Rocky Road Indeed

When I said last week that you should get set for a rocky road, I didn't know the half of it. Well, at least I was mostly immunized by the long VIX trade. I'm leaving this on, even though I think the worst is over, since I don't believe there is much downside to the VIX.

Here's why I think the stock market is going up:

1. Private sources have told me that there is active bidding for the large banks' portfolio of bridge loans made on behalf of private equity. Note in the Journal today that Citadel took over Sowood's book. I know of other efforts along the same lines.

2. There is a big difference between a liquidity squeeze and a recession. If the current paralysis in the credit markets were to persist for awhile, that would be a problem. Buy as I said in 1., I don't think it will. In fact, the return to normal risk premia in the credit markets is a good thing. Loans were being make at rates and terms that were simply ridiculous. Nobody will make that mistake again - at least for a couple of years.

3. Finally, go back to the "Fed model" of treasuries vs. equity yields that I published several posts on. The 10-year is at 4.80%, and the equity yield (inverse of P/E ratio) is at about 6.20%. We have found value.