MarketsMuse Editor Note: At risk of pounding the table too frequently by pointing to global macro strategy think tank “Rareview Macro” and their high-frequency of prescient postulating…the below excerpt from this a.m.’s edition of Rareview’s Sight Beyond Sight illustrates why this analyst is become the analyst ..For those confused by our use of ‘high frequency’, please note that we’ve filed a trademark for a new label “HFP” aka high-frequency prescience; and not to be confused with HFT aka high-frequency trading!. Premium merchandise including t-shirts, ball caps, and other items will be on sale soon!
“…The “True Pain Trade” Now Underway…Only Defence is Outright Risk Reduction”
Yesterday, our main argument was that US equity investors needed to be mindful of chasing higher prices as that was a “bull trap”. We specifically said:
“The key point here is that the S&P 500 finally closed below the 200-day moving average after almost two years and the bounce off the break of that record streak can be large enough to make professionals believe that the weakness is now over.
Make no mistake that is the formula for how we get to 1800 in the S&P 500 next. You suck investors back in only for them to have to liquidate all over again. This time, however, the losses are too great and the even lower prices force them to sell the positions they held onto all the way down in the first place and were not willing to relinquish that time around.
The sentiment is no longer about whether this is a correction or not. It is now about whether it is a 10% or 15% correction.”
At some point our microphone may be louder than it is at the moment, but for now this warning was dismissed by the bulk of investors. At the time of writing the S&P futures (symbols: ESZ4) are down -1.8% from yesterday’s highs. That is the very definition of new longs being trapped at higher prices.
Before dismissing this view we would remind you that the majority of professionals in this business are sheep, and to remain part of the asset gathering business they have to always put themselves in a position to capture ~60% of any market move. And, as sheep would, that is what they tried to do yesterday.
Now most participants who use a Bloomberg terminal just walk into the office and look at the World Equity Index (WEI) screen. This is a lazy exercise as it only provides updates for the major developed markets. The point is that a smart investor should also look at the markets not included on the WEI screen (i.e. Greece) and the Emerging Market Equity Indices (EMEQ) and World Bond Markets (WB) pages.
Why?
Because you would see that Greece is showing the largest negative risk-adjusted in Equities (-4.7%) and the front-end of their fixed income market is trading +5 standard deviations away from the average over the last three months.
To put that observation in statistical context this widening in Greece spreads is larger than yesterday’s end of day puke in Crude Oil when the “barrel” fell $4.00. To put this in laymen’s terms, this is the biggest spike in Greek bond yields in two-years.
Call it new found fears that Greece’s current financial structure is unsustainable without outside assistance or the fact that global risk-asset weakness is finally spilling over to the low beta sovereign debt, you decide. There is still some dramatic weakness that has yet to materialize.
For example, the Markit iTraxx Europe Crossover index (symbol: ITRX XOVER CDSI GEN 5Y) is wider by 20-25 bps to 395-400. As a reminder, this index comprises 75 equally weighted credit default swaps on the most liquid sub-investment grade European corporate entities.
It is important to note that this is a shift in profile. Up until now the European weakness has been isolated to “high beta” credit (i.e. CCC paper). The fact that both peripheral and cross-over corporate debt spreads are widening highlights the spillover effect.
In last Friday’s edition of Sight Beyond Sight under the section titled “Welcome to Long/Short Hedge Fund Investing” we specifically highlighted the risk to concentrated position, including risk-arbitrage strategies related to M&A activity and activism situations.
By now everyone has seen this headline from Bloomberg: “AbbVie Inc. is considering scrapping its planned 32.4-billion-pound ($51.5 billion) acquisition of drugmaker Shire Plc in what would be the biggest casualty of the
U.S. crackdown on so-called tax inversions.”
As a result, Shire PLC (symbol: SHP LN) is down -26%. This is a company that has a ~35 bln USD market capitalization. So before getting out of bed today in the US, the firms that specialize in deal-arbitrage collectively just lost over $5 billion USD in mark-to-market PnL.
The key point being is that like European low beta credit the risk asset weakness has now spilled over into another stronghold.
What does this all mean now?
Firstly, before anyone can make a call on stabilization in risk asset crude oil needs to find equilibrium.
In the last 48-hours WTI Crude Oil has moved into “contango”, finally joining the Brent structure. The market was caught off guard by the substantial 250k per day downward revision in projected oil demand growth by the IEA. We have learned that Saudi Arabia and Iran are comfortable with lower prices. The “barrel” is down again today the exporting countries levered to Oil – Canada and Norway – are seeing their exchange rates (i.e. CAD and NOK) under pressure on the currency crosses.
The key point being is that that no one this morning can say with a straight face that Crude is close to bottoming and that means they cannot say the same thing about High Yield debt, especially now that weakness in peripheral and cross-over corporate debt is accelerating.
Secondly, the US Dollar is once again being defended, most notably against the Euro (EUR/USD) and the Japanese Yen (USD/JPY). To what speed and degree this continues is difficult to handicap but everyone is aware of the extreme long positioning in the US Dollar and knows we are approaching the wide levels in the October ranges.
We have thoroughly explained how we define the “pain trade”. Specifically, there is clear distinction between arbitrarily chasing an asset price higher (i.e. the term most sales people use) relative to being long an asset that is falling dramatically in price (i.e. the true pain trade because this is PnL duress).
Right now the “true pain trade” is long US Dollar, long S&P 500 and long European peripheral/corporate credit.
To continue reading the Oct 15 a.m. edition of Rareview Macro’s Sight Beyond Sight, we encourage smart-seeking readers to secure a free trial to this publication…and then determine on your own whether (i) the $3000 annual subscription is the most fairly-priced independent research you might ever find and/or (ii), whether you can afford NOT to make this type of investment to ensure you are thinking straight and thinking smart while managing your money, or the monies of folks who have entrusted you to steer clear of car wrecks… To continue, simply click this link to Rareview Macro’s site.