AFTER SEEING STARS, WE SEE A FULL MOON
After seeing stars in the past week, we saw a Full Blue and Red Moon last night.
A Blue Moon is the third full moon in a season with four (most seasons have only three).
Another name for this month’s full moon is the Full Red Moon, because the weather and atmospheric conditions during this season can often make the moon look reddish when it rises through a haze.
Markets have slipped into a small lull, so we have time to lick our wounds and plot a path the future.
I like this strategy piece from Citi which makes plenty of good sense.
“Bottom line: Lower correlation between equities and treasuries potentially increases portfolio volatility, prompting lower leverage. Fed efforts to cool fixed income volatility could prove supportive for USD even if extending the period of low rates.”
It concludes that “If an investor holds a passive portfolio of bonds and equities with a specific volatility target, higher fixed income volatility and a less negative cross asset correlation both equate to higher portfolio volatility. This prompts lower weights for both assets to maintain the volatility target and could represent a headwind for equities and to a degree the USD.”
And thus builds a case for a small initial tapering size and curve steepening to persist.
Let us not miss the forest for the trees, or the moon for the stars at this moment.
Volatility is a friend and not a foe, if we use it properly. Major trends have just started to emerge and it is inevitable that our EM trade have to have take a breather for a while after a relentless rally on the back of a sheer wall of liquidity.
My friend Zico says this is time to pick to winners and stay with the winners, cut the losers and forget about them. It is not time to do nothing.
He is not the only one.
” investors might not want to wait until fall to reposition their portfolios, says Mohamed El-Erian, Pimco chief executive and co-chief investment officer at Pimco.” Source : FT and Marketwatch
Bill Gross is hard selling bond telling investors “do not give up on bonds”. He recommends extending duration for carry as well in his August newsletter Bond Wars.
Black Rock is telling investors not to give up on EM.
“investors may also find that an allocation to EM debt helps to capture some of the exposure to GDP that is missing from their equity approach.”
Others warn of an imminent S&P crash while the rest argue for a rally to close the year higher.
It is a lot of noise. But there is one thing I know for sure. No amount of QE can bring things back to the way they were now that the fear has set in. So there, Mr Gross.
“Will it hit U.S. stocks? Well, it depends on how bad the outflows of EM debt get to be honest, but as most of that money is flowing into developed markets, the falls should be limited. U.S. traders are thinking more U.S. What happens to the economy and borrowing if we see a continued liquidation of U.S. fixed income? There could be tipping point though where EM pulls back so far that it affects developed Asia and therefore U.S…although that is not in the market thinking right now.”
For me, I agree. It is definitely not time to do nothing. And the thing to do is RUN. Yes, I will be looking at Zico’s picks (Super Group, Amgen, Amazon, UHC, wind power etc) some time in the near future but right now, just unwind and not miss the forest for the trees. The new normal trend is upon us and that is to brace for more pain as we build a better future.