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Dodging Bullets

What a week. If you are still standing, I suppose that counts for something in itself. I retain my relatively constructive stance towards this not being a repeat of 2008, but we should not be blind. The market is trading shit and anyone being long risk the last six months must feel a bit like Neo from the Matrix. So you managed to dodge the oil bullet, you managed to dodge the HY bullet, you managed to dodge the copper bullet and you managed to dodge the CHF bullet ... but will you dodge the next? 

Meanwhile, the bull market in benchmark fixed income is now getting silly, and I wonder what comes next. In EM, the higher USD is a drag but people are forgetting that the huge move lower in US rates is normally associated with all kinds of milk and honey in these markets, and yield here will be looking mightily attractive with benchmark rates racing below zero everywhere else.

We now have rates up to 5 year below zero in the Eurozone and below zero up to 10 years in Switzerland. Both of these economies run substantial external surpluses. Macro 1-0-1 suggest that this will be a source of carry trades, all dependent on the volatility regime, but fundamentals are fundamentals after all. And I am not even talking about Japan where it is arguably the same story. The conclusion is perhaps to forget a little bit about Yellen in the next few months, there is another game in town and it could take over the show for a while. Many a carry monkey just got nuked, but I cannot help but feel that this is part of the final capitulation setting up the mother of all carry trades, to end them all! This doesn't make me particularly "bullish" actually; in fact it is scary as hell because unless you are the chosen one or an agent, and I am neither, you cannot dodge all the bullets, all the time!. 

Portfolio Notes: 

The SNB slaughter prompted us to do a little clean-up. In the long-term part of the portfolio* we sold some equities and upped the gold holding significantly. Stupid, silly, insane you say ... well, we know an inflationary regime when we see one and this could go quite crazy, quite quickly. Meanwhile, we have opened up a position in BP, another bet on higher inflation, which has been working out a charm so far, but only enough to just about cover losses elsewhere. You see, and keeping with the theme above, even we didn't manage to dodge the fallout from SNB's nuke. KGF, currently our biggest position, has 10% of its revenues in Poland where they have a lot of CHF denominated mortgages ... gówno!

*Keeping turnover to a minimum!


Too Many Cheerleaders?

After doing away with the extremes in my recent post, and advocating a continuing constructive market stance based on country and sector rotation, I thought that I needed to put a face on the anti-thesis of Hussman whom I, perhaps unfairly, stung a little bit. You will not find a more hardened advocate for the bull market than Jeffries' David Zervos and his (in)famous Spoos and Blues call, recently re-wamped into a Spoos and Qs variant. In one of his latest missive, he notes; 

With all that said, I feel just fine about our Spoos and Q’s call for 2014. Adding that to the trophy shelf with Spoos and Chartreuse, Spoos and Blues, Spoos and Duu's and Spoos and 2s feels pretty sweet! So, let's move on to 2015? Is it still a Spoos and Q’s world? Maybe, but there are probably better trades for this year. I suspect we have to pass the QE playbook, and the “No Hater” hats over to Europe. I outlined this idea back on 5-Dec-2014 in a commentary entitled BTDD. Here, once again, is the logic behind moving from a Spoos and Q’s world to what I would like to think of for 2015 as a "Dax and Dollars" world. 

Is this what is called resting on one's laurels? The notable difference between Zervos and the bears, though, is that the former has been right for so long that even a cynic like me would afford him a victory lap. But could it really be that easy, forever? 

Equities have been trading on a background of persistently higher volatility. This is consistent with uncertainty surrounding the timing and nature of Fed policy this year as well as the collapse in global energy and commodity prices. On the latter, it seems to me that we are balanced on a knife's edge between Albert Edward's version of the world where deflation crushes all things risk asset related, and a world in which the huge tax cut to consumers and non-energy producers, and the associated delay of rate hikes, sends the market into the stratosphere. Having recently alienated myself from extremes, I still think that the S&P 500 can do absolutely nothing for a year, even as other markets offer significant opportunities, but it will be a bumpy ride. 

Using my own private random news generator, however, the report (in Danish!) that retail investors in Denmark are warming to the stock market in record fashion, as well as the increasing fondness of Chinese retail investors for "penny stocks" indicate that the stock market euphoria is starting to spread. The market needs cheerleaders to move forward, but too of a good thing is just that. 

Portfolio notes:

One step forward, and one-and-a-half step back is pretty much the state of play at the moment. The key positions are doing alright, and earnings have been kind for now, but performance is underwhelming and risk is starting to feel too high for the reward. We still intend to build long-term EM positions further in coming months, but also plan to add to the gold allocation.