The FoF Chairman speaks.
The Spinout May Begin - Overnight Events
Asian stocks followed the New York lead and traded higher. European stocks looked to do the same with Paris and Frankfurt trading up over 1% at 3:30 EST. Italian bonds, however, were having none of it.
The yield on the Italian 10 year pushed well above 7%. More importantly the spread between it and a basket of other
bonds widened enough to prompt some regulators to raise the level of collateral needed for the Italian bonds.
Worse yet, the whole Italian bond yield inverted. The yield on the 2 year and 5 year actually traded higher than the yield on the 10 year.
That spooked markets and Milan was down over 600 points by 6:00 EST.
Things have calmed somewhat since but we need to get some adult supervision soon.
The problem is now clear. Italy is both too big to fail and too big to save. Tomorrow we’ll go through some of the numbers.
And here Art explains why with everyone chasing beta to make up for the October underperformance in which hedge funds only achieved about10-20% of the broader market's gains, how everyone just got burned. Badly:
Most money market managers have been underperforming the market. There are several ways you can try to make up the difference.
In the old days, you might find the hot new stock in the hot new industry. But given the very heavy correlation among asset classes (everything moves together), that’s not productive.
So now, some managers are trading the swings. You wait for the selling to dry up and as the market begins to turn up; you rush in to buy the high beta stocks (they give you the most bang for the buck). So, by buying the dips in this manner, you add another point or two to your performance.
That strategy may be the cause of another phenomenon noted by Jason Goepfert. It is the apparent crowding into these positive stocks causing some distortion in the arms index.
Here’s a bit of what Jason said:
"This is more directly related to breadth than sentiment, but the Arms Index (better known as the TRIN) is showing that over the past week, traders have poured into positive stocks. There has been roughly 25% more volume flowing into advancing stocks than declining stocks."
Jason further notes that the prior two times this happened this year, it was at or near a short-term market top. In any case, this morning’s outlook suggests that the bond market is the better interpreter of events Italian.