Category: Uncategorized
Strong Directional Trends in Bond, Rates, and Energy Sectors
September was a slightly down return month for many trend-followers as the first half of the month was range bound. Our sector indicators showed most markets not having clear trends with only some slight directional tilts. During the month, the markets became more directional for bonds, rates and energy. The price action in these markets aligned with economic fundamentals. A combination of continued good economic news, higher inflation, and another Fed increase all point to negative fixed income markets not just in the US but across all developed markets. Equity market signals were less clear-cut as the combination of higher rates and strong economic growth generated crosscurrents that were less clear. Cash flows should be higher, but the discount rates are also higher.
10 Years After the Financial Crisis: What Have We Learned?
We spend a great deal of time studying history, which, let’s face it, is mostly the history of stupidity.”
-Stephen Hawking
“We learn from history that we learn nothing from history.”
-George Bernard Shaw
I don’t want to sound pessimistic, but it cannot be helped when reviewing what lessons have been learned since the Financial Crisis. It has been a decade since the Financial Crisis; however, some of the same problems that led to the crisis seems to still exist. Yes, there are differences; subprime loans, mortgage excesses, and bank leverage will not be the problems. Some of the structures have changed and our knowledge of financial channel dynamics on the real economy has improved, but the meta-issues of credit, leverage, and liquidity still seem to exist with limited solutions and discussions.
Trade Matters but Capital Flows Matter More – The Dollar as a Global Risk Factor
Global markets has been focused on trade, trade wars, and tariffs. News has been dominated by discussions on trade and less often about dollar currency changes and capital flows, yet capital flows often dominate trade. An increasing dollar is supposed to be emerging market positive through the trade channel, but in reality, a dollar appreciation will increase financial risks and impact EM investments.
Rates Are Now Higher Than Dividend Yields – Should Investors Care?
Short-term interest rates are now above dividend yields for the first time since the Financial Crisis. This could be a big deal. Investors can now hold short-term bonds and receive a higher carry return than holding dividend-paying stocks. The cost of holding cash is now less than holding dividend stocks.
Alternative Risk Premiums across Asset Classes Are Not Alike – What Has Worked and What Has Not Worked
There are now hundreds of alternative risk premia that are available from banks. This is a business outgrowth of the alternative risk premia work that has been done by academics. Yet, it is difficult to argue that there is any one return or risk profit that can describe the performance of risk premia. There are structural risk premiums which may not vary much over time and as well as risk premia that are cyclical in nature and be related to macro economic factors.
Carry – What to Watch With This Alternative Risk Premium
One of the core issues with alternative risk premia is not just determining whether they exist but how they will move through time. If alternative risk premia are time varying and associated with specific macro factors, it may be possible to tilt exposures based on current or future market conditions or avoid carry risk premia during those periods when expected returns will be lower.
Simple Alternative Risk Premia (ARP) Allocation – You Get Value
Investments in alternative risk premia (ARP) are way to access the important building blocks for returns and generate return streams that will not be highly correlated with market beta exposures. Through factors and styles like value, carry, momentum, and volatility, investors can generate unique return streams relative to asset class betas. To show the value of alternative risk premia, we have taken a broad based index constructed from HFR through bank swap products and compared against a standard 60/40 stock/bond index. The HFR index is new and represents only a portion of the growing ARP market and may not include the largest banks. Still, it may provide some insight on what realistic value can be added through investing in a portfolio of risk premia.
CTAs Show Strong Monthly Returns, But Hedge Funds In General Have Not Found Their Edge This Year
Whether, large-caps, small-caps, growth or value as measured by the major stock index benchmarks, US stocks markets are having a good year, but you would not know it if you saw August or year-to-date hedge fund style performance. Many hedge fund managers seem to have missed the big equity moves and not generated alpha. We find this especially odd since market dispersion and correlation numbers within indices show that there should have been a significant number of unique opportunities as measured by S&P Dow Jones Indices.
The New Era of “Sudden Stops” and Emerging Markets
The 1990’s were filled with emerging market failures through “sudden stops” – a sharp reversal of capital flows which led to declines in currencies, large increases in local interest rates, and sharp declines in equity market. Countries hit a funding wall.
Trend Environment Mixed – Limited Directional Moves Beyond US Equities
Using a combination of short, intermediate, and long-term trends across the major markets within a sector, we make judgments on potential trend behavior for the coming month. Our signals are surprisingly mixed as we move into the post-Labor Day period. While there are some upward and downward biased sectors, all seem more range bound with no consistency between short and longer-term trends. This was after a good trading month in August.
Risk-On In US, But Not For The Rest Of The World
Call it the pain of international diversification for 2018. With a significant divergence between US and international equities, the cost with holding DM and EM stocks has been significant. The differential between EM and US growth indices is over 25%. August just added to this different with fears of sudden stops in risky EM countries. Turkey and Argentina have both showed that credit flows can change quickly in a sensitive macro environment.
The Two Disconnects of 2018 – Market Behavior Versus Politics and US Versus International Equities
What can be called the twin disconnects of 2018 have continued this summer. There is the disconnect between market and political behavior. If you read the newspaper headlines, you would think there is government confidence crisis in the US, yet if you plot market activity, any investor would suggest the economy is in great shape. There is also the disconnect between US market activity and global market behavior. 2018 is shaping up to be a great year especially for small cap and growth benchmarks that are both up double digits with August again showing strong performance. Global and emerging markets, both equities and bonds, are sickly.
Dollar Doom Loop – Why A Stronger Dollar Today Means More Financial Trouble Tomorrow
The Financial Times suggested that there is a “Dollar Doom Loop” facing the Fed. Perhaps a little dramatic with the “doom loop” analogy, but not as bad as “death spirals” or “Wile E. Coyote moments”, this story sets the tone for what may be one of the biggest problems not being looked at by most investors. Risk is really volatility or price moves times the exposure to the price change. As the dollar denominated global debt exposure increases, there will be more global risk for any change in rates.