Below is the lead-in to this morning’s edition of Rareview Macro’s “Sight Beyond Sight”; the ‘read more’ link below provides additional extracts that caught the eye of more than a few folks who follow macro-strategy themes..
Three Day Trickle Down Rule in Play…This is Not Same as Late March Correction
• Conundrum Across Asset Classes Leads to Risk Reduction
• Extra Focus on Front End of Interest Rate Curve and the Left Coast Investor
• Underbelly of Professionals Too Weak…Skepticism Suggest Weakness is Bought
Overnight
We apologies in advance for the deviation away from our normal humility level but sometimes frustration get the better of us.
The definition of the word Conundrum is: a confusing and difficult problem or question. While just a handful of examples, and because no one has a good explanation, these conundrums are leading professionals to reduce exposure levels for a third day in a row.
Brent Crude Oil is now down for eight straight days (during which it has lost ~5%) and it’s traded down in 12 out of the last 14 days. It is a similar trend in WTI Crude Oil which is down 10 out of the last 12 days. However, contrary to what one would expect Airline stocks are significantly lower in price and the correlation between Gold-to-Oil has not swung back to being negative. In fact, Gold is showing the largest risk-adjusted return and WTI Crude Oil is showing the largest negative risk-adjusted return in Commodities and the rejection so far of the profile (i.e. Gold dropped -10% over 45-days) that followed the peak in the Ukraine-Russia conflict has Gold bears nervous, including us who remain short it via a longer dated option structure.
The darling of Emerging Markets, India SENSEX is -2.5% over the last two days but the Dollar-Rupee (USD/INR) is lower by 41 basis points (i.e. weaker USD and stronger INR). Historically, in bouts of risk reduction both SENSEX and Rupee would weaken in tandem.From a geopolitical perspective the Tel Aviv 25 Index (symbol: TA-25) had the largest positive risk-adjusted return across regions and assets and the Israeli shekel (USD/ILS) is flat. Granted the invisible hand (i.e. Government intervention) could be at work this is not the type of reaction one would expect to possible re-occupation of the Gaza strip and 40,000 military reserve troops being called up.
In environment where there is no volatility investors need to hold outsized positions to be able to generate performance that beats their benchmarks. In our experience that is a recipe that leads to a loss of assets under management and we are reminded by the Long Term Capital Management (LTCM) bailout in 1998. Instead, investors need to accept the returns commensurate with the low volatility profile because volatility is not “static”. The last couple of days are evidence of that.
By the way, if you are a long/short investor suffering some PnL duress to start the third quarter just imagine how the largest non-Government holder of US Treasuries with their “new neutral” view feels after reading the Hilsenrath article this morning. The answer is that no one is going to call the fire department (i.e. Federal Reserve) one day if their office is on fire.
Secondly, the idea that professionals are nervous about losing the support of the Federal Reserve due to positive economic data holds little merit in our view. In fact, many will consider Yellen’s tenure a failure if the economy does not overheat eventually.
As a result of being overexposed to risk assets we understand why investors are optically shocked about an index level being down ~70 basis points. However, that does not take into context the fact that the S&P 500 has not had a 1% down day in 56-days and or the fact that the S&P 500 is still positive on the month. We get the fact that the JOLTS data was a bull market data print but does a down 70 basis point day and hedge funds suffering some PnL duress signal a steep interest rate hiking cycle is now forthcoming? The answer is NO.
Another way to look at this is that the anxiety being espoused in the market place is a question of where professionals are exposed. In our opinion, investors are less concerned about overall length in positions than the fact of where the concentration is of that length. The key point being is that unlike the March/April period looking at Small vs. Large Caps, Biotech and Internet, or Growth vs. Value is the wrong search for “knowledge”.
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