Month: June 2022

A $300 million superyacht owned by Russia’s wealthiest oligarch, Vladimir Potanin, has arrived in the safe haven of Dubai as the West tightens sanctions on Russia’s economy. 

Potanin, who is the CEO and majority shareholder of the world’s largest producer of refined nickel, Nornickel, has taken the precaution by transferring his 88-meter-long (289-foot-long) superyacht, called “Nirvana” to Dubai,” according to AP News.

The arrival of Nirvana in Dubai has become a symbol of the UAE’s unwillingness to oppose Russia for its invasion of Ukraine and enforce Western sanctions. 

“One of a shrinking number of countries where Russians can still fly directly, the financial center has become a thriving hub for Russia’s rich, in part because of its reputation for welcoming money from anywhere — both legitimate and shady,” AP noted. 

Julia Friedlander, a former senior policy adviser for Europe in the U.S. Treasury’s Office of Terrorism and Financial Intelligence, said the UAE had open arms in accepting oligarchs and their yachts. 

“When it comes to taking sides in the conflict, it’s not in their political interest to do so. They want to keep their access to money from around the world,” Friedlander said. 

AP released the story on Potanin’s yacht arriving in Dubai on Tuesday. At the time, the oligarch wasn’t sanctioned, but one day later, Britain appears to have slapped him with sanctions. 

“Today’s sanctions show that nothing and no one is off the table, including Putin’s inner circle,” a British government spokesperson said Wednesday.

Other Western countries could follow suit and sanction the oligarch. The movement of Nirvana to Dubai was probably a defensive play by the billionaire to prevent the vessel’s seizure from Western countries. 

The UAE’s neutral stance will likely make it a safe haven for Russians searching for ways to shield their yachts, planes, and valuables from crippling Western sanctions. 

Some macro thoughts from JPMorgan futures and options trader Marissa Gitler.

After a handful recent conversations, the most salient theme from clients has been a lack of conviction as for how to handle the next few months of trading. What’s interesting is that the general thought process amongst many remains the same – EPS and company guidance are likely to fall short of articulated expectation in Q3 as inflation has failed to moderate globally while growth has definitively started to wane in lockstep.

The FED will continue hiking to keep inflation under control in the short term, though much is out of their devices as energy, input prices, and supply chain bottlenecks outpace demand-led triggers in the market. Inflation will eventually start to moderate into the back half of the year (though still remain higher than ‘target normal’). Recession in the US isn’t a guarantee, but the likelihood is increasing – whereas Europe’s outlook is much more bleak and headed towards stagflation given inflation pressures are more heavily tilted towards the supply-side. Though emerging market economies have, in past, been better equipped to weather an inflationary storm – they are currently fairly anchored to the path of DM rates, and overall performance of DM countries (from a demand perspective), and (though to a bit lesser extent now) China. Energy upside makes sense fundamentally (inventories remain critically low), but desire to add to existing positioning is lacking at current elevated levels amidst lower liquidity, higher realized vol, and recession fears ticking higher. Similar can be said for Ags, which are broadly back to pre-invasion levels as positioning while wiped out in the broader macro sell-off.

As per this thought process, risky assets continue to look fairly unattractive, while the popular front-end fixed income shorts that had ‘worked’ for the majority of the year now appear at more risk. Though the US outlook is better than most from a global perspective – a U.S. flight-to-quality trade fails as the FED path remains uncertain (highly inflation-print dependent) while equity valuations still appear stretched in the current macro environment.

Consequently, investors have continued a pattern of degrossing in the equity space – from both the long and short sides. As has been well advertised at this point, CTAs were the first to de-gross when indexes crossed through technical downside levels, while long only’s have been working through books to take down exposures throughout the entirety of 2022. Though selling of growth plays by long-only’s has been taking place since the end of last year when yields began to move decidedly higher, the newest iteration of selling has been of well-owned winners (like Energy) as there remains overall less of the growthier/weak balance-sheet stocks to sell. Moreover, HFs – who had most recently been playing the market from the short side on the back of global central banks’ sharp hawkish pivot, have also taken down grosses ahead of the summer; covering short positions at the index lows, and unwinding index hedges given there is a higher bar for a further rollover (recession) vs a move higher (squeeze/chase).

The question really becomes – how to go forward amongst what has now become fairly homogeneous (under-positioned) playbook and recession-led thought process amongst investors; especially as we enter the historically more ‘relaxed’ summer months. As the market awaits more information (eco data, inflation prints, CB rhetoric) there has been a fairly well advertised upside equity rebalancing view into month end – which has caused many macro investors to step back from selling at the index level in recent days. Moreover, there are worries arising that a drift higher will trigger CTAs to re-enter the market, which would then spiral into price moves higher given the reduced overall positioning. In the same vein, discussions of market bottoms preceding actual recessions have also begun to enter conversations. Any pullback in bond yields would also add to this conversation.

The tactical upside play appears to me a bit of a shaky leg to stand on longer term, especially as the macro environment is far from decisive in its path forward, and index hedges have come down over recent weeks (which could lead to more violent down-trades). For those looking into upside in the next few months – would be best to play tactically from a positioning perspective – long in what is under-owned (growth/tech/short momentum), and balancing these trades scaling into some long-duration plays. Overall though, I still favor using equity upside as opportunity to re-engage in sales. What I continue to watch for (in equities), is growth in open interest (and net position growth by asset managers in CFTC data) that would imply CTA re-engagement and real money equity re-grossing – which would provide footing for a more sustained move higher – but this is yet to be seen…

Bottom Line: light positioning could lead to an equity rally, but in absence of CTA re-engagement this feels fairly unsustainable, play any upside tactically – vol has cheapened, puts are attractive for short-term downside delta plays.

While the Biden administration is hoping and praying that someone – anyone – will watch the comical “Jan 6” kangaroo hearsay court taking place in Congress and meant to somehow block Trump from running for president in 2024 while also making hundreds of millions of Americans forget that the current administration could very well be the worst in US history, it is quietly preparing for the worst.

As none other than pro-Biden propaganda spinmaster CNN reports, when it comes to what really matters (at least according to Gallup), namely the economy, and specifically galloping gasoline prices, the White House is in a historic shambles.

For an administration that ended last year forecasting a leveling off of 40-year high inflation and eager to tout a historically rapid recovery from the pandemic-driven economic crisis, there is a level of frustration that comes with an acutely perilous moment. Asked by CNN about progress on a seemingly intractable challenge, another senior White House official responded flatly: “Which one?”

The suspects behind the historic implosion are well known: “soaring prices, teetering poll numbers and congressional majorities that appear to be on the brink have created no shortage of reasons for unease. Gas prices are hovering at or around $5 per gallon, plastered on signs and billboards across the country as a symbolic daily reminder of the reality — one in which White House officials are extremely aware — that the country’s view of the economy is growing darker and taking Biden’s political future with it.”

“You don’t have to be a very sophisticated person to know how lines of presidential approval and gas prices go historically in the United States,” a senior White House official told CNN.

A CNN Poll of Polls average of ratings for Biden’s handling of the presidency finds that 39% of Americans approve of the job he’s doing. His numbers on the economy, gas prices and inflation specifically are even worse in recent polls. What CNN won’t tell you is that Biden is now polling well below Trump at this time in his tenure.

The CNN article then goes into a lengthy analysis of what is behind the current gasoline crisis (those with lots of time to kill can read it here) and also tries to explains, without actually saying it, that the only thing that can fix the problem is more supply, but – as we first explained – this can’t and won’t happen because green fanatics and socialist environmentalists will never agree to boosting output.

Which brings us to the punchline: as CNN’s Phil Mattingly writes, “instead of managing an economy in the midst of a natural rotation away from recovery and into a stable period of growth, economic officials are analyzing and modeling worst-case scenarios like what the shock of gas prices hitting $200 per barrel may mean for the economy.”

Well, in an article titled “Give us a plan or give us someone to blame“, this seems like both a plan, and someone to blame.

But unfortunately for Biden – and CNN which is hoping to reset expectations – it’s only going to get worse, because as we noted moments ago, while nobody was paying attention, Cushing inventories dropped to just 1 million away from operational bottoms at roughly 20MM barrels. This means that the US is officially looking at tank bottoms.

But wait, there’s more… or rather, it’s even worse, because as even Bloomberg’s chief energy guru Javier Blas notes, over the last 2 weeks, the US gov has drained 13.7 million barrels from the SPR, “and yet, commercial oil stockpiles still fell 3 million barrels over the period.”

Just imagine, Blas asks rhetorically, “if the SPR wasn’t there. Or what would happen post-Oct when sales end.”

OIL MARKET: Over the last 2 weeks, the US gov has injected 13.7 million barrels from the SPR into the market. And yet, commercial oil stockpiles still fell 3 million barrels over the period. Just imagine if the SPR wasn’t there. Or what would happen post-Oct when sales end #OOTT

— Javier Blas (@JavierBlas) June 29, 2022

And here is the punchline: at the current record pace of SPR drainage, one way or another the Biden admin will have to end its artificial attempts to keep the price of oil lower some time in October (or risk entering a war with China over Taiwan with virtually no oil reserve). This means that unless Putin ends his war some time in the next 5 months, there is a non-trivial chance that oil will hit a record price around $200 – precisely the price the White House is bracing for – a few days before the midterms. While translates into $10+ gasoline.

And while one can speculate how much longer Democrats can continue the “Jan 6” dog and pony show as the entire economy implodes around them, how America will vote in November when gas is double digits should not be a mystery to anyone.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

If we could only impart one bit of wisdom to our readers about today’s market it is “don’t fight the Fed.“

Unbeknownst to many investors, the saying, don’t fight the Fed, is a two-way street. It is easy for investors to grasp the advice when the Fed provides liquidity. During these periods of easy monetary policy, markets tend to grind higher daily. Volatility is low, meaningful declines are infrequent, and drawdowns tend to be shallow.

But, when the Fed raises rates and reduces liquidity, it’s wise to appreciate that the trend is not often an investor’s friend. In this scenario, don’t fight the Fed is a warning to take a more conservative stance.  

Given the Fed’s current hawkish monetary policy agenda and its effect on asset prices, we thought it might be helpful to share our thoughts on Fed-based trend analysis.

The Fed Trend is Your Friend

The Federal Reserve provides markets liquidity directly and indirectly.

By purchasing or selling bonds, they affect the amount of investable dollars available to markets. They also provide liquidity directly to investors via the repo markets. Both actions directly affect the amount of money and securities in financial markets and, therefore, all financial asset prices.

Equally important is the Fed’s indirect impact on liquidity. The perception that the Fed is supporting or not supporting markets is potent. Investors usually feel more confident knowing the Fed is adding liquidity, regardless of how much liquidity finds its way to markets. Conversely, as we see now, angst tends to arise when they remove liquidity.

“Monetary policy is 98% talk.” – Ben Bernanke

Raising and lowering interest rates is another way they indirectly affect liquidity. Higher rates make it more costly to leverage financial assets and vice versa for lower rates. So-called margin trades increase the purchasing power of buyers.

Given the Fed’s direct and indirect influences, stocks often trend higher when the Fed is easing and fall when removing liquidity.

Trend Management

With an understanding of how the Fed influences markets, we need to consider the degree of “influence” they provide.

Financial media pundits often rate the Fed and its members on a hawkish-dovish scale. A hawkish plan is one in which Fed members want a tighter monetary policy to slow economic growth and or inflation. A dovish stance implies easier policy to support or boost growth and or prices.

The table below from InTouch Capital Markets is one such example. It is crucial to keep in mind the degree of hawkishness or dovishness is relative. For instance, Neel Kashkari is the most dovish member of the Fed today. Despite his dovish views, he is strongly advocating for a series of rate hikes and QT. 

“Right now, it is easy to be a hawk because inflation is out of whack and the labor market is strong.”- Neel Kashkari

Reducing interest rates once or twice by .25% is far different from dropping them abruptly to zero percent and starting an extensive QE purchase program as we saw in 2020. The more the Fed alters monetary policy, the greater the market effect. And, importantly, the steeper the resulting market price trends.

Hawkish Dovish Slopes

Price trends tend to be the steepest, up, or down when monetary policy is most extreme. Today, monetary policy is potentially more hawkish than at any time in the last 30 years. The graph below provides hypothetical examples of varying price trends based on Fed policy. The current environment is akin to the Strong Hawkish yellow line. The Strong Dovish orange line represents the previous two years of extremely easy monetary policy.  

Analysis of the trend’s slope shifts with expectations for the Fed. For example, nine months ago, the upward trend started to flatten. At the time, inflation was rising rapidly, and the Fed began talking about interest rate hikes. Since the initial expectations were for small rate hikes and no QT, the trend flattening and ultimate shift toward a downward direction was gradual. Since then, the downward trend has steepened as Fed rhetoric has grown increasingly hawkish.

The slope of the trend will shift with expectations for monetary policy. Inflation, economic growth, and employment drive those expectations. If inflation starts fading quickly and economic growth continues to weaken, we suspect the Fed’s tone will be less hawkish. In such a scenario, the downward slope of the trend will become less steep.

At some point, the market will presume the Fed has tightened enough. Whether it’s a recession or much lower inflation, expectations for a change of policy stance will become more popular. Then a period of consolidation becomes likely. Expectations for QE and lower interest rates will likely follow, and the upward trend may resume. 

S&P 500 2020-2022

Unfortunately, the trend analysis concept we discuss is abstract. While Fed-based trend analysis is helpful, it is impossible to quantify Fed dovishness and hawkishness into trend slopes. That said, understanding the slope and the trend can be a powerful risk management tool.

The graph below shows the changing trend channels of the S&P 500 over the last two years.

There are a few things worth pointing out in the graph.

• Between zero interest rates and unprecedented levels of QE, the Fed employed an exceptionally easy monetary policy from March 2020 until early 2022. As such, the trend higher was steep. The S&P 500 rose over 100% in less than two years!

• The upward trend was well defined, with support at the 100-day moving average (green) and resistance at 7.5% above the 100-day moving average (dotted green). Any breaks above or below the channel were opportunities to trade and rebalance.

• From September 2020 to June 2021, the S&P 500 closely tracked the upper green channel resistance.

• Around June 2021, investors started discussing the potential for a shift to a less dovish Fed stance. From that point, the S&P 500 started trading below resistance and occasionally touched support. The slope of the trend was flattening. We can see this as the trend pitch started declining (gray shaded area).

• As inflation rose beyond expectations and hawkish rhetoric became more common, the S&P started to consolidate (black channel).

• A new downward trend channel began in 2022 (red). As we see, the channel support is starting to establish itself.

The Fed is unlikely to become more hawkish than it is today. The question is, when do they start to pivot to a less hawkish policy. At that time, the slope of the red channel is likely to flatten, and a bottoming process can begin.

Summary

The Fed has just started its tightening campaign. Rates have risen on three occasions by a total of 150bps. Fed Funds futures imply another 2% of rate hikes by the end of 2022.

The current equity trend is sloping steeply downward. It will likely stay that way until the market thinks the Fed is letting up. At times prices will deviate toward the bottom of the channel and other times towards the top. Trading within the channel can be a valuable bear market trading tool.

Don’t fight the Fed and short stocks when the Fed is providing liquidity. Equally important and pertinent to today, don’t fight the Fed by aggressively buying stocks when the Fed is pulling liquidity from markets.