Seeking Alpha
Mutual fund manager, CFA, registered investment advisor, macro
Profile| Send Message|
( followers)  

"The power of visibility can never be underestimated." - Margaret Cho

The S&P 500 (NYSEARCA:SPY) fell last week as markets gyrated between gains and losses following unimpressive industrial production, concerns over Japan, the direction of bond yields, and ultimately what the Fed will say next week. On CNBC Thursday, I argued that the big concern is that we are in a period of falling bonds and falling stocks - something which is an infrequent occurrence given the historical inverse relationship between longer duration Treasuries and equities. However, just as everyone is seemingly getting nervous about a rising interest rate environment, it does seem entirely plausible that the exact opposite occurs and we re-enter a period of falling bond yields and recovering cyclicals.

I am not convinced a correction is yet here for stocks. SuperBen and the League of Extraordinary Bankers will not risk their precious wealth effect by attempting to end quantitative easing too early. In fact, I suspect they may talk up the possibility that they will only do more given that global growth is faltering. Recent downgrades of economic activity span across multiple countries, making it hard for any central bank to do anything other than push more money into their respective economies. Schizophrenia over an end to QE will soon be replaced by the very real concerns over deflation given that, as has been the case all year, the reflation story simply is not materializing.

The irony over the last few weeks of the Fed's "confuse and conquer" strategy to tame equity markets is that the threat of QE tapering domestically in the U.S. has most hit emerging markets (NYSEARCA:EEM), with those currencies (NYSEARCA:CEW) getting hurt, and equity markets entering correction/bear market territory. Any kind of reversal in rhetoric, then, likely reverses the oversold nature of anything outside U.S. borders. With globalization, the Fed needs to be wary of their words and their actions on not just America, but everything else connected to us and the types of ripple effects and feedback loops that result.

Our ATAC models used for managing our mutual fund and separate accounts rotated, favoring bonds over stocks in the near-term. Historically, such moves have preceded corrective environments, but I'm not so sure if that is the case now. Bonds may simply be a more clear long trade than stocks are either long or short. Much clearly will depend on the tone the Federal Reserve takes, and how that impacts expectations and intermarket trends. I suspect that emerging market currencies will likely bounce rather strongly, alongside sovereign debt. In the U.S., momentum favors shorter-duration Treasuries for now, but perhaps for only a fleeting moment. Any kind of realization that the yield curve steepened too far, too fast likely means the long-duration bond trade (NYSEARCA:TLT) returns.

Ed Dempsey nicely lays out the dangerous game we are now in through his latest market video with Carrie Lee done last Wednesday. As I have said numerous times in my writings and on Twitter, this is not about being optimistic about the future. We are optimistic only in our ability to take advantage of it. To that end, we trust the work, and will continue doing what we do at Pension Partners through our ATAC buy and rotate approach to inflation rotation.

Source: Visibility And The Clearer Trade

Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.