Below extract from this a.m. edition of “Sight Beyond Sight”, the global-macro strategy insight courtesy of Stamford, CT-based, macro strategy “think tank” Rareview Macro LLC
Blood on the Streets Provides Counter-Trend Trading Opportunities
• Our 30,000 Foot Takeaways
• Model Portfolio Update: Closed EUROSTOXX and Dow Jones Index Short
• Model Portfolio Update: Opened Long S&P Structure
• Model Portfolio Update: Opened Eurodollar Interest Rate Steepener
• What Makes the Bounce Durable?
• Trading the Bounce
• US Equities Risk Profile for Next 48-Hours
• Watch List: Sugar, BRL/JPY and Nickel
Blood on the Streets Provides Counter-Trend Trading Opportunities
Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.” Since he ended up as one of the wealthiest men in the world at that time, he probably knew what he was talking about.
The objectives we laid out for risk assets have largely materialized. We would humbly point out that we were able to navigate these waters in the model portfolio fairly successfully, losing less than ~35 basis points on the week so far. With our large outperformance it is our intention to take advantage of the blood on the streets, as Rothschild would have done.
We wish we could say the same for others but our conversations are plagued with horror stories. Now, if we rub salt in someone’s wound or pinch the nerve of an investor that is just too bad. If that is you, then don’t read this edition. This is not us being cavalier. If we are wrong on some views or ideas we will keep an open mind and change our opinion, and will then simply reduce risk and move on.
Despite the widespread PnL duress, this week’s correction was the best thing that could have happened to the markets because looking forward many asset prices, positions and consensus views are being reset.
Our 30,000 Foot Takeaways
1. Crude Oil dropped $2.00 beyond the $4 capitulation on Tuesday after the IEA cut its 2015 forecasts due to lower demand. Depending on what metric you want to look at Brent and WTI are now both in “contango”. The positive “roll yield” or “risk premia” that commodity investors need to run a business in the deepest market has officially evaporated.
2. The S&P 500 (cash) broke the 200-day moving average and longest streak above it on record. The S&P 500 (futures) concluded a formal “technical” correction with a 10% hi-low move. The CBOE Holdings’ Exchanges set several trading records yesterday (see below Top Overnight Observations).
3. US Interest Rates (Eurodollars) priced out of the market a rate hike in 2015 (i.e. from June 2015 all the way to Feb 2016) on record volumes before recovering only back to the end of 2015.
a. The entire Eurodollar open interest (11.96mm contracts) almost turned over (11.14mm contacts) yesterday and there was a record drop in open interest (-440k contracts). Remember, this is a vehicle used to hedge cash flows and usually takes 1-2 to weeks to turn over.
b. If you buy a 2-year note that yields ~30 basis points (i.e. the current yield) your bet now is that the FED will not hike interest rates for ~2 years despite the fact that the same governing body we have all been beholden to for years says they will hike interest rates in less than 12 months. That is the very definition of absurdity.
4. The European fixed income “mini carry trade” has begun to unwind. This is result of the European Central Bank (ECB) telling world leaders and investors that they have reached their limits for 2014. The onus has been pushed to fiscal policy makers deliver stimulus and road map forward.
5. All the usual hyperbole that accompanies a corrective event is widespread
a. Investment fund closures, portfolio managers being carted out on a stretcher, funds hitting their yearly stop-loss triggers, margin calls, etc.;
b. “Spam-chucking” by the sell-side brokers reached 2014 highs;
c. Emotional swings by reporters all the way to the degree of the flash crash, systemic issues, and major trading systems crashing or being slow;
d. Noted real money investors with significant AUM unwinding short volatility positions across asset classes, the banks being forced to take the other side, and then losing hundreds of millions of dollars.
e. A surprise FED announcement about no interest rate hikes in 2015 or that QE will be extended (major leap but highlights the cry for “Mommy”).
f .Guests on CNBC making outlandish calls on lower US yields and stock market prices.
6. Other:
a. Nickel is trading ~2200 below even the lowest end of the cost curve at ~18k. Copper is at the level (i.e. 295) where the China strategic stockpiling reserve is a known buyer (i.e. last March was the invisible hand buyer).
b. The mood around “Fracking” is so bad that the oil speculator has been banished and put in the same category as a gold miner.
c. Russia is no longer a B.R.I.C. nation; it is part of C.R.I.B. as it is sent back to its infancy in terms of valuation and foreign direct inflows.
In each instance these were classic examples of “capitulation”, “throwing in the towel” or being “stopped-out”.
Taken together, these events provide a tradable low in many assets.
You can debate the speed and degree of any bounce on a relative basis between assets but holistically it would be all the same trade.
Now, to be clear that does not mean that a deeper and prolonged correction is not a real probability. That could certainly still happen. However, the “bull trap” we highlighted on Tuesday that lead professionals to where they were on Wednesday has now been largely removed. Put another way, the market positioning is a lot cleaner if you want to speculate or invest from here.
So what did we do?
We put our money (i.e. model portfolio) where our mouth is. In terms of what assets could bounce the most and why, here is what we would say.
To read the remainder of this edition of Sight Beyond Sight, free trial subscription (no credit card info is required) can be secured directly from Rareview Macro website by clicking on this link.