Mean Reversion

Fed Finds "The End Of The Road"

The big risk for the Fed has always been the market would “call their bluff”  be unwilling to buy into the “forward guidance.”  It is currently too soon to know for certain but reactions following yesterday’s announcement are not promising.

"We Are Becoming Convinced That The System Won't Stabilize" - Citi Explains How Central Banks Broke The Market

"Central bank distortions have exacerbated these movements, making investor interest more one-sided and leading one market after another to exhibit more bubble-like tendencies, rising exponentially and then falling back abruptly. As such, managers are struggling to justify their fees, while the sellside wonders whether it is really worth the continuing commitment to market-making in the face of increased capital requirements and legal and back-office overheads."

UBS Warns "Beware The Bull Trap" As Breadth Breaks Down

"Together with a divergence forming in the VIX index, and with the seasonality getting toppish we continue to see the risk of a significant and longer lasting tactical correction leg in the US and global equities into summer."

A "Generational" Peak In Corporate Profit Margins

Falling profit margins and rising valuations (as earnings fall) make for a pretty bearish one-two punch for the stock market. Investors will surely become less eager to pay higher valuations for companies growing more slowly. That equation usually works in reverse. And there’s no reason we can see to expect these challenges to corporate profit margins to let up any time soon. The S&P 500 now trades at its highest price-to-earnings ratio since the bull market began even as the index remains well off its recent price highs. And profit margins still could have a long way to fall before even reaching their average level since 1950.

Q1 Slams Hedgies 'Most Popular Trade' - Momo Crashes Most Since 2009

In mid-February, we warned of the looming carnage for equity market-neutral funds, and sure enough, as Bloomberg reports, one of the most popular (and successful) hedge fund trades - playing the difference between high- and low-momentum stocks - crashed by the most since 2009 in Q1. After 6 years of almost unstoppable gains, equity market-neutral funds suffered their biggest losses since 2012 - comparable to the 2007 quant crisis devastation - as weak momo stocks massively outpeformed crushing the hedgies' models.

The Stock Market Is A Monetary Policy Junkie - Quantifying The Fed's Unprecedented Impact On The S&P

The bulls will presumably argue that this Fed impact is now part of the accepted wisdom, and that P/Es should remain higher than history in order to reflect the Greenspan/Bernanke/Yellen Put. The bears will suggest that if ever there were a time for the scales to fall from investors’ eyes over the Wizard-of-Oz-like nature of the Fed, then this is it. We are inclined to the latter view. Betting on the Fed’s ability to generate continued market levitation seems like a dangerous game to us, but as Newton long ago opined, “I can calculate the motion of heavenly bodies, but not the madness of people.”

Why Currency Traders Are So Confused

"The FX market is confusing this year. More easing by the BoJ, the RBNZ, the Riksbank, the ECB and the Norges Bank, led to stronger currencies, despite delivering more than markets had expected in all cases. The market seems to be taking recent monetary policy easing as evidence that central banks are reaching their limits, as their forward guidance has sent mixed signals."

A Top Performing Hedge Fund Just Went Record Short: Here's Why

What remains most remarakable about Horseman Capital is that even as it modestly boosted its gross exposure to 59%, as of February the fund's net short exposure has risen from what was a previous record of 76%, to a whopping -88%, an unprecedented record even for one of the world's most bearish hedge funds!

Shorts Pulverized: Iron Ore Soars Most On Record After Goldman Says "Bearish Case Intact"

Just hours after Goldman Sachs issued a report in which it said the iron ore rally is likely to be short lived "in the absence of a material increase in Chinese steel demand, and steel raw materials will once again drive steel prices rather than the other way around", overnight Iron Ore futures traded on the Singapore SGX exploded as much as 19% higher to $58.95 in one session, its biggest jump on record.

Citi Asks "When Does A Recession Become A Depression?"

“When it rains, it pours.” That is most assuredly one of the most heavily used cliches in the history of the English language but a failure to understand it apparently causes Citi’s economics team to get it wrong when it comes to forecasting the depth and trajectory of EM recessions.

Morgan Stanley: "We Struggle To Remember When Bearish Sentiment Was As Widespread As Today"

"... the growing perception that central banks are moving away from QE-style programmes to negative interest rates is less supportive for equities, in our opinion. With little evidence so far that negative rates boost aggregate economic activity, the risk is that this policy tool increasingly resembles a more blatant form of 'beggar thy neighbour' currency devaluation. A shift towards a more nationalistic and perhaps less coordinated global policy response could signal a quickening in the pace of fiat currency debasement and augurs badly for risk appetite, in our view."