Amazing how this played out. I remember specifically how long October 11-14 felt and that even you were considering that it was the wrong call. Didn't capitalize on it because that's what markets do, they shake out the best of us.
1. What are the conditions you would like to see in the macro / USD / Yields for the Equity to bottom or go long equity.
2. As USD is seen as safe haven & most of the sovereign nations or funds buying USD to invest in US assets, what assets they are investing in US with those $$$
Hi Mr B, I know you’ve been warming to risk/reward in bonds. There seems to whispers of a possible FED easing off in the coming months and then even a pause as the FED as they evaluate the lagged effects on the economy. Powell eluded to this in his last press conference. Are bonds likely to bottom out as they start to reduce incremental raises to 50 or 25 points in your view (investors looking ahead)?
Looking back at the last 3 fed hiking cycles US 10 year treasury yields peaked 1-4 months before the terminal FED rate.
i'm afraid fed will keep going until they run into something. at that point the risk/reward for bonds will be more clear. plenty of signs building to suggest slowing growth momentum, but has not yet shown itself in the metrics (mostly lagging) the fed cares about. i like adding bonds to the portfolio in small/modest size...but its a position i dont expect to work immediately. for me, the additions have primarily been in munis and specifically some closed end muni funds that trade w/ 15% discount to NAV which is largest since 2008. i would guess that bonds won't really rally until we get a negative NFP print.
Thanks Mr B, I'm eager to add exposure and conscious prices will move at a pace when it things finally "break". Although it's hocus pocus, I can't help but feel a strong labour market and no more SPR oil might have a negative effect on oil prices which in turn might stoke the inflation dragon further. Ala higher for longer.
Great analysis as always. Regarding the HY CDX vs SPX point, I believe another interpretation could be that high yield bonds are overvalued vs stocks right now. I saw an analysis that compared equity vs high yield from a cost of capital perspective that suggested the same thing - that high yield is overvalued vs equities now. Does that seem like a conclusion you could make as well? Subbed btw
tricky question. there are significant universe differences between HY and S&P 500 and this cycle is a bit strange with all in yields up significantly even though credit spreads have not widened that much. in very short periods of time (days to a few weeks) these two assets typically move together and you would expect new lows in SPX to be joined/confirmed by new highs in HY spreads...not always, but typically.
if we were to study S&P 500 earnings yield vs. high yield, i think the conclusion would be that high yield looks more attractive, but complicated by composition point above as well as liquidity risk premium differences, etc.
Ah ok, so a bit of apples and oranges, but when the storm hits the orchard, they all tend to fall off the tree somewhat in unison. Appreciate the insight
Excellent post and analysis. While it's possible to see a bear market bounce, the forces behind this bear remain largely intact, which is a massive drain of liquidity from financial markets. I discuss this in my newsletter this week, and why I feel the Fed and bear market aren't finished yet.
A breakdown in high yield that you discussed and move in VIX over 35 are key indicators I'm watching for the next breakdown in stocks.
Thanks Mr Blonde. Glad to see you are still trying to shake me out of my puts! ;). You are not alone in pointing out CTA positioning. I am not a rules-based investor myself, but I keep an eye on them. What is interesting is that this flow narrative is 100% coming from the sell side and the CTA managers are not really confirming this to be the case. I regularly listen to Top Traders Unplugged, a podcast focused on trend following and systematic investing. Niels Kaastrup-Larsen and his guests are highly sceptical around these brokers’ calculations and flow estimates.
yea…as i said at the outset:..trading against one’s core view is uncomfortable. last week highlighted the roller coaster ride we are on.
here you in CTA estimates, but don’t such forecasts always develop from the sell side? can’t imagine too many CTAs would tell people what they expect to do tomorrow.
the most important aspect of CTA flows currently in my view is the asymmetry in potential flows…up move generates bigger buying than down move drives selling…and in flat tape we get some buying. all a change from late Aug
100% agree that the scale and asymmetry of the numbers is eye-popping. If I was to put my tin-foil hat on I might even be tempted to believe that GS was trying to create some exit liquidity for their beloved hedge fund friends.... (in the meantime I will carry on taking the meds!). Really enjoying these reports and your insights.
yes good point on seasonality. i didn’t repeat in this note, but that window is still open. touchy situation in a tough tape but the conditions for bounces till there and haven’t seen enough to tell me it’s ruled out quite yet
Amazing how this played out. I remember specifically how long October 11-14 felt and that even you were considering that it was the wrong call. Didn't capitalize on it because that's what markets do, they shake out the best of us.
Great thoughts ! Mr B. I have two QQ
1. What are the conditions you would like to see in the macro / USD / Yields for the Equity to bottom or go long equity.
2. As USD is seen as safe haven & most of the sovereign nations or funds buying USD to invest in US assets, what assets they are investing in US with those $$$
TIA
Hi Mr B, I know you’ve been warming to risk/reward in bonds. There seems to whispers of a possible FED easing off in the coming months and then even a pause as the FED as they evaluate the lagged effects on the economy. Powell eluded to this in his last press conference. Are bonds likely to bottom out as they start to reduce incremental raises to 50 or 25 points in your view (investors looking ahead)?
Looking back at the last 3 fed hiking cycles US 10 year treasury yields peaked 1-4 months before the terminal FED rate.
i'm afraid fed will keep going until they run into something. at that point the risk/reward for bonds will be more clear. plenty of signs building to suggest slowing growth momentum, but has not yet shown itself in the metrics (mostly lagging) the fed cares about. i like adding bonds to the portfolio in small/modest size...but its a position i dont expect to work immediately. for me, the additions have primarily been in munis and specifically some closed end muni funds that trade w/ 15% discount to NAV which is largest since 2008. i would guess that bonds won't really rally until we get a negative NFP print.
Thanks Mr B, I'm eager to add exposure and conscious prices will move at a pace when it things finally "break". Although it's hocus pocus, I can't help but feel a strong labour market and no more SPR oil might have a negative effect on oil prices which in turn might stoke the inflation dragon further. Ala higher for longer.
Great analysis as always. Regarding the HY CDX vs SPX point, I believe another interpretation could be that high yield bonds are overvalued vs stocks right now. I saw an analysis that compared equity vs high yield from a cost of capital perspective that suggested the same thing - that high yield is overvalued vs equities now. Does that seem like a conclusion you could make as well? Subbed btw
tricky question. there are significant universe differences between HY and S&P 500 and this cycle is a bit strange with all in yields up significantly even though credit spreads have not widened that much. in very short periods of time (days to a few weeks) these two assets typically move together and you would expect new lows in SPX to be joined/confirmed by new highs in HY spreads...not always, but typically.
if we were to study S&P 500 earnings yield vs. high yield, i think the conclusion would be that high yield looks more attractive, but complicated by composition point above as well as liquidity risk premium differences, etc.
Ah ok, so a bit of apples and oranges, but when the storm hits the orchard, they all tend to fall off the tree somewhat in unison. Appreciate the insight
Excellent post and analysis. While it's possible to see a bear market bounce, the forces behind this bear remain largely intact, which is a massive drain of liquidity from financial markets. I discuss this in my newsletter this week, and why I feel the Fed and bear market aren't finished yet.
A breakdown in high yield that you discussed and move in VIX over 35 are key indicators I'm watching for the next breakdown in stocks.
Thanks Mr Blonde. Glad to see you are still trying to shake me out of my puts! ;). You are not alone in pointing out CTA positioning. I am not a rules-based investor myself, but I keep an eye on them. What is interesting is that this flow narrative is 100% coming from the sell side and the CTA managers are not really confirming this to be the case. I regularly listen to Top Traders Unplugged, a podcast focused on trend following and systematic investing. Niels Kaastrup-Larsen and his guests are highly sceptical around these brokers’ calculations and flow estimates.
yea…as i said at the outset:..trading against one’s core view is uncomfortable. last week highlighted the roller coaster ride we are on.
here you in CTA estimates, but don’t such forecasts always develop from the sell side? can’t imagine too many CTAs would tell people what they expect to do tomorrow.
the most important aspect of CTA flows currently in my view is the asymmetry in potential flows…up move generates bigger buying than down move drives selling…and in flat tape we get some buying. all a change from late Aug
100% agree that the scale and asymmetry of the numbers is eye-popping. If I was to put my tin-foil hat on I might even be tempted to believe that GS was trying to create some exit liquidity for their beloved hedge fund friends.... (in the meantime I will carry on taking the meds!). Really enjoying these reports and your insights.
Cheers Mr B 👍
Thank you.
Good comps to credit. Today is seasonal low for equities before the year end rip—especially in midterm years though 2018 was a notable exception.
yes good point on seasonality. i didn’t repeat in this note, but that window is still open. touchy situation in a tough tape but the conditions for bounces till there and haven’t seen enough to tell me it’s ruled out quite yet
Mr Blonde regarding your subscription how many posts will you do per month...approxiamately?
4, sometimes more, sometimes less but always interesting
ok
Mr Blonde I will give it a go
great, glad to hear. it’s a monthly subscription so you are free to walk away at any point you think it’s either not enough or not worth it
Superb.Thanks.