don't fight the fed has certainly worked over the years. Given the onset of taper, is that not the shift towards tighter policy? I know the Fed is jawboning on how tapering isn't tightening, but what matters to the capital markets is typically one, two, or three levels of abstraction from the whatever you see on CNBC (a la the Keynes beauty contest).

 

ZIRP and related policies were obviously unprecedented, so wouldn't you expect similarly unprecedented outcomes via the great unwind? Saying nothing is going to drop because rates will remain near zero for the foreseeable future seems like common perception, which as we know can be wrong from time to time.

[jschembs]

Also, economic growth brings up an idea I've been kicking around for the last year or two. The only reasonable argument I can muster vis-a-vis social media/SAAS/internet 2.0 valuations is the dearth of growth exhibited by more traditional businesses. One can argue whether the growth has been partially manufactured by excessive sales & marketing spend, but that's a different discussion.

 

Anyway, the idea is now that consensus is forming around widespread economic strength, if the AMZNs, TWTRs, LNKDs, CRMs, and other large, rapidly growing, unprofitable enterprises will no longer be given a free pass, since growth will be seen (or will be expected) from the non-sexy pockets of the market.

 

Thoughts?

[bmichaud]

Good thoughts Wellmont. Dinans interview was phenomenal. Love how he thinks. Both NDR and Cullen Roche have strong economic forecasting records and both are strongly suggesting accelerating growth next year based on their models. Tough to see the risk of more than a 10 to 15% pullback with no recession.

[jschembs]

SKEW jumped above 140 for the third time in six months...just sayin' :)

 

http://pragcap.com/cboe-skew-index-spikes-to-bearish-levels