Macro Notes Flashcards
Week of 9/4/2015 (Pre-Fed meeting of hike expected to occur on 9/19/2015)
Following period of decent earnings with China growth problems being the primary concern. European growth has been flat and LATAM is also struggling with Brazil tendering on inflation. Inflation in the US is still low.
Konstam in a “things may get worse in Fall” tour de force for sure.. DOMINIC KONSTAM
13:51:56 Strategy Update: 1. Rates are going lower and so are equities 2. Jobs report was fine but that’s the problem. 3. Fed cannot/won’t do a clean relent. It will be dirty. dirty means you worry each meeting and then when they dont hike you worry about the next meeting. the uncertainty itself is probably enough to kill you. you don’t know if you shd be worrying about the hike or the fact they are not hiking and you worry about both. 4. much more importantly the feds balance sheet is not growing and fx reserves are falling. together these imply an incredible weakening of global liquidity which the ecb/boj as yet have not offset. moreover fed liquidity and fx reserves are more important for assets than other cb liquidity. 5. liquidity correlates positively with equities and positive with yields. so that means equities go down and yields go down. 5y5y on that metric shd be closer to 2 not 3. 6. china isn’t done. they need more stimulus and it may well be via more fx adjustment. the sensible thing is not to waste their reserves or more likely to use them as a part bailout of institutions in the carry trade that they care about. it cd happen in next few weeks , it may take another 6 mths. but it is not over. risk will hate a sudden china move. it will hate not knowing. 7. the only “solution” is another round of CB including Fed commitment to ongoing stimulus and if necc more. 8. dont forget inflation is falling, even in the US.. ex core pce ex shelter.. that traded bit that every beggar thy neighbor wants more of is in less of supply
Dealer Gamma 8.21.2015
With so much focus on the buyback trade, we wanted to take a quick look at dealer gamma. Many feel that the recent VIX craze has been a contributing factor to the weakness we have seen over the last few sessions. “Dealer desks have been acting as less of a “speed bump” by actively trading around their gamma due to the relatively light positioning in in fixed strike index/sector based hedges.” Estimated gamma at these levels appears to be around 2bln with ¼ of that rolling off on this morning’s index expiry.
Over the past few weeks we have seen a shift hedging activity street wide– flows have moved away from traditional fixed strike index / sector based hedges and moved towards more vol/VIX-based hedges. Further, many have been implemented via low carry structures such as call sprd collars, calendar call spreads, etc. Below are 30 day charts for SPX futures as well as the VIX. Relatively tight range of the SPX (30d range or around 3% prior to past few sessions)– masking significant dispersion at the single stock levels - has made carrying fixed strike hedges frustrating / “buying and holding” hedges a tough strategy to implement. While VIX-based hedges are generally challenging to monetize as well, the broader ranges we have seen in vol / vol of vol of late (over 50% past 30 days) have provided more opportunity to monetize hedges. Further, credit and capital structure arb players have gotten more active given the perceived disconnect between equity and equity vol levels relative to credit indices. Credit players naturally gravitate to the VIX given its depth/liquidity. (increased capital structure arb activity can be seen in the pick-up in downside trades in many mining / material names in Jan17…these are purchased vs long credit positions)
“Dealers as well have cut back on long gamma positioning over the past several weeks (at precisely the wrong time!) as it had proven difficult to carry over the past few months. We are of the view that this has been a contributing factor to the weakness we have seen the past few sessions – ie dealer desks acting as less of a “speed bump” by actively trading around their gamma. Alternatively can have same effect on way up but obviously not the amplifying effect we would potentially see if dealers were short gamma, which they are not.” (DB)
History of VIX 14 day RSI closing above 70
We went back to 1990 to look at market performance post VIX 14day RSI closing above 70 (95 instances).
1 day performance +.3% (up 61% of the time)
1 week performance +.9% (up 68% of the time)
1 month performance +2% (up 69% of the time)
3 month performance +3.6% (up 76% of the time)
We then wanted to run this same scenario, post financial crisis (22 instances since 2010). The numbers are far more compelling.
Since 2010 when the VIX 14day RSI closes above 70, performance is as follows:
1 day performance +.4% (up 64% of the time)
1 week performance +1.8% (up 77% of the time)
1 month performance +2% (up 73% of the time)
3 month performance +5% (up 91% of the time)
Finally, we looked at if the VIX 14 day RSI closes above 70 for 2 consecutive sessions, (5 times post crisis) the data is as follows:
1 day performance +.7% (up 60% of the time)
1 week performance +2.7% (up 80% of the time)
1 month performance +1% (up 60% of the time)
3 month performance +6.2% (up 100% of the time)
History of Fed Days
Below is an updated table highlighting the historical performance of the S&P 500 on Fed Days since ZIRP (zero interest rate policy) began in December 2008. Remember, throughout history, the market has done well on Fed Days, both recently and since 1994 when the Fed began announcing its policy decisions on the same day of meetings. Since 1994, the S&P 500 has averaged a gain of 0.33% on Fed Days, and since ZIRP, the index has done even better with an average gain of 0.44%. These numbers compare to an average change of 0.03% for any given trading day for the market throughout history. Had you only owned the S&P 500 on Fed Days since ZIRP (buying at the close on the day prior to the Fed Day and selling at the close on the Fed Day), you’d be sitting on a gain of 26.4%.
Obviously the specific decisions and comments from each Fed meeting are what impacts investor behavior on that specific Fed Day, but over time there has been a bias to the upside for stocks on these days that we think shouldn’t be overlooked. Tomorrow’s Fed decision is a special case because it has been nearly 10 years (June 2006) since the Fed last raised the Fed Funds Rate. There’s a real chance that we finally see a rate hike, but as shown on the prior page, the market is currently pricing in just a 20% chance.
Tax Loss Selling on Oct. 31st
1986 tax reform act replaced tax year ends with a common Oct 31 year end for all mutual funds. After the TRA, we find that funds systematically accelerated the sale of losers prior to Oct 31. Evidence does point to a strong November effect for prior losers in which funds collectively had large holdings. Funds have since mitigated the potential price pressure by having the foresight to spread-tax motivated sales over longer time horizons
