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Bloomberg ran an article that caught my attention this morning:

Cash Best as Record Correlation Hints Herd Collapse 

Investors are moving in lockstep like never before, driving up stocks, commodities and emerging markets and risking a replay of last year, when they all plunged the most since World War II.

The Standard & Poor's 500 Index, whose increase in the past three months was the steepest in seven decades, is rallying in tandem with benchmark measures for raw materials, developing- country equities and hedge funds. The so-called correlation coefficient that measures how closely markets rise and fall together has reached the highest levels ever, according to data compiled by Bloomberg...

Investors are moving in lockstep like never before, driving up stocks, commodities and emerging markets and risking a replay of last year, when they all plunged the most since World War II.

The Standard & Poor's 500 Index, whose increase in the past three months was the steepest in seven decades, is rallying in tandem with benchmark measures for raw materials, developing- country equities and hedge funds. The so-called correlation coefficient that measures how closely markets rise and fall together has reached the highest levels ever, according to data compiled by Bloomberg.

I'm assuming he's not going for the 2nd derivatives/green shoots story yet, either.

The gains pushed correlations between the indexes to 0.74 this month, based on percentage changes over the past 60 days. That's the highest in at least five decades, data compiled by Bloomberg show. A reading of 1 means two assets move in tandem, while zero means they are independent.

 

The correlation never rose above 0.66 before this month.

Gains in U.S. stocks have mirrored those in crude oil as never before, with correlations above 0.7 this month, according to data compiled by Bloomberg. For the MSCI Emerging Markets Index, the relationship is the tightest since Russia defaulted on its debt in 1998. The correlation between the S&P 500 and an HFRI index of fund of hedge funds, based on percentage changes in the past 12 months, reached 0.5 in April for the first time in almost five years, monthly data compiled by Bloomberg show.

‘The Same Trades'

"I have a lot of friends in the hedge-fund world; they talk to each other and have many of the same trades," said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees $27 billion. This "same trade" nonsense is truly a problem. Even when your trade is correct, and on the right side, too many people in it can cause it to go wrong. In addition, when was the last time EVERYBODY was right??? "These are people who say, ‘I see a pattern, and I've got to jump on.'"

... The S&P 500 plunged 57 percent from a record 1,565.15 in October 2007, while developing-nations stocks lost two-thirds of their value as the world's largest financial companies racked up almost $1.5 trillion in losses from the collapse of the subprime mortgage market and investors sold everything but the safest assets. Oil tumbled 78 percent from a record $147.27 a barrel in July, while the CRB retreated 58 percent.

Harry Markowitz, 81, who won the Nobel Prize for economics in 1990 for his work on portfolio theory, says that last year's collapse reinforces his view that even the most unlikely outcomes are possible in any year.

... "The thundering herd is still with us," said Markowitz, a professor of finance at the Rady School of Management at the University of California, San Diego. "Nature draws into a bushel basket full of returns and finds a next return every year, and I believe there's another 1929 somewhere in that bushel basket. 2008 was not a refutation, it was a confirmation."

...

Now, options traders are paying more to protect against a drop in the S&P 500 versus the cost to wager on gains than at any time since September, when the collapse of New York-based Lehman Brothers Holdings Inc. froze financial markets.

So-called implied volatility, which measures the expected price swings of an underlying asset and is a barometer of options prices, for contracts that lock in gains should the S&P 500 fall at least 10 percent in three months rose to 30.5 percent on June 12, data compiled by Bloomberg show.

That's 42 percent higher than call options that enable traders to profit if the index rises at least 10 percent in the same period, the steepest so-called implied volatility skew since Sept. 19, four days after Lehman's failure.

"There's nowhere to hide," said Joseph Mezrich, the head of quantitative research at the U.S. brokerage unit of Nomura Holdings Inc. in New York. "The problem of correlations is growing, and I don't think it goes away."