Tag Archives: sight beyond sight

circus at hofstra

Circus Comes To Town-Global Macro Guru Heads to Hofstra

MarketsMuse inhouse political pundits are headed to Hempstead, NY, home of Hofstra University where the Circus Comes to Town disguised as the first tranche of 2016 US Presidential debates. While our inhouse politicos battle the LIE rush hour traffic in effort to get a ring-side seat for the Ringling Bros Bake-Off circus, our curators pass the ball for pre-debate color courtesy of global macro guru Neil Azous, principal of macro think tank Rareview Macro and publisher of Sight Beyond Sight.  Below extract first appeared in yesterday’s weekend edition of FinAlternatives.com


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Neil Azous, Rareview Macro

Humble in Hofstra…One Debate an Election Can Make
by Neil Azous

Tonight’s U.S. Presidential debate, infamously coined the “Humbling in Hofstra” by Mark Cuban, has the potential to reshape the world. Unlike the adage “one stock a market does not make,” our view is that “one debate an election can make.”

At the top-down investment level, this event will dictate asset prices over the next 72 hours more than any other catalyst. For the reasons we will layout below, our bias is to be short risk assets or hedged going into the event.

Additionally, the event will kick-off a greater rebalancing exercise at the sector, industry, and single stock level which might take a few weeks to find an equilibrium.

The Debate Setup

Firstly, this is an advertiser’s dream as over 100 million people are expected to tune in, the largest ever for a US Presidential debate.

The debate will run from 9 to 10:30 p.m. ET at Hofstra University in Hempstead, New York.

Baby Boomers, Generation X, and Generation Y, can watch the debate on C-SPAN, Fox, ABC, NBC, CBS, Fox News, CNN, and MSNBC.

It will also be streamed live on various social networks. That way, the millennials who cut-the-cord from networks have an opportunity to follow along as well.

Secondly, it is important to recognize the extreme view that non-US citizens take on Donald. J. Trump. They view Trump in a similar vein as the Dear Leader in North Korea – that is, highly concerned over the prospects of his ascent on the world stage and having access to weapons of mass destruction.

The key point here is that if there is going to be a change in viewpoints on Trump, it will be for the better, as it cannot get much worse internationally.

Finally, the political strategists, already bruised from being wrong on Trump for 18 months, are struggling to pinpoint what a win or loss looks like for either candidate in advance of tomorrow night’s debate.

As evidenced by the widespread views expressed on the various Sunday morning talk shows this morning, they are all soul-searching at the moment.

The conclusion, especially after a surprise ‘Brexit’ outcome, is that paid forecasters, political strategists, media persona, and politicians are worthless in shaping sentiment and helping investors construct their portfolios.

Our View

Allow us to put one simple view forward.

Continue reading


If History Is Any Guide-Sell Every Rally, Now! Says Global Macro Muse..

If History is Any Guide….more than one “markets muse” should be running for cover, faster than if they found themselves strolling the streets of NYC’s Chelsea neighborhood this past Saturday evening. And, one global macro muse is extending that warning..

Stock market technicians, i.e. those who hang their hats on technical analysis and the notion that history tends to repeats during select times of the year should take note of the following statistics; if history is any guide, professional traders should sell every rally, now!

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Neil Azous, Rareview Macro

Why? Aside from the fact that the month of September is notorious for market tops and arguably, the most damaging sell-offs in US equity markets followed soon thereafter, the month of October in years ’29, ’87, ’91, , ’01* ‘ and 08 to cite just a few), professional chartists are reminded by a illuminating observation courtesy of global macro guru Neil Azous in the a.m. notes published by Rareview Macro’s “Sight Beyond Sight”:

Gann Day: Per legendary Wall Street trader W.D. Gann, September 22nd is the date markets top more frequently than any day of year. This year that date coincides with the Fed and BoJ meetings on Sep 21st. Stock Trader’s Almanac : S&P 500 down 22 of 26 during week after September options expiration, average loss 1.08% (Full Stats HERE, @AlmanacTrader)

S&P 500 Seasonality: This week is the 38th week of the year. This is the worst week of the year since 1950 and the S&P 500 has been down 7 of past 8 years. Last week was Sept Options Expiration. Since 1990, the week after this has higher only 4 times past 26 years. Higher only 15.4%, lowest for any week of year.

Those having glasses half full, or those whose glasses use bifocal lenses might argue “even a broken clock is right twice a day, that doesn’t mean lightening strikes at the same place at the same time..” will discount the above. On the other hand, “Many People Are Saying” that those who are familiar with fall stock market falls will want to follow Azous on Twitter, or better and smarter still, those who are global macro aficionados should grab themselves a subscription to Sight Beyond Sight by clicking this link.




To Whom It May Concern: Inflation Risk Is On

Memo: To Whom It May Concern: Inflation Risk is Back In Play

Below is a special edition of global macro commentary courtesy of Stamford-based think tank Rareview Macro LLC, the publisher of “Sight Beyond Sight.” The following has been excerpted by the curators at MarketsMuse and republished with permission from the author, Neil Azous.

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Neil Azous, Rareview Macro

For the last two years the expectations around the path of Federal Reserve policy swing from one side of the spectrum to the other every six to eight weeks.

This time is no different, and as that pendulum reaches an extreme, it just comes down to trading probabilities.

Right now, our models spit out the following – inflation risk is back in play.

Now, we do not care whether the Fed raises interest rates or not at the upcoming meetings. We only care that the market begins to believe the Fed will be at some point shortly on account of being behind the curve on inflation.

What we mean by that is that from the first speeches after next Wednesday’s FOMC meeting – which usually start on the Friday following – the tone from the various policymakers on the FOMC will begin to sound more hawkish.

A new drumbeat from the Committee will unlock the Treasury market to move away from the range it has been trading in for the past two months.

At the end of the day: the fixed income market needs to price in the inflation impulse that all other assets are reflecting.


The Rareview Macro Toolkit

Below is a list of five illustrations that describes our process that we use to determine the probabilities of Fed action over the next 12 months. Included is an explanation for each chart.

The first chart looks at the implied probability of a hike “BY” a certain meeting, which is the cumulative probability of every meeting before that point (i.e. adding them all up to a certain point).

The second chart looks at the unconditional probability of raising interest rates “AT” a certain meeting, which is specifically the probability of an individual meeting.

The third chart is our ‘decision tree’ illustrating the process we use to calculate answers to the following:



  • What is the probability of the Fed raising rates at BOTH the June and September meetings?


  • What is the probability of the Fed raising rates at the June meeting and NOT at the September meeting?


  • What is the probability of the Fed raising rates at the September meeting and NOT the June meeting?


  • What is the probability of the Fed NOT raising rates at EITHER the June or September meetings?


From there, we use options on Eurodollar futures to recreate these four scenarios digitally.


The decision tree starts with two generic questions:

What is the probability of the Fed raising rates at the June meeting?

What is the probability of the Fed raising rates at the September meeting?

Once we know the probability assigned to each of those two outcomes, by following the flow of the decision tree, we can determine the mathematical probability of the outcome of our original four questions.

To read the entire piece from Rareview Macro’s Sight Beyond Sight, please click here


Neil Azous is the Founder and Managing Member of Rareview Macro, an advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight®. Neil has close on two decades of experience across the financial markets, and is recognized as a thought leader in global macro investing. Prior to founding Rareview Macro, Neil was a Managing Director at Navigate Advisors where he specialized in constructing portfolios and advising on risk. His daily commentary was highly regarded by the institutional investing community and his success in delivering a forward-looking viewpoint on global markets helped lay the foundation for Sight Beyond Sight® to be built. On Wall Street, his career included roles at UBS Investment Bank and Donaldson Lufkin & Jenrette, where his responsibilities comprised of trading derivatives, hedging solutions, asset allocation and fundamental securities analysis. He began his career at Goldman Sachs in Fixed Income, after completing both the firm’s Analyst and Associate training programs, widely acknowledged as the pre-eminent and most coveted learning ground for undergraduate and graduate students. Neil completed graduate level coursework for a MS in Real Estate at New York University and received his BA in Business Administration from the University of Washington, where he is a member of the University of Washington Bothell Board of Advisors and was the recipient of the Bothell Business School 2013 Distinguished Undergraduate Alumnus Award. He is active in various charity and community organizations.


Global Macro Gut Trade: China ETF

For those following global macro think tank Rareview Macro’s “Sight Beyond Sight”, you already know that the firm’s chief strategist Neil Azous is on a roll and the firm’s model portfolio is outpacing many who have an ax in global macro style investing. Today’s edition of the firm’s commentary caught the attention of MarketsMuse curators in our ETF and Strike Price departments when noticing a Gut Trade view re the top China ETF: FXI. Below is the extract from today’s edition of Sight Beyond Sight and reproduced with permission..

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Neil Azous, Rareview Macro

Usually, we do our best to provide solid supporting evidence and some underlying insight for every trade we put forward in these pages.

It does not happen very often, at least for us, but sometimes this business is also about a gut feeling, instead of cold analysis, and nothing more. When it strikes, we act.Yesterday, we said that Monday was a top 3 performing day of the year in the model portfolio and that we are going to take that outsized performance for a spin and ramp things up a bit more directionally than normal. So you will see a subtle change in our tone and some of the things we do going forward. It will be a bit more aggressive.

Well, yesterday turned out to be even better than Monday and on account of again closing at a new high watermark for 2016, we feel it’s time to shift into a higher gear.

As we were walking out of a meeting yesterday afternoon we had a “gut feel” that the unwind related to all the voodoo we wrote in yesterday’s edition on a “mini-inflation scare” was going to accelerate and we were not big enough in the positions we had on.

New Position: Long iShares China Large-Cap ETF (FXI)

We make a living by entering trades when no one else is willing to, or by going places where no one else is willing to go. Today is no different.

Let’s go to China.

On March 30th, we added a long FXI position to our watch list.

Last night, the Hang Seng Index showed the largest positive risk-adjusted return across ALL regions and assets.For the avoidance of doubt, the FXI and the Hang Seng, in correlation terms, are virtually one and the same thing. While mainland China indices move and regularly make our risk -adjusted return monitor it is very rare to see the Hang Seng on that screen. We are well aware the data has stabilized in China, their political communication strategy is now more effective than last summer, and they have done a masterful job weakening their currency basket while holding steady vs. the US dollar. But what was missing was some action in the stock market following all that , especially the non-mainland such as Hong Kong.

Our interest is now piqued.

The structure we initially added to our watch list was to go long on the FXI August 38 call options. One structure we like even more is as follows:

1.Buy the FXI Aug 37.5 calls

2.Sell the FXI Aug 28 puts

After last night’s move in Asia, we doubt we will get the chance today as China is bid up.

At yesterday’s closing prices you could add this risk-reversal for even money on account of the puts trading 12 implied volatility points rich to the calls. Selling that expensive skew and knowing that the low in February was $28.44 (vs. the 28 put strike) is a better proxy for getting long than just buying the spot FXI outright. Besides, if we are wrong, and China implodes, we have massive convexity in our book overlays via being long on SPX puts and S. Korea credit default swaps (CDS).

We will see if we get the chance to put this on today for even money, or at least a similar structure. Otherwise, we may have to chase the bid and pay up if we want to participate. It is not going to help our entry point that JPMorgan raised MSCI China to overweight, but at least they downgraded Taiwan to neutral, which we are short of their currency.   Real time updates as to this position and all others are posted via our Twitter feed @NeilAzous


Neil Azous is the Founder and Managing Member of Rareview Macro, an advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight®. Neil has close on two decades of experience across the financial markets, and is recognized as a thought leader in global macro investing. Prior to founding Rareview Macro, Neil was a Managing Director at Navigate Advisors where he specialized in constructing portfolios and advising on risk. His daily commentary was highly regarded by the institutional investing community and his success in delivering a forward-looking viewpoint on global markets helped lay the foundation for Sight Beyond Sight® to be built. On Wall Street, his career included roles at UBS Investment Bank and Donaldson Lufkin & Jenrette, where his responsibilities comprised of trading derivatives, hedging solutions, asset allocation and fundamental securities analysis. He began his career at Goldman Sachs in Fixed Income, after completing both the firm’s Analyst and Associate training programs, widely acknowledged as the pre-eminent and most coveted learning ground for undergraduate and graduate students. Neil completed graduate level coursework for a MS in Real Estate at New York University and received his BA in Business Administration from the University of Washington, where he is a member of the University of Washington Bothell Board of Advisors and was the recipient of the Bothell Business School 2013 Distinguished Undergraduate Alumnus Award. He is active in various charity and community organizations.


Global Macro Guru Says: Look Out Below

MarketsMuse curators are often most inspired by views expressed by those dedicated to interpreting and positing financial market outlooks via a global macro lens. This ‘style’ requires a disciplined process and for those who are best in the practice of this dark art, the projections are often prescient. With that, we point to opening commentary courtesy of  global macro guru Neil Azous via  ‘Special Sunday Night Edition’ of “Sight Beyond Sight”, a daily publication produced by global macro think tank, Rareview Macro LLC and one that is followed by many of the top hedge funds across the globe.

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Neil Azous, Rareview Macro

The majority of conversations over the weekend were centered on the breakdown in the momentum factor in US equities. Given how deeply embedded this factor is into all strategies built over the last 18-months, the tentacles are far reaching, including observations on the value versus growth style, large versus small capitalization, quantitative strategies, the performance of TMT funds, defensive rotation, etc.

Since this newsletter is forward-looking – sight beyond sight – we will not rehash those conversations or illustrate the back-tests of past episodes of momentum unwinds that have been published.

However, there are a few important observations to recognize.

Firstly, the world’s most sought after top-down strategists are united in calling for the momentum unwind to continue. In fact, some were quick to begin to take victory laps on their forecasts for this event so the last thing they want to do is relinquish their trophies so soon. At this point, vanity is all that is left for some even if their broken clock is right twice per day.

Secondly, a lot of ink has been spilled over the last six months on the narrow market leadership – FANG, NOSH, Top 10 basket, Top 20 basket, etc. We highlight this because unlike the sell-off in January that was driven by hedging and index futures flows this sell-off is being driven by the long selling in the narrow leadership – single stocks – which makes up a disproportionate amount (i.e. 40-45%) of the S&P 500’s market capitalization. Put another way, there is no hedge to this type of selling except to reduce risk outright.

Thirdly, there are a lot of kids with rulers out there drawing straight lines on a chart. In fact, we did not even have to data mine very hard at all to find key breaks in many relationships. While these illustrations are subjective depending upon what technical analysis discipline you subscribe to, the fact is that for the moment they are self-fulling to the momentum unwind narrative and you have to live with them for a while. We have included a few for your amusement in the Top Observation section below.

In our experience, there are two types of momentum unwind.

The first one is the normal run-of-the-mill unwind due to irrational exuberance in valuations and an extended positioning in consensus strategies.

The second one is related to changes in cycles.

It is a bad combination when all three – valuations, positioning, and cycles – converge as is the case now, in our opinion.

Regardless of which bucket you want to place the current episode into, the reality is that these exercises tend to last 2-3 months, and in some cases when the world is really in bad shape, as many currently feel it is, can last 6-months or longer.

The key point here is that to expect a resumption of momentum or a recovery of that factor’s leadership this early in the unwind, especially considering the PnL duress in the professional community is currently more violent than the losses suffered in January, would be misguided.

Put another way, if there is a momentum strategy, style relationship, market capitalization, sector rotation, you watch daily, and it is down or has reversed by 5-10%, call us when it is down or has reversed by 20-30%, and we will take a look at it.

Finally, ask yourself this question:

If the EURO STOXX 50 Index (SX5E), German DAX (DAX), NASDAQ 100 (NDX), Russell 2000 (RTY), and Facebook-Amazon-Netflix-Google (FANG) all made new “closing lows” for 2016 last Friday, then is it more likely that the next move for global risk assets is a bounce or that the Nikkei 225 (NKY) and S&P 500 (SPX) will play catch up?

The answer to that question, along with other insights can be found by those who read the entire Sunday Night Special Editor of Sight Beyond Sight. To do so, please go directly to Rareview Macro’s archive section via this link (Subscription Required, but Free Trial Subscriptions are still being offered)

Global Macro View-Friday’s Stock Rally In Perspective

MarketsMuse curators have canvassed assortment of guru-types who have attempted to decipher Friday’s stock rally, along with tuning in to the abundance of Monday morning quarterback views. For those who turn to the cartoon channel (i.e. CNBC), some pundits call it a dead cat bounce, more optimistic professional traders and pontificators would like to believe the spike on Friday is a sign of a “bottoming formation”–irrespective of many signals that suggest the “R-word” will become more frequently used when describing the state of the US economy. Smarter money, particularly those who have Sight Beyond Sight are focusing on following a private weekend comment summarizing last Thursday’s email newsletter from global macro think Rareview Macro…

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Neil Azous, Rareview Macro

Factually the 14-day (Relative Strength Index) or “RSI” on the SPX Index is now 39; no one with a straight face can say the market is oversold technically. Last week, when the S&P futures bounced off the lows the professional community was open to the notion that the index could trade back up into the 1920-1960 range. That has not happened despite three key things:

  1. President Draghi has backing of the Committee now to ease policy further;
  2. The FOMC was dovish and the implied probability of a hike in March now is at 18% (it was ~28% yesterday); anything below 20% most likely means it’s going to zero; unconditional probability of June is exactly 20%; post-March FOMC that is most likely around 33% or 3 to 1 AGAINST;
  3. Crude oil has taken out last week’s highs multiple times and broken the downtrend channel today on an intra-day basis. Additionally, the market has removed the majority of event risk related to Yen and Nikkei heading into the BoJ meeting tonight on the view that if the BoJ eases they go big (20 bonds, 1-3 ETF, and even cut IOER) because they can’t risk an incremental easing that the market rejects.

The key question is with largely every asset now discounting these central bank events and the high degree of correlation of risk assets to crude oil, especially the S&P 500, why has the S&P not responded and traded up to the expected range of 1920-1960?

The answer is that tomorrow the BEA releases their quarterly update for corporate profits (Bloomberg Ticker: CPFTYOY Index). Last quarter it was down -5.74%. The key point being is that tomorrow brings a likely confirmation of two-quarters in a row of declining profits – or a “profit recession”. Remember, this is a clean look at profitability and there are no footnotes like a company specific earnings release that can attempt to paint any Picasso they want.

Additionally, ISM Manufacturing data is released on Monday and in order for the cyclical call bounce to begin to materialize it can’t show another print to the downside. Right now the market has shifted to a 40-50% probability of a forthcoming recession up from 10-20% to start the year. Confirmation of further ISM Manufacturing weakness will only accentuate the view that 11 of the last 13 recessions included ISM Manufacturing printing below the 50 level.

So while you may have to wait for two-quarters in a row of negative GDP at some point in the future to get formal confirmation of a recession, the risk is that corporate profits and manufacturing will govern risk assets for the time being and outweigh the heavy emphasis the Ph.D. community places on the consumer and a services-driven economy for now.

When you marry all of this with corporate earnings season that is now half-way complete, with the exception of Facebook (NYSE:FB), not one icon company has had a good print or said something truly positive in the outlook. In fact, AAPL is very close to touching its 200-week moving average like Russell 2000 and Transports. The last time that happened was during the GFC.

Finally, Friday was month-end and the bulls will lose the call for further pension re-balancing that showed equities were very large to buy. The risk now, with all of the oversold conditions worked off, is that the S&P 500 resumes its downtrend and like every other risk asset the 200-week moving average of 1704 is a magnet.

Interest Rate Probability Dispersion Post-FOMC:

  • Hike Twice March AND June: 6%
  • Hike Once March OR June: 36%
  • NO Hike At All by June: 58%

Rareview Macro is the publisher of “Sight Beyond Sight“, a subscription-based advisory service for professional investors, hedge funds and self-directed investors and offers actionable trade ideas using futures, options, and ETFs within the framework of a disciplined analysis process. Author Neil Azous publishes intra-day updates re model portfolio and trade posts via Twitter @rareviewmacro


wrong way first trade global macro

2016-Global Macro-The Wrong Way First Trade

You don’t need to be a MarketsMuse or a global macro guru (or any other type of pundit) to know that professional financial market traders are only as good as their last best trade. In that spirit, we look to the 2016 outlook and spotlight on the Wrong Way First (WWF) Trade courtesy of Rareview Macro’s Neil Azous and Sunday night special edition of Sight Beyond Sight–which included a wink and a nod to astrology-friendly traders who swear by the “Bradley Effect”

marketsmuse neil azous rareview macro cnbc oct 6 2015You’re Only as Good as Your Last Best Trade

  • Wrong Way First (WWF) Trading Explained
  • WWF Driving: High Yield (Ignition), Chinese Yuan (Accelerator), US Jobs Report (Speeding Ticket)
  • WWF Candidates: Two Real (Japan & Momentum) & Two Fakes (Styles & FANG)
  • New Trade:  Short EURGBP Spot Exchange Rate

Wrong Way First (“WWF”) Trading Explained

  • Wall Street Jargon: Wrong Way First
  • Acronym: WWF
  • Reference: The risk the professional investment community is exposed to at the beginning of every New Year – that is, the first major trade will be a reversal in the consensus positioning and lead to significant PnL duress.
  • Time Frame: 20 calendar days or in this year’s case US equity options expiration on January 22, 2016.
  • Candidates: Trend, momentum, sentiment, position, faith-based extremes (not fundamental)
  • 2015 WWF Examples: S&P 500 and Swiss franc
  • 2014 WWF Examples: Japanese Nikkei and Chinese yuan carry trade strategies

While it is true that substantial wealth is only really created over time (i.e. by investing sensibly), the money management business is still a slave to the Gregorian calendar and that means performance resets at the close of business on December 31st.

Put another way, if you manage money for a living you’re only as good as your last best trade.

Therefore, it should be of little surprise that professionals begin every January more focused on not getting caught up in a New Year’s malaise rather than trying to take advantage of opportunities by adding new risk or pressing legacy positions.

While there are many key conversations underway to start 2016, it is important to highlight that the dominant theme emerging from our discussions with the risk takers we know is concern over a WWF trading theme materializing. Such is the nature of this business, especially for absolute return strategies.

Following a flat-to-negative performance in 2015, our interpretation of these conversations is that, for most investors, there is very little tolerance to withstand PnL duress around any theme that is a current WWF candidate.

It should be noted that the sensitivity to start 2016 is also elevated on account of the much higher than the normal market beta that would be associated with this theme – short commodities and emerging markets.

If you apply this theme to actual positioning it reveals that the top WWF candidates across the major asset classes are:


  • RV: Long Japan and Europe vs. Short/Underweight US
  • Quantitative: Long US and EU 12-month momentum
  • Style:  Long Growth vs. Short/Underweight Value
  • Market Cap: Long US large vs. short small caps
  • Sector: Long Banks
  • Directional: Long stock baskets (FANG, NOSH, Top 20)


  • Long USD vs. short c/a deficit (ZAR, TRY, BRL)
  • Long USD vs. short crude oil (NOK, CAD, RUB)
  • Long USD vs. short Chinese yuan (USD/CNH)


  • Short Gamma

Fixed Income

  • Short US front-end
  • Long US flattener (2yr/10yr and 5yr/30yr)
  • Long 5-10yr Italy vs short Germany Bunds


  • Short crude oil
  • Short base metals
  • Long EM oil importers vs. Short exporters


  • Long US vs. short EU High Yield

Personally, while we are mindful, if not darn right respectful of WWF trading, it is not a strategy we look to exploit largely because we are process driven. Additionally, it is our experience that in general contrarian strategies perform badly because they get on the wrong side of trending markets. By that, we mean that the big themes have the ability to persist for a number of years. They do not mean-revert after one year or simply because the Gregorian calendar undergoes its annual reset.

So not only do we tend to side with the majority who look to “weather” a potential 20-day storm, but we hope that a WWF trading event actually materializes and creates enough dislocation to enter positions at much better prices than we initially envisioned to start the year, and at the same time reveal which trends are strong- or weak-handed.

That said, we recognize this is a newsletter and many of you want to actively trade.

So in that spirit, here are the most important questions and answer related to WWF trading to start 2016.

Before that, it should, however, be noted that this year begins with an added twist.

Sometime in the next 72 hours, there will be a “Bradley turn date”. (H/T CP)

The Bradley Siderograph (literally: star chart) is illustrated below but those who use astrology, numerology and cycle analysis to forecast market turns are highlighting this indicator as a catalyst for risk asset weakness.  The 2016 Bradley Siderograph Turn Dates are in green. The first one is January 5, 2016, or this Tuesday.

Note that the siderograph looks like a price chart with smooth sloping lines going up and down. However, the turn dates are only indicators of a change in the trend – not in the direction of the markets.

bradley siderograph


While we are not ourselves great believers in the ability of the stars to influence the markets, just as we don’t read our horoscopes, it is important to recognize that more professionals follow this indicator than they care to admit in public. For example, disciples of Bradley give themselves a +/-4-day grace period and argue that Equities and Gold are the two assets most prone to turning when it does.

With that in mind, however, here are three things we are watching down here on earth.

WWF Driving – High Yield (Ignition)

  1. Which asset class matters the most, or is the ignition switch?
  1. Answer = US High Yield Credit
  1. Which market proxy is second most important, or the accelerator pedal?
  1. Answer = Chinese yuan (CNY)
  1. Which event in the first week of the year breaks the speed limit?
  1. Answer = Monthly US Employment Report (this Friday)

See the below correlation matrix that shows how the various market proxies are all a “One Beta” trade – they’re all going in the same direction.

To continue reading the 3 January edition of Rareview Macro’s Sight Beyond Sight, please click this link (subscription is required; free trial available without need to insert credit card)

global macro stock conflagration

Global Macro Guru: Simmering Stock Conflagration?

MarketsMuse Global Macro curators, like many across the hedge fund complex, have attempted to decipher an investment thesis that can prove itself without being hijacked by short-term volatility. Deflation, Inflation, Oil, the Dollar and bets being made in advance of the Fed’s widely-expected interest rate adjustment are talking point ingredients that are potentially leading to a stock conflagration–according to global macro guru Rareview Macro LLC.

In the firm’s a.m edition of “Sight Beyond Sight”-the top bullet point “Top 10 SPX stocks on Alert” evokes a view that may not be rare, but the underlying premise is certainly worth contemplating….Thanks to Rareview’s top gun, Neil Azous, below is the opening extract..

Deflationary Impulse Spreading Beyond Inflation Levered Plays…Top 10 SPX Stocks on Alert

  • Getting from A to B
  • Canada and Crude Oil
  • South Africa and Metals & Mining
  • The Top 10 Stocks in the S&P 500
neil azous
Neil Azous, Rareview Macro

To get on the front foot today, we hope that you have an appreciation for how acute the pain is around the world on account of the latest downward price adjustment in crude oil.

There is no question that the latest 10% move lower (and counting) in the barrel has led to an “acceleration point” in various asset prices, corporate decision making, and countries.

The trade-weighted US dollar is making new highs (JPMQUSD) and the CRB Commodity Index (CRY) is making new lows today. Asset prices across Asia are once again feeling the reverberations rippling out from the latest weakness in the Chinese yuan (CNY) as fear builds of another devaluation. This is once again shining the spotlight on emerging market currencies, especially the Mexican peso (MXN) where the weakness today is a result of it being the main source for liquidity for emerging market proxies.

In equities, the alarm on the carbon monoxide detector for the Top 10 stocks in the S&P 500 is now at risk of going off more than at any other point since the October recovery. Some are noticing the two main symptoms of that – a headache and stomach nausea – but can’t seem to smell anything because they live in a world of isolation and only care about something else when they are forced to. And some of the longs we speak to who are more mindful of the top-down backdrop are almost as nervous as a long-tailed cat in a room full of rocking chairs.

Given the degree of concentration or narrow breadth, does crude oil weakness ultimately matter to these stocks? We may be close to finding out the answer to that.

Rareview Macro updates its views, along with trade ideas in real time via Twitter. To read the entire edition of the Dec 8 edition of Rareview Macro’s “Sight Beyond Sight, please click here

The Fed Really Wants to Lower Interest Rates-Here’s Why..

While 99% of market pundits have been busy for the past months laying odds and making bets as to precisely when and how much the Fed will raise interest rates, a small universe of Fed Watchers have picked up on a surprising nuance that few seasoned market experts have even calculated into their outlooks. Its not about Janet Yellen’s body language, its more about the water in San Francisco and what the real Fed thought-leaders are signalling. Tony Bennett might have to update his iconic song..we’ll let the marketplace decide that one!

MarketsMuse Global Macro curators offer a hint into what those having Sight Beyond Sight are now modeling into their own calculations. As proffered via a special CNBC appearance by Neil Azous, the founder of global macro think tank Rareview Macro, LLC, the “lower for longer” theme could prove to be an even lower interest rate regime and lead to prospects for yet another QE, all driven by the clouds on the horizon that some believe are spelling out  “global recession..” Listen carefully to the following thesis….and in tribute to Tony Bennett, scroll down and sit back to the second video clip on this post

Classic Counter-Trend Tuesday; You Date Equities But Marry Credit

“To put it bluntly, what headline writers or traders are selling you today is a load of bollocks.” Neil Azous, Rareview Macro LLC

When global macro guru Neil Azous of Rareview Macro appeared on CNBC midday yesterday, MarketsMuse curators had already absorbed and relayed his recent views about energy prices, as well as his relatively rare (and sober) view as to the mid-term outlook for equities. When he opined late last night, “You date equities, but you marry credit..” via his Twitter feed, MarketsMuse Fixed Income curators smirked; simply because our resident bond market experts have long held that rare view–one that today’s “young Turks” often fail to appreciate.

Whether Monday’s equities market action was merely a ‘dead cat bounce’ in a progressively deteriorating state of market metrics that some attribute to a cyclical ‘earnings recession’, or a firming up of the underlying financial market foundation that portends “higher for longer” stock prices, its good to have sight beyond sight…

Consensus is a Classic Counter-Trend Tuesday…You Date Equities but Marry Credit

To put it bluntly, what headline writers or traders are selling you today is a load of bollocks.marketsmuse neil azous rareview macro cnbc oct 6 2015

Emerging market equities have just recorded their largest five-day gain since the taper tantrum in June of 2013. While the historical precedent is not the same the absolute performance is of similar magnitude for developed market equities. The prevailing view is that this is on account of a weaker US dollar, and on the view that lower interest rate for longer will be supportive for global growth.

As a gesture of goodwill by the Bulls, after five days of impressive stock gains, and for no other real reason, the consensus view is that today is a classic counter-trend Tuesday.

We have to chuckle to ourselves over this, because just last week, a stronger US dollar and an imminent interest rate increase that would remove the Federal Reserve uncertainty were also viewed as positive for equities. There is not even an acknowledgement that the move off the lows in the S&P 500 is very similar to the market bounce seen at end of August, and we all know how that worked out.

We’ll leave the narrative spinning to everybody else and, as we do every day, just try and deliver you some sight beyond sight.

One would think that this large group of people, all of whom consider themselves students of the market, would include a few other basic factors in their headline writing or analysis, such as:

  • The BoJ meeting tonight;
  • The ECB and BOE meeting minutes on Thursday;
  • Dead-cat equity market bounces of this magnitude are thematic during bear markets;
  • Reluctant buyers ahead of earnings season, especially considering a mini-theme of negative pre-announcements beforehand has already begun.

We suppose the list of data points could go on and on, but for us the key driver for risk assets is whether financial conditions tighten or loosen. We are watching corporate-based measures closely for that insight, not just the traditional market-based measures the majority on the Street monitor.

Despite the bounce in equity markets, a minor step-change in sentiment around the energy sector, which is supportive for inflation expectations, and the minor relief that a weaker US dollar and lower interest rate profile provides, there really has been no loosening in financial conditions over the past five days.

The breakdown in correlation between equity and credit markets is too hard to ignore, especially if you are looking for the upturn in equities to show durability beyond the past five days.

Here are three examples from yesterday of what we mean by this disconnect between stocks and credit and how credit is struggling with the tight financial conditions. These are just some of the corporate-based, as opposed to market-based, measures we are referring to.

  1. Ford Credit (F), a BBB rated issuer, came to market with a two-part 3-year fixed and floating rate note deal. Later in the day, the 3-year fixed notes were sold after combining its fixed and floating rate tranches. Additionally, it was forced to pay a 35 to 50 bps concession over its nearby 3-year fixed issue to print new paper. The key takeaway is that with a BBB rating, in this type of market, Ford would only issue if it “needed” to, not because it would do so opportunistically. Accordingly, the market is making them pay up for this new paper.
  1. The Province of Ontario (a sovereign-type issuer that is rated A+) stood down from issuing a €2.5bn 10-year deal due to “market conditions”, even though the deal had already been pre-marketed (i.e. investors knew of and were prepared to buy the deal).

The lead managers released the statement below.  This is extraordinary to say the least and illustrates how even the best credits are being very cautious… “Ontario always tries to right size its transactions and provide a liquid benchmark sized offering.  The Province views the USD and EUR markets as core strategic markets and, as such, wants to maintain a well-defined liquid yield curve in each currency.  Market conditions were today such that Ontario could not meet these objectives and, as a result, has decided to step back from the market at this stage and would like to thank investors for their interest.” 

  1. Five (5) other IG deals were known to have stood down from coming to market yesterday, following the decision by the Province of Ontario. (Source: Mischler Financial, Quigley’s Corner, Ron Quigley)

In our view, we do not expect financial conditions to confirm the recent equity bounce. In fact, we think tighter financial conditions will be a key determinant in why the fourth quarter positive seasonal call will struggle this year despite the stock trader’s almanac always saying otherwise.

Firstly, we have already made our views very clear on how one major financial condition – the corporate financing gap – has now swung into deficit. And we have pointed out the consequences of that: it will limit their ability for further credit issuance, M&A will cost more, and stock buybacks will slow, and that collectively has led to the Street being way too generous in its fourth quarter forecasts for all of these metrics.

In fact, we were pleased to see Deutsche Bank yesterday echo what we have already said and lower its forecast for stock buybacks in 2016 by 25% or more, relative to the total announced in Q3 ($600bn annualized). Moreover, the buyback announcements in Q3 were already significantly lower than the first half of the year.

Secondly, investors are beginning to recognize that a high yield bond should never have traded with a 4% yield in the first place, as that yield was artificially inflated by extreme monetary policy measures such as QE. So while spreads have widened a lot, a 5% or 6% yield should really still be the equivalent of 7% or 8% similar to other cycles. Additionally, the breadth of weakness, for the first time this year, has now spread outside of the energy and materials sectors as investors do their homework on the rest of the things they own. The point here is that high yield is not cheap if the measurement is multiple cycles, not just the cycle with extraordinary monetary measures.

Finally, the other anecdotal trend we are observing is that credit traders don’t have the same appetite as equity traders to buy weakness right now. The majority of credit trader’s performance over the last few years is easily traceable to buying a new issue, watching that credit tighten immediately thereafter due to the sensational appetite for yield, and then selling them out quickly. Put another way, you are insulting equity investors when you call them IPO flippers. Right now, this trade does not exist and anyone who does not have a genuine investment process is being shut out of the market. This is one reason why credit spreads are not tightening.

The bottom line is that corporate Treasurers or credit investors remain highly suspicious of the primary issue market. Yes, companies will always need to re-finance their credit stack as part of their normal operations, as could be seen with Ford Motor paying up for it yesterday. But anything opportunistic is on hold, especially if a company has to re-model their economic projections for an M&A deal in the pipeline, as that will now come at a higher price.

So until we see several – by which we mean 3 to 4 consecutive days – of firm market tone conveying that corporate Treasurers and credit investors are once again aligned it is pretty easy to chalk up the latest move in stocks to nothing more than a classic bear market bounce. If this does not materialize, then the mindset of selling into strength will prevail.

As a reminder, when push comes to shove, you date equities but marry credit, especially after a 5-6% bounce.

Neil Azous is Founder/Managing Member of global macro think tank Rareview Macro LLC and the publisher of global macro newsletter, Sight Beyond Sight, a daily publication subscribed to by leading hedge funds and investment managers. Neil’s real-time comments and trade ideas are often posted to Twitter

To continue reading the Oct 7 edition of Sight Beyond Sight, please click the following link. Subscription is required, a Free Trial is available (no credit card required). Click here to access...




Risk Takers Cry Out In Terror-A Rareview With Sight Beyond Sight

Professional Investment Community Cries Out in Agony and They Don’t Yet Know Exactly Why

MarketsMuse Strike Price and Global Macro curators voted the Oct 5 edition of global macro advisory firm Rareview Macro’s Sight Beyond Sight the best read of the week. Yes, its only Monday, but those who follow this newsletter as we do (along with a discrete universe of savvy investment managers and hedge fund traders) have discovered that a certain degree of prescience can be contagious when trade ideas are presented with a pragmatic, transparent and easy to understand thesis.. Below are the lead-in topics and followed by selected excerpts…

  • A Great Disturbance in the Force – Oil, Materials, & Momentum Strategies
  • Portfolio Overlay – Two Inexpensive Ways to Add Downside Convexity
  • New Trade – Short 2-Year US Treasuries via Put Options

For those of you who still have to make up your mind on whether we can help you or not with your daily investment process, today’s edition of Sight Beyond Sight is a good example of what makes us different.  The majority of the morning notes you have received today all center on the “bad news is now good news” meme or how lower interest rates for longer will be supportive for risk assets. Of course, none of them have highlighted that financial conditions have been tightening all year long so despite the call for lower interest rates for longer the real world is not buying that unless credit spreads tighten. Instead, we will give you a rareview into how risk takers are faring across various strategies. Additionally, we provide three new trade ideas.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

In the 1977 iconic movie Star Wars: Episode IV-A New Hope, following the scene where the Death Star destroys the planet Alderaan, the Jedi Knight, Obi-Wan Kenobi, said: “I felt a great disturbance in the Force, as if millions of voices suddenly cried out in terror and were suddenly silenced. I fear something terrible has happened.”

I have started with that quote because it seems the best way to describe the Start of the new week for the professional investment community. Take a look at the below observations and it will be easier to understand why risk takers are “crying out in terror” and for many of them “something terrible has happened”.

If you are a global macro fund, then liquidity is not going to be your friend today as you defend core strategies that are deeply entrenched. For those who have been living on a deserted island the remaining long US dollar positioning is mostly versus emerging market FX and G10 commodity currencies, rather than other reserve currencies such as the euro, Japanese yen, Pound sterling, and the Swiss franc.

If you are a long/short strategy, you already know what is happening because it started well over a week ago.

You just did not want to believe it. Not to worry, a further unwinding in the long Financial/healthcare versus short Material/Energy sector strategy will help you finally come to grips with reality. If you are a quantitative fund, up until really last Friday in both Europe and the US, you have had the benefit of being part of the number one factor input and best performing strategy this year –that is, MOMENTUM. Sadly for you, the reversal of that strategy is a lot more violent on the way out then chasing it on the way in. Perhaps you will take back your 15 minutes of old fame from the new guys-Risk Parity and Target Volatility funds?

The conclusion would be that the worst-of-the-worst–energy, materials and bottom 15% of single stock performers–is now in play from the long side for whatever reason –its “go time”, crude oil has bottomed, or gross exposure reduction is not near being completed.rareview macro sight beyond sight 0c5 5 2015

Ok, here we go…

Rareview Macro Portfolio Overlay –Two Inexpensive Ways to Add Downside Convexity

The current price in S&P 500 futures is ~1950. The low on August 24th was 1831. The difference between the two is ~6%.Protecting against a 6% downside move, or 120 S&P 500 points, is an expensive exercise right now, and not one we are interested in. Instead, we are more worried about the second 6%, or the move down to 1720-1700 from 1831, especially the air pocket that is likely to develop once/if the August 24th intra-day low of 1831 is breached.

The problem is that we do not know the short-term direction of the S&P 500 index, including if it will first go to 2000 in the next 30-days but we are highly sensitive to an even larger move on the downside in the fourth quarter than what occurred in the third quarter. So working on these premises, what are the best strategies to deploy right now? We think having a two-tiered approach between the S&P 500 index and equity volatility, as measured by the CBOE VIX Index, is an optimal strategy.

We’ll look to dynamically manage both of these strategies side-by-side in the event that we see another leg lower in US equities. The two strategies we like are and the ones we deployed in the model portfolio late last week and posted via Twitter are…. Continue reading

Why Glencore is Going to Cause Gas- A Global Macro View-Grab The Glenlivet

MarketsMuse news curators have spotted dozens of commentaries from leading equities and debt market pundits opining about global mining giant Glencore. There is only one comment that offered a truly rare view that struck a chord, and it is courtesy of this morning’s edition of global macro newsletter “Sight Beyond Sight”, which is published by global macro think tank Rareview Macro LLC. The title of today’s edition:

Tentacles from Glencore Extend Well Beyond the Naked Eye…Quarter-End Flight to Quality

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Today’s edition of Sight Beyond Sight is going to sound aggressively Bearish to some people. At the same time, the tone is insensitive to the countries, companies, and employees involved. If that bothers you, that is too bad. This is a financial services newsletter, not the United Nations or the Red Cross. We are not trying to disparage anyone or call someone out. Our goal is to try and help you make or save money.

When I traded credit derivatives at Goldman Sachs back in the late 1990’s, the way we separated our bond business between investment grade, high yield and distressed was very simple. If an issuer’s bond price was trading above 80 cents on the dollar you were investment grade. Conversely, if an issuer’s bond price was trading below 80 cents on the dollar you were high yield. Anything below 50 cents on the dollar, you were distressed. Below 20 cents…don’t ask.

Glencore EU1.25b notes due March 2021, one of the most recently issued and liquid tranches of their debt outstanding, dropped six cents to~76 cents on the euro today, effectively crossing over into high yield territory even though it still maintains its BBB credit rating. Headline writers argue that most of the weakness today in Glencore’s stock and bond price is the result of comments made by Investec Plc, where it warned that there would be little value for shareholders should low commodity prices persist. This echoes a key research note last week from Goldman Sachs that said: “If commodity prices were to fall 5% from current levels–which we do not consider to be a far-fetched assumption given the downside risk to commodity consumption in China–we believe that concerns about its IG credit rating would quickly resurface.

Under this scenario, we estimate that most of Glencore’s credit rating metrics would fall well outside the required ranges to maintain its IG rating, and that could happen as early as the next reporting period (FY15).”

From here, this is where those who throw bombs for a living believe is what is coming up next:

  1. Commodity prices drop another 5%;
  2. Rating agencies downgrade Glencore to high yield

(by Friday);

  1. Glencore’s trading desk receives margin/collateral call immediately as commodities are T+0 settlement for margin (i.e. remember Duke&Duke in Trading Places);
  2. Like AIG, the re-insurer of the credit markets, a significant amount of derivative contracts tied to commodities become an unknown.

Continue reading

Global Macro Rareview: ETF Investors and The Ivy Portfolio

If the second shoe is actually falling as US (and all other) equities markets appear to indicate this morning, MarketsMuse ETF and Global Macro editors were stimulated by having Sight Beyond Sight with this morning’s coffee, courtesy of Rareview Macro’s Neil Azous. Of particular interest, Azous points to Mebane Faber’s The Ivy Portfolio for those who have defaulted to using exchange-traded funds and to the reference to Occam’s Razor, a principle that global macro enthusiasts will appreciate.

Without further ado, please find an extract from this morning’s edition of Sight Beyond Sight…

Corporate Buybacks Not Strong Enough to Save Stocks Today…Retest of the Lows Now Underway

  • Negative Statistical Analogs
  • No September First of the Month Inflows
  • China Quantitative Tightening (QT)
  • Trends Switch to Medium- from Short-Term
  • Correlation Breakdown
Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

The key takeaways to start September are invisible to the naked eye; a little sight beyond sight is required this morning in order to see them clearly.

Firstly, we are not sure who the source was, but the following S&P 500 analog was sent to us:

In the 11 times the S&P 500 fell by more than 5% in August it declined in 80% of the subsequent Septembers; the average decline in September in those years was 4%.Now, there are many statistics with similar odds of success being circulated out there, but in aggregate these one-liners miss the bigger picture, in our opinion.

The message is that the higher volatility witnessed during August has carried over into September. It took eight hours of the overnight session for S&P futures (ESU5) to confirm 65% of the above analog, as the index was -2.6% at one point.

Secondly, the first of the month inflows into risk assets that professionals are accustomed to relying on to support their long equity positions has gone missing this year. Inflows into equities are generally expected to follow the simultaneous release of PMI manufacturing data, especially when the data historically points to a stronger global growth profile. However, the data released this morning was uniformly weak, and serves as a reminder of the regional synchronicity – that is, Japan’s consumption-led recovery is faltering, the US has a second half of the year inventory overhang to work through, Europe’s inflation profile is reverting back to pre-“QECB” profile, and China remains an unknown.

Thirdly, given the overall weakness in risk assets the sell-off in the German Bund (RXU5) over the last 24-hours is confounding professionals. Occam’s Razor, a principle that states that among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected, suggests that the Chinese central bank is once again selling dollars and foreign fixed income reserves to buy yuan. As a reminder, FX intervention means foreign reserves have to shrink. The mechanics are as follows: sell foreign sovereign bonds > receive US dollars (USD), euro (EUR), yen (JPY) > use USD/EUR/JPY proceeds to buy CNY = no impact to private economy.

The Chinese Yuan, both the onshore (USD/CNY) and offshore (USD/CNH) versions, is trading at its strongest level since the devaluation. The key difference today however is that the central bank is not defending yuan weakness. Instead, in the spirit of managing volatility, it appears it is proactively reminding speculators who their daddy is and doing a good job of crushing their souls at the same time.

Next.. Continue reading

Market Mayhem: A Rare View From Global Macro Guru

One needs to have ‘been there and seen that’ for at least twenty years in order to have been “loaded for bear” in advance of this morning’s equities market rout. At least one of the folks who MarketsMuse has profiled during the past many months meets that profile; and those who have a true global macro perspective such as Rareview Macro’s Neil Azous have pointed to the credit spread widening during the past number of months as a prime harbinger of things to come. And so they have…

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Last night, Neil Azous published one of his finer commentaries in advance of this morning’s global equities market rout and incorporated a great phrase:

“Man looks in the abyss, there’s nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss.” – Lou Mannheim, Wall Street, 1987


The highlights of last night’s edition of “Sight Beyond Sight” are below…

  • Big Picture View
  • S&P 500 View
  • Asset allocation Requires Swimming Against the Tide – Low-to-Negative Downside Capture
  • Long German versus Short US Equities (Currency Hedge)
  • US Fixed Income – Short 2016 Eurodollars
  • Long European & Japanese Equities (FX hedged), US Biotech and US 10-Yr Treasuries
  • Long US Energy Sector
  • Volatility – Sell Apple Inc.; Not the S&P 500 or VIX
  • Harvesting S&P 500 Index Option Skew
  • Long Agricultural Call Options
  • Long US Housing (Hedged)
  • Technical Mean Reversion – Short EUR/BRL
  • Long Euro Stoxx 50 Index Dividend Futures (symbol: DEDA Index)

To read the full edition of the Sight Beyond Sight special Sunday (Aug 23 2015) commentary, please click here*

*Subscription is required; a free, 10-day trial is available

Neil Azous is the founder and managing member of Rareview Macro, an advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight.

Global Macro Think Tank Rate Hike Hedge: A Rareview Special

Within the context of continuous guessing as to the outlook for a rate hike, and how to hedge fixed income portfolios accordingly, getting a strong fix on fixed income strategies has proven to be a challenge for a vast majority of professional investors during the past 24-26 months, many of whom have replaced high-priced wall hangings with dart boards.  Many other managers prefer to simply hum “Lower for Longer” to themselves. For global macro-focused fund managers, MarketsMuse spotlights a refreshing update from Rareview Macro LLC, the global macro think tank and publisher of professional newsletter “Sight Beyond Sight.”  Below please find opening excerpt from today’s edition

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

We are pleased to present our new portfolio construction, including four new trade ideas and a tail risk hedge that make up our core fixed income strategy. As is customary, each one includes our standard trade matrix with a pre-defined game plan for managing gains and losses.

For those that regularly traffic in fixed income, we look forward to any feedback you may have and a spirited debate on our ideas. We are confident they are sufficiently robust to survive some criticism.  For those not in fixed income, please feel free to share this internally with your colleagues who are.

  • TRADE 1 – Gradual/Variable pace of rate hikes
  • TRADE 2 – Leverage on Gradual/Variable pace of rate hikes
  • TRADE 3 – Targeted field bet on no rate hikes in 2015, recession book overlay
  • TRADE 4 – “Uncertainty” Risk Premium
  • TRADE 5 – Choke Yourself Tail Hedge


  • Thematic view, not tied to day-to-day movements in the long bond
  • Multiple sources of return attribution
  • High return on capital: Low option premium outlay, high leverage
  • High risk/reward: Lose 1.5% (realistic) to 3% (absolute) of the NAV to make 6% to 8%
  • Both quantitative and qualitative risks clearly expressed

Above is the teaser, those interested in drilling down into the above, today’s edition of Sight Beyond Sight is available by clicking this link.

GlobalMacro Rare View: Fixed Income Market Flashing Recession Alert?

MarketsMuse Global Macro and Fixed Income desks converge to share extract from 23 July edition of Rareview Macro commentary via its newsletter “Sight Beyond Sight”. For those not following the corporate bond market, most experts will tell you the equities markets follow the bond market–which in turn is a historical indicator when it comes to economic expansion, contraction, and recession. Below is courtesy of Rareview’s founder/managing member Neil Azous .

In the past few days, US investment grade (IG) credit spreads have reached new three year wides. Historically, the absolute level of these spreads is consistent with periods of economic and financial market stress. Additionally, the daily volatility of these spreads has increased dramatically in recent weeks.

Below is a chart of the Moody’s Baa Corporate Bond yield spread over the US 30-year Treasury yield.

What is the significance of this observation?

Investment grade corporate bonds are one of the least risky investments within the capital structure, and less sensitive to changes in default risk due to economic weakness. Moreover, the credit market is arguably, next to the slope of the yield curve, the greatest predictor of future economic stress.

The most widely cited explanation for the recent widening in spreads is that it is due to the amount of new investment grade credit issuance. Indeed, that is one factor as new issuance (+SSA) set a record pace yesterday after having surpassed $1 trillion, a level not reached last year until mid-September.

However, the recent widening of the spreads is not just down to the recent surge in corporate issuance. Issuance is simply not a large enough driving force to cause this level of “stress”. The reasons for this widening are two-fold.

Firstly, the aggregate level of issuance, to a degree, is beginning to finally catch up with the market after years of sensational appetite. Corporations, in aggregate, are raising their leverage levels by issuing the new debt and not using the proceeds to grow their revenues or cash flows to compensate. Put another way, the market is beginning to segregate between issuance related to refinancing a company’s “credit stack” as part of its normal annualized funding requirements and pure capital redeployment for the benefit investors.

By the way, as we have pointed out in these pages for a while now, not only is the IG spread widening, signaling the distinction noted above, but the equity markets are now doing so as well. Again, see the below chart of the ratio of the S&P 500 to the S&P 500 BUYUP index overlaid with the US Treasury 5-30yr yield curve. Stock buy-backs are simply underperforming in 2015 after multiple years of outperformance as the yield curve steepens in anticipation that interest rate hikes will slow the capital redeployment process down. As a reminder, it is much easier to slow a buy-back than reduce a dividend as the former has a time-band and discretion to implement and the latter generally is a board-level decision.

Secondly, we are aware that discussions around the lack of liquidity in the credit markets are a near daily occurrence these days. The only observation of note is that there is now a new term associated with the market construct – that is, “liquidity cost basis”. In simple terms, due to the lack of market depth and the continued sensational appetite to issue bonds, there is now a higher premium being applied in the market to finding liquidity if you want to own a bond. All we are saying is that the investor concerns over liquidity are not only being priced into the market but those worries have been crystalized with a fancy Wall Street name.


The end result is that investors are demanding a higher premium for the new issues they are taking down, largely due to deteriorating fundamentals in the actual credit.


Now, the second most widely cited explanation for the spread widening is that it is due to the energy sector. If you decompose the spreads it is easier to argue that a notable portion of the weakness is due to the deterioration in the energy sector, whose credit spreads are highly correlated with the lower price of crude oil. However, energy makes up a much smaller portion of the investment grade market (~12%)  than it does for the high yield (i.e. ~18%+), which indicates that the breadth of weakness stretches across many other sectors of the investment grade market and is not due to one single risk factor, such as crude oil.

Lastly, we would note that the absolute levels of these spreads referenced on the chart above are also consistent with weakness after the US quantitative easing program was completed and in anticipation of an interest rate hike. We are not sure how much of the spread widening is a result of this less easy monetary policy but the fact is that both QE and the zero interest rate policy forced investors to perpetually search for yield and investment grade credit was a major source of that appetite. To what degree that happened is difficult to handicap but some of those inflows have to reverse given how asymmetric the outcome would be if the Federal Reserve actually embarked on a rate hiking cycle consistent with past cycles, as opposed to a gradual pace of hikes.

Taking a step back, if you look at both the US yield curve and the credit markets, what you find is that both are saying roughly the same thing – that is, there is currently a recession risk embedded in the market, and that there is the potential for the end of this credit and/or economic cycle to be on the horizon.

Take what we have just sketched out any way you want. We are not making a bearish call on risk assets or attempting to sell blood. All we are doing is saying that credit markets, the yield curve and corporate share repurchase trends are signaling some concern sometime over the next 6-9 months. Given that we have not had a recession in 6-7 years, and historically we have had one every four years on average in the modern era, it is not at all unreasonable to start to watch these signals a lot more closely from now on for something more acute.

Above segment from investment newsletter Sight Beyond Sight is re-published with permission from global macro think tank Rareview Macro LLC. Subscription to the daily commentary and trade strategy profiles is available via the firm’s website



FinTech Helps Power Bull Market For Unbundled Research

Disruptive Unbundlers, Securities Industry Untouchables, Fintech Aficionados and Innovative Altruists seek to level the investment research playing field, inspiring a bull market for independent research distribution channels, start-ups and disruptive schemes.

Investment research and expert ideas, whether within the context of equities analysis or global macro perspective, has long been the domain of sell-side investment banks, whose research insight is typically bundled as a ‘free product’ within the range of fee-based services provided, including trade execution. Those old enough to remember the ‘dot-com bubble’ days will recall that much of Wall Street’s so-called research was (and arguably still is) notorious for being heavily tilted towards “buy recommendations” in favor of the investment bank’s corporate issuer clients.

This clearly conflicted practice was perfected in the late ‘90s by the likes of poster-boy analyst Henry Blodget (since banned from the securities industry, and ironically, now Editor and CEO of financial media company Business Insider) and was lambasted by securities industry regulators when the “Internet bubble” burst. Those chasing-the-horse-after-the-barn-door-closed efforts since led to a regime of regulation and firewalls intended to distance in-house research analysts from their investment banker brethren so as to mitigate biased recommendations and conflicts of interest. Compliance officers across the industry found themselves facing a host of new rules, and that ‘compliance contagion’ served as the catalyst for a spurt in “independent research boutiques” offering “unbundled” and un-conflicted research sold as a stand-alone product with no ties to execution or trading commissions.

However compelling the notion, and despite the regulatory impetus to foster the growth of independent research boutiques, the business model for these firms has proven challenging during the past 10-15 years. Many boutique research firms floundered or failed for several crucial reasons, including but not limited to (i) the burdensome costs and means associated with creating a stand-alone brand, (ii) the challenge of delivering consistent and compelling content to institutional investment managers and sophisticated investors at a price point that could prove profitable and (iii) the non-trivial logistics required to deliver content in a compliant manner. In the interim, regulators stood by and observed, and digital delivery mechanisms for independent researchers only slowly evolved. Investment banks, never shy when it comes to creative workarounds, bolstered their research ranks and produced more content, even if mostly undifferentiated, but still promoted by the strength of the investment bank’s brand.

All of this is about to change again, causing some to conclude that regulatory market moves in cycles every decade or so, much like the stock market moves in cycles. The current bull market case for unbundled independent research is not a result of efforts by get-tough-on-Wall Street types such as New York Attorney General Eric Schneiderman or Massachusetts’ kindred spirits Elizabeth Warren and William Galvin, and the bull case is certainly not because of any efforts made by the SEC. To a certain extent, the positive outlook for those in the unbundling space is based on Moore’s Law and the advancement of Fintech-friendly applications, but it is more directly attributed to a new European Union law inspired by MiFID II, that if passed as expected, will require investment managers to pay specifically for any analyst research or related services they receive. With that new rule (which includes more than a few line items), many large money managers are starting to follow the proposed rules globally; investment banks in the U.S. (and obviously those in Europe) are devising new business models for one of their oldest and highest-profile functions: offering ideas to customers that banks can monetize through commission-based services.

More than some across the major continents believe that however much top investment bank brands are a decidedly powerful selling tool for research product, the power of the internet has enabled the distribution of independent research and enables a Chinese menu of pricing schemes via a continuously-growing universe of independent portals that invite content publishers to sell their products using an assortment of social media-powered distribution channels and revenue-sharing schemes.

Bloomberg LP has created its own independent research module accessible by 300,000+ subscribers in direct competition with Markit, the financial information services provider. Earlier this year, Interactive Brokers (NASDAQ:IBKR), the web-powered global online brokerage platform that provides direct market access to multiple exchanges and trading venues across the entire asset class spectrum quietly began enhancing its offering of third-party professional and institutional-grade research. IB’s 300,000+ accounts comprising professional traders and institutional clients may subscribe to research made available in the trading platform, Trader Workstation (TWS). At the same time, IB began promoting these third-party research providers via IB Traders’ Insight, a blog embedded within the firm’s Education module that covers the full range of investment styles from more than two dozen content providers.

While bolstering objective research content is a natural business extension for those having captive brokerage clients and for terminal-farm behemoths, perhaps even more interesting is that start-ups in the unbundling space are starting to percolate.

On the European side of the pond, UK-based SubstantiveResearch, created earlier this year by former EuroMoney Magazine publisher Mike Carrodus, is positioned to be an institutional research thought- leader that curates and filters both independent and sell side global macro research, with a sleeve that hosts regulatory events for investment manager content consumers and sell-side content providers.  Start-ups in the US include among others, Airex Inc. , which dubs itself “the Amazon.com for financial digital content” and recently secured funding from fintech-focused merchant bank SenaHill Partners. TalkMarkets.com is another notable entrant to the space, and was created in late 2014 by Boaz Berkowitz, a former “Bloombergite” who was also the original brain behind Seeking Alpha. From the traditional financial media publishing world, industry stalwart Futures Magazine, recently re-branded as “Modern Trader” and the parent to hedge fund news outlet FinAlternatives is also embracing the research content unbundling movement as a means towards capturing more Alpha and better monetizing relationships with content providers. Each have their own business models, including the use of cloud-based technology and coupled with the muscle of creative online marketing, social media tactics and search-engine ranking techniques.

While the start-up space is often littered with short shelf-life stories, these new unbundled research distribution vehicles are being enabled by the fintech revolution and embraced by distributors of content, high-profile independent research providers, as well as by at least one major bank seeking to hedge its internal bets; earlier this year, Deutsche Bank inked a deal with upstart Airex, such that DB’s proprietary equity research is available on a delayed basis and can be purchased by any AIREX Market shopper. In the case of now 6-month old TalkMarkets, they are embracing an advertising-based business model, which is predicated on building an outsized audience of sophisticated retail investors for prospective advertisers. To date, they have enlisted more than 350 content providers and 10,000+ registered users. While there is no cost to access the platform, content providers are able to upsell subscription-based services and at the same time, earn ‘points’ that can be converted into the private company’s equity shares.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

According to former sell-side global macro strategist Neil Azous, the Founder/Managing Member of think tank Rareview Macro LLC, and the publisher of subscription-based Sight Beyond Sight” which is now being distributed across several channels apart from the firm’s website (including via Interactive Brokers), “Truly superior, high-quality content, including actionable ideas remains relatively scarce, but the fact remains, content has become commoditized. The good news is that banks are not the sole source of carefully-conceived research and the better news is that conflict-free content publishers can now more easily distribute via a broad universe of narrow-casting, web-based channels.”

Added Azous, “For independent research providers and trade idea generators, it’s arguably a watershed moment. As new rules take shape, content publishers, including those who previously worked under investment bank banners, can now reach an exponentially larger universe of content buyers through these new distribution channels. It’s a numbers game; instead of working inside an investment bank and trying to ‘sell’ a traditionally high-priced product to a relatively narrow list of captive clients, the more progressive idea generators can re-tool their pricing and make their product available to exponentially more buyers, and in a way that conforms to and stays within goal posts of compliance-sensitive folks.”

However much it makes sense to foster the easy distribution of independent and un-conflicted research, Wall Street et. al. is not going to easily abrogate their role for providing ideas or forgo the trade execution commissions derived from those proprietary ideas. Banks are reported to be devising new pricing models for investment research in view of EU proposals that could prevent research from being paid for using dealing commissions. In an unbundled world, where payments are separated, competition for equity and credit research may increase as asset managers look beyond traditional sources, which may trigger fragmentation. They may also move research in-house. The U.K.’s FCA, which is driving the debate, has endorsed the EU proposals.

As noted within the most recent edition of Pensions & Investments Magazine, Barclays PLC, Citigroup Inc., Credit Suisse Group AG and Deutsche Bank AG are working with clients to come up with pricing for the analyst research customers receive, according to bank executives. Prices are expected to range from roughly $50,000 a year to receive standard research notes, up to millions of dollars for bespoke research and open-door access to analysts.

“We are working to change the mind-set so that fund managers understand that research should be treated as a scarce resource. There is a great opportunity to tap into experts in their fields at brokers, but we need to really think about the value of research and determine the right amount to pay for it,” said Nick Anderson, head of equities research at Henderson Global Investors.

The following [excerpted] analysis is by Bloomberg Intelligence analysts Sarah Jane Mahmud and Alison Williams and helps summarize the current outlook. It originally appeared on the Bloomberg Professional service. 
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Its All Greek..A RareView View…

As the events in Greece escalate to a frenzy, global macro strategists are lining up to opine on what might happen as the EU and the world calculate the impact of a Grexit. MarketsMuse tapped into one of the industry’s most thoughtful strategists and one who is notorious for having both ‘sight beyond sight’ and inevitably, a view that is rare when compared to those who position themselves as “opinionators.”  Without further ado, below is the extracted version of the 29 June edition of “Sight Beyond Sight

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro
  • Key Talking Points…What People Are Watching…Major Asset Prices
  • US Fixed Income – Choke Yourself If  You Believe in 2 Rate Hikes in 2015
  • China – Correction Accelerates Government Learning Curve & Possibly IPO Reform


We started working early yesterday morning, spending time on the phone with as many risk takers as possible around the world and listening in on numerous bank conference calls on the unfolding events. Additionally, we felt compelled to watch our screens all night. At the time of writing, we have not actioned one item in our model portfolio and are nowhere near able to aggregate the thoughts of the risk takers we respect or the market commentary we received from anyone who writes research for a living. The fact is there is no coherent sentence to write. The dust has yet to settle, and until it does, no one can claim to know what will happen.

Despite all of this market plumbing being very visible, and even after the Greece referendum news on Friday, the probability of a disorderly financial reaction due to its consequences has only risen to ~40% from 20% or less based on what we can gather. Leaving last week many held the view there was a 50-50 probability for a resolution with a bias for a positive outcome.

Now let’s go through the asset classes and products, and ask how they will perform. For ETF players, our lens is on GREK, FXI, HEDJ and necessarily, SPY. For those looking for an immediate take-away trade with regard to the overwhelming Greek-infused chitter chatter and jibber jabber, think $GLD. In this case, our view, which we have espoused for more than 15 minutes, might or might not be  ‘rare’, but its one we can hang our hat on…

Prudent risk management says that the overriding exercise now is to take risk down regardless of your bias on the outcome. Resolution strategies are a distant second place and with US employment Thursday followed by a three day weekend that includes this Greek referendum, that makes this scenario that much more likely.

In terms of Greece, many are watching/waiting for the ECB reaction function to the Emergency Liquidity Assistance (ELA), which is scheduled to be revisited on Wednesday. As a reminder, the events in 2012, in which there was a large spike in the ELA program assistance as a result of Greece, was the catalyst for the now famous “do whatever it takes” speech by ECB President Mario Draghi. Ironically, the three-year anniversary of that speech is coming up shortly and there is no question professionals want to see Draghi re-ignite the European recovery trade. Our point is that faith in him being a steward of the market remains unwavering and he is still the only person perceived as the class act in this goat rodeo.

If we had to pick one asset that we all were led to believe mattered in the context of a “Grexit” over the last five years, and that was supposed to react to that event, it would be Gold. It should be up $50 at a minimum and yet it can barely hold a bid. If you feel bad for the citizens of Greece, then please save a little sympathy for the Gold terrorists at the failure of the yellow metal to respond today. Next week, if things get worse, and gold still fails to respond, that could be the final nail in their coffin. At least there will be one good outcome to the whole sorry saga. Continue reading