Posts in Markets and Trading
Three assets, one riddle

Your humble scribe is old enough to remember the Kinder egg commercials, which lured kids with the promise of a three-in-one treat. Chocolate, a surprise and something to play with. Markets feel similar at the moment except they aren’t exactly treating investors; they are posing a riddle. The year has begun with a rally in stocks, a collapse in the dollar and sharply higher global bond yields. Just as punters seemed to have settled on this constellation of price movements, though, markets threw a curve ball last week. The sell-off in bonds continued, but stocks weakened, and the dollar strengthened. What the heck is going on? I was never a fan of the idea that a weaker dollar and higher U.S. bond yields signalled investors’ abandonnement of U.S. assets in the face of a shit-show in Washington, aggressive fiscal stimulus and a widening CA deficit. This is especially the case given that we were supposed to keep buying U.S. stocks. That makes little sense if you think that U.S. assets are no longer high quality. 

It is relatively simple to make sense of bonds, stocks and the dollar in isolation. But if we want to connect them, our best chance is to start with how bonds impact the two others and work our way up from there. 

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Markets and Tradingclaus vistesenBonds, equities, Spoos, S&P 500, dollar
Equity Model = #N/A

Apparently, the flogging of the dollar will continue until morale improves. I said my peace on the topic last week, but that hasn’t prevented markets from upping the pressure on the greenback. The prospect of a government shutdown added to the pain last week—it is now a reality—but so far other markets haven’t taken note. Bond yields have been rising, although not faster than before the dollar was taken to the woodshed. And equities…well, it’s looking pretty good, isn’t? Global equities rallied incessantly last year, and they have come out swinging in 2018. The MSCI World is up a punchy 4.3% year-to-date, and we aren’t even through the first four weeks of trading. In case you’re wondering, this pace would deliver a cool 74.5% return for the year, if sustained. Even the most ardent equity bulls probably don’t believe that, but I am starting to wonder what exactly we’re supposed to expect. I have also reached the stage where I am struggling to make sense of my equity models. I concede that the technical picture is mixed. My normalised put/call ratio on the S&P 500 has collapsed, indicating that few investors are bothered to hedge. Breadth, however, remains resilient, hinting the big bear is still far away.

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Markets and Trading, International Trade and Economics claus vistesenequities, bonds
As you were

On a headline level, 2018 has started exactly as 2017 finished. Stocks are up, U.S. short term rates are up—but the dollar has traded heavy—and economic data continue to tell a story of a synchronised upturn in global growth. The bears are furious, or perhaps just confused. Hussman recently published a prepper’s guide to a hypervalued market. And value investor extraordinaire—and famed bear—Jeremy Grantham from GMO invokes the “highest-priced markets in US history,” but also proclaims that we’re now in the  “melt-up phase” of the bull market. I am all for holding opposing views at the same time, but markets demand a view and a position. So which is it Mr. Grantham? Long, short, or flat? I am not holding my breath for an answer. I have long since left the extremes behind. Picture a spectrum with Hussman and GMO at one end, and the wet-behind-the-ears trader, who have never experienced a sizeable drawdown in Spoos, at the other end. Hint: You want to be somewhere in between.

Separating signal from noise is an important skill in this game, and markets currently are throwing a number of curve balls at investors. What better way to kick off 2018 than by highlighting the ones that matter.

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China, Markets and Tradingclaus vistesencommodities, spoos, Equities, China, CNY
Mark to Market

Barring a disaster in the final trading sessions of the year, the portfolio will return about 5%—excluding fees and dividends—in 2017. This is a far cry from the nearly 20% of the MSCI World, but better than a hole in the head. The good news was concentrated in the first half of the year. Profit-taking trades in Wells Fargo, Sabadell and Japanese equities added to the strong performance. From spring onwards, however, performance hit the skids, and only recently have returns started to improve. Slumps in General Electric, Xper have been the primary drags, but the dumpster fire has been more broad-based than that. A 15% allocation to gold and commodities—industrial and soft—for example, haven’t done me any favours either. Neither have exposure to producers of generic medicines and other small-cap pharma firms. Finally, various attempts to hedge out impending, but ultimately non-existing, sell-offs in the market as a whole also have hurt. Syntel and Urban Outfitters have been rising from the ashes in recent months, and I am hoping that further mean reversion will reach the rest of the portfolio next year. Given where we are in the cycle, the risk of a balanced equity portfolio losing money is rising. But let’s see whether I can’t come up with some ideas.

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Markets and Tradingclaus vistesengrowth stocks, value stocks, yield curve, equity sectors, Equities