What’s the Story?

by CC February 16, 2012 9:19 am • Commentary


Housing starts for January rose 1.5% to a seasonally adjusted annual rate of 699,000, according to an estimate from the Census Bureau and the Department of Housing and Urban Development.

Economists polled by MarketWatch had expected a rate of 688,000 housing starts for January. See economic calendar.

In December the rate reached 689,000, compared with the previously reported estimate of 657,000.

Single-family housing starts fell 1% in January to a rate of 508,000. Meanwhile, starts in buildings with at least five units rose 14.4% to a rate of 175,000, continuing the surge in creation of apartment buildings.


Jobless claims tumbled 13,000 to 348,000, the lowest level in nearly four years. The four-week moving average fell to 365,250, inching further away from that key 400,000 level, showing the economy can consistently add jobs. This report was better than economists were expecting and suggest consistent monthly job growth of 200,000 to 250,000 jobs may become the new normal as opposed to an anomaly.


The producer price index rose a seasonally adjusted 0.1% last month, the Labor Department said Thursday. Economists surveyed by MarketWatch had predicted a 0.5% increase, largely because of rising gasoline prices.

Yet a 2% increase in wholesale gasoline prices last month was more than offset by a drop in the cost of electricity and home-heating fuels, a result of unseasonably warm winter weather. Overall energy costs fell 0.5% in January.

The wholesale cost of food, meanwhile, fell 0.3% in January, primarily because of lower prices for fresh and dry vegetables.

Minus those two categories, so-called core wholesale prices rose a surprisingly sharp 0.4%. That was double the MarketWatch forecast for a 0.2% increase.

The core index is viewed by the Federal Reserve as a more accurate gauge of inflationary pressure because it excludes the volatile food and energy categories.

The rise in the core rate was generated mainly by higher costs of pharmaceutical drugs, light trucks and appliances, the government said.


A payroll tax cut for 160 million Americans, set to expire at the end of this month, would be extended through December under a bipartisan deal announced early on Thursday by U.S. congressional leaders.

The accord would also renew expiring jobless benefits for millions of others and prevent a pay cut for doctors of elderly Medicare patients.

The payroll tax was first reduced from 6.2 percent to 4.2 percent in the beginning of 2011 at the request of Obama as part of his bid to stimulate the economy.

The new deal would continue the 4.2 percent rate until the end of this year, during which it is projected to put an additional $1,000 in the pockets of the average American working family.


Investors are finally putting money into domestic equity funds. Their timing couldn’t be worse.

The Dow Jones Industrial Average’s biggest selloff of 2012 coincided with data showing domestic equity funds registered their biggest weekly inflows in nearly a year.

Ironic, no?

It only took a 20% rally off the October lows for investors to finally feel confident enough to trickle back into the stock market.

The rise in fund flows coincides with a surge in bullish sentiment, underscoring how the average investor is finally starting to put their money where their mouth is. The big worry is they could be too late to the game.


Macro Risk Advisors’ (MRA) Dean Curnutt has picked on a very interesting development in the land of volatility ETNs. In the last few days there’s been an absolutely astounding amount of vega trading through these products.

As he notes:

One client summarized the situation as “the volatility ETNs are the dog and SPX implied vol is the tail.”

The above applies to two products specifically, the VXX — the long-standing Barclays iPath ETN whose strategy is focused on rolling across short-term Vix futures — and TVIX, a 2x levered VXX product marketed by India’s VelocityShares, but backed by Credit Suisse and launched in November 2010.

It’s the sudden growth in the shares outstanding of the latter — to 35.725m this February week versus less than 6m in December 2011 — which is perhaps the most eye opening:

Though shares outstanding in the VXX have also been rising steadily:

Here, meanwhile, courtesy of MRA is a table showing the recent burst of volume in Vix future and Vix ETN vega that has accompanied that spike:

According to Curnutt, both the increase in shares outstanding and volume could have significant repercussions for the volatility market and may increase the risk of a “disconnect between implied and realized volatility”.

As he notes, close-to-close realised volatility for the SPX — which Vix is derived from — has registered an anaemic 8 per cent over the past 30 days and 9.4 per cent over the past 10 days. But implied volatility (as registered by Vix) has picked up considerably more: