Causes of weakness Funds deleveraging –Taking gross and net positions down –Some had been levered 5+ times Forced liquidation-margin calls Flow of funds away from equity Weakening economy –Lack of credit –Lack of confidence
VIX-CBOE Volatility Index What Does VIX - CBOE Volatility Index Mean? The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".investor
Libor-OIS Spread The LIBOR-OIS spread is a comparison between the London Interbank Offered Rate (LIBOR) and the overnight index swap (OIS) rate. You see, analysts aren't too concerned with the nominal value of each of these rates. What they are concerned with is the relationship between these two rates. Typically, LIBOR is higher than the overnight index swap rate, but knowing that alone isn't enough. You need to know what the spread is. London Interbank Offered Rate (LIBOR) overnight index swap (OIS) rate
Libor-OIS Increasing LIBOR-OIS Spread When the LIBOR-OIS Spread is increasing, it tells us that banks believe the other banks they are lending to have a higher risk of defaulting on the loans so they are charging a higher interest rate to offset this risk. It also tells us that the credit markets are not functioning as smoothly as they could bewhich is sign of potential economic contraction. Decreasing LIBOR-OIS Spread When the LIBOR-OIS Spread is decreasing, it tells us that banks believe the other banks they are lending to have a lower risk of defaulting on the loans so they are charging a lower interest rate to offset this risk. It also tells us that the credit markets are functioning smoothlywhich is sign of potential economic expansion.
Determine Health of market Volatility-VIX-back at Sep 08 levels Liquidity-OIS Libor spread-back at Mar 08 Equity Markets-32% rally from low of Mar Credit Market-IG and high yield rally Equity and credit deals –$32 billion equity deals last 2 weeks
Volatility=Opportunity Large hedge fund unwinding –Several weeks worth of volume Liquidity Crisis and Margin calls –Many forced sellers last year –Need to liquidate at any cost