What the Market Wants: Sequestration Update, Hedge with VIX

It has been an unusual week to say the least. The market has declined a tad on the indecisive Italian election and the still uncertain outcome of the sequestration issues despite a robustly positive series of economic news and a very positive testimony from Chairman Bernanke who emphasized that the stimulus would continue as previously projected until employment and economic growth has improved.  

The latest Case Schiller showed continued home price increases and that positive news for the industry group was reinforced by New Home Sales and Pending Home Sales that were above projections. Consumer Confidence and today’s Chicago PMI were both solidly above forecasts.  Initial Jobless claims fell back towards last year’s low, and Durable Goods (ex-aircraft sales) was yet another very positive surprise.   Corporate earnings are wrapping up for Q1 with 69% of the 93% of the S&P 500 that have reported beating earnings handily. That’s a strong performance considering that percentage of companies beating earnings last year was generally in the low 60%s. Top line beats were over 50%, which was much better than expected.   So it all comes down to how the sequestration plays out as we are once again at the cliff’s edge.  If the cuts that are built in are not revised or postponed, the general thinking is that the economy will be severely weakened due to the massive layoffs in all federally supported activities including the military and defense support industries which will take place over the coming months.     We guess that we will know more tomorrow, so it is more important than ever to remain hedged.  We would suggest that in addition to our usual hedged positions that you consider adding a VIX related hedge such as the VXX which rose nearly 4% today and over 15% on Monday. The VIX itself is up about 25% for the week.