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Weekly Commentary - Quantitative Easing in the Eurozone

A PDF version of this commentary can be downloaded here.

On Thursday, the European Central Bank (“ECB”) announced its much speculated about quantitative easing (“QE”) program.

Over the last several years, central banks around the globe have been engaging in aggressive balance sheet expansion policies by purchasing government bonds (or other assets), driving down interest rates and increasing the money supply. The ECB, however, has been reluctant to act. As a comparison, while the Federal Reserve’s balance sheet nearly doubled in size over the last 3 years through aggressive purchasing, the ECB’s was basically cut in half.

And arguably, the Eurozone has suffered for it. Below we compare several economic indicators for the U.S. versus the Eurozone.

 U.S.Eurozone
2014 Q3 QoQ GDP Growth5.0%0.2%
Unemployment5.6%11.5%
Inflation Rate0.8%-0.2%
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Weekly Commentary – Connecting the Dots

Ancient cultures used to look towards the heavens and identify their myths and legends etched within the stars. While the present 88 constellations recognized by the International Astronomical Union are heavily based on the catalog authored by Ptolemy, many cultures – such as the Chinese and Maya – had their own unique constellations and star groupings.

We bring this up not because we subscribe to any astrological implications on market behavior, but rather to highlight that while the game of “connect the dots” is deeply ingrained in human behavior, the dots we connect are highly subjective.

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Weekly Commentary – Markets & Murphy's Law

Image credit Markus Spiske.

Market Recap

Murphy’s law is an epigram that is typically stated: “anything that can go wrong, will go wrong.” We tend to think of good luck or bad luck as just probability personalized, and so prefer a broader interpretation of the law: “anything that can happen, will.”

For the last several years, analysts, market commentators, and speculators alike have been claiming that interests rates must rise at some point, and when that day came, any investor that held long-duration bonds would be in for a world of pain. Artificially repressed interest rates coupled with a fear of duration has, arguably, led to the massive suppression of credit spreads.   Ironically, yield chasing made long-dated Treasuries such a great relative valuation bet in 2014 – at least, in retrospect. Nevertheless, the “rates must rise” thesis continues.

It takes less effort to prove something false than it does to prove something true. Before it meant “a very rare event,” this was the very point Nassim Taleb tried to highlight in his book The Black Swan. Proving that all swans are white is very difficult, but it only takes the existence of a single black swan to prove that statement false. To prove something false, you only need a single contradictory example.

Put-Write ETFs as Alternative Income Options

In a previous post, we covered buy-write strategies and related ETFs, which are currently offering very attractive yield levels. Today, we’ll look a bit further into the buy-write’s cousin, the put-write.

What is a Put-Write Strategy?

Like buy-writes, put-writes also earn income by writing options to collect premiums with the hope that the options will expire worthless. Unlike a buy-write, where the call is covered by the stock, put-writes either write naked puts or must maintain a cash account to cover the payout if the put is exercised.

Relationship to Buy-Writes

There is a fundamental relationship between put-writes and buy-writes that can be seen by rearranging put-call parity:

C – P = S – D × K

-P + D × K = S – C

where P, C, and S are the put, call, and stock prices, respectively, K is the strike price, and D is the discount factor to maturity. This assumes no dividends and European options, but the intuition is still helpful.

january

Weekly Commentary – "As Goes January, So Goes the Year"

You can download a PDF version of this commentary here.

Market Recap

At the end of every January there is an onslaught of articles talking about the old adage, “as goes January, so goes the year.” The translation is that the performance in January is a good indicator of how the year will turn out.

Instead of our usual weekly market commentary (with the recent holidays and lack of market volume, there is little to report on), we thought we’d take some time out to debunk this myth.