February 9, 2018
We are continuing to sell low yielding (3-4%) corporate bonds that were purchased before we started the blog (not listed in the Core Portfolio)…with the intent to buy higher yielding investments when and if this correction is over. Their prices have been declining altho we are seeing small profits since we purchased at lower levels. We do see additional declines ahead in the general markets.
Everyone is asking WHY we are seeing market declines. We noticed this very interesting article talking about Cramer’s (CNBC) take.
The VIX index was made to gauge the fear in the market. For 2017, VIX remained low. This led to rise of leveraged trading vehicles that short the VIX. “Now, it isn’t enough sometimes on Wall Street to just own volatility or bet against volatility. Brokerages know people crave real juice, particularly hedge fund managers, so they invented stocks that allowed you to get twice the gain of the VIX on a given day, or get twice the loss of the VIX if it goes down on a given day. These instruments are the proximate cause of the madness you are now seeing,” said Cramer.
ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY) is an ETF that doubles the performance of the S&P 500 VIX Short-Term Futures Index every day. There were a lot of fund managers that short the instrument due to low volatility in 2017. With spike in volatility, they were caught off-guard and 110M shares were traded on Thursday. “There are some very big funds that have bet against this thing and they have to raise cash to stay short it. They can either end the pain and buy it back, or cover their call shorts, or they can just keep wagering by putting more and more of their money by selling stocks or selling S&P futures to raise money,” said Cramer.
The other three funds are iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), VelocityShares Daily 2X VIX Short-Term ETN (NASDAQ:TVIX) and ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY). SVXY goes down when VIX spikes as it did on Thursday. There were millions of shares traded on these funds as traders had bet against volatility.
When the volumes on these and 12 others dry up, it means that market can return to normalcy. It won’t go up again immediately, but the market will be clean enough to trade in a sane manner.