Oct 29, 2004


The volatility indices, VIX and VXO, are spiking up a bit. This is a familiar pattern where market participants get their heads together and decide that there could be a terrorist attack this weekend. It is true that if there is an attack 16 vol on the SPX will look very cheap. My problem with the behavior is that the election is widely publicized as something that might spur terrorist attacks and options that incorporate the election have not traded at a premium to the recently deceased October options. This makes the piling in today seem irrational and irrational trading is more likely to be a contrarian indicator.

This election also seems to be occupying a disproportionate amount of people's radar. Most pundits agree with my view that the U.S. deficit is the controlling economic factor no matter who gets elected. Because of this I am viewing the trading chatter as representative of traders' emotional commitment to a particular candidate.

Lastly, and I realize I am contradicting myself, I have been toying with the thought that if Bush wins we are more likely to see the deficit used against us. The deficit is funded by foreigners and foreigners do not like Bush. Perhaps foreigners are cutting us slack because they recognize that while our gov't represents us it is not always representative of us. Should Bush win, that perception may change and foreigners may collectively feel the need to take matters into their own hands and curb America's belief that it can act unilaterally. The obvious result of this is the dollar trading lower while interest rates move higher. I have a hard time betting on this because such a policy by foreigners could have been used preemptively (where have I heard that phrase before) to wake up the U.S. electorate with higher rates before the election.

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