Tuesday, 8 April 2014
"It's Panic Captain - But not as we know it"
We could consider that what we are seeing is a form of market panic but to paraphrase Dr. McCoy on the USS Enterprise, "It's panic captain, but not as we know it".
The normal anatomy of a panic goes something like this. A price has risen, price becomes news, leverage is employed to extend the gains, an unknown unknown appears to introduce doubt, leverage trades are unwound, prices fall and then price falls shake out even the steadier hands due to money management rules.
This year we have seen plenty of debate as to whether various markets are overbought and though property is the people's choice when it comes to bubbles, in this case we are looking at equities. But as a quick aside I do wonder what happened in popular property commentary between "Property is dead, it has to rally" and "Property is in a bubble it has to fall". Can anyone remember the "Property prices are just right, how wonderful" bit that should logically have occurred somewhere in between?
But back to equities. It has struck me that there has been something very different in this run up in equities to previous ones in that the professional investor circles (and we only need to look at our own dear comments column at Macro Man to detect this) has had a bias towards the belief that equities are generally too rich and so should correct. To the point that retail appear to be mocking the professionals as they lead the markets higher. This, I suspect, has led to a consistent underweight positioning by many professionals that has led to a mix of responses.
First, the indices have tracked higher and general fund performance has under-performed the very visible (and easy to compare against) indices which has pressured funds to invest not so much because they really want to through belief but because the have to in order to remain credible and avoid redemptions in favour of index trackers.
Second, to play catch up, high beta has been sought and as ever that is to be found in the land of the techs, bio or otherwise (remember the more unknown the product the more that dream hype can be built into it).
Third, to incorporate the beta performance yet still maintain an overall sanguine macro view on the markets they have been employing sectoral plays of long high beta and short cyclicals as this "should" partially hedge any overall falls in the general indices that has become the visible performance benchmark (as in in the first point). Going one stage further long DM tech and short EM cyclicals takes things one stage further.
This has all left the long/short equity plays loaded.
Now let's look at what has happened this year so far. We came into January with popular opinion geared towards DM rallying over EM, a begrudging feeling that equities might still perform ( ref that "begrudging" back to the points above) and a feeling that global growth would continue and apart from a risk that the EM component (that we were selling to fund DM) might cause some general contagion.
By mid January the EM contagion story took hold and we saw the general DM long trade come to a halt, or rather - Pause.
Next Mr Putin decided to don his Napoleon hat which has led to a media frenzy extrapolating that his Crimea adventure will only end once he victoriously enters Napoleon's wedding venue to Josephine in the Orangerie in 3 Rue D'Antin (which may upset any foie gras reception that the current occupants, BNP Paribas, may be throwing there).
Meanwhile, back in homeland USA the Fed stool Yellen has been projecting the image of a UK teenager - to the point that I am wondering if we should call her Vicky Yellen. Her first presser was on a par with this.
However through the "yeah but no but whatever" the message of unabated tapering was clear.
Under normal circumstances one would have expected the above melange of EM, Putin and taperage, seasoned with China slow down and credit fears and general deflation to pull the rug from all things risk. But it hasn't, though many will respond "yet!" I would instead suggest that the resultant panic this time in risk has indeed seen positions dramatically adjusted but that risk adjustment has been where it was piling up in long/short books and DM/EM trades. As has been pointed out in previous posts on Macro Man the rotation in rotation is getting positively gyroscopic in intensity. You only had to open an equity monitor page this morning to see the lack of consistency by sector or country.
There is indeed panic in the books but it's below the surface of outright equity indices and there will be some more nasty performance figures appearing soon as assumed long/short hedges have been bonfired. Back to TMM's old favourite "If you want a good hedge, go to a garden centre". However the lack of absolute equity index dump reinforces a view that whilst leverage catch up beta trades are getting hosed the overall market positioning is not monster long and the rule of "path of most positional pain" is indeed playing out but it will not lead to an overall equity melt down.
In fact - playing the path of most pain idea. If markets were to continue upwards what do the stopped out long/short high beta tail chasers do then? That would be a pain in their tails for sure.