VIX

  • Three days of gains in the market are nice. In this world of whiplash, what’s more important is the sharp decline in the Chicago Board Options Exchange Volatility Index, or the VIX, which closed at 60.90 Tuesday, just a few days removed from a near-80 close. The expectation for volatility is justified, given the realized volatility on the S&P 500 has been tremendous, and the clouded economic outlook. “There are a lot of unanswered questions that will be answered over the next couple of months,” says Gregory Hold, CEO of Hold Brothers. As the VIX has dropped, individual sectors have also seen their expected volatility decline as well, though in some cases more slowly than others. The Financial Select Sector SPDR ETF’s implied volatility fell to 102% from 130% on the news of the Federal Reserve’s plans to buy $500 billion in mortgage-backed securities, as well as intervene in other markets. Andrew Wilkinson, senior market analyst at Interactive Brokers, said activity in Citigroup’s options suggest a bit of comfort taken as a result of the new Fed plan, but that they “don’t necessarily take this to mean that the bank’s shares are off to the races.” Citi closed up 2.2%, a more sober gain than the previous two sessions — but a gain nonetheless. Meanwhile, Merrill Lynch’s commodity strategist Francisco Blanch notes that volatility has eased off a bit among energy commodities, though he warns that “the current perceptions of risk remain heavily skewed to the downside due to a deteriorating consumption environment.”

    • Trading

  • For the markets, it was another strong session, as the Dow put together its first three-day rally since the end of August, led by strength in the banks, and reasonable buying in the retailers, transportation stocks, and industrial names. Investor attitudes improved along with the gains in consumer attitudes, though the rebound in consumer confidence wasn’t much more than an acknowledgment that the world is not going to end in twisted wreckage in the next month or so. “Whether it was due to the collapse in gasoline prices or the good feelings about the election of a new president I can’t say,” writes Joel Naroff, head of Naroff Economic Advisors. “But we may be turning the corner on the irrational despondence that has gripped households for quite some time now. While people feel it is nearly impossible to get a job, they are beginning to think it may be less so in six months.” There will be a multitude of opportunities for investors to react to economic data Wednesday. As this week is carved up by Thanksgiving, a slew of releases are due tomorrow, including news on sales of new homes, orders for durable goods, and the Chicago-area manufacturing index. While positive reactions to strong releases are nice, David Reilly, director of portfolio strategy at Rydex Investments, says the market needs to react positively to poor data, because that would suggest investors are already discounting gloomy news. “The market still seems to be continually surprised,” he says.

    • Mining

  • Investors had a somewhat predictable reaction to the dissolution of the expected merger between miners BHP Billiton and Rio Tinto. The acquirer, BHP, shot up, gaining 14.5% on the New York Stock Exchange, while Rio Tinto, the target, dropped 27.3% on the news. In this environment, the difference, not surprisingly, comes down to leverage. Rio Tinto has about $44 billion in debt, while BHP has about $12 billion, according to Bill Hunter, managing director and head of the global mining group at Jefferies & Co. The additional leverage Rio Tinto is contending with is likely to limit their flexibility. “You have low-cost assets and a good management team in Rio Tinto, but in this capital markets environment, cash is king,” says Mr. Hunter. The $68 billion deal was a long-awaited one, playing out over 18 months before BHP finally gave up the ghost and decided that now was not the time to absorb such a large volume of debt. While BHP writes off about $450 million in costs from the deal, Rio Tinto, which had been resistant, may have been in a better place for such a deal to happen due to the sharp decline in commodity costs.

    • Computers

  • Automotive companies are used to worker furloughs, but not technology giant Cisco Systems. The company plans on closing its U.S. and Canadian offices from December 29 to January 2, and is also encouraging employees to take additional time off from December 22 through December 24, according to the Wall Street Journal, citing an internal memo. It’s the first time the company has shut down in a decade, and comes after the computer networking manufacturer said revenue is likely to fall 5% to 10% in its current quarter. The company says the shutdown is part of a $1 billion savings plan, as this will lower payroll, but when companies close their offices, they don’t earn money either. UBS analysts saw the news as a warning, saying that “we believe it is prudent for Cisco’s management team to plan for cushion in the event of weaker than expected revenues.” They added that the 5% to 10% revenue decline estimate seems “realistic,” at least.