Sunday, September 27, 2009


VIX is calculated and disseminated in real-time by the Chicago Board Options Exchange. It is a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel -smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The goal is to estimate the implied volatility of the S&P 500 index over the next 30 days.

The VIX is the square root of the par variance swap rate for a 30 day term initiated today. Note that the VIX is the volatility of a variance swap and not that of a volatility swap (volatility being the square root of variance). A variance swap can be perfectly statically replicated through vanilla puts and calls whereas a volatility swap requires dynamic hedging. The VIX is the risk neutral expectation of S&P volatility over the next 30 calendar days. The VIX is quoted on an annualized variance basis.

The VIX is quoted in terms of percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, on an annualized basis. For example, if the VIX is at 15, this represents an expected annualized change of 15% over the next 30 days; thus one can infer that the index option markets expect the S&P 500 to move up or down over the next 30-day period. That is, index options are priced with the assumption of a 68% likelihood (one standard deviation) that the magnitude of the S&P 500's 30-day return will be less than 4.33% (up or down).

The price of
call options and put options can be used to calculate implied volatility, because volatility is one of the factors used to calculate the value of these options. Higher (or lower) volatility of the underlying security makes an option more (or less) valuable, since there is a greater (or smaller) probability that the option will expire in the money (i.e. with a market value above zero). So a higher option price implies greater volatility, other things being equal. Despite its sophisticated composition, however, the predictive power of VIX is similar to that of simpler measures, such as past volatility (see graphs on the right).

Investors believe that a high value of VIX translates into a greater degree of market uncertainty, while a low value of VIX is consistent with greater stability.

Although the VIX is often called the "fear index," a high VIX is not necessarily bearish for stocks. Instead, the VIX is a measure of fear of volatility in either direction, including to the upside. In practical terms, when investors anticipate large upside volatility, they are unwilling to sell upside "call" stock options unless they receive a large premium. Option buyers will be willing to pay such high premiums only if similarly anticipating a large upside move. The resulting aggregate of increases in upside stock option "call" prices raises the VIX just as does the aggregate growth in downside stock "put" option premiums that occur when option buyers and sellers anticipate a likely sharp move to the downside. When the market is believed as likely to soar as to plummet, writing any option that will cost the writer in the event of a sudden large move in either direction may look equally risky. Hence high VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward. The highest VIX readings occur when investors anticipate that huge moves in either direction are likely. Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.

Thursday, September 24, 2009

Saturday, September 12, 2009

Ten Bubbles in the Making

Here's 10 for which you should be on alert:

1. China bubble: Despite the weak global economy, the Chinese stock market has soared like crazy this year. But many believe the rally has been driven purely by government-supplied liquidity, rather than fundamentals. The fear is that companies are flush with cash, but have little "real" to do with the cash, so they're parking it in the stock market casino. The Chinese real estate market appears to be on a similar trajectory.

2. Green bubble: Green has been everywhere. With observers saying the "Age of Cleantech and Biotech" will be the next major economic revolution, and Washington pouring billions of dollars into alternative energy projects, you'd think a bubble would have already formed. But, as we noted this spring, it did not, at least from an investment perspective.

Still, as the economic recovery takes shape, alternative energy could see excess investment on hopes of big future returns. There's plenty of hype left, and if investors regain the cash to get in the game, could green become the next internet or housing bubble?

3. Gold bubble: Gold prices just keep going up. They've risen for seven straight years, recently breaking $1,000 per ounce.

Is it a bubble? Right now, it doesn't look too bad. Gold is good in both inflationary and deflationary periods, as it holds wealth tangibly. And, as the Telegraph notes, there's real demand, especially from China.

But with some predicting a doubling of prices to $2,000 an ounce, too many people could jump in and spike the real value of the precious metal. The "rise forever" mentality usually means trouble.

4. Federal Reserve bubble: Is the Fed saving the financial system or creating another dangerous credit bubble by snapping up mortgage-backed securities?

At first glance, the Fed's effort to clean up mortgage-backed securities is a winner. But, as Heidi Moore wrote for Slate's The Big Money, the Fed is actually creating a bubble similar to the one it's trying to do damage control on. By eagerly trying to save banks and stabilize the housing market, Washington is taking on too much: $1.25 trillion of mortgaged-backed securities, including both the original toxic assets and products of foreclosures to come. So who would bail the Fed out? You.

5. Trash stock bubble: There's a rush to trash going on. Stocks like Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) and even GM made big runs in August -- trading in trash financials made up nearly one-third of NYSE's August volume.

So why are people buying junk? Charlie Gasparino says shares of junk financials -- companies like Fannie, Freddie, AIG, Citi and Bank of America -- are being pushed up by a short squeeze. The Wall Street Journal suspects its high frequency traders. And others say its retail speculation and day traders getting their way while Wall Street went on vacation.

6. Education bubble: More people are going back to college and taking on huge debt to do it, despite questions about what the degree is really worth.

Last year, the amount borrowed by students and received by schools grew some 25% over the previous year, to $75.1 billion. That's a huge amount, especially with weak, low-paying job prospects for graduates in this economy.

As we've noted, all this student loan debt is crazy. Despite the desire to see more subsidization of college, we suspect there will be a collapse in student loan debt availability and desire to take on new debt.

Short of telling kids not to go to college, something's going to give.

The pop may be starting already. As Bloomberg reports, as many as one-third of all private colleges surveyed said they expected enrollment to drop in the next academic year. And almost 40 percent of those colleges said some of their students dropped out due to personal economic reasons and a quarter said full-time attendees switched to part time. Half said families had to cut back their expected contributions as the value of college savings plans dropped 21 percent last year.

7. Subprime bubble, 2.0: What are banks doing with all those subprime mortgages? They're repackaging with a higher rating -- "re-securitization of real estate mortgage investment conduits" -- and selling them.

As we've noted, it's a plan nearly identical to the complicated investment packages of the financial crisis a year ago. That being said, the problem was not strictly securitization, but the underlying housing bubble. So the return of complicated products isn't necessarily the end of the world.

8. Life insurance securitization bubble: In its search for new profits, Wall Street is planning on securitizing “life settlements" -- policies that the sick and elderly can sell for cash while they're alive -- much like it did subprime mortgages. The New York Times warns that we could be looking at subprime all over again.

Maybe. As we've noted, it wasn't securitization that caused the financial meltdown. It was the bursting of the housing bubble. Yes, there was a feedback loop, whereby securitization allowed more money to flow towards housing, but it seems unlikely that "life settlements" would get big enough to infect all portions of the financial world.

9. Commercial real estate bubble: This bubble is already hissing, if not popping outright.

While the economy is improving and some home sales are slowly coming back, the commercial real estate market could get far worse.

As The New York Times reports, "Even though industry lobbyists were able to persuade Congress to extend a loan program aimed at prodding the stalled securitization market back to life, several analysts said it was unlikely to head off a spate of defaults, foreclosures and bankruptcies that could surpass the devastating real estate crash of the early 1990s."

As UPI notes, commercial mortgage defaults could reach 4.1 percent by the end of the year, up from 2.25 percent in the first quarter, and Real Capital Analytics estimates commercial property loans worth $83 billion have been involved in default, foreclosure or bankruptcy in 2009.

Badly hit will likely be malls. "The next financial tsunami to hit will be the widespread failure of shopping center mortgages," says Peter Monroe, co-chair of REOMAC, a not for profit trade association to CNBC. "Half a trillion dollars of commercial loans financed on historically low rates, are due for refinancing in the next three years," says Monroe. "The negative impact of these shopping center mortgages is enormous."

10. Emerging market bubble: It's not just China. Risk-tolerant investors are bidding up emerging market shares to valuations not seen in 9 years. With an average PE of 20x, they're not in bubble territory just yet, but watch for things to get out of hand.

Obama to impose tariffs on Chinese tires

WASHINGTON (AP) -- President Barack Obama has slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

Obama had until Sept. 17 -- next week -- to accept, reject or modify a U.S. International Trade Commission ruling that a rising tide of Chinese tires into the U.S. hurts American producers. A powerful union, United Steelworkers, blames the increase for the loss of thousands of American jobs.

The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year and 35 percent in the third year. Obama settled on slightly lower penalties -- an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said Friday.

Wednesday, September 9, 2009

Genting Singapore plans over US$1b rights, sources

Casino operator Genting Singapore (GENS.SI) is planning to raise more than US$1 billion ($1.43 billion) through a rights issue, sources familiar with the matter said today.“It’s a big issue. Over US$1 billion,” one source with direct knowledge of the deal told Thomson Reuters. Genting shares were suspended earlier today.Genting Singapore, a unit of Malaysia Genting (GENT.KL), is building one of the city-state’s two integrated casino resorts and is also the largest casino operator in the United Kingdom. Bankers involved in the deal include UBS (UBSN.VX), JPMorgan, DBS (DBSM.SI) and Deutsche (DBKGn.DE).

Tuesday, September 8, 2009

1,200 coming soon

For those hold Long position at FKLI, can start take profit when market go above 1,200. and reduce your stock in hand (buy back when market correction).

Sunday, September 6, 2009

FKLI - Market seem to break the 1200 soon

Long at 1073 - 1080, cut loss 1068

Genting Singapore Sentosa Resort

Genting Singapore Plc, which is building one of two casinos in the republic, jumped 6.54% or seven cents to close at a record-high of S$1.14 yesterday. The stock had surged as much as 9.3% in intra-day trading to S$1.17.
Bloomberg had earlier reported that Genting surged to a record on speculation its S$6.6 billion (RM16.2 billion) resort casino in the city-state will open ahead of schedule.
“It’s possible for the resort casino to open by the end of the year,” CLSA Asia Pacific Markets analyst Aaron Fischer said in a telephone interview yesterday.
The project is still scheduled to open in early 2010, according to Robin Goh, spokesman at Resorts World, the Genting Singapore unit building the casino.

Fischer wrote in a note dated Sept 1 that Genting Singapore could be worth as much as S$3 per share based on the city-state’s potential gaming revenue of between US$3.2 billion and US$4.7 billion once the two casinos open next year. That compares with Macau’s US$14 billion (RM49.4 billion) gaming revenue, said Bloomberg.