Any instrument, any exchange traded product that can lose almost 90% of its value after the bell rings, putting the whole darned market into concussion protocol, is something we do not need. It is some slickly designed sucker's piece of paper that will lull unsuspecting but putatively smart managers into thinking there's free money to be had by buying it, and it will have its defenders until the end.
The Velocity Shares Inverse Vix Short-term Exchange Traded Note (XIV) is one of those kinds of pieces of paper that should never have been born. The description is easy enough: the note "provides investors with a cash payment at the scheduled maturity or early redemption based on the inverse performance of the underlying index, the S&P 500 VIX Short-term Futures Index."
Now, I don't want to get too deep into the woods about a "short vol" piece of paper. I don't want to discuss what it was really meant to do, because obviously, in a time of pretty minimal stress -- like down 4% after being up about 30% in a straight line -- it failed miserably, or it wouldn't have darned lose near 90% of its value not during, but after the session.
I won't even tell you about the fights I picked with the SEC about not allowing this kind of product because it would suck nice, hardworking people into its own toxicity aided by brokers telling you it actually fulfilled an "important function."
Let's just say what I care about is it bleeds into my zone, which is the zone of stocks, and has the kind of crazy impact that allows the Dow to be down 1000 and then up 1200 without ever having the stock market trade. That means, for example, that you could have Exxon-Mobil (XOM) , the largest oil company in the world, go lose five points and then make seven points, say, without ever having done anything.
In other words, it makes a total mockery of what a stock market is supposed to do.
Now, I have heard endlessly from defenders of these pieces of paper and their interaction to the stock market and how vital they are ever since they were created. I have heard those same defenders try to cobble together some explanations for what is basically the inexplicable, which is how the stuff really works. In fact, it reminds me very much of portfolio insurance, which clowns tried to sell me on in 1987 and whenever I said that in a time of stress it would fail, they simply told me that I didn't know what I was talking about.
I have heard those words dozens of times in my career, and I can tell you that when I do, I know one thing: the person telling me it is a charlatan. I am enough of a product of our educational system and of a decent pedigree that includes some very good firms that I can tell you, if I can't understand how it works, then there is something wrong with it.
I knew that portfolio insurance could not protect you from a market crash. My better trading half, Karen Cramer, actually went so far as to say that it could help cause or exacerbate a crash, which is why we had nothing long in to the 1987 crash.
Same here. Same this time. All sorts of wise guys trying to explain to me what happened, as if there is nothing wrong with a piece of paper that's worth $100 at 3:59 p.m, and less than $20 at 4:01. That's a piece of paper that breaks like portfolio insurance and takes the market down with it, like portfolio insurance, and it should go the way of portfolio insurance, which is to disappear.
Now, its defenders -- and there are so many of them, just like there were of portfolio insurance, which made you a fortune if you peddled it, or borrow short to go long or whatever "carry" trade that is in vogue -- tell you "don't blame us, it is not our fault."
I don't give a rat's ass about blaming them or not. Did the market go down? Yes. Should it have gone down? We wouldn't have told club members of Action Alerts PLUS to sell a huge amount of stock like the trust did, if I thought the market was going higher.
What I am talking about, though, is that this product and its ilk clearly and convincingly exacerbated both the speed and the distance that the market declined. It is why I came on air in the afternoon yesterday and said it was all phony and just go buy something you like with a limit, because there's an obviously broken instrument out there that's inflicting havoc on the market.
Frankly, at this point I don't care about the direction. I thought it was absurd that we kept going straight up, so absurd that I was willing to wipe out some great bases on stocks the trust had owned for ages, something I try never to do if the fundamentals are still strong. Sometimes stocks do override those fundamentals though, and this was one of those times.
And for those who say I only start shouting when it goes down, here's what I have to say to you: get out of my face. What I care about is making sure that someone isn't making a mockery of the asset class. That's what happened yesterday, and the oddity here is that there are chowderheads who actually believe that the "VIX" is an asset class. Well, so is the "over" on the Pats-Eagles if you want to go there. So is the payoff on a Super Bowl box, which I have always thought is some stupid thing that's a waste of time and money.
The only difference: The over, or the box, can't wreck the underlying game itself.
But the VelocityShares Inverse blah blah blah? That can wreck the underlying game, because the underlying game is not strong enough, not controlled enough and not deep enough to be able to handle it.
Those in the government who approve this stuff either aren't sophisticated enough about the way stocks interact, or don't really care and think anything can be approved -- something that happens under both democrats and republicans.
The regulators, regardless of the parties they belong to, are equally without a clue. The mountebanks who create it tend to have better math skills than I have, as did those who worked at Long Term Capital or those who created "dynamic hedging" in 1987. They brand me a Luddite until what is happening right now comes to light.
All I care about is that when we are through with this exercise, wherever it takes the S&P, there will be another group of people who will never come back to stocks, because who wants to own anything when a stock no one ever heard of that doesn't really own anything of value, can be down 85% and crash, literally crash, the rest of the market?
That's the essence of what drives people away.All I can say is, it's happening again. And the people who made their money creating and peddling this? You know what they are saying? How about: "so long, suckers!"