The chart below was going around a lot last week. It shows a composition of AP Moller-Maersk (the world’s largest container shipping company) and Sotheby’s (the auction house of high-end art, etc.) in blue vs. the MSCI World Stock Index in orange. That’s a pretty tight correlation and a pretty wide gap we’re seeing right now after both companies had some not so great things to say about their respective business environments.
AP Moller-Maersk & Sotheby’s (blue) vs. MSCI World (orange)
This confirms similar concerns I’ve had lately with global trade data contracting for almost a year now and inventory-to-sales ratios continuing to rise. Other indications like credit spreads are still widening, telling me it’s still not safe to jump in yet with stocks – or in our case, to remove our option hedges. I’m viewing the current bounce as an opportunity to lighten up on positions I’d like to reduce and just sold some more credit call option spreads above the S&P 500 for March (February’s will expire next week).
Last week I also took some profits in our long-term Treasury bond positions. I was buying these during the 4th quarter of 2015 as another hedge against stock risk, expecting yields to fall in 2016. 2 months later and yields on the 30-year Treasury had fallen about 0.5% from a little over 3% to under 2.5% last week, providing us with double-digit returns. I’m still holding both intermediate and long-term Treasury bonds as I think yields have more room to fall, but it would have been foolish of me to not lock in some profits after a nice run like that.
Last month, China stepped in again to support the Yuan against massive capital outflows. They usually use 3-month swaps to do this which can buy them 2 to 3 months of time before they become a forced seller themselves as the position reverses. This usually brings some calmness to the markets and allows risk assets a chance to bounce, as we’re seeing right now. This was exactly how things played out this past fall after they stepped in at the end of August providing a 3 month bounce into November, lifting stocks, but then the selling pressure resumed. If things play out this way again, we could see another period of calm that carries us through March with potential selling pressures resuming in April and beyond. Obviously I don’t know how things will play out as anything can happen between now and then, but this is my base case right now. The People’s Bank of China (PBOC) just also recently came out stating that they have no intentions of additional devaluations. This means that they’re planning to devalue and they’re telling you the opposite so you can’t front-run them and add additional pressure to the currency.
Central Banks are on the hot seat right now and the markets are not cooperating with their rosy narratives. Nice opportunities will eventually be created but now is not the time to take risk. The smart play is to remain patient and keep your powder dry.
Thanks for following!
-Nick
FYI