Tag Archives: neil azous

Classic Counter-Trend Tuesday; You Date Equities But Marry Credit

“To put it bluntly, what headline writers or traders are selling you today is a load of bollocks.” Neil Azous, Rareview Macro LLC

When global macro guru Neil Azous of Rareview Macro appeared on CNBC midday yesterday, MarketsMuse curators had already absorbed and relayed his recent views about energy prices, as well as his relatively rare (and sober) view as to the mid-term outlook for equities. When he opined late last night, “You date equities, but you marry credit..” via his Twitter feed, MarketsMuse Fixed Income curators smirked; simply because our resident bond market experts have long held that rare view–one that today’s “young Turks” often fail to appreciate.

Whether Monday’s equities market action was merely a ‘dead cat bounce’ in a progressively deteriorating state of market metrics that some attribute to a cyclical ‘earnings recession’, or a firming up of the underlying financial market foundation that portends “higher for longer” stock prices, its good to have sight beyond sight…

Consensus is a Classic Counter-Trend Tuesday…You Date Equities but Marry Credit

To put it bluntly, what headline writers or traders are selling you today is a load of bollocks.marketsmuse neil azous rareview macro cnbc oct 6 2015

Emerging market equities have just recorded their largest five-day gain since the taper tantrum in June of 2013. While the historical precedent is not the same the absolute performance is of similar magnitude for developed market equities. The prevailing view is that this is on account of a weaker US dollar, and on the view that lower interest rate for longer will be supportive for global growth.

As a gesture of goodwill by the Bulls, after five days of impressive stock gains, and for no other real reason, the consensus view is that today is a classic counter-trend Tuesday.

We have to chuckle to ourselves over this, because just last week, a stronger US dollar and an imminent interest rate increase that would remove the Federal Reserve uncertainty were also viewed as positive for equities. There is not even an acknowledgement that the move off the lows in the S&P 500 is very similar to the market bounce seen at end of August, and we all know how that worked out.

We’ll leave the narrative spinning to everybody else and, as we do every day, just try and deliver you some sight beyond sight.

One would think that this large group of people, all of whom consider themselves students of the market, would include a few other basic factors in their headline writing or analysis, such as:

  • The BoJ meeting tonight;
  • The ECB and BOE meeting minutes on Thursday;
  • Dead-cat equity market bounces of this magnitude are thematic during bear markets;
  • Reluctant buyers ahead of earnings season, especially considering a mini-theme of negative pre-announcements beforehand has already begun.

We suppose the list of data points could go on and on, but for us the key driver for risk assets is whether financial conditions tighten or loosen. We are watching corporate-based measures closely for that insight, not just the traditional market-based measures the majority on the Street monitor.

Despite the bounce in equity markets, a minor step-change in sentiment around the energy sector, which is supportive for inflation expectations, and the minor relief that a weaker US dollar and lower interest rate profile provides, there really has been no loosening in financial conditions over the past five days.

The breakdown in correlation between equity and credit markets is too hard to ignore, especially if you are looking for the upturn in equities to show durability beyond the past five days.

Here are three examples from yesterday of what we mean by this disconnect between stocks and credit and how credit is struggling with the tight financial conditions. These are just some of the corporate-based, as opposed to market-based, measures we are referring to.

  1. Ford Credit (F), a BBB rated issuer, came to market with a two-part 3-year fixed and floating rate note deal. Later in the day, the 3-year fixed notes were sold after combining its fixed and floating rate tranches. Additionally, it was forced to pay a 35 to 50 bps concession over its nearby 3-year fixed issue to print new paper. The key takeaway is that with a BBB rating, in this type of market, Ford would only issue if it “needed” to, not because it would do so opportunistically. Accordingly, the market is making them pay up for this new paper.
  1. The Province of Ontario (a sovereign-type issuer that is rated A+) stood down from issuing a €2.5bn 10-year deal due to “market conditions”, even though the deal had already been pre-marketed (i.e. investors knew of and were prepared to buy the deal).

The lead managers released the statement below.  This is extraordinary to say the least and illustrates how even the best credits are being very cautious… “Ontario always tries to right size its transactions and provide a liquid benchmark sized offering.  The Province views the USD and EUR markets as core strategic markets and, as such, wants to maintain a well-defined liquid yield curve in each currency.  Market conditions were today such that Ontario could not meet these objectives and, as a result, has decided to step back from the market at this stage and would like to thank investors for their interest.” 

  1. Five (5) other IG deals were known to have stood down from coming to market yesterday, following the decision by the Province of Ontario. (Source: Mischler Financial, Quigley’s Corner, Ron Quigley)

In our view, we do not expect financial conditions to confirm the recent equity bounce. In fact, we think tighter financial conditions will be a key determinant in why the fourth quarter positive seasonal call will struggle this year despite the stock trader’s almanac always saying otherwise.

Firstly, we have already made our views very clear on how one major financial condition – the corporate financing gap – has now swung into deficit. And we have pointed out the consequences of that: it will limit their ability for further credit issuance, M&A will cost more, and stock buybacks will slow, and that collectively has led to the Street being way too generous in its fourth quarter forecasts for all of these metrics.

In fact, we were pleased to see Deutsche Bank yesterday echo what we have already said and lower its forecast for stock buybacks in 2016 by 25% or more, relative to the total announced in Q3 ($600bn annualized). Moreover, the buyback announcements in Q3 were already significantly lower than the first half of the year.

Secondly, investors are beginning to recognize that a high yield bond should never have traded with a 4% yield in the first place, as that yield was artificially inflated by extreme monetary policy measures such as QE. So while spreads have widened a lot, a 5% or 6% yield should really still be the equivalent of 7% or 8% similar to other cycles. Additionally, the breadth of weakness, for the first time this year, has now spread outside of the energy and materials sectors as investors do their homework on the rest of the things they own. The point here is that high yield is not cheap if the measurement is multiple cycles, not just the cycle with extraordinary monetary measures.

Finally, the other anecdotal trend we are observing is that credit traders don’t have the same appetite as equity traders to buy weakness right now. The majority of credit trader’s performance over the last few years is easily traceable to buying a new issue, watching that credit tighten immediately thereafter due to the sensational appetite for yield, and then selling them out quickly. Put another way, you are insulting equity investors when you call them IPO flippers. Right now, this trade does not exist and anyone who does not have a genuine investment process is being shut out of the market. This is one reason why credit spreads are not tightening.

The bottom line is that corporate Treasurers or credit investors remain highly suspicious of the primary issue market. Yes, companies will always need to re-finance their credit stack as part of their normal operations, as could be seen with Ford Motor paying up for it yesterday. But anything opportunistic is on hold, especially if a company has to re-model their economic projections for an M&A deal in the pipeline, as that will now come at a higher price.

So until we see several – by which we mean 3 to 4 consecutive days – of firm market tone conveying that corporate Treasurers and credit investors are once again aligned it is pretty easy to chalk up the latest move in stocks to nothing more than a classic bear market bounce. If this does not materialize, then the mindset of selling into strength will prevail.

As a reminder, when push comes to shove, you date equities but marry credit, especially after a 5-6% bounce.

Neil Azous is Founder/Managing Member of global macro think tank Rareview Macro LLC and the publisher of global macro newsletter, Sight Beyond Sight, a daily publication subscribed to by leading hedge funds and investment managers. Neil’s real-time comments and trade ideas are often posted to Twitter

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Risk Takers Cry Out In Terror-A Rareview With Sight Beyond Sight

Professional Investment Community Cries Out in Agony and They Don’t Yet Know Exactly Why

MarketsMuse Strike Price and Global Macro curators voted the Oct 5 edition of global macro advisory firm Rareview Macro’s Sight Beyond Sight the best read of the week. Yes, its only Monday, but those who follow this newsletter as we do (along with a discrete universe of savvy investment managers and hedge fund traders) have discovered that a certain degree of prescience can be contagious when trade ideas are presented with a pragmatic, transparent and easy to understand thesis.. Below are the lead-in topics and followed by selected excerpts…

  • A Great Disturbance in the Force – Oil, Materials, & Momentum Strategies
  • Portfolio Overlay – Two Inexpensive Ways to Add Downside Convexity
  • New Trade – Short 2-Year US Treasuries via Put Options

For those of you who still have to make up your mind on whether we can help you or not with your daily investment process, today’s edition of Sight Beyond Sight is a good example of what makes us different.  The majority of the morning notes you have received today all center on the “bad news is now good news” meme or how lower interest rates for longer will be supportive for risk assets. Of course, none of them have highlighted that financial conditions have been tightening all year long so despite the call for lower interest rates for longer the real world is not buying that unless credit spreads tighten. Instead, we will give you a rareview into how risk takers are faring across various strategies. Additionally, we provide three new trade ideas.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

In the 1977 iconic movie Star Wars: Episode IV-A New Hope, following the scene where the Death Star destroys the planet Alderaan, the Jedi Knight, Obi-Wan Kenobi, said: “I felt a great disturbance in the Force, as if millions of voices suddenly cried out in terror and were suddenly silenced. I fear something terrible has happened.”

I have started with that quote because it seems the best way to describe the Start of the new week for the professional investment community. Take a look at the below observations and it will be easier to understand why risk takers are “crying out in terror” and for many of them “something terrible has happened”.

If you are a global macro fund, then liquidity is not going to be your friend today as you defend core strategies that are deeply entrenched. For those who have been living on a deserted island the remaining long US dollar positioning is mostly versus emerging market FX and G10 commodity currencies, rather than other reserve currencies such as the euro, Japanese yen, Pound sterling, and the Swiss franc.

If you are a long/short strategy, you already know what is happening because it started well over a week ago.

You just did not want to believe it. Not to worry, a further unwinding in the long Financial/healthcare versus short Material/Energy sector strategy will help you finally come to grips with reality. If you are a quantitative fund, up until really last Friday in both Europe and the US, you have had the benefit of being part of the number one factor input and best performing strategy this year –that is, MOMENTUM. Sadly for you, the reversal of that strategy is a lot more violent on the way out then chasing it on the way in. Perhaps you will take back your 15 minutes of old fame from the new guys-Risk Parity and Target Volatility funds?

The conclusion would be that the worst-of-the-worst–energy, materials and bottom 15% of single stock performers–is now in play from the long side for whatever reason –its “go time”, crude oil has bottomed, or gross exposure reduction is not near being completed.rareview macro sight beyond sight 0c5 5 2015

Ok, here we go…

Rareview Macro Portfolio Overlay –Two Inexpensive Ways to Add Downside Convexity

The current price in S&P 500 futures is ~1950. The low on August 24th was 1831. The difference between the two is ~6%.Protecting against a 6% downside move, or 120 S&P 500 points, is an expensive exercise right now, and not one we are interested in. Instead, we are more worried about the second 6%, or the move down to 1720-1700 from 1831, especially the air pocket that is likely to develop once/if the August 24th intra-day low of 1831 is breached.

The problem is that we do not know the short-term direction of the S&P 500 index, including if it will first go to 2000 in the next 30-days but we are highly sensitive to an even larger move on the downside in the fourth quarter than what occurred in the third quarter. So working on these premises, what are the best strategies to deploy right now? We think having a two-tiered approach between the S&P 500 index and equity volatility, as measured by the CBOE VIX Index, is an optimal strategy.

We’ll look to dynamically manage both of these strategies side-by-side in the event that we see another leg lower in US equities. The two strategies we like are and the ones we deployed in the model portfolio late last week and posted via Twitter are…. Continue reading

Why Glencore is Going to Cause Gas- A Global Macro View-Grab The Glenlivet

MarketsMuse news curators have spotted dozens of commentaries from leading equities and debt market pundits opining about global mining giant Glencore. There is only one comment that offered a truly rare view that struck a chord, and it is courtesy of this morning’s edition of global macro newsletter “Sight Beyond Sight”, which is published by global macro think tank Rareview Macro LLC. The title of today’s edition:

Tentacles from Glencore Extend Well Beyond the Naked Eye…Quarter-End Flight to Quality

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Today’s edition of Sight Beyond Sight is going to sound aggressively Bearish to some people. At the same time, the tone is insensitive to the countries, companies, and employees involved. If that bothers you, that is too bad. This is a financial services newsletter, not the United Nations or the Red Cross. We are not trying to disparage anyone or call someone out. Our goal is to try and help you make or save money.

When I traded credit derivatives at Goldman Sachs back in the late 1990’s, the way we separated our bond business between investment grade, high yield and distressed was very simple. If an issuer’s bond price was trading above 80 cents on the dollar you were investment grade. Conversely, if an issuer’s bond price was trading below 80 cents on the dollar you were high yield. Anything below 50 cents on the dollar, you were distressed. Below 20 cents…don’t ask.

Glencore EU1.25b notes due March 2021, one of the most recently issued and liquid tranches of their debt outstanding, dropped six cents to~76 cents on the euro today, effectively crossing over into high yield territory even though it still maintains its BBB credit rating. Headline writers argue that most of the weakness today in Glencore’s stock and bond price is the result of comments made by Investec Plc, where it warned that there would be little value for shareholders should low commodity prices persist. This echoes a key research note last week from Goldman Sachs that said: “If commodity prices were to fall 5% from current levels–which we do not consider to be a far-fetched assumption given the downside risk to commodity consumption in China–we believe that concerns about its IG credit rating would quickly resurface.

Under this scenario, we estimate that most of Glencore’s credit rating metrics would fall well outside the required ranges to maintain its IG rating, and that could happen as early as the next reporting period (FY15).”

From here, this is where those who throw bombs for a living believe is what is coming up next:

  1. Commodity prices drop another 5%;
  2. Rating agencies downgrade Glencore to high yield

(by Friday);

  1. Glencore’s trading desk receives margin/collateral call immediately as commodities are T+0 settlement for margin (i.e. remember Duke&Duke in Trading Places);
  2. Like AIG, the re-insurer of the credit markets, a significant amount of derivative contracts tied to commodities become an unknown.

Continue reading

The Volcano Trade, Vontae Mack and VXX

MarketsMuse Global Macro merges with Strike Price seers with sage excerpt from 18 Sept edition of “Sight Beyond Sight”, the daily newsletter published by global macro think tank Rareview Macro and authored by Managing Member Neil Azous and rising star Michael Sedacca…For fans of the film Draft Day, this excerpt will resonate in a resounding way..For those who option traders who understand what VIX really is, and respect ideas that make sense, the following is a solid read.. The entire SBS edition can be found via link below..

Volcano Trade Cont. – No Matter What, Vontae Mack

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Today, we are going to use a metaphor from a football movie to get our point across. Please note we expect to receive significant push back in this view, given we are going against the grain here. We are prepared for whatever you want to throw at us.

The movie, Draft Day, starring Kevin Costner, was an interesting (supposed) peek into the shrewd world of power plays among National Football League (NFL) general managers as they jockey to make the best deals on the yearly NFL Draft Day.

What grabbed the attention of viewers was the final, big reveal on a visual tease that ran through the whole movie involving a Post-It note. Kevin Costner’s character, Sonny Weaver, Jr, in only his second year as the General Manager for the Cleveland Browns, is feeling Herculean pressures from all sides – the arrogant owner, the difficult coach, and the even more difficult fans – to elevate the pitiful Browns into a team of national contenders. He has to make big, smart plays, which means we glimpse the political maneuverings at work, the salary cap issue, the various strengths and weaknesses of the key players his staff has been researching, as well as the poker game he must play with other GM’s in the NFL who are playing poker right back at him.

But all along, we see Sonny continually referring to the same little Post-It note he started with earlier that morning before he even left his house. He wrote the note himself, stuck it in his pocket, and then keeps referring to it as the day wears on and the stress level rises.

The draft begins. By making a painful trade that puts the entire future of his franchise on the line, Sonny secures the enviable #1 pick of the first round. Perfect, now he can get the obvious choice, the much-hyped #1 quarterback candidate. Instead, to the astonishment of all he unilaterally chooses the strong, but less regarded linebacker, Vontae Mack.

And this is what touched most viewers. At the end, after weathering the draft day storm, regardless that we all knew Costner would come out on top, it turns out what matters is that Post-It note. When he lays it on the table for the viewer, to finally read, it simply said:

vontae mack marketsmuse rareview macroNo. Matter. What. He carried it with him all day. He clutched it in his fist when the heat was hottest and the fog was thickest. He fumbled it, strayed from it, even doubted it, but in the end, that simple determination governed him, guided him, through the storm. When no one supported him or even thought he was sane, the fictional Sonny Weaver, Jr, had one thing, his No Matter What.

This is how I feel about the VXX put options we hold in the model portfolio.

You can insert CNBC in place of the Cleveland fans, my inner circle of trusted advisors in place of the coach, and our paid subscribers as the arrogant owner. But at the end of the day, we want to see how these moves lower in volatility plays out into next week. While we know we can book an additional 30-60 bps of PnL in the model portfolio in short order, we are looking to make a significantly larger amount if volatility continues to come in at the pace that has been witnessed over the last few days. The key point being, if VXX closes at 18 next Friday the below Volcano Trade would contribute an additional +4% to the NAV, on top of the 60 bps already realized. That is an opportunity we can’t ignore and we want to be a pig about it.

Yesterday before the Federal Reserve monetary policy statement we adjusted our short US equity volatility position for a second time.

Below is the sequence of trading events since the inception of this strategy but as a reminder the definition of the “Volcano Trade” is as follows: After an asset has had a large move in your favor and the option you own approaches a ~70 delta, you are able to roll the position to an out-of-the-money strike in two or three times the size, and capture an increasingly larger amount of profit if the move continues.

vxx puts no matter what rareview macro marketsmuseSeptember 1st:  Bought 10,000 VXX 9/18/15 $25 put options for $0.95 (VXX spot reference ~$30.50)

September 15th:  Volcano Trade

  1. Sold 10,000 VXX 9/18/15 $25 put options at $1.61 (vs. 0.95 cost basis)
  1. Bought 20,000 9/18/15 $23.50 put options for $0.78 (VXX spot reference ~$24.20)

Net Credit: $0.03 or $30,000

September 17th a.m.:  Super-Volcano Trade

  1. Sold 20,000 VXX 9/18/15 $23.5 put options at $1.76 (vs. $0.78 cost basis)
    1. 3,520,000 premium taken in
  1. Bought 30,000 VXX 9/25/15 $20.50 put options for $0.57 (VXX spot reference ~$22.00 at 9:57 a.m.)

Net Credit:  $1.81 or $1,810,000

*Locked in 60 bps of PnL to the model portfolio

**The roll and the remaining options are FREE.

September 17th p.m.:  Super-Volcano Trade Cont.

  1. Bought 10,000 VXX 9/25/15 $20.5 put options for $0.36 (VXX spot reference $22.80 at 4:10 p.m.)

Current position:  40,000 VXX 9/25/15 $20.5 put options for $0.5175.

*Playing with House Money:  Current premium $2,070,000 or 69 bps to the NAV.

Time Stamp: All updates were sent in real-time via Twitter.

Here are the following reasons for taking these actions:

  1. The FOMC rate decision and approaching expiration date (i.e. today) had caused this week’s options to carry an implied volatility about double that of next week’s expiration.
  1. The notional of the put options reached 150 bps of the model portfolio NAV, which considering they were less than 48 hours from expiration breached our rules-based discipline.

As a result we were able to accomplish three things.

  1. We were able lock in profit whilst keeping a comparable amount of short delta. At the time of the sale we were synthetically short 1.5mm shares of VXX. By rolling the options our new synthetic short position was the equivalent of 835,000 shares.
  1. We increased our gamma exposure to a further decline in US equity volatility by rolling down and out into larger size (i.e. 40,000 put options versus 20,000 put options).
  1. We significantly reduced our vega risk by shifting into options with half of the implied volatility.

So far, this is nothing more than us sticking to our rules-based discipline. In fact, this was “text-book” trading and a classic example of adjusting a position on numerous occasions at the most opportune time. Following the FOMC release yesterday, the VXX even broke below our new strike and traded at $20.04.

Our view remains the same as it did on Wednesday when we introduced the “volcano trade” to you – that is, we expect US equity volatility to continue to decline into the end of the quarter. Additionally, the VIX curve continued to shift towards contango, with it trading inverted for a portion of yesterday’s session.

While headline writers want to suggest that uncertainty around the path of Fed policy is negative for risk assets the fact remains that investors believe lower-for-longer interest rates trumps that view and, as a result, they are not long enough market beta if the bounce back in risk into the end of the quarter continues. After all, that would be the biggest Bronx cheer (i.e. middle finger) of all right now.

We are mindful that hanging around this long may be overstaying our welcome, but hopefully the “volcano” will continue to explode through this new lower-lower strike with four versus two times the leverage since inception and dispense burning lava all over the nearby villages filled with dogmatic perma-bears who are looking for high volatility once again because they did not get unshackled from the Fed handcuffs.

Feel free to turn the CNBC volume to full blast, call our office, or send us angry emails to change my mind. But remember where I am coming from today and what our Post-It note says. vxx puts no matter what rareview macro marketsmuse

Neil Azous is the founder and managing member of Rareview Macro LLC, a global macro advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight.  


Wanted: Fed-Watching Pundits: Requirement: Coin-Tossing Skills

MarketsMuse editors were relieved yesterday after the Fed announcement for two reasons; the first being we were reminded that at least half of Wall Street’s Fed-watching pundits who get paid big bucks to predict events can be replaced by anyone who can flip a coin, as half of the pundits were wrong and arguably, at least half of those who were right, were probably right for the wrong reasons. One would need to have a transcript of the entire meeting to know what those Fed governors were thinking and saying.

The second relief comes from having watched a post-announcement color commentary on CNBC “Fed Winners and Losers”..which had sober and well-thought out thoughts from Rareview Macro’s Neil Azous and SocGen’s Larry McDonald


Investment Grade Credit Spreads Are Saying…MarketsMuse

Most sophisticated investors, whether Tier 1 institutional investment managers, ‘top minds’ across the sell-side, or the truly savvy, self-directed types should all agree that fixed income market signals, and investment grade credit spreads in particular are a prelude to what equities market can expect to happen.

Whether the ‘lag time’ is 3 months, 6 months or 9 months, history has proven that interest rate markets and investment credit spreads are a reliable indicator. Reading those ‘tea leaves’ is complex, and a task often relegated to “senior research analysts.”  That said, MarketsMuse followers  (primarily investment industry professionals who hail from both sides of the aisle) know that when it comes to truly superior research within the financial market ecosystem, finding diamonds in the rough is not easy, particularly when the landscape is a minefield of jibber jabber produced by ‘experts’ at top banks–folks whose interests are more often aligned with their own wallets as opposed to being aligned with their clients’ best interests.

Worse still, having access to understandable, plain-speak analysis from objective and un-conflicted (aka INDEPENDENT) research is a challenge, albeit the unbundling movement is helping to address that issue.  Without further ado, the MarketsMuse Fixed Income team is happy to share an ‘evergreen’ piece from one such highly-trained and completely conflict-free expert. You’ve seen the work from Neil Azous of Rareview Macro LLC here before and the banner of his publication “Sight Beyond Sight” speaks volumes.

Roll the tape….

A segment from our daily global macro newsletter, Sight Beyond Sight, written at the end of July – What Investment Grade Credit is Really Telling Us – made the cover of the back-to-school issue of the IRP Journal, a recently launched magazine that is digitally distributed to institutional investors and features current research from independent research providers (aka IRP’s). As our readership expands deeper into Asia we are pleased to have been selected to be on the cover by this Hong Kong-based publisher.

In the past few days, US investment grade (IG) credit spreads have reached new three year wides. Historically, the absolute level of these spreads is consistent with periods of economic and financial market stress. Additionally, the daily volatility of these spreads has increased dramatically in recent weeks.

Below is a chart of the Moody’s Baa Corporate Bond yield spread over the US 30-year Treasury yield.

what investment grade credit spreads are telling us marketsmuse neil azous rareview macro

What is the significance of this observation?

Investment grade corporate bonds are one of the least risky investments within the capital structure, and less sensitive to changes in default risk due to economic weakness. Moreover, the credit market is arguably, next to the slope of the yield curve, the greatest predictor of future economic stress.

The most widely cited explanation for the recent widening in spreads is that it is due to the amount of new investment grade credit issuance. Indeed, that is one factor as new issuance (+SSA) set a record pace yesterday after having surpassed $1 trillion, a level not reached last year until mid-September.

However, the recent widening of the spreads is not just down to the recent surge in corporate issuance. Issuance is simply not a large enough driving force to cause this level of “stress”. The reasons for this widening are two-fold.

Firstly, the aggregate level of issuance, to a degree, is beginning to finally catch up with the market after years of sensational appetite. Corporations, in aggregate, are raising their leverage levels by issuing the new debt and not using the proceeds to grow their revenues or cash flows to compensate. Put another way, the market is beginning to segregate between issuance related to refinancing a company’s “credit stack” as part of its normal annualized funding requirements and pure capital redeployment for the benefit investors.

By the way, not only is the IG spread widening, signaling the distinction noted above, but the equity markets are now doing so as well. See the below chart of the ratio of the S&P 500 to the S&P 500 BUYUP index overlaid with the US Treasury 5-30yr yield curve. Stock buy-backs are simply underperforming in 2015 after multiple years of out-performance as the yield curve steepens in anticipation that interest rate hikes will slow the capital redeployment process down. As a reminder, it is much easier to slow a buy-back than reduce a dividend as the former has a time-band and discretion to implement and the latter generally is a board-level decision.

Continue reading

Global Macro Rareview: ETF Investors and The Ivy Portfolio

If the second shoe is actually falling as US (and all other) equities markets appear to indicate this morning, MarketsMuse ETF and Global Macro editors were stimulated by having Sight Beyond Sight with this morning’s coffee, courtesy of Rareview Macro’s Neil Azous. Of particular interest, Azous points to Mebane Faber’s The Ivy Portfolio for those who have defaulted to using exchange-traded funds and to the reference to Occam’s Razor, a principle that global macro enthusiasts will appreciate.

Without further ado, please find an extract from this morning’s edition of Sight Beyond Sight…

Corporate Buybacks Not Strong Enough to Save Stocks Today…Retest of the Lows Now Underway

  • Negative Statistical Analogs
  • No September First of the Month Inflows
  • China Quantitative Tightening (QT)
  • Trends Switch to Medium- from Short-Term
  • Correlation Breakdown
Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

The key takeaways to start September are invisible to the naked eye; a little sight beyond sight is required this morning in order to see them clearly.

Firstly, we are not sure who the source was, but the following S&P 500 analog was sent to us:

In the 11 times the S&P 500 fell by more than 5% in August it declined in 80% of the subsequent Septembers; the average decline in September in those years was 4%.Now, there are many statistics with similar odds of success being circulated out there, but in aggregate these one-liners miss the bigger picture, in our opinion.

The message is that the higher volatility witnessed during August has carried over into September. It took eight hours of the overnight session for S&P futures (ESU5) to confirm 65% of the above analog, as the index was -2.6% at one point.

Secondly, the first of the month inflows into risk assets that professionals are accustomed to relying on to support their long equity positions has gone missing this year. Inflows into equities are generally expected to follow the simultaneous release of PMI manufacturing data, especially when the data historically points to a stronger global growth profile. However, the data released this morning was uniformly weak, and serves as a reminder of the regional synchronicity – that is, Japan’s consumption-led recovery is faltering, the US has a second half of the year inventory overhang to work through, Europe’s inflation profile is reverting back to pre-“QECB” profile, and China remains an unknown.

Thirdly, given the overall weakness in risk assets the sell-off in the German Bund (RXU5) over the last 24-hours is confounding professionals. Occam’s Razor, a principle that states that among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected, suggests that the Chinese central bank is once again selling dollars and foreign fixed income reserves to buy yuan. As a reminder, FX intervention means foreign reserves have to shrink. The mechanics are as follows: sell foreign sovereign bonds > receive US dollars (USD), euro (EUR), yen (JPY) > use USD/EUR/JPY proceeds to buy CNY = no impact to private economy.

The Chinese Yuan, both the onshore (USD/CNY) and offshore (USD/CNH) versions, is trading at its strongest level since the devaluation. The key difference today however is that the central bank is not defending yuan weakness. Instead, in the spirit of managing volatility, it appears it is proactively reminding speculators who their daddy is and doing a good job of crushing their souls at the same time.

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Market Mayhem: A Rare View From Global Macro Guru

One needs to have ‘been there and seen that’ for at least twenty years in order to have been “loaded for bear” in advance of this morning’s equities market rout. At least one of the folks who MarketsMuse has profiled during the past many months meets that profile; and those who have a true global macro perspective such as Rareview Macro’s Neil Azous have pointed to the credit spread widening during the past number of months as a prime harbinger of things to come. And so they have…

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Last night, Neil Azous published one of his finer commentaries in advance of this morning’s global equities market rout and incorporated a great phrase:

“Man looks in the abyss, there’s nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss.” – Lou Mannheim, Wall Street, 1987


The highlights of last night’s edition of “Sight Beyond Sight” are below…

  • Big Picture View
  • S&P 500 View
  • Asset allocation Requires Swimming Against the Tide – Low-to-Negative Downside Capture
  • Long German versus Short US Equities (Currency Hedge)
  • US Fixed Income – Short 2016 Eurodollars
  • Long European & Japanese Equities (FX hedged), US Biotech and US 10-Yr Treasuries
  • Long US Energy Sector
  • Volatility – Sell Apple Inc.; Not the S&P 500 or VIX
  • Harvesting S&P 500 Index Option Skew
  • Long Agricultural Call Options
  • Long US Housing (Hedged)
  • Technical Mean Reversion – Short EUR/BRL
  • Long Euro Stoxx 50 Index Dividend Futures (symbol: DEDA Index)

To read the full edition of the Sight Beyond Sight special Sunday (Aug 23 2015) commentary, please click here*

*Subscription is required; a free, 10-day trial is available

Neil Azous is the founder and managing member of Rareview Macro, an advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight.

Global Macro Think Tank Rate Hike Hedge: A Rareview Special

Within the context of continuous guessing as to the outlook for a rate hike, and how to hedge fixed income portfolios accordingly, getting a strong fix on fixed income strategies has proven to be a challenge for a vast majority of professional investors during the past 24-26 months, many of whom have replaced high-priced wall hangings with dart boards.  Many other managers prefer to simply hum “Lower for Longer” to themselves. For global macro-focused fund managers, MarketsMuse spotlights a refreshing update from Rareview Macro LLC, the global macro think tank and publisher of professional newsletter “Sight Beyond Sight.”  Below please find opening excerpt from today’s edition

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

We are pleased to present our new portfolio construction, including four new trade ideas and a tail risk hedge that make up our core fixed income strategy. As is customary, each one includes our standard trade matrix with a pre-defined game plan for managing gains and losses.

For those that regularly traffic in fixed income, we look forward to any feedback you may have and a spirited debate on our ideas. We are confident they are sufficiently robust to survive some criticism.  For those not in fixed income, please feel free to share this internally with your colleagues who are.

  • TRADE 1 – Gradual/Variable pace of rate hikes
  • TRADE 2 – Leverage on Gradual/Variable pace of rate hikes
  • TRADE 3 – Targeted field bet on no rate hikes in 2015, recession book overlay
  • TRADE 4 – “Uncertainty” Risk Premium
  • TRADE 5 – Choke Yourself Tail Hedge


  • Thematic view, not tied to day-to-day movements in the long bond
  • Multiple sources of return attribution
  • High return on capital: Low option premium outlay, high leverage
  • High risk/reward: Lose 1.5% (realistic) to 3% (absolute) of the NAV to make 6% to 8%
  • Both quantitative and qualitative risks clearly expressed

Above is the teaser, those interested in drilling down into the above, today’s edition of Sight Beyond Sight is available by clicking this link.

FinTech Helps Power Bull Market For Unbundled Research

Disruptive Unbundlers, Securities Industry Untouchables, Fintech Aficionados and Innovative Altruists seek to level the investment research playing field, inspiring a bull market for independent research distribution channels, start-ups and disruptive schemes.

Investment research and expert ideas, whether within the context of equities analysis or global macro perspective, has long been the domain of sell-side investment banks, whose research insight is typically bundled as a ‘free product’ within the range of fee-based services provided, including trade execution. Those old enough to remember the ‘dot-com bubble’ days will recall that much of Wall Street’s so-called research was (and arguably still is) notorious for being heavily tilted towards “buy recommendations” in favor of the investment bank’s corporate issuer clients.

This clearly conflicted practice was perfected in the late ‘90s by the likes of poster-boy analyst Henry Blodget (since banned from the securities industry, and ironically, now Editor and CEO of financial media company Business Insider) and was lambasted by securities industry regulators when the “Internet bubble” burst. Those chasing-the-horse-after-the-barn-door-closed efforts since led to a regime of regulation and firewalls intended to distance in-house research analysts from their investment banker brethren so as to mitigate biased recommendations and conflicts of interest. Compliance officers across the industry found themselves facing a host of new rules, and that ‘compliance contagion’ served as the catalyst for a spurt in “independent research boutiques” offering “unbundled” and un-conflicted research sold as a stand-alone product with no ties to execution or trading commissions.

However compelling the notion, and despite the regulatory impetus to foster the growth of independent research boutiques, the business model for these firms has proven challenging during the past 10-15 years. Many boutique research firms floundered or failed for several crucial reasons, including but not limited to (i) the burdensome costs and means associated with creating a stand-alone brand, (ii) the challenge of delivering consistent and compelling content to institutional investment managers and sophisticated investors at a price point that could prove profitable and (iii) the non-trivial logistics required to deliver content in a compliant manner. In the interim, regulators stood by and observed, and digital delivery mechanisms for independent researchers only slowly evolved. Investment banks, never shy when it comes to creative workarounds, bolstered their research ranks and produced more content, even if mostly undifferentiated, but still promoted by the strength of the investment bank’s brand.

All of this is about to change again, causing some to conclude that regulatory market moves in cycles every decade or so, much like the stock market moves in cycles. The current bull market case for unbundled independent research is not a result of efforts by get-tough-on-Wall Street types such as New York Attorney General Eric Schneiderman or Massachusetts’ kindred spirits Elizabeth Warren and William Galvin, and the bull case is certainly not because of any efforts made by the SEC. To a certain extent, the positive outlook for those in the unbundling space is based on Moore’s Law and the advancement of Fintech-friendly applications, but it is more directly attributed to a new European Union law inspired by MiFID II, that if passed as expected, will require investment managers to pay specifically for any analyst research or related services they receive. With that new rule (which includes more than a few line items), many large money managers are starting to follow the proposed rules globally; investment banks in the U.S. (and obviously those in Europe) are devising new business models for one of their oldest and highest-profile functions: offering ideas to customers that banks can monetize through commission-based services.

More than some across the major continents believe that however much top investment bank brands are a decidedly powerful selling tool for research product, the power of the internet has enabled the distribution of independent research and enables a Chinese menu of pricing schemes via a continuously-growing universe of independent portals that invite content publishers to sell their products using an assortment of social media-powered distribution channels and revenue-sharing schemes.

Bloomberg LP has created its own independent research module accessible by 300,000+ subscribers in direct competition with Markit, the financial information services provider. Earlier this year, Interactive Brokers (NASDAQ:IBKR), the web-powered global online brokerage platform that provides direct market access to multiple exchanges and trading venues across the entire asset class spectrum quietly began enhancing its offering of third-party professional and institutional-grade research. IB’s 300,000+ accounts comprising professional traders and institutional clients may subscribe to research made available in the trading platform, Trader Workstation (TWS). At the same time, IB began promoting these third-party research providers via IB Traders’ Insight, a blog embedded within the firm’s Education module that covers the full range of investment styles from more than two dozen content providers.

While bolstering objective research content is a natural business extension for those having captive brokerage clients and for terminal-farm behemoths, perhaps even more interesting is that start-ups in the unbundling space are starting to percolate.

On the European side of the pond, UK-based SubstantiveResearch, created earlier this year by former EuroMoney Magazine publisher Mike Carrodus, is positioned to be an institutional research thought- leader that curates and filters both independent and sell side global macro research, with a sleeve that hosts regulatory events for investment manager content consumers and sell-side content providers.  Start-ups in the US include among others, Airex Inc. , which dubs itself “the Amazon.com for financial digital content” and recently secured funding from fintech-focused merchant bank SenaHill Partners. TalkMarkets.com is another notable entrant to the space, and was created in late 2014 by Boaz Berkowitz, a former “Bloombergite” who was also the original brain behind Seeking Alpha. From the traditional financial media publishing world, industry stalwart Futures Magazine, recently re-branded as “Modern Trader” and the parent to hedge fund news outlet FinAlternatives is also embracing the research content unbundling movement as a means towards capturing more Alpha and better monetizing relationships with content providers. Each have their own business models, including the use of cloud-based technology and coupled with the muscle of creative online marketing, social media tactics and search-engine ranking techniques.

While the start-up space is often littered with short shelf-life stories, these new unbundled research distribution vehicles are being enabled by the fintech revolution and embraced by distributors of content, high-profile independent research providers, as well as by at least one major bank seeking to hedge its internal bets; earlier this year, Deutsche Bank inked a deal with upstart Airex, such that DB’s proprietary equity research is available on a delayed basis and can be purchased by any AIREX Market shopper. In the case of now 6-month old TalkMarkets, they are embracing an advertising-based business model, which is predicated on building an outsized audience of sophisticated retail investors for prospective advertisers. To date, they have enlisted more than 350 content providers and 10,000+ registered users. While there is no cost to access the platform, content providers are able to upsell subscription-based services and at the same time, earn ‘points’ that can be converted into the private company’s equity shares.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

According to former sell-side global macro strategist Neil Azous, the Founder/Managing Member of think tank Rareview Macro LLC, and the publisher of subscription-based Sight Beyond Sight” which is now being distributed across several channels apart from the firm’s website (including via Interactive Brokers), “Truly superior, high-quality content, including actionable ideas remains relatively scarce, but the fact remains, content has become commoditized. The good news is that banks are not the sole source of carefully-conceived research and the better news is that conflict-free content publishers can now more easily distribute via a broad universe of narrow-casting, web-based channels.”

Added Azous, “For independent research providers and trade idea generators, it’s arguably a watershed moment. As new rules take shape, content publishers, including those who previously worked under investment bank banners, can now reach an exponentially larger universe of content buyers through these new distribution channels. It’s a numbers game; instead of working inside an investment bank and trying to ‘sell’ a traditionally high-priced product to a relatively narrow list of captive clients, the more progressive idea generators can re-tool their pricing and make their product available to exponentially more buyers, and in a way that conforms to and stays within goal posts of compliance-sensitive folks.”

However much it makes sense to foster the easy distribution of independent and un-conflicted research, Wall Street et. al. is not going to easily abrogate their role for providing ideas or forgo the trade execution commissions derived from those proprietary ideas. Banks are reported to be devising new pricing models for investment research in view of EU proposals that could prevent research from being paid for using dealing commissions. In an unbundled world, where payments are separated, competition for equity and credit research may increase as asset managers look beyond traditional sources, which may trigger fragmentation. They may also move research in-house. The U.K.’s FCA, which is driving the debate, has endorsed the EU proposals.

As noted within the most recent edition of Pensions & Investments Magazine, Barclays PLC, Citigroup Inc., Credit Suisse Group AG and Deutsche Bank AG are working with clients to come up with pricing for the analyst research customers receive, according to bank executives. Prices are expected to range from roughly $50,000 a year to receive standard research notes, up to millions of dollars for bespoke research and open-door access to analysts.

“We are working to change the mind-set so that fund managers understand that research should be treated as a scarce resource. There is a great opportunity to tap into experts in their fields at brokers, but we need to really think about the value of research and determine the right amount to pay for it,” said Nick Anderson, head of equities research at Henderson Global Investors.

The following [excerpted] analysis is by Bloomberg Intelligence analysts Sarah Jane Mahmud and Alison Williams and helps summarize the current outlook. It originally appeared on the Bloomberg Professional service. 
Continue reading

Global Macro: Long/Short Hedge Funds Have Done Something Stupid

Now that InteractiveBrokers is turning up the heat and joining the “unbundling movement” by offering independent research via its world-class trading platform, MarketsMuse editors spotlighted the following comments courtesy of global macro sage Neil Azous, Founder/Managing Member of Rareview Macro LLC from today’s IB feed..If you’re a hedge fund-type, you will either smile, smirk or throw a rock at your computer..

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

A few of our hedge fund buddies have asked us to bring back “the old-school Neil” and tell you what I think will happen in the next 48-hours. We aim to please, at least sometimes, so therefore today’s note has a lot of “hedge fund speak” and is very short-term in nature. Here we go.

If you ban selling, threaten to arrest short sellers and suspend over half the market, then at some point Chinese equities will inevitably close positive. Add in some good old fashioned government buying of what actually remains open and it is no great surprise that equity markets closed positive in China.

Of the 2,754 shares traded in Shanghai, 1,700 were suspended but the ones that were opened had virtually a 100% up-day. All 194 of the 484 shares that are still open for trade on the ChiNext Board – the poster child for speculation – rose limit up 10%. The three main index futures – CSI 300 and CES China 120 – closed limit up 10% and FTSE China A50 futures closed up +17%. The 5.8% gain in the Shanghai Composite was the largest since 2009.

While the invisible hand of China’s government has set a positive bid-tone for the rest of global risk assets today, it also increased the probability of further PnL duress for long/short hedge funds here in the old US of A.

Sadly, the desire by the long/short hedge fund strategy to reduce overall gross exposure over the last week has been very low.

The fact is that the majority believe that the earnings bar going into this reporting season is so low that you can crawl over it on your knees, and that the dispersion of opportunities remains high due to M&A activity or event-driven catalysts. The last thing this investor base wants to do is lose core positions on account of Greece or China. In Greece, the opportunity cost has been high over the years, and in China’s case, since none of them have really any meaningful direct exposure, the mindset is that the spillover effect to US equities is marginal at best.

As a result, long/short hedge funds remain long on single stocks, and to at least show some appearance to their investors that they are being prudent given the top-down concerns globally they have OVER-purchased a lot of market-related protection, or have used blunt instruments to get really short of the market outright. Put another way, their gross exposure is roughly the same as where it was last month, before the very recent global margin call kicked in, but there is large contingency now running TOO NET SHORT.

To continue to dazzle you with words like “code-red”, it does not take a genius in this business to look at all the usual short-term hedge fund indicators and recognize that many of them are at extremes – that is, put/call option ratios are at 18-month highs, prime brokerage position reports show the net short position at multiple standard deviations above the average over the past year, etc.

So what does the fact that long/short hedge funds are extremely long single stocks and over-hedged actually mean? Continue reading

Its All Greek..A RareView View…

As the events in Greece escalate to a frenzy, global macro strategists are lining up to opine on what might happen as the EU and the world calculate the impact of a Grexit. MarketsMuse tapped into one of the industry’s most thoughtful strategists and one who is notorious for having both ‘sight beyond sight’ and inevitably, a view that is rare when compared to those who position themselves as “opinionators.”  Without further ado, below is the extracted version of the 29 June edition of “Sight Beyond Sight

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro
  • Key Talking Points…What People Are Watching…Major Asset Prices
  • US Fixed Income – Choke Yourself If  You Believe in 2 Rate Hikes in 2015
  • China – Correction Accelerates Government Learning Curve & Possibly IPO Reform


We started working early yesterday morning, spending time on the phone with as many risk takers as possible around the world and listening in on numerous bank conference calls on the unfolding events. Additionally, we felt compelled to watch our screens all night. At the time of writing, we have not actioned one item in our model portfolio and are nowhere near able to aggregate the thoughts of the risk takers we respect or the market commentary we received from anyone who writes research for a living. The fact is there is no coherent sentence to write. The dust has yet to settle, and until it does, no one can claim to know what will happen.

Despite all of this market plumbing being very visible, and even after the Greece referendum news on Friday, the probability of a disorderly financial reaction due to its consequences has only risen to ~40% from 20% or less based on what we can gather. Leaving last week many held the view there was a 50-50 probability for a resolution with a bias for a positive outcome.

Now let’s go through the asset classes and products, and ask how they will perform. For ETF players, our lens is on GREK, FXI, HEDJ and necessarily, SPY. For those looking for an immediate take-away trade with regard to the overwhelming Greek-infused chitter chatter and jibber jabber, think $GLD. In this case, our view, which we have espoused for more than 15 minutes, might or might not be  ‘rare’, but its one we can hang our hat on…

Prudent risk management says that the overriding exercise now is to take risk down regardless of your bias on the outcome. Resolution strategies are a distant second place and with US employment Thursday followed by a three day weekend that includes this Greek referendum, that makes this scenario that much more likely.

In terms of Greece, many are watching/waiting for the ECB reaction function to the Emergency Liquidity Assistance (ELA), which is scheduled to be revisited on Wednesday. As a reminder, the events in 2012, in which there was a large spike in the ELA program assistance as a result of Greece, was the catalyst for the now famous “do whatever it takes” speech by ECB President Mario Draghi. Ironically, the three-year anniversary of that speech is coming up shortly and there is no question professionals want to see Draghi re-ignite the European recovery trade. Our point is that faith in him being a steward of the market remains unwavering and he is still the only person perceived as the class act in this goat rodeo.

If we had to pick one asset that we all were led to believe mattered in the context of a “Grexit” over the last five years, and that was supposed to react to that event, it would be Gold. It should be up $50 at a minimum and yet it can barely hold a bid. If you feel bad for the citizens of Greece, then please save a little sympathy for the Gold terrorists at the failure of the yellow metal to respond today. Next week, if things get worse, and gold still fails to respond, that could be the final nail in their coffin. At least there will be one good outcome to the whole sorry saga. Continue reading

Greece and The True Pain Trade-A Rare Global Macro View

The True Pain Trade in Yields and Euro…Not the Wall Street Pain Trade of Equities

Greece, Grexit and the notorious ‘pain trade’ commentary below is courtesy of MarketsMuse’s extracted rendition of today’s above-titled edition of “Sight Beyond Sight”, the global macro commentary and investment insight newsletter published by Rareview Macro LLC. Added bonus: a thesis for trading EEM.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Those like us who have been in this business for some time will be familiar with Futures Magazine, a cornerstone property of The Alpha Pages and its sister publication FINalternatives. Their new flagship publication, Modern Trader, has just been launched and hit the newsstands last week. The full publication can be viewed HERE (Password: prophets). Our article “Riding The Dollar Bull” begins on page 28. We were pleased to be a centerpiece of this inaugural issue and would like to use this moment to wish CEO Jeff Joseph and Editor-in-Chief Daniel Collins the best of success in this new endeavor.

The True Pain Trade in Yields and Euro…Not the Wall Street Pain Trade of Equities


The professional community is fixated on a “pain trade” – that is, a durable European equity relief rally that lifts all other risk assets in sympathy.

The “Shenzhen-style” bid in European equities this morning argues in favor of that theory and clearly validates the view that risk reduction has been thematic the past two weeks and professionals are left without enough of a position should risk assets continue to appreciate.

This is where this theory stops working, however.

We think this is the wrong way to think about what a Greece resolution means for asset prices going into the third quarter of 2015 and it also tells you why this conversation is about much more than just a 5-10% rally in the German DAX.

Now those who have followed us for years appreciate that we actually have two definitions for the widely-touted phrase “pain trade” – one for the true meaning – that is, lower prices because that leads to investors actually losing money – and one for sales people on Wall Street – that is, some terminology that makes them  sound like a “cool kid” who is “in-the-know” for their hedge fund clients who do nothing more than try to capture 60% of any market move up or down so they can justify their existence for a bit longer.

While we appreciate that the “cool kids” believe equity markets can go higher, we think real investors, ones that are not forced to be “close to the Street”, are much more concerned about a breakdown in the correlation of the European carry trade relative to the US dollar.

Let us explain what we mean…

The three drivers of global macro investing during 2012-2015 have been and still are:  the US Carry Trade (SPX + UST 10-yr), the Japanese Yen, and the US dollar.

The additional driver of global macro investing during 2015 is:  EU Carry Trade (DAX + German 10-yr BUND).

Now, let’s combine a key long-term driver with the additional driver…In today’s edition of Sight Beyond Sight, we provide our readers with an illustrative of the EU Carry Trade (DAX + German 10-yr BUND) versus the U.S. Dollar Index (DXY), and a detailed thesis as to our proposed trade idea.

Model Portfolio – New Position – Emerging Markets Book Hedge

On Friday, in the model portfolio, we spent 10 bps of the NAV and added a long emerging market volatility position in the portfolio overlay return stream to protect the existing long risk positions in the Real-Yen (BRL/JPY) and crude oil (CLX5).

Specifically, we purchased 10,000 iShares MSCI Emerging Markets ETF (EEM) 06/26/15 C41– 39.5 option strangles for $0.31. For the purposes of this model portfolio being liquidity verified, not just time-stamped, we paid $0.02 through the asking price.

Given the binary risk around possible Greek capital controls, we were genuinely shocked to see that such a trade existed in the marketplace. Additionally, the hedge was cheaper than using S&P 500-related options, and has a higher correlation to the Greek stock market. This makes EEM one of the best kept secrets in the market.

The break-even for the trade at the time of execution was 2.23% by next Friday, or exactly the historical 1-sigma move by the end of this week. On a 2-sigma move, the expected profit return is 2.5:1.

On further analysis, we discovered that about 33% of the weekly occurrences during the last 12 months (i.e. last 52 weeks) exceeded the expected 1-sigma move, and that doesn’t even include the potential Greek risk next week!

Ultimately, this means that upon entering the trade there is statistically a 1 in 2 probability that we turn a profit on the position. We like those kind of odds.

Neil Azous is the founder and managing member of Rareview Macro LLC, a global macro advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight.


Global Macro: Decomposing the Move in Yields-The Pendulum Swing

Decomposing the Move in Yields…Global Fixed Income Coming Closer to Decoupling from German Bunds

MarketsMuse Global Macro and Fixed Income departments merge to provide insight courtesy of “Sight Beyond Sight”, the must read published by global macro think tank Rareview Macro LLC. Below is the opening extract from 10 June edition.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Firstly, please note this morning’s Model Portfolio Update: Crude Oil, XLU/SPY, IYR/SPY, FXI: As per yesterday’s edition of Sight Beyond Sight, we added to existing long positions in Crude Oil, XLU/SPY and IYR/SPY. The update was broadcast in real time via @RareviewMacro.

Now, on to the day’s primary talking points..

The confidence level in the professional community remains low. The attack on the Dollar-Yen (USD/JPY), which had its largest one-day drop since August 2013, was just another casualty of the search and destroy mission underway in overall asset markets. The fact is that there is no model–valuation, technical, or otherwise–that can handicap the speed and the degree of the backup in global yields. The overriding question remains: “When will global yields stop going up, and when can the rest of fixed income decouple from German Bund leadership?”

Risk-Adjusted Return Monitor Summary & Views Continue reading

ETF Trade for Experts Only: Revert to the Mean: IYR, XLU, SPY

“What Goes Up, Must Come Down”

MarketsMuse ETF update is courtesy of a special trade post sent this afternoon to subscribers of “Sight Beyond Sight”, the global macro trade newsletter published by Rareview Macro LLC and authored by Neil Azous.  The trade alert was also posted to Twitter via @RareviewMacro. For those not familiar with the concept of mean reversion, the simplest metaphor that drives the following thesis is “what goes up must come down.”

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

As highlighted in this morning’s edition of Sight Beyond Sight, the ratio of the iShares U.S. Real Estate ETF (IYR) and Utilities Select Sector SPDR Fund to the SPDR S&P 500 ETF Trust (SPY) is now trading at approximately two standard deviations away from its regression line since US interest rates peaked in September 2013.

rvr jun4

A short while ago in the model portfolio, we initiated a new mean reversion strategy in both of these ratios.

Specifically, we are buying $10 million notional each of IYR and XLU, and selling $20 million notional of SPY over the rest of today at VWAP.

Tomorrow, depending upon the results of the US Labor Report, we will add an additional $10 million notional each of IYR and XLU, and sell an additional $20 million notional of SPY in the morning.

Below is a thesis and trade matrix with a pre-defined game plan for gains and losses. Continue reading

Crude Oil-This Global Macro Trading Expert Says This About That

MarketsMuse Global Macro Trading dept. merges with our ETF dept. to provide the following excerpt profiling a compelling and conservative Crude Oil-centric strategy courtesy of global macro think tank Rareview Macro LLC. The following was posted to subscribers of “Sight Beyond Sight” on Wednesday, May 27. Irrespective of subsequent three day’s pricing and trade activity across crude oil marketplace, MarketsMuse editors have determined the strategy proposed by Rareview Macro’s Neil Azous remains ‘evergreen’ (for the time being).

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Today we got long on WTI crude oil in the model portfolio. Take it for what it’s worth, but this is the first time we have traded Crude Oil during this entire corrective phase stemming back to last summer. As per the March 18th edition of Sight Beyond Sight, when we put a long crude oil strategy on our watch list for a reduction of the severe contango in the futures curve, we are finally comfortable with the risk profile, especially considering volatility has been reduced by more than half since then. Sadly we did not deploy a position on March 18th as it coincidentally was the day the “barrel” bottomed.

The reason we chose to utilize a risk reversal approach today to get long on crude oil is because of the pronounced put skew in the term structure. For example, the structure we entered captures seven volatility points of skew on the ask side.

We like the risk-reward in this position. For example, if the November 2015 crude oil future (symbol: CLX5) were to fall $6 in the next one to two months, the strategy stands to lose ~$1.4mm. Conversely, if it were to rise by $6 in the same time frame the expected profit is ~$3.2mm, which returns a profit ratio of 2.28:1.

Sidebar: A similar strategy can be employed in the US Oil Fund (symbol: USO) by buying the 10/16/15 $21.5 calls and selling the $16 puts, but the ETF position is vulnerable to the shape of the futures curve moving further into contango. Continue reading

Global Macro: Historical Backdrop re Yield Moves: Pre-Mature to Call Bear Market

MarketsMuse Global Macro update is courtesy of extract from a.m. edition of “Sight Beyond Sight”, the newsletter published by global macro think tank Rareview Macro LLC and authored by Neil Azous.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

In last Thursday’s edition of Sight Beyond Sight we argued that we couldn’t work out how anyone was able to make an argument about the short-term direction of fixed income, and especially calling the end of the sell-off, with a straight face. Put another way, there were a lot of pikers out there with no accountability or transparency voicing their opinions that day. Given that any attempt at analyzing fundamentals relative to positioning at historically climactic moments is generally a very poor exercise, we refused to go on the record that day and said we would regroup over the weekend. Given the resumption of the sell-off, that patience has served us well.

At this point, just repeating that CTA/Managed futures, a strategy that makes up ~10% of hedge fund AUM but deploys the most leverage, have lost on average ~5% over the last few weeks is a waste of time. Since CTA’s apply priced-based trend-following algorithms to the trading of futures contracts what matters is that many thresholds used to trigger a stop-loss have been breached and then some.

The takeaway at this point is that CTA’s/Managed futures strategies are way passed working through large offsides positions and many of them have now flipped their strategies to go the other way. Along those lines the positions that have flipped are more acute so far in Europe than the US.

That is very important to recognize because that position building is still in the early stages and as/if the new trends extend those positions will grow and grow given this is the most levered strategy within hedge fund products.

The big out-trade at this point is that asset managers still hold structural long US dollar and Treasury curve flattening positions and have yet to adjust them in the same way as the CTA’s. Why? Because their threshold for pain is a lot greater and they are not reactive to priced-based trend-following algorithms.

What does this mean? It means that the risk from here is that as CTA/Managed futures strategies ramp up new positions that will begin to force the hand of asset managers who have yet to be really reactive.

The new leverage being applied to the counter-trend on the hedge fund side plus the liquidation of structural position on the asset manager side is the point we think we are at now in terms of overall market positioning.

So what is most at risk now? Continue reading

Global Macro: Selloff and Noise Level Around European Fixed Income Reach Historic Levels

MarketsMuse Global Macro update is courtesy of opening extract from today’s a.m. edition of “Sight Beyond Sight“, the global macro newsletter published by global-macro think tank Rareview Macro LLC and authored by Neil Azous, Rareview Macro’s Founder and Managing Member.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Forgive our saucy tone today, but this has been a long week. That is not because we were long European bonds, but because we provided a lot of free therapy to people who were. In the last two hours we have received way too many communications around today’s events.  At one end of the spectrum there are those arguing that Fixed Income has crashed, the bond bull market is over, and this is reminiscent of US Treasuries in 1994 or the Japanese JGB move in 2003. And at the other end, today’s reversal off the extreme yield levels seen just a short while ago is leading many to call the move finally over, arguing that supply/demand and the search for income are once again set to take over and force global yields much lower.

We don’t know how either side is able to make either argument with a straight face. Put another way, there are a lot of pikers out there with no accountability or transparency in their views voicing their opinions today. The attempt to analyze fundamentals relative to positioning at climactic moments historically is a poor exercise, especially considering the UK election is today and the US employment number is not released until tomorrow.

Instead, you might be able to make a better argument that the European Central Bank (ECB) was able to meet its bond buying quota very early in the month, and at choice prices and it is best for everyone else to wait until next Monday to go on the offensive. That just seems more rational. Just because we write a newsletter doesn’t mean we have to go on the record today. So we will not and instead regroup over the weekend and come back Monday refreshed.

To be clear, we are not “off-side’s.” We are just more interested in where Global fixed income will be over the next two to three months rather than getting caught up in the next two to three hours. In that spirit, for those who want to fall back on something more fundamental or process oriented instead, the below observations may be of interest.

US Fixed Income Observation

Below is a snapshot of our internal model for US interest rate hike probabilities over the next 18 months. The top graph looks at the total probability of a hike BY a certain meeting, whereas the bottom graph determines the probability of a hike AT a certain meeting. Beyond that, the very affordable cost of Sight Beyond Sight ® newsletter prohibits us from sharing any additional methodology with you. So please don’t ask us. Let’s just say we utilize this tool frequently in our internal process and we place a lot of weight on it. Continue reading