Major with FOMO Being Prevalent


Major with FOMO Being Prevalent

Monday, February 6, 2023 By Vincent David-Robin

We had a very interesting week last week. Full of contrast. I felt that the data on the consumer side was wishy-washy. A bit weaker in Europe. In America, cash share was still extremely strong. ECI is coming down, but not that much.

Strong Consumer Strength in America

JOLTS and NFP were extremely good. JOLTS in particular was very good. The claims, 191, is extremely good as well. With regard to mortgages: in prime mortgage, a 30-year mortgage is down at 620 now. We were at 670 three months ago. We know that gasoline – the pump, the gallon – has gone down quite a lot.

So, for the consumer it is still pretty solid. A lot of the wealth is in the housing market. Of course, if you are a new entrant you will have a difficult time just to get onto the ladder. But for the pool of homeowners, it's still pretty good. Despite what a lot of economists say, cash share is still very much there. It hasn't really turned. So, you have a solid landscape of the consumer strength in America.

It is true that credit card balances have increased, and that the savings rate is coming down. But there have been other periods where credit card balances were extremely high. That didn't mean there was necessarily a crash thereafter. As long as there's some level of affordability, then it is fine.

The second-hand cars market has come down as well, so affordability is still pretty good. That's the strength of the consumer in America. Full employment, maybe minus the really menial jobs. But U-3 and U-6 are pretty good.

Weaker Outlook for Europe

In Europe, it's less good, even though we may avoid a recession. Maybe more so in Germany and the UK, but it's less good. But inflation is becoming entrenched. You have it in France, in Belgium, in the UK, and in Italy to some extent as well. There are higher demands for salaries. So, it's a self-fulfilling prophecy. That's why the ECB’s Lagarde was not dovish, and that's why the BOE raised rates last week as well.

It may be the case that in the UK they're near the end of the cycle. But in Europe, I don't think they are. They will need to do a bit more just to remove any risk of inflation becoming permanent. I was quite surprised with the press conference of chairman Powell.

Better Risk Management Needed in Hedge Funds

When you start the year at hedge funds, your P&L is zero. You're on the blank sheet. These days everyone has tight limits. You have monthly drawdowns and yearly drawdowns. The amount of capital that you run is likely to be reduced if you start losing money.

So, and it's pretty much like, when we started, we were swinging the bat aiming for home runs. And that's, that was like that in the nineties and 00s. After GFC, things really started to change. A lot of institutional investors didn't want to lose money anymore.

Just good risk management measures are needed on the hedge funds' part in terms of survival: if you have PMs starting to lose money, you cut the capital allocation.

Usually, what the owners of large hedge funds care about is the management fee. That's how they became very, very rich. In large hedge funds these days, you don't have alignment between the possible managers, the risk takers, and the principals. The principals usually won the management fee, whereas the PMs want the performance fee. But since it's not your shop, you do as you are told, and you have much lower risk limits.

That's a current theme among hedge funds; be it fixed income and banks or equities and pretty much everybody has the same ones. If they turn around, everybody turns around at the same time.

And I suspect in some of those tech stocks, that's exactly what happened in the last few days. One position in PA, Beyond Meat, rose around 22% in two days! That's just crazy!

Fixed Income Markets Followed Suit

We saw exactly the same thing with fixed income. It makes sense to be short, given the, the data that we see. It's as asymmetrical. The market is pricing many more rate cuts than the Fed, and you don't have yet the certainty that the market is right. It's a risky position to be low on fixed income at these levels.

So, there was a large community of short base among firms. And thereafter, you saw exactly the same thing: everybody going for cover and buying back the shorts. So, I think we have seen some of that as well last Thursday and Friday, which explains the very large movements.

Something I hadn't seen in quite a while. I saw RSI, on Russell, on Nasdaq. The finance was over 80% and the FARS they touched 86%. I hadn't seen an RSI at that level in a long, long while; for equity markets, I mean.

An Exceptional Week in Markets

What a week! There was no, no big inflation data last week other than in Europe, which was a bit higher. But we know because it's about the energy cap being unwound. So obviously it goes back up. We have production data a bit weaker, and employment data is still very good. And yet, markets running like hell.

I think it's a one-off. I'm not saying that equity markets are going to settle by 20% from here. They may settle by 5% again, but I think they may go back into the range; i.e. S&P back at 4,000 maybe. Around there, possibly. And Nasdaq in the 12 territory: 12,000 and change. So, we are still a few percent from there.

Long or Short on Euro?

Europe is very expensive in my opinion, because it's done very well since the start of the year, and I find the markets quite expensive. So that theme of Europe is exhibiting value. As of now, I'm not so sure. I would rather be short on Euro than long on Euro. But again, is it going to go very far from here? I'm not so sure.

I think we saw a bottom in impact volatility last week. S&P was around 16%. That's really, really low. BIGS was around 17% and changed. That's pretty low as well. So, I think volatility may find a base here, which is good for TIF. The other thing a bit better for TIF is that bond yields have a sold off again – a bit better as well.

It's all marginal. But if we have our TIF stuff on one-and-a-half-year or three-year out, we need the yields to be a bit higher than, rather than a bit lower for sure; because the coupon is used in part just to give the premium. Maybe a three-year swap now in the US at 4.5% and rise. So basically, off your TIF coupon, you already have like 4.5% just because of where interest rates are. The rest is the volatility.

So, I'm moderately bearish on equities. I think bonds now we have had a washout. I think they're going to sell off slowly but surely. I'm thinking about re-entering slowly but surely as well in. At least in the front end. We exited around 390, and now it's 406. That's good: we're at 16 basis points in the money on the exit. But I think we could get a 420, without too much trouble.

So that's the view here. Alongside that, the dollar seems to be doing a bit better. So, dollar index is up. We saw – again, that was really incredible – the Euro-Dollar touching 109, on the way to 110. Now it's 107.70, and that's half of the Euro-Dollar index. It's coming back down as well. I think it's going to stay down a bit. Can we see DXY at 104 or 105? Maybe 107, but I'm not sure we'll get there. But I think a marginally stronger dollar is good. That's bad for commodities, for sure. So, I think we did well just to get rid of as much gold and silver as we could.

It's going to be a bit difficult for RAIF at the moment, for sure. But we're not completely aggressive in that. So WTI is at 73. The SPR floor is 72. We're near the floor, so I don't see oil going much lower than this. If you look at SCOG or even the BCOM index. With SCOG, I think where it is, for oil production and exploration it's more or less there. The Bloomberg Commodity (BCOM) Index could go bit slower, for sure.


We had a major washout last week; the likes of which I haven't seen in a few years. I think the base is a bit more sound. I guess retail is still in it. Mostly because of FOMO (fear of missing out). A lot of guys went back in, maybe 20% to 25% of the volume in January was retail. There were positions that had never been there, at least since last year and the year before. So, people are nursing some losses since the term.

But I guess we saw some activity again of people redeploying money. Casie Wood is a good benchmark. She's been on the television a lot. I'm not trying to push her shop and business. I wouldn't be surprised if she has had a lot of subscription as well in January. So I guess a bit of FOMO as well there. In my opinion, we should go a bit lower on equities. We go a bit higher in yield. We go a bit higher on the dollar. A bit lower on the commodity. So the, the regular correlation is coming back.

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