Morning Note: Nuance

Asian equities were the definition of mixed overnight; 8 of the markets we track up, 8 down. Europe’s getting hammered this morning; all but two of the 19 indices we track are in the red as I type. U.S. equity traders, on the other hand, are, for the most part, liking what they heard from Fed Chairman Powell this morning (more on that later). Dow up 178 (0.63%), S&P 500 up 0.24%, Nasdaq flat +0.02%, Russell 2000 flat -0.04%.

Options traders, however, aren’t at all feeling the Fed at this point in the session: The VIX (SP500 implied volatility) is up 6.75%. VNX (Nasdaq vol) is up 5.39%.

Oil futures are down -0.62%, gold’s down -1.22%, silver’s down -1.41%, copper futures are up 0.36% and the ag complex (in the aggregate) is up 1.11% so far this morning…

The 10-year treasury is taking a beating (yield higher) and the dollar’s up a hair as I type.

Our core portfolio, as has been the case the past few days, is more or less stuck in neutral (8 positions in the green, 9 in the red) so far this morning (-0.16%). With financials, ag commodities, staples, healthcare and tech (in order) our top five winners; while silver, gold, Eurozone equities, Asia-Pac equities, emerging market equities and the yen comprise our bottom 5 losers. 

The components in our mix that have largely helped keep our core performance inline with stocks (with notably less downside risk [diversification and option hedging]) the past couple of months have, as you might imagine, been what’s kept us kind of stuck in the mud the past two weeks. 

I’ve noted herein of late that we’re looking for a technical bounce in the dollar off of hugely oversold levels that would offer up a nice entry point to add more of what’s been working — or, I should say, looking to add more of what works in a down-trending dollar environment (i.e., we’ve actually been expecting to get stuck in the mud a bit as gold, for example, sells off). 

Now, as long-time clients are fully aware, our macro theses are ever-evolving phenomena. They, of course, have to be, for obvious reasons. And while our base case going forward remains essentially what it’s been since last December, there’s evolving nuance that needs to be compensated for within our investment mix. 

Case in point, Monday we cut our gold exposure at the margin and increased our ag exposure with the proceeds. Here’s the narrative from our internal log:


Gold remains a logical play going forward, however, there’s one caveat; interest rates. Gold, having no yield, competes favorably against no-yielding treasuries. However, should rates rally on, say, better than expected data, larger than expected issuance, higher than expected inflation expectations, etc., while I’m still long-term bearish on the dollar (bullish gold), after the huge run-up, and speculative money chasing it, notable pullbacks — particularly if/when rates spike — are to be expected.

Ag commodities have been in a long-term bear market since the peak in ‘08. In a weak-dollar world they have an edge and they’re historically not quite as negatively correlated to interest rates as gold has been…

Therefore, we’re marginally cutting our gold exposure today (to 50% of currency/commodity exposure from 55%) and adding more ag (increasing to 30% of curr/comm) with the proceeds…

White=GLD, Purple=DBA (ag), Blue=10-yr yield index

Stay tuned…

Have a great day!


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