Wednesday Morning Twofer

I have never been in the housing market is going to crash camp and still am not. I do think this business with Bear Stearns and any other stories like it has the potential to be disruptive and further impact capital markets.

To the extent that markets are interconnected, something unusual in some big segment, like the mortgage market, can cause problems for asset prices without causing people to lose their houses or causing home values to cut in half as some fear.

However the the bond market is very complex, the equilibrium between various bond market segments is complex, disruptions to that equilibrium will cause visible reactions. I am not calling for Armageddon, the the thought that this increased stock market volatility will persist seems very plausible.

Something at sometime will cause the next real correction, I suppose this could be it but I am not sure yet. For now the increased volatility for stocks looks more like a stalling out than anything else, if it deteriorates more so be it but whatever happens I can't imagine it will be unprecedented.

The following quote is from the Chinese Restaurant episode of Seinfeld;

GEORGE: Excuse me, I'm expecting a call. Costanza?

BRUCE: Yeah, I just got a call. I yell 'Cartwright! Cartwright!' Put Write! Put Write!, just like that. Nobody came up, I hang up.

GEORGE: Well, was it for Costanza or...

BRUCE: Yes, yes, that's it. Nobody answere

The CBOE has created a new product called the CBOE Put Write Index and can be quoted on Yahoo Finance with ticker ^PUT.

The idea behind the index is to sell cash secured at-the-money SPX puts that expire in one month.

This chart comes from the CBOE PDF that explains the index. Cash secured put selling is a fairly conservative strategy for people who know what they are doing and understand leverage.

I will say that I am amazed that it had periods of outperformance when the market was declining.

Also interesting is that according to page four of the PDF PUT has a lower standard deviation than the Buy Write Index (BXM) and a version of the S&P 500 they refer to as S&P 500 Total Return.

Another article you can read on this is from Index Universe, which is where I first found ^PUT. I doubt CBOE brought this out as merely an academic exercise. I suspect we will see an exchange traded something that mimics it soon.

A common theme to my writing has been that investment products will evolve in such a way that do-it-yourselfers who are able to spend the time will be able build very sophisticated portfolios for themselves.

The idea of having 1/3 of your equity portfolio in eight or nine products that take different routes to reliable 7-8% returns with a lot less volatility that the stock market makes sense for investors who have saved properly and really understand the concept of risk adjusted returns.