Monday, 30 June 2008

The equity credit dislocation

I have observed before that the equity markets have not yet reacted as fully as the debt markets to the crisis - and increasingly it looks likely that they will fall further rather than that the debt markets will rise to join them. Goldman is of that mind, and has recently observed that downside vol is cheap so now is an excellent time to buy puts. Bloomberg reports that Goldman:
recommended Dow Jones Euro Stoxx 50 Index puts that expire in December and have a strike price of 3,000, or 11 percent less than the measure's closing level today.

``High inflation/low growth is an increasing downside tail risk ...If that risk crystallizes, we think it means material rather than modest downside.''

The Euro Stoxx 50 plunged 24 percent to 3,354.20 in 2008 and closed at the lowest since November 2005 last week. The December 3,000 puts on the index fell 6.7 percent to 83.50 euros today. They cost as much as 189.30 euros in March.

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