With the threat of a potential 'black swan' event with a Trump Victory, The Elite have pulled out their "Ace in the Hole" - Russia. Russia is the most feared and misunderstood of all US artificial villians (even more than Islamic Terrorists).
"The punchline is that the passive / smart beta / risk-parity / risk-control systematic universe often times ARE the entities in the market causing counter-intuitive trading behavior, such as today’s price-action."
"So here we go: BoJ ready to commit to go deeper negative rates and experiment with their curve, the Fed is seemingly locked-and-loaded on a hike as global growth rolls over, a deluge of supply into a suddenly wobbly rates backdrop, and a loaded-coil of synthetically low volatility across asset classes…as cross-asset correlations trickle back near multi-year/crisis extremes."
Many thought that having been squeezed between the terrible performance of his Valeant long and his Herbalife short, that Bill Ackman would quietly fade into the sunset. No such luck, and as he revealed moments ago in a 13D filing, the Pershing Square founder has just gone activist on Chipotle, revealing a 9.9% stake, announcing he is "intend to engage in discussions" with management and the board.
Last week’s sharp sell-off in JGBs following the BoJ’s decision not to cut rates, renewed investor fears of forced selling by risk parity funds. This was accentuated as it took place roughly one year after last August's notable risk-parity sharp, market-moving deleveraging. So under what conditions could a similar risk-parity blow up take place again? Here is the answer.
"Having been 150 Dow points higher and then only moments later to have traded down to where the Dow was suddenly 150 lower, the market finished effectively unchanged, with the Bulls and the Bears left scratching their heads and wondering aloud, “What the hell just happened?”... Yesterday was our worst day of the year thus far, as that which we were long of fell and that which we were short of closed unchanged."
With China's Plunge Protection Team having intervened and set a positive spin on another poor session, traders put declines in Asia behind them as European markets rose along with U.S. index futures and commodities. European shares advanced for the first time in three days on speculation the region’s central bank will ramp up monetary stimulus on Thursday. A gauge of raw materials rebounded from its biggest selloff in a month, buoyed by gains in oil and copper. Furthermore, the previously noted selloff in Japanese government bonds - one which triggered circuit breakers and which some speculated may have been precipitated by the BOJ itself - dragged Treasuries and German bunds lower, gold fell a second day and the euro dropped versus most of its major peers.
"YTD performance of equity long-short Hedge Funds was likely dragged down by their net long equity exposure and heavy exposure to popular growth and momentum stocks. As a result, the HFRXEH index performed in line with passive investors (S&P 500). The momentum selloff in the first week of February negatively impacted equity quants who are on average overweight momentum/low volatility factors"
Despite the decline in stock valuations, US equities have performed far better than credit, causing investors to ask us, “What does the credit market see that the equity market does not?” Credit markets are reacting to a real deterioration in corporate balance sheets that the equity market has yet to digest. High yield (HY) credit spreads have widened dramatically since June and are currently in territory typical of recessionary environments. In contrast, the S&P 500 is just 6% below its all time high of 2131 reached in May of this year. Here are five observations...
"Templeton Global Bond ($100bn in total; $59bn in mutual funds) – BEN’s largest fixed income fund – has seen meaningful outflows YTD (-$7.6bn from retail; -13% annualized rate) and could persist given the deterioration in excess performance (-460bps vs. benchmark YTD)."
The Energy names in the S&P 500 haven't broken their August lows in the recent downdraft for the group. That’s surprising for two reasons: first, spot crude prices certainly have – $36.52 today versus a $39.65 low on August 24th; and second, December is typically the month where investors harvest tax losses by selling losing positions and the Energy sector has a bumper crop of such candidates.
Presenting Exhibit A: Goldman's latest YTD performance breakdown by strategy basket. It reveals is that far from suffering even the most modest correction, the "Hedge Fund Hotel" strategy (aka the most concentrated holdings), is massively outperforming not only the broader market, but has returned double the second most profitable strategy - investing in companies with high revenue growth. In a world in which the Fed just saw its credibility crushed, expect this to change shortly.