Are Interest Rates Driving the Stock Market?

3-Month SP500 VIX Volatility spiked an astounding 42% from 16.61 up to 23.72 last week. We know that a lot of alpha is generated from short selling options and option writing programs, as dangerous as these strategies are in times of panic, their use is widespread and a tool of many funds’ arsenal in terms of alpha generation. Basically, these strategies look for continued linear movement and not the one-off cataclysmic style event, we just hope that the system continues to let these players out in times of need, but we know, one day, the market will retreat and continue to do so and that has us a bit worried. The complexity of these strategies isn’t the issue, it’s the LIQUIDITY when you most need it that keeps us worried. However, the markets have continued to show their resiliency and that is why these short vol strategies have been so popular. The, this time is not different mentality seems quite pervasive and that is nothing more than naivety to us. From our vantage point we can point to a few things that are clear indications that this time is indeed different. In fact, Charlie Bilello of Pension Partners posted our next chart, aptly entitled “This is the End,” as the Real Fed Funds rate is now higher than US core inflation for the first time in 10.3 years:

With interest rates rising, with central banks around the globe cutting back on their QE programs, perhaps maybe this time is indeed different! As for the interest rates moving higher, well this next chart is a clear demonstration toward the limiting factors working against a Fed that wants to normalize rates. The Fed is going to raise the US governments interest costs to well over $600 billion next year and we expect this to rise indefinitely and is nothing more than a function of higher debt and higher rates:

Speaking of interest payments and yields, the US government 10yr bond last week fell sharply from 3.26% down to the 3.13% area where strong yield support trend lines come into play. The market rejected that level swiftly and yields rose as equities began to rebound Friday.

Well that is all we have folks, thank you for reading our research and thank you for staying the course with us. Perhaps the equity markets have turned, or perhaps they will grind back up to new highs, all we know is there are signs saying the cost of entry has risen and with that our risk radar must rise also. You know what’s not rising though? Is the global temperature as headline after headline last week was about the early snowfall and impending drop in temperatures, well so much for global warming, us Chicagoans are to smart to fall for that anyway. We know that a wintery wind gust lies just around the corner and that means summer is some many, many months away and that bitter air rules the day, cheers!

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