Tuesday, September 28, 2021

Morning Note: Sound Familiar?

So equity markets are feeling the jitters this morning. Question is, over what?

Well, in DC, well, it's a mess... Here's Bespoke Investment Group summing it up in their morning note:

"To put everything in plain English: Republicans voted down a procedural process that would have prevented a US debt default and kept the government open, while Democrats are negotiating themselves into a corner where they don’t pass any of their legislative priorities and would also oversee a government shutdown, a debt default, and general legislative chaos, despite controlling Congress and the White House."

Sound familiar? Yep... Thus, should we, at this juncture, lose any sleep over politicking in the U.S. Capitol? Probably not... 

Over at the Federal Reserve, the two governors whose latest disclosures exposed the ugliest of optics around their personal investments last year while steering U.S. monetary policy announced their respective retirements yesterday. Don't know to what extent, if any, that is troubling markets this morning. You see, both were considered "hawkish" (in favor of tighter policy). I think it's probably safe to assume that their replacements will, at a minimum, not be more so. In fact, I suspect otherwise; their replacements, given the current regime, are likely to be of the dovish ilk.

For certain, a further spike in bond yields is doing a number on stocks this morning, tech in particular. The Nasdaq 100 is down 2% as I type.

Asian equities sold off overnight, with all but 2 of the 16 markets we track closing lower.

Europe's getting battered this morning as well, with all but 3 of the 19 bourses we follow trading lower, as I type.

U.S. stocks are off across the board: Dow down 360 points (1.05%), SP500 down 1.44%, SP500 Equal Weight down 0.99%, Nasdaq 100 down 2.04%, Nasdaq Comp down 2.06%, Russell 2000 down 1.58%.

The VIX sits at 26.20, up 20.02%.

Oil futures are up 1.06%, gold's down 1.06%, silver's down 1.29%, copper futures are down 0.43% and the ag complex is up 0.36%.

The 10-year treasury is down (yield up) and the dollar is up a serious 0.45%.

Led by energy stocks, ag commodity futures and AT&T -- but dragged by uranium miners, MP (rare earth miner), AMD, Eurozone equities and solar stocks -- our core portfolio is off 0.87% to start the session. 

We find the proper use of options to be the most efficient way to hedge portfolios against major downside risk. The following from Hari Krishnan's latest book (co-authored by Ash Bennington), Market Tremors points to the downside of hedging under-the-surface risk; the downside being the risk of being early, as well as the more-than-offsetting upside when markets indeed crack:

"Admittedly, it might take a while for structural risk to transform itself into realized volatility. That is the downside to measuring subterranean risk, the risk of being early. We may have correctly characterized the current regime as “calm but unsafe”, which is superior to buying options whenever volatility is cheap, without regard to market internals. Although we have a theoretical edge, our options structures might lose money for a while. However, when they do payout, our trading gains are likely to more than offset previous losses. Why? We bought options when risk was underpriced by the market."

Have a great day!

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