Volatility Decline Appears To Have Ended
Here are my morning observations:
1) If there's anything there is a consensus on, it's that the four-year decline in volatility is now ending. The implications of this are very important for hedge funds and active investors, particularly those that employ a quantitative strategy: 1) fewer concentrated portfolios (spreading out risk), 2) an unwinding of leverage, and 3) sector rotation.
Sector rotation has already been very noticeable. Indeed, the market decline that began in July and culminated in mid-August was largely led by concentrated selling in Smallcap names. The trend since then has been to buy big cap growth stocks. In turn, smallcap, midcap and particularly smallcap value has suffered.
The slowdown in housing is affecting more than just home builders. Auto parts maker ArvinMeritor lowered guidance, saying that sales of truck parts were slowing down due to the decline in housing construction. It's down 16%.
2) Company news:
Marriottbeat top and bottom line estimates, but their guidance for the fourth quarter was below expectations (on lower timeshare profits) and 2008 earnings are below expectations. MAR down about 3%.
Still, they have been able to raise prices and RevPAR (revenue per available room, the key metric of profitability) growth of 5%-7% worldwide in 2008 is very respectable.
Constellation brands , the largest wine maker in the world, beat estimates and boosted their 2008 guidance. They have a new vodka--Svedka--that's doing well, and wine sales appear to have stabilized. up 4%
Standard Pacific upgraded at UBS--this on valuation--earlier in week Citi raised a number of homebuilders as well.
3) ECB President Trichet surprised a few by saying that the risks to economic growth are on the downside. The U.S. dollar rallied on that. He reiterated his concern about inflation, citing higher agricultural products and oil as inflation risks.
4) Think climate change is not a hot topic? Morgan Stanley is out this morning with an immense 56-page report entitled "The Economics of Climate Change." The lead sentence: "Climate change will likely affect economies and financial markets by causing shocks to long-term growth prospects and shifts in the relative price of carbon-intensive goods...financial markets need to price in the risks today."
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