Macro, Markets, and Malarkey

Stocks and Bonds
It feels like forever ago, but back in February, the S&P 500 hit its lowest level since 2014 as global growth fears spooked investors, leading to liquidations and deleveraging—most notably for sovereign wealth funds.

Fast forward to now…as of the end of July 2016, the S&P 500 closed at 2,173.60—up 7.5% from the beginning of the year. And, 10-year treasury yields started the year at 2.24%; as of the end of July 2016, rates were at 1.46%—a 35% decline in yield from the beginning of the year. These are big movements in both domestic stock and bond markets which investors shouldn’t take lightly.


Also, more than $11 trillion in negative yielding bonds are outstanding, largely in Europe and Japan. The Financial Times wrote a great piece recently highlighting the post-Brexit surge in investor bond purchases.[1]


This means that if an investor holds one of these bonds until maturity, they actually lose money. They are also paying the issuer for the right to own these bonds, versus receiving some sort of payment in return—as Finance 101 teaches us should be the case. Governments with massive stimulus policies (ECB, Bank of Japan, and now the Bank of England) are buying up bonds, bidding up the price of these bonds and thus sending yields negative. Accelerating the decline in yields is the fact that the supply of such bonds is not ample enough to meet this demand. Negative yields are supposed to entice investors to invest in other assets, since they clearly lose money by investing in such bonds. This hasn’t happened. And yes, this is completely backwards and deflationary.

Currencies and Commodities
Currency markets have not been immune to this storyline; as Europe and Japan use monetary policy to help grow their economies, foreign investments flow to the US for its higher yields. Since May, foreign buying coupled with more hawkish Fed speak has strengthened the US dollar versus other currencies.


If the US dollar continues to strengthen or simply stays strong on a relative basis, this has the potential effect of placing a lid on US inflation. The stronger the US economy gets versus its global counterparts, the stronger the dollar looks versus other currencies.

A strong dollar is usually a negative for commodities. And in fact, the strong dollar has kept commodity markets mostly in check since early May, as we wrote about in Commodities at a Crossroads. Of note, crude oil fell to under $30 a barrel earlier this year, sliding alongside the S&P 500, touching its lowest levels since May of 2002. It then spiked to above $50, and now hovers just north of $40 due to dollar related price pressure—nearly 20% below its peak in June of $50.11.

The US Economy and Election
That’s not all. We’ve barely discussed the domestic economy. Here at home, despite anemic GDP growth of 1.2% for Q2, economic growth is indeed expanding as evidenced by the latest payroll and hiring figures. Non-farm payrolls increased by 255,000 in July on a seasonally-adjusted basis, with the unemployment rate at a very healthy 4.9%. Wage growth and labor market improvements here in the US makes a strong case for the Fed to raise rates. Our view is they should raise rates in September, ahead of the election. Whether they will or not remains another question.

Lastly, and as an homage to Vice President Biden’s favorite saying, “malarkey,” rhetoric around the US election has truly captured the American public, including ourselves. We are seeing raw democracy at work here and elsewhere. People are voting against the establishment; it’s a small segment of the human race, but it affects us all. In the meantime, it may become clearer that at extremes, when enough of the populace is truly feeling disadvantaged, capitalism has to make some changes. Otherwise capitalism and democracy are not going to work when the rule of law favors a few as opposed to the many. While this line of thinking may be too philosophical for a financial markets blog, it merits consideration because it does affect one’s view on investing.

Thus far financial markets have not reacted to the election news melee, but investors should pay attention. Should the Republicans lose their majority in the House and Senate, and Hillary Clinton is elected, this could have a dramatic impact on GDP as government spending will very likely increase…then again, it will also increase if Trump builds his wall.

What Should Investors Do?
Stocks can be at record highs throughout the year. The reality is that it doesn’t take much of a move to set a new record high when you have just made one. Odds are we will see low growth for the rest of the year, maybe the rest of the decade. One should expect dispersion by country and company with thoughtful, well analyzed decisions to make on what to own. This is going to take real professionals who are either doing real fundamental analysis or machine learning or can take advantage of the volatility and the anomalies. It’s going to be a different market. We all know that global and country growth comes from demographics and technology (of which productivity is a subset if you can measure it). But, there is a payback when the easy money goes away, causing slower growth than the demographics and technology would suggest.

In light of this, our view is that investors should have two areas of their portfolio well covered. First, there are downside risks to the market right now. Ignoring this fact would potentially leave one’s portfolio without a buffer, and we believe every portfolio needs uncorrelated assets. While it is self-serving to advocate for managed futures, Altegris has a focus on managed futures because time and time again they have performed during some of the worst periods for traditional equity markets.

Equity markets could continue to push for new highs, but we believe they are also susceptible to periods of steep losses. Managed futures performance has historically been uncorrelated to the performance of the broad stock market, and we strongly believe all investors with risk capital should consider this diversifying return stream, given the current macro picture.

The second bookend to investors’ portfolios, given the market environment, is private equity. Private equity was one of the few areas that didn’t sell off when investors panicked earlier this year, and whose returns can be orthogonal to the returns of traditional markets. Now, private equity is not a liquid investment option, so investors must be thoughtful in terms of just how much they allocate. But it is the forgoing of frequent liquidity that makes private equity attractive in our opinion. This is what is commonly referred to as the illiquidity premium, which is essentially the potential reward of enhanced returns—over time. This potential for enhanced returns may be particularly attractive for investors given the uncertainty in traditional equities at present.

The bottom line is that investors should aim to diversify portfolios. Look for ways to grow and preserve capital in your portfolio and seek returns in areas where investment managers have a real edge and understanding of the underlying investments. Pay attention, and invest for the future of your portfolios.


Data sourced from Bloomberg unless otherwise specified.

[1] Financial Times, June 29, 2016:

A Look at the Year Ahead

Providing some answers to the questions on the media’s minds (and maybe the investors’).

This is the time of year when we get a lot of questions regarding our outlook for next year including a call for point estimates on the usual indices and other variables. It is somewhat pointless to provide point estimates, but we did some of that below. We are in an unusual environment, with many variables that can certainly see some volatility throughout the year with, in my view, greater dispersion in results, similar to this past year. We are working on our annual Altegris Perpectives piece, “What to Expect in 2016 (and Beyond).” I must say, it is a harder year for developing definitive expectations than I have seen in a long time. That says something about the markets and increases the desire to spend time with the micro folks as opposed to the macro types. Historically, when this has been the case, that has paid off.  Paying Attention is still the advice, but I would add the words of my friend and former co-worker many years back, Art Cashin, “…Stay Nimble.”  As many of you who on occasion read the Altegris Blogs, you have seen me write that Past Performance is Not Indicative of Future Results. Given some of the dispersion we did see in 2015, this may be a time when last year’s performance may be more indicative of this coming year’s results.

Below are some of the consistent questions that have come up from those looking for answers.


Taking into consideration the rollercoaster some equity investors found themselves on this past year, particularly in August, what are the biggest risks facing investors in the stock market in 2016?

There’s a long list of factors impacting the stock market as we begin the New Year. The global slowdown, a strong dollar and the Federal Reserve’s late-in-the-game rate change, to name a few, all add a degree of uncertainty for investors. I would also stress two other factors that will play into investor returns: another year of profit disappointment driven by wage increases and the end of the oil dividend for many corporations.


What will be the biggest surprise for investors over the next 12 to 18 months?

Inflation could pick up a lot faster than widely anticipated. I would encourage investors to keep an eye on wage growth.


How are you advising clients looking to allocate assets and potentially reinvigorate their returns entering into the New Year?

We’ll be publishing an in-depth outlook with a few wild cards shortly, but I can provide a quick preview of what we’re seeing in the markets.

To the extent an investor doesn’t need liquidity, the opportunities in the less liquid parts of the markets will likely benefit from a growing illiquidity premium. Just don’t buy a daily liquidity fund that has been buying illiquid securities to juice returns.

Investors experienced no to low equity returns in 2015. We’re predicting more of the same for equities next year. It may prove to be a good year for true equity hedge fund managers. In terms of fixed income, we’re anticipating some credit accidents, but on balance, no major credit meltdowns. The recent moves in the high yield markets may have provided some opportunities if one does very specific credit analysis security by security.  Activist and event-driven managers are likely to experience favorable returns as M&A activity continues to be strong going into 2016. As we have seen this past year, sometimes an activist approach doesn’t work, but I think over time it does. This recent action does open up opportunities for those who have a longer time horizon and are dealing in the less liquid parts of the markets. I recently made a point (which I stole from one of our own, Greg Brucher) “…investors buy and hope, activists buy and influence, and private equity firms buy and fix.”  There will be a lot of situations open for fixing over the next few years.


Given Donald Trump’s campaign has been getting a lot of media attention, with speculation that he could actually have a shot at the Republican nomination, what would the election of Donald Trump mean for equities?

Trump’s nomination would most likely be a negative for equities since it would represent some element of disarray in the Republican Party. If he is elected, however, we think it could potentially be positive for the markets. Most of the programs he is calling for would raise debt levels more than any previous administration’s policies. The upside for the economy would be a lot of fiscal stimulus. The downside is that it would inevitably increase rates. This would also bode well for defense stocks. Whoever is elected, I think the odds of more fiscal action is higher than it has been over the last 8 years, even amidst ongoing dysfunction at the Congressional level.

Historically, the President only affects stocks on the margin. But as we’ve seen with Trump’s campaign for the nomination, a Trump presidency would no doubt be a different animal.


Who would be the best presidential candidate for the stock market? 

I’m more interested in picking the best candidate for the country. While one could say what’s good for the stock market is good for the country, I tend to think it’s the other way around. Historically, markets have done better under Democratic presidents, but it’s a close call.


Looking forward to the next 12 months, on which sectors are you taking a bullish or bearish stance?

We’re bullish on defense stocks, technology and healthcare. In terms of technology, we’re actually favoring old tech over new tech, particularly companies involved with the cloud, cybersecurity and have been spending on R&D.  Moore’s Law continues to be operative.

Consumer staples and most fast food companies are where we’re currently bearish. While staples tend to be a more defensive sector that does relatively well in slow growth environments, changing eating and drinking habits among Americans are going to make it tough for these companies to keep up and generate meaningful returns. Once again, it is company by company, but they won’t all be making the adjustments to new habits in a timely fashion.


If you had to give 2016 year-end targets for a handful of major market indicators and indices, what would they be?

Take the point estimates with a grain of salt because on any given day those numbers can and will change. But overall the market may keep pace with nominal GDP results next year in spite of the profit picture looking quite weak.

S&P 500: 2,120 (but with big dispersion)

Dow: 18,100

10-year Treasury yield: 2.65%

Gold: $1150

Crude oil (WTI): $52 (this was my target before this latest downdraft and I’m sticking with it—at the moment)

Fed Funds Rate: 0.75%

Our survey shows the role of alternatives in portfolios is likely to increase—But the language needs to change.

We asked Prosek Partners to conduct a survey of a random selection of attendees at our SIC15 held in May. The topic, of course, was the Role of Alternatives in Future Portfolios. 124 of the 649 attendees were asked a series of questions regarding their use of alternatives and some of the issues affecting their decision processes. One has to say that even though this was a random sample of attendees, almost all the attendees were relatively sophisticated institutional and individual investors and advisors, who were there to listen to a variety of observers and analysts of the global markets, economies, and geopolitics. We have commented on some of the observations at the conference, and you will be seeing videos on the Altegris site beginning June 24. These were not novices when it comes to alternative investments. Every attendee interviewed had some participation in alternatives, with different reasons for their use from complements to traditional strategies, substitutes for traditional equity or bond allocations to hedges against volatility.

70% of the advisors, 69% of the private investors and 63% of the institutions expect to have a net increase in their alternative holdings in the second half of 2015. This may reflect the tone of uncertainties expressed by the speakers at the conference regarding where expected market returns may come from and the possible volatility associated with them.  Highest on the list for advisors and private investors are Managed Futures/Global Macro (33%) while institutions put Private Equity (36%) at the top of the list.  Private Equity (25%) and Long/Short Equity (21%) are also high for advisors and private investors while the institutions put Managed futures/Macro (20%) and Long/Short Equity (20%) next on their list. Interestingly, there were also some expected decreases in all categories: Private Equity, Long/Short Equity, Managed Futures/Macro and Alternative Fixed Income with some investors increasing and decreasing the same strategies. I would read into this a fairly active approach to using alternatives in the portfolios with some concerns about the markets in general—in particular, the fixed income markets. This was certainly the anecdotal tone among attendees away from the hard numbers in the survey.

The survey participants were also asked what percent of a portfolio should be in alternatives. 10-25% was the most common range (59%). Interestingly, 15% indicated 25-50% as the range, while 3% indicated the allocation should be above 50%. We have seen certain institutions, endowments in particular, move toward having alternatives as a core of their allocations with more tactical allocations for long only active managers and straight beta plays using ETFs. It is interesting to see suggestions of higher allocations to alternatives coming from advisors and private investors.

Of particular interest to us were a series of questions regarding attributes of importance and concerns in making investments in alternatives. Clarity Regarding Investment Philosophy and Strategy ranked highest (60%) among attributes and second among concerns (24%) with Lack of Education on the Product Offerings (10%) being the third most significant concern. Among concerns, fees (53%, but 80% among Advisors), was the highest. This has been a high concern for the whole time I have been in the industry. And, with some democratization as well as Moore’s Law at work, the universe of strategies that do justify the fees on a net return basis continues to shrink.

Clearly the industry has some work to do explaining the strategies and positioning them appropriately in portfolios. The term “alternatives” may be part of the problem. This is hard for me to say given that it is an integral part of our name. It has come to represent a multitude of strategies within the investment universe and carries with it a tinge of the exotic. Merriam-Webster describes an alternative as: “different from the usual or conventional. Existing or functioning outside the established cultural, social, or economic system.” That makes it a little scary for some—or maybe for most. In truth, most of these alternative strategies are simply investment approaches that carry different degrees of risk, correlation and sometimes, liquidity, within the classic 60/40 stock/bond allocations. Others, such as true managed futures and absolute return strategies, provide uncorrelated return and risk streams to these classic allocations.  The decisions one makes on including such “alternatives” are not too different from deciding how much to allocate between a small-cap growth strategy or large-cap value in equities, or between high yield and investment grade in the bond world. I can remember when a deviation from the center of the classic style boxes was viewed as exotic and “alternative.”  Every strategy carries with it a different risk and return profile, and allocations should adjust according to the specific needs of the investor.  Given an investor’s goals and desired outcomes, it could be that various “alternative” strategies might offer better ways of achieving them. We have a responsibility to add investment clarity to make this a more complete picture as opposed to an exotic one.   The survey provided some surprises, even for us, with some very positive messages given our focus. It also pointed out, even among a sophisticated group of investors, there is work to do. We are Paying Attention.

Managed Futures Update: Reversals or Corrections?

Managed futures performance can be frustrating for investors. After strong performance in 2014 and into Q1 2015, many may be wondering why the strategy has lost some luster in Q2. The reality is that some of the very strong trends from last year have seen changes in direction. The key to understanding what might happen next is in trying to assess whether those trend changes are corrections against the previous trend or have graduated into full-blown trend reversals.

There were price corrections across all four major market sectors in Q2—the US dollar, interest rates and equity indices (especially in Europe) all sold off while commodities (particularly energy) have rallied. The result was that no single market or sector was the cause for negative performance. Rather, each sector or even sub-sector therein, lost a small amount. Add these up and you get negative performance for many managed futures managers in Q2.


Below is a brief summary of some of the major drivers in each sector:

Currencies. In 2014 short positions in the euro, yen, and most other currencies versus the US dollar proved to be a very successful trading strategy for managed futures managers as central bank policies began to diverge. In Q2, expectations have shifted due to early signs of QE success in Europe. The EUR/USD trade has corrected and is heading back towards where it started the year. Short euro trades have logically resulted in losses. Most trend following managers remain short euro, betting that the trend of a stronger US dollar will resume.

Commodities. Short crude oil was, by far and away, the most successful trading strategy in the second half of 2014. Since the downward price trend was so strong, most trend following systems have regarded the price appreciation in 2015 as a correction within the overall downtrend, rather than a trend reversal. However, as the months roll forward without a resumption of the downtrend most managers have reduced short exposure to crude, and a few have begun to reverse their positioning to long. The longer the crude oil price holds above $60 per barrel and continues to tick higher, we expect more managers to view the market as having reversed.

Fixed Income Futures. Fixed income has been volatile—especially in Europe. German bond yields rose and prices fell quickly as market participants wised up to negative yields. Managed futures managers were largely long the bund and other European fixed income contracts, thus incurring losses (albeit most somewhat minor). Fixed income positioning has been reduced across the board as the market determines whether a new uptrend in bond yields has indeed begun. Some managers have begun to establish short futures positions.

Stock Index Futures. Long stock index futures positioning—both domestic and globally—have been a mainstay of portfolios for many quarters. Corrections in some of the strongest upward price trends such as Eurostoxx 50, the DAX and even S&P 500-miniFutures caused losses in Q2. Most trend following managers remain long in anticipation of an ongoing uptrend.


Will it Get Better?

Managed futures managers, particularly medium- to long-term trend following managers, do not reverse positions overnight. Timing depends on the parameters of their underlying trend identification algorithms. In general, most trend following managers require a sustained price movement before reversing positions from long to short or short to long. Even in 2008, a banner year for managed futures strategies, many trend following managers suffered several months of negative performance before their systems identified whether corrections were new trends. After a prolonged period of strong trends, it is very common to see markets experience reversals for either technical or fundamental reasons (or both). In today’s market, there is no unifying reason for these moves—markets appear to be simply retracing some of their price trends over the last 12-plus months. We believe these price reversals represent “normal” market behavior, particularly after a long trending period. Similarly, it is normal for managed futures managers to have periods of drawdown after a strong winning sequence like the one we saw beginning in mid-2014. Investors might be nervous that we are entering another extended period of stagnation in the strategy, but we believe the underlying market conditions of expanding volatility and central bank policy divergence remain supportive of the opportunity sets in managed futures, regardless of whether you view current price moves as corrections or new trends.