One of the major developments withing the financial industry over the last half-decade or so has been the ascendance of passive investing as a discipline. The reasons for this are not hard to discern; the performance of active managers as a class has lagged major benchmarks and the fee schedules are, by and large, unappealing. In many cases, managers who appear to possess a genuine edge (e.g., Renaissance Technologies) are either closed to new investors or only manage proprietary capital. (And no, humble pie does not constitute a genuine edge.)Amidst all the tutting from the proponents of passive buy and hold investing, however, there seems to have emerged a smugness that evninces itself every time the SPX flirts with a new all time high, as it has since the election. The chart below is a few years old but still gets trotted out with regularity when equities are at their peak, usually as a justification as to why you should never sell (or why it was a mistake to have sold your SPY or Vanguard 500 holdings.)While it is certainly true that the long term trend for equity prices has been higher, it is equally the case that there is no guarantee, as seems implicit in the commentary of the passive investing fetishistas, that they will go up during one's investing lifetime. There have been several occasions when stocks have delivered no returns over periods of 30 or more years. It's all well and good to look at the chart and say "well, ya should have been long", but the higher the valuations are today, the lower the expected return is tomorrow. As the small print promises, past performance is no guarantee of future returns.Of course, virtually all of the praise for buy and hold passivity that Macro Man has encountered has come from the United States. A healthy dose of this has no doubt been warranted, given the ability of the finance industry to separate the consumer of retail financial products from his money. That being said, the belief that buy and hold is some sort of optimal strategy likely rests on a foundation of American exceptionalism. After all, how do you think Greek investors feel about a passive buy and hold strategy?OK, Greece is just small country. What about the Eurozone as a whole? Let's talk when the total return of the Eurostoxx eclipses its 2000 highs.One wonder how much traction the buy and hold message would have here. Still, despite the sovereign crisis the Eurostoxx has been the land of milk and honey compared to Japan, where total returns are at levels first reached nearly 30 years ago.So sure, by all means if you don't have a view, take your equity risk with index products and be happy with the market return. (No, seriously!) But just remember that the long run on a 400 year chart is a lot different than the long run for a 40 year old guy looking to put a few kids through college and have a few nickels left over for retirement. Valuations matter, there's no guaranteed pot of gold at the end of the Vanguard 500 rainbow, and while over-trading is a cardinal investment sin, so too is willfully sticking your head in the sand and dismissing the need for thought.
Macro Man is back, belatedly, after a glorious few days of eating, drinking, football, and even a little cycling. He returns to what can be described as the business end of the year, with a lot of important event risks to navigate before books are taken down for the holidays.Before considering payrolls, the Italian referendum, ECB, and Fed, however, we must also be cognizant of how far markets have come recently. US fixed income markets are on course for their worst month since January of 2009, and the fourth worst since at least 1988. While there has been a lot of shuffling of winners and losers under the surface, on an index basis US equities have done quite well as hopes of Trumpflation have gripped markets.Put it all together, and you have the sixteenth biggest monthly SPX outperformance of Treasuries (on a total return basis) since 1988.Now, this might naturally lend itself to concerns that we'll see some month-end rebalancing from the pension guys who suddenly find themselves overweight equities and underweight bonds. Today's price action thus far fits that narrative to a T. However, does this sort of behaviour really drive bond price action? Macro Man decided to investigate.As there are three trading days left in the month (including today), Macro Man parsed US 10 year yields by their movement over the last three trading days of every month since 1988. He then sorted this data by the amount of aggregate equity outperformance over the course of the month, and focused on those months where stocks either over- or under-performed bonds by at least 5%. Ifg there is something to the rebalancing gig, we should expect to see Treasury yields dip when stocks have outperformed and rise when they have underperformed.As it turns out, the size of the sample window and the size of the long bond bull market mean than on average, bond yields have dipped no matter how you slice them. However, the evidence seems to suggest that the last 3 trading days of the month are characterized more by momentum than mean reversion. As the table below illustrates, when stocks have outperformed, bond yields tend to fall by less than average over the last few days of the month. Similarly, when stocks have been crushed, yields tend to fall by more than average. It may be the case that the fixed income sell off has exhausted itself, if only temporarily. If so, however, the historical record suggests that it will not be month-end rebalancing that drives whatever correction we may see.
SPX Corporation (SPXC) was a big mover last session, as the company saw its shares rise nearly 6% on the day.
Having exploded higher in the run-up to the election, market expectations of the correlation between stocks within the S&P 500 have completely collapsed since to new record lows. Simply put, massive systemic overlays were placed ahead of the election event, and were forced to be unwound increasingly aggressively as the post-Trump rally caught everyone offside (the unwind would mean relatively heavy selling of Index protection relative to single-name protection). As a reminder, implied correlation measures the relative demand for macro overlays (index hedges) vs micro risk (individual stock hedges/concerns). The higher it is, the more systemically worried investors are and the more traders believe a high correlation 'event' is due (typically the high correlation event is a big downturn in stocks). As The Wall Street Journal reports, sectors and styles in the S&P 500 index have started to move independently after seven years of depressed volatility and tighter correlations. While the S&P 500 climbed to a record for a second day on Tuesday, “there are elements of a bull market and a bear market at the same time,” said Andrew Wilkinson, chief market analyst at Interactive Brokers. “You’re seeing pressure on different sectors. In a typical bull market, you’re going to get all stocks going higher.” “It makes it very interesting for the stock picker and the active manager who’s on his game,” Mr. Wilkinson said. The relationship between growth and value stocks in the benchmark equity measure has also decoupled, with the rolling correlation between the two groups sliding since voting day, FactSet data show. A Republican sweep of the U.S. presidency and Congress has boosted the inflation outlook, pushing investors into value names. Before the election, investors crowded into growth companies in 2015 amid a sluggish economy and then poured money into low-volatility equities in the first half of this year. But it is not just correlations between individual stocks that is crashing. The correlation between bonds and stocks has collapsed back to its norms... Which, as we noted previously, is raising notable concerns over a risk-parity fund blow up. As BofA warns: "Latent risk remains worth monitoring, as (i) leverage is still near max levels across a variety of risk parity parametrizations, (ii) bond allocations are historically elevated, and (iii) markets continue to be sceptical of a 2016 Fed hike." If BofA is correct, it would mean that a day which sees a -4% SPX drop and +1% bond rally (good diversification) would generate no selling pressure, "underscoring the critical role played by bond-equity correlation in governing the severity of risk parity unwinds." However, a troubling scenario is one where even a relatively benign 2% selloff of the S&P coupled with just a 1% selloff of the 10Y could result in up to 50% deleveraging, which in turn would accelerate further liquidations by other comparable funds, and lead to a self-fulfilling crash across asset classes. Which incidentally sounds like precisely the scenario that could happen when the Fed tries to raise rates, and is also why asset classes continue to move without fear of any rate hike, as they now realize - very well - just how trapped the Fed truly is. That said, in short order, we will see if the Fed, for once, has the intestinal fortitude to actually raise rates in the face of the extreme volatility awaiting equities in the event they do... we doubt it. As RBC's Charlie McElligott notes, the classic risk-parity pain-trade ensues-- developed mkt sovereign bonds, stocks, EM, credit and commodities (ex-crude) all under the cosh right now at the same time (shocker--a strategy built on a core concept of ‘negative correlation btwn bonds and risk stocks’ is going to be exposed in a regime change of this magnitude). And as the chart below shows, Risk Parity funds are plunging... As is clear, he massive decoupling between stocks and risk-parity funds is not unpredented... but has not ended well in the past (for stocks).
A frenzied week is nearly over, leaving investors with a major question as the weekend approaches: Can stocks set a new record high today? Futures trading early Friday pointed to a slightly lower open, but the S&P 500 Index (SPX) closed Thursday just about six points away from the all-time peak [...]
The stock market is in a position where it should see a 2-3% air pocket Friday November 18th and possibly early into early Monday the 21st. The SPX has a downside target of 2120's to the 2140's. Monday is the ten week low from Sept 12.
It's ugly out there in Risk-Parity (RP) fund land as losses on bonds outweigh gains on stocks as correlations normalize (and volatility drops) echo the plunges experienced during 2013's Taper Tantrum. However, as RBC notes, adjustments to the leverage mechanism with RP strategies means, despite the carnage already, we may not have seen the cross-asset-class spillover yet. The Trump Tantrum in RP stratgies is accelerating rapidly but remains less than the Taper Tantrum for now... But while this looks disastrous, RBC's Charlie McElligott notes that adjustments in the Risk-Parity (RP) frameworks means that we have nto yet seen the big spillovers that many are expecting... Risk-Parity fund performance (not great) definitely a talking-point right now, with regards to folks asking “when is the potential risk-asset / equities deleveraging going to ‘kick-in’?” as forced by the terrible fixed-income performance of late. If grossly oversimplifying key inputs as ‘leveraged USTs,’ ‘stocks’ (SPX) and’ inflation-protected securities’ (TIP ETF), the funds simply aren’t getting relief from their asset mix. The trick here from speaking with my good friend Max Nelte in RBC GELP Structuring is that during prior periods of stress (i.e. the original Taper Tantrum in ’13) some of these funds will have shifted their traditional volatility ‘trigger’ for their leverage / risk mix to a more duration-adjusted measure, which in turn will dampen their leverage allocation, and thus, asset allocation (post-leverage). So, we still might not get that ‘expected’ cross-asset ‘spillover’ which we’ve seen in prior (read: smaller) ‘rate tantrums’ of the recent past in this ‘immediate’ period. That said, further performance challenges within fixed-income / EM / commodities and lack of a significant enough boost from equities and inflation-products may dictate a larger / more significant questioning of allocation size into RP strategies from real money investors, as there certainly looks to be a potent cocktail brewing for investors to redeem from the strategy if the struggle were to continue further. Simply needs to be monitored further…as do ALL bond fund flows, especially. And the last time bond-stock correlation collapsed from such a positive extreme, things did not end well... Finally, RBC's Charlie McElligott shows his LOL CHART OF THE DAY: EQUITY FACTOR MKT NEUTRAL PERFORMANCE % MTD SHOWS INSANITY OF CURRENT QUANT ROTATION SINCE ELECTION: Considering the scale of factor mkt neutral AUM, the leverage inherent in these strategies and the factor overlays at various other monstrous ‘long only’ asset managers…I’d say ‘this’ is behind a lot of the performance pain out there for fundamental managers. The rotation in ‘size’ alone, with Russell 2000 (small cap) outperforming SPX (large cap) by 7.1% MTD, is just gutting funds who’ve been crowded into large cap (tech, for instance) due to scale issues - even those who might have had the sector selection correct. And the end of the day - it’s still a ‘factor’ world... even if the nascent change from monpol to fiscal policy does in fact make a MASSIVE-difference with regards to prospects for active management going-forward (with the eventual removal of Central Banks as the determining input in asset pricing / removal of volatility suppression).
With the "Trump reflation" rally fizzling, not helped by a Goldman note which forecast that no matter what Trump does, it will lead to a slowdown in the global economy, momentum chasers, pardon, traders are once again confused what to do next: if we are approaching an inflection point, and algos get cold feet about ramping upside stops, well, the downside beckons. So, for some much needed perspective on what may happen, here is RBC's cross-asset wizard, Charlie McElligott explaining why "Under the Hood It's Not Good" Spooz hovering near flat, while the long-end of USTs see a meaningful relief rally, boosted by Goldman’s “stagflation scenario” call (which outside the policy component is also receiving increased note from clients, in light of the US Dollar and RMB moves “deflation impulses”)...although now fading a bit again as meaningful IG issuance sees some rate lock sellers. Outside of that though, I wanted to communicate on some performance observations. As touched on this a.m. in “RBC Big Picture,” the single-name / sub-sector / sector level dispersion within both equities and credit universes has been gut-wrenching in the post-election period. But also think about the past two week span: most funds went into a fierce de-risking mode (taking down gross, where others actually added to single-name shorts / took down nets) into the election event-risk, while since then, the market has found the point of max pain with a gap index jump higher, while under-the-hood, we’ve seen popular positioning and pairs-trade unwinds in almost every sector. Just thematically, seeing more of this too: everything (for example) from biotech vs healthcare facilities, banks vs fintech, even Dow Industrials vs Nasdaq (outperf by 6.0% MTD already)… There is clearly a ‘factor crowding’ issue at play here (as there was at start of year) — whether it’s ‘style’ (‘momentum’ and ‘anti-beta’ hammered while ‘value’ and ‘size’ scream higher) or previously mentioned ‘sector leans’ (everybody stuffed to gills on tech and discretionary, underweight financials and industrials) or ‘macro input’ (reflation / crude oil) — these market-neutral strategies are not supposed to see moves like this over multiple days (sorted by 5-day % return), let alone in a single day: And thematically, on the 5-day % return view, we see ‘estimate momentum l/s, HF VIP l/s, growth l/s, price momentum l/s, mkt neutral earnings momentum, mkt neutral price momentum and mkt neutral anti-beta all taking it on the chin relative to SPX +3.8%. With that, I’d be willing to bet that there are likely a number of “stop outs” occurring at market neutral and long-short shops. Let’s first look at a few performance spreads / ratios that are indicative of this wonkiness: SMALL CAP : LARGE CAP— FINANCIALS : UTES RATIO— TECH : BANK RATIO-- And it’s not just stocks of course where we saw mega-moves… GOLD : COPPER RATIO— DEVELOPED SOVEREIGN BOND INDEX SEES LARGEST 5-DAY DRAWDOWN IN HISTORY--Equivalent to the original “Taper Tantrum” sell-off in ’13. LONG DURATION / DEFENSIVE EQUITIES--Frankly, by the looks of it, defensive stocks still have a ways to go lower as they play ‘catch-up’ to long-duration ETFs…skinny exits. And I sit here twiddling my thumbs waiting for the first class-action lawsuit from retail against the “low vol” / “min vol” ETF products. And one final thought that might be ‘at play’ here as well: tomorrow approximately marks the 45-day hedge fund redemption window into year-end—which to be fair is not how all funds operate (same require request a quarter ahead of time, so Sep for end of year redemption). That said for this type, if funds haven’t been redeemed yet, they might still be in a position where they need to have cash on hand ‘in anticipation of redemption, meaning that some funds or strategies (relative value / stat arb / long-short / market-neutral) might be incapable of deploying into some of this spread blow-out, whereas under normal circumstances some would have potentially been there to help mitigate some of the bleeding.
Individual indexes have reacted differently to the election results. It will take a little longer to arrive at a consensus view of what lies ahead. For now, the SPX may be ready to complete the final phase of the uptrend which started at 1810.
Last week, I mentioned that it was possible that Y of B could make a new high into next week then we go down hard. I had 2214 (or so) on the SPX as a maximum upward target and that could be the case by Tuesday next week.
Holy smokes, this election really has #mademacrogreatagain. The DXY is breaking out, yields are rising/curves steepening, and for a couple of days at least it's actually paid to be forward looking. Macro Man has used this opportunity to take profits on a couple of trades that are getting carried along for the ride.Although the chart would suggest that the Euribor curve has further to steepen, any time you can take 20 ticks out of a dead market it behooves you take take the money and run.Similarly, the EMB chart looks terrible, but the head and shoulders target was met so Macro Man rang the register and said cheerio.That being said, the rates market over the last couple of days has served as a happy reminder of the market as it used to be and why macro could make money. Even after the SPX rallied back to unched yesterday, you could buy the ED 2 vs 8 spread at 36 bps. That's at 50 now (the chart below was from earlier this morning.)Looking ahead, there could be some interesting calendar set ups. Although we don't know how Janet Yellen will react to a Trump administration, we do know that she has been quite dovish for the last several years and that prominent Republican economists (John Taylor, for example) have suggested that rates should be raised more aggressively.It seems reasonable to expect that in early 2018 Yellen will be replaced by one of these economists. The EDH7/Z7/U8 butterfly is priced close to flat. It probably won't move very much in the near future, but selling it allows one to bet that Yellen's replacement will be more aggressive than she will be as a low cost "bottom of the drawer" proposition.Finally, although it's premature to think in these terms before we know the slightest thing about a Trump administration and its relationship with Congress, it's fun to look at some key macro variables sorted by year of presidential term. The equity market effect is well known:...but did you know that industrial production growth tends to peak in the second year of a term? Or, putting it another way, new presidents are often welcomed with a recession; the last two have been.Finally, T bill yields are a bit all over the shop depending ion whether you look at average or median rates. We know bill yields will be low in year 1; how they evolve after that of course depends on timing a recession. If a hawking Fed chief arrives in early 2018, might this set the stage for a 2019 contraction (defying the historical norms?)It's too early to know but early indications are that it will be fun to figure out.
U.S. stocks rose sharply on Wednesday in a dramatic turnaround from deep overnight losses as Wall Street embraced the upset presidential election victory of Republican Donald Trump. After warning for months that a Trump White House would create uncertainty and damage sentiment, investors poured money into sectors that may benefit from the former reality TV show star’s victory. That was a steep reversal from the previous night, when financial markets reacted violently as Democrat Hillary Clinton’s path to victory disintegrated and S&P futures ESc1 dropped 5 percent before a trading limit kicked in. “The stock market is acting like a teenager. It makes a lot of demands but it doesn’t know what it wants,” said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, Oklahoma. Gains of over 3 percent each in the heavily weighted healthcare .SPXHC and financial .SPSY sectors pushed the Dow Jones industrial average up over 1 percent. The Dow was just shy of its record high. The real estate sector .SPLRCR fell 2.28 percent and utilities .SPLRCU lost 3.68 percent. Both sectors are proxies for bonds, which also fell. “Anything that Trump mentioned during the campaign, any industry he has mentioned, favorably or unfavorably, is moving today big-time,” said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York. A curb on drug pricing was a key campaign theme for Clinton, while Trump has called for repealing the Affordable Care Act and loosening restrictions on banks enacted after the financial crisis. The Dow Jones industrial average .DJI jumped 1.4 percent to end at 18,589.69, just 0.25 percent below its all-time high set in August. The S&P 500 .SPX surged 1.11 percent to 2,163.26 and the Nasdaq Composite .IXIC added 1.11 percent to end at 5,251.07. Trading volume was the highest since June, when Britain voted to abandon the European Union. DoubleLine Capital Chief Executive Jeffrey Gundlach, known as the ‘Bond King,’ said stocks rebounded strongly from overnight losses because investors believe Trump’s policies are better for economic growth in the short-term than Clinton’s. Republicans maintained their majorities in both chambers of the U.S. Congress, potentially enabling the party to reshape Washington with two years of “unified” government. “Regardless of the fact you had a Republican sweep, there are still checks and balances in place,” said Art Hogan, chief market strategist at Wunderlich Securities in New York. “So you are going to have some of your more fiscally conservative Republicans that will certainly slow (Trump) down from doing anything crazy in terms of policy changes.” Wall Street is typically seen as preferring gridlock, or shared control of the White House and Congress, over a sweep of both chambers of Congress and the presidency. The CBOE Volatility index .VIX, a gauge of investor anxiety, fell 23 percent and was on track for its biggest daily drop since late June. Shares of big pharmaceutical companies gained, with Pfizer (PFE.N) jumping 7.07 percent, the biggest driver of the S&P 500’s gains. The iShares Nasdaq Biotechnology ETF (IBB.O) surged 8.93 percent and was on track for its biggest daily percentage gain in eight years. Among financials, JPMorgan Chase (JPM.N) surged 4.60 percent, while Wells Fargo (WFC.N) rose 5.38 percent. Advancing issues outnumbered declining ones on the NYSE by a 1.24-to-1 ratio; on Nasdaq, a 2.59-to-1 ratio favored advancers. The S&P 500 posted 60 new 52-week highs and 14 new lows; the Nasdaq Composite recorded 208 new highs and 98 new lows. About 11.7 billion shares changed hands on U.S. exchanges, far above the 7 billion daily average over the last 20 sessions. -- This feed and its contents are the property of The Huffington Post, and use is subject to our terms. It may be used for personal consumption, but may not be distributed on a website.
After a close contest, Republican Donald Trump shockingly won the race to the White House. The majority of Wall Street analysts believe that the S&P 500 will see a big sell-off on Trump???s victory.
Well, the big day is finally here, and at least phase one of our long national nightmare is coming to a close. The FBI non-event, the late shift in polls, and early voting results would all appear to suggest a Clinton victory for the presidency. That being said, the majority of votes have not been cast yet, so the result is quite far from a foregone conclusion. Dewey, after all, did not defeat Truman.Moreover, there are other features of the election that still have the chance to shape policy for the next few years. The Senate is essentially a toss-up; given the upper house's role in confirming presidential appointments (and their erratic track record in doing so), a Senate controlled by the opposite party as the White House could conceivably deny the Supreme Court its full complement of judges for years.Some degree of gridlock looks the most likely outcome, and frankly (given the paucity of quality of so many elected officials) probably the best case outcome as well. That being said, yesterday's uber-rally has now priced outcomes close to the best case in a number of assets, at least according to the MM poll (which of course is far from infallible.)Still, as the chart below indicates, the SPX has now priced a 97% chance of a Clinton victory, based on your collective guesses for year-end pricing based on the outcome. The DXY is similarly priced. There's a bit more juice in the MXN and Fed funds, but not a lot.Again, it bears repeating that these forecasts are fall from foolproof, so it's not quite as easy as selling SPX and getting 30-1 odds on a Trump victory. Given the ongoing uncertainty and the hangover from the Brexit vote, it seems likely that a relief rally could extend further. Still, the message from the summer episode is that at some point it's worth taking the other side because the expected value just gets too high. Hard as it is to believe, we could rapidly approach that point at some time today before the official vote counts roll in.Bonne chance!
Итак, если Конгрессмены не договорятся до 1 марта 2013 г., то выглядеть американское бюджетное секвестирование на 2013 фин. год будет следующим образом.Общий объем автоматического сокращения госрасходов = -$85,4 млрд.Из них:- оборонная промышленность: -$42,7 млрд. - не связанные с оборонной промышленностью дискреционные расходы: -$27,6 млрд. - не связанные с оборонной промышленностью обязательные расходы: -$15 млрд.Здесь еще вопрос в мультипликативном эффекте, т.е. эти $85 млрд. на самом деле обернутся куда большими потерями для экономики.Если все останется как есть после 1 марта 2013 г., то на 2014 фин. год. госрасходы ужмут уже на $109 млрд. На текущий момент настроения по поводу достижения компромисса во властных структурах Вашингтона не очень оптимистичные:Как видно, наибольший удар при секвестре понесет оборонная промышленность. При этом, 40% из $42,7 млрд. урезаний расходов на оборонку в 2013 фин. году. приходятся на 1 марта, т.к. шесть месяцев секвестра (сентябрь-март) ужимаются в один.Сокращения госраходов также коснутся следующих отраслей:Так ведет себя SPX при упоминании слова "Sequester"....хотя надо отметить, что скорее движения рынка пытаются объяснить этим словом, т.е. сначала есть движение в SPX, а потом уже СМИ раздувают эту тему.Show must go on....