kung fu grip trade

Today, in the stock market, you saw the kung fu grip trade. For those of you that remember the movie Trading Places, Eddie Murphy's character tells the Duke brothers that the pork belly market is tanking because in was Christmastime and everyone was selling so they would have enough money left to buy their kids the GI Joe with the kung fu grip. The market tanked, they got their 10% down move so they can call it an official correction, and then it went back up and ended unchanged. Tomorrow is option experation, which always generates some crazy moves so stay tuned. The real problem is in the front end of the credit market. No money funds want to buy anything other than t-bills. Now the moves there recently are crazy. It is a classic supply and demand problem. Everyone wants bills and nothing else (CP, CDs, BAs, etc.) The talking heads want the Fed to ease, lower discount rate, and have the Fed accept any old crap as collateral for repos. That might bail out their mortgage and hedge fund friends, but it will do little to restore the confidence the money markets. The people who could spell credit risk a few weeks ago are now hiding under a rock to escape it. Remember, the pendulum always swings one way or the other to the extreme, so there is more to come. But, the market will find its value level and go form there. With t-bills 300 bp through other short-term assets, it won't take long for investors to get back in.

One final note. With the volatility back in the market (look at the VIX index), options finally look attractive again. You don't have to put on some complex strategy, just some commonsense moves. The volatility just makes the pricing more attractive. On the other hand, your investment could become worthless (or worse) so be sure you understand this kind of investment first.