3 Charts on Risk

These three charts struck me as interesting, given current market / economic conditions.  (They are from GS “Weekly Kickstart” note)

I find it surprising that ‘fear’ has evaporated in the market given the gathering storms in sovereign creditworthiness; whether they are the Mediterranean’s or island nations of Japan, UK or Ireland. The media is quick to cheer that Greece has been ‘saved’ by another bailout (110 billion for a nation of 11 million!), but it’s hard to see the sustainability.  And as an aside, there was chatter out of Europe this wknd that Lazard has been engaged by the Greek govt to look at restructuring.  (Lazard recently handled Ivory Coast and Ecuador’s restructurings)

Again this chart too shows much of the same behavior as the above – people are paying less to be fearful.  Another way I think of VIX -- as not just implied volatility -- but also as a price of liquidity, since options are the right to buy/sell specified amounts at specified prices.  If VIX is low, liquidity is not as dear as it used to be.

The above is US big cap stock centric, but my instinct is that this applicable to other markets/sectors as well.  What does it mean?  The relatively high levels of sector / individual stock correlations suggest that even though we are not in the beta market of 2009, macro market moving events are still driving individual asset prices rather than idiosyncratic behavior.  This seems particularly true of sectors which are being pushed around by sector risks whether Cap & Trade for utilities, Financial Reform for banks, or Health Insurance laws for drugs / insurers.  One other non risk thought -- If this goes lower it’s probably a better for active management but if stays high persistently indexing will look better.