Corporate insiders: are selling at a multiple of 2.3 (selling relative to buying). That is the most since January and a pretty good indicator to be cautious on equities.
Inflation: the world is experiencing the worst inflation in 40 years but instead of restricting demand most countries are making it worst by stimulating demand via government handouts. The US president just gave away $300 billion in student loan forgiveness, several EU countries have artificially reduced the price of gas and electricity bills. These actions will just maintain high inflation for longer when the only way to take down inflation is demand destruction, a recession/austerity, higher rates, slower GDP growth and so on.
The ECB: the next meeting will take place on September 8th. Market is pricing a 70% chance of 75BPS increase. The bank is facing many dilemmas as the supply shocks continues to plague the Eurozone, inflation pressures are not abating, Italian spreads (currently +235 BPS of Germany) are increasing again, and refinancing rates need to be increased much higher if they want to tackle inflation pressures with the EUR down 12% YTD.
The FED: the next meeting will take place September 21st. The markets are fully pricing a 50BPS hike in rates and almost 70% chance of a 75BPS increase. QT (balance sheet reduction) will increase in September from $45 to $95 billion. The next CPI release is on September 13th. We should get confirmation that inflation in the US has peaked but it will remain at elevated levels for some time. Still not enough demand destruction and GDP growth needs to come down further.
Oil: elevated demand fears fail to keep prices of Crude under at $90 even as the U.S. govt keeps selling its SPR reserves now at a 40-Year low since 1985. Mid-terms are coming up so that’s a driver for Democrats. More importantly, right now the Oil market is trading in backwardation, crude prices for Feb24 are around $14bucks lower. Let’s hope the US govt is currently buying forward and replenish at a profit. At the same time, Saudi Arabia is calling to reduce output to keep prices elevated.
Changes to fund positioning:
Equities US: we used the bear market rally via index futures to reduce exposure. We have bought protection via long Vix futures as we are entering what is historically the most volatile period of the year. Main sectors are agricultural, chemicals, oil majors, fertilizer, and industrial/precious metals sectors.
Equities Europe: we still find very little value in European stocks and remain underweight to short on several countries like France and Germany.
Emerging Equities: long China and no exposure to other EM countries as the strong USD is tearing apart their economies.
Rates: Long US 2 and 10-YR and reinvested cash into higher yielding short-term government and corporate bonds. Added some US T-bills yielding over 3%.
Currencies: no change.
Cash and short-term securities: raised to 9%.
Sentiment: we used summer rally to take-profits and reduce equity exposure. The bear market environment remains, and we will trade accordingly. We still see a lot of complacency in the markets as the VIX is too low and High-Yield spreads are widening again towards the June highs. The next few months could be highly volatile as the Fed will not come to the rescue of equity investors since the main priority is to fight inflation. Our fund has a positive performance YTD, and we increased our absolute overperformance to equity indexes by almost 20%. The Fed has been very vocal lately by saying that they will “tighten until they break something”. Most central banks will keep raising rates to fight inflation thus reducing demand, GDP growth and economic activity.