Bill Chisarick, CFA, FRM, ERP, CAIA

December indigestion caused by the Federal Reserve's comments today? The S&P was humming along until the FOMC cut 25 bps as expected, and the changes to the statement were trivial (although the vote to cut wasn’t unanimous). Chairman Powell wasn’t a reassuring voice at this meeting, and the market’s confusion led to hawkish projections and speculations for 2025. The S&P 500 closed at the day's lows, -3%. Capital flow was heavy at 145%. Today's move lower in the stock market was significant. We’re below the 50-day moving average for the first time since September. We’re not oversold (yet), and we’re (only) back at mid-October levels. From a technical standpoint, the rest of December should be a race for the exits….but dip-buyers will (most likely?) do their thing. It's worked for the last 12+ years, so why stop now? Considering today’s drop is rooted in a market unprepared for a Fed that wasn’t gung-ho with spiking the punch bowl a lot more, it could mean that once investors relax and think, they won’t believe this is all that bearish. If that’s the case, watch for an enjoyable bounce back. In summary, the fundamental landscape isn’t radically altered; however, the emotional landscape temporarily is.

11

A thoughtful look at implications for the CEMAC financing markets of Congo’s recent local currency default. Fitch expects liquidity on the regional bond market to remain tight over the next two years despite a loosening of monetary policy with a resumption of liquidity injections since June 2024. Regional market roll-over needs will rise and reach 36% of the outstanding debt in 2026. Congo (Foreign-Currency IDR: CCC+; Local-Currency: CCC), particularly after its default, and Gabon (CCC+) appear the most exposed, with large funding needs in addition to regional refinancing needs. Congo, Gabon and Chad (B-/Stable) are also vulnerable to price shocks. Free-to-air summary from Cedric Berry at https://lnkd.in/e46_pJ9R; the full report from Cedric and colleagues Hawa Ly and José Pedro Mantero available to subscribers at https://lnkd.in/eada2ACp   #fitchoncredit #emergingmarkets #cemac #congo

19

I've traded STIR for over 18 years. Couldn't help notice interesting surge in volume in SOFR Z4-Z5 calendar as spread narrows to 58bp. It is interesting as not only the market has begun to price fewer cuts in 2024, it has taken out more than an entire cut from 2025. Is the market beginning to price higher for longer? This could also imply that if the Fed cuts too soon, inflation might reaccelerate. It opens up some really interesting trades in mid curve options for me. What are your thoughts?

87

6 Comments

Check out my macro notes just released:) Some interesting insights from the Snb and Norges decisions today along with thoughts on the S&P 500's outperformance in the last month against global asset classes. Enjoy:) https://lnkd.in/gcaEFYje

4

Our Corporate team have identified USD800bn of debt sitting on cusps of the ‘A’ and ‘BBB’ categories. At the ‘A’ level, USD550m belonging to Chinese issuers with IDRs linked to the sovereign, but the cusp list also includes Intel and PECO Energy Company in the U.S. The split of debt on the cusp of the ‘BBB’/‘BB’ categories is more balanced, although leans slightly more towards downgrades, with 26 potential fallen angels (USD180bn aggregated debt), compared to 17 potential rising stars (USD120bn aggregated debt). Boeing’s debt accounts for about one-third of the total debt of all potential fallen angels, following its Outlook revision to Negative. The free-to-air summary from colleagues Emmanuel Bulle and Tatiana Kordyukova, highlighting individual issuers, is at https://lnkd.in/eKVn56-r; the full report for subscribers is at https://lnkd.in/ewP7G2nT. #fitchoncredit #investmentgrade #creditratings

35

Hot off the press, as expected, the Fed cut by 25 bps and will assess incoming data to see what to do next but scales back rate cuts in 2025: Link: https://lnkd.in/ehth9ZXy Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate. In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent. My take: The Fed is going to find it increasingly more difficult to justify rate cuts next year if the economy remains hot and inflation picks up again. Worse still, there's a bubble going on in the stock market, buckle up, 2025 will be volatile as hell!! Next up, Jerome Powell's presser at 2:30 p.m., should be interesting (or not): https://lnkd.in/e2sEW76H

9

3 Comments

The great active/passive small cap benchmark mismatch… Included with this post is a graphic that shows the percentage of assets in active and passive* mutual funds that use the S&P SmallCap 600 Index as their Primary Prospectus Benchmark (all data from Morningstar Direct) from January 2000 to May 2024. While only about .4% of actively managed mutual funds have used the S&P 600 as their primary prospectus benchmark, on average over the period, about 49% of passive assets have done so (although this is has dipped lately). This spread is a lot wider than is say Large Cap Blend mutual funds, where 83% of active funds use the S&P 500 versus 98% of indexes. These differences can result in some notably different outcomes when comparing the performance of say active and passive strategies (e.g., in the Morningstar’s US Active/Passive Barometer report). For example, looking at some five factor regressions**, while there hasn’t been much of a difference in the small cap factor historically (SMBs for both are ~.83) there is a significant difference in RMW (profitability/quality) coefficients, which is an explicit screen in the S&P 600 (versus say the Russell 2000). The different loadings have resulted in a historical outperformance of the S&P 600 over the Russell 2000 by around 1% per year since 2001***. While I think that the Russell 2000 is probably a better actual benchmark for small cap managers, since it is a more pure representative of the small cap universe, the significant difference in underlying benchmarks between active and passive strategies has important implications for things like active/passive studies (or just benchmark selection in general), that I think (more?) people need to be aware of! * passive is defined as field “Index Fund” = Yes in Morningstar Direct, the extract was performed on June 11, 2024 and is survivorship bias-free. ** data from Kenneth French’s Data Library: https://lnkd.in/esUg_VBB (five factors: market, size, value, profitability, and investment) *** RMW factor has had a ~5% annual return over the period and the factor coefficient differential is +.2046 for the S&P 600 versus the Russell 2000, resulting in a ~+1% outperformance for the S&P 600.

12

2 Comments

Securitized credit has consistently offered undervalued opportunities in this market cycle. Here, my colleague Kyra Fecteau, CFA shares how macro research and in-depth analysis of securitized sectors' varied market dynamics and collateral characteristics inform her construction of securitized allocations in diversified fixed income portfolios.

4

One thing I value about Meradia is that I am always learning from my colleagues. This brief article by Ryan Bond, CFA, MBA, PMP reminding us about the value of collateral management is just another example of the expertise Meradia can bring to the table. #meradia

6

Why are more fixed income managers partnering with outsourced trading providers? Ron Catena dives into the drivers – including liquidity access, global coverage and multi-asset capabilities – that are shaping this trend. Marex Fixed Income Leaders Summit Worldwide Business Research (WBR) #FixedIncome #Equities #OutsourcedTrading #AssetManagement #Marex

11

Huge news in #cta #etf land: AlphaSimplex Group went live today with their managed futures ETF, $ASMF. Important points: - ASG put factor replication of #hedgefunds on the map when Andrew Lo wrote the seminar paper in 2006 (which convinced this guy 👆 to try to commercialize it....). ASMF has, at its core, replication. - Like Man Group, ASG runs a great #mutualfund and now is jumping into the ETF pond. The ecosystem keeps growing and more and more investors will have access to "institutional quality" managed futures products in client-friendly wrapper. - Virtus Investment Partners now owns ASG and is an investment powerhouse that can drive widespread investor education, led by the exceptional Kathryn Kaminski, PhD, CAIA, who coined the term "crisis alpha." To beat the DBi drum: managed futures ETFs represent around 0.02% of the ETF world. This for a strategy that arguably has more diversification value than any other liquid alternative. This is a greenfield, transformational opportunity that already has attracted the likes of Corey Hoffstein with ReSolve Asset Management, Jerry Parker, Mt. Lucas Management (with KraneShares), Simplify to join us, our partners at iM Global Partner, and comparative veterans WisdomTree Asset Management and First Trust. Grow the pie! https://lnkd.in/epfXYHTR

117

10 Comments

Are you getting the most out of your collateral? My colleague, Ryan Bond, CFA, MBA, PMP, explores ways to do just that in his latest article. #Investmentmanagement #Assetmanagement #InvestmentOperations #collateral

2

NEW Trader TV This Week: Ramon Baljé, head of fixed income at Flow Traders, discusses trends he is seeing in algo trading and exchange-traded funds as desks prepare for the final weeks of the year. He looks at evolving activity outside of market hours across regions, including blurred lines across market close and open, and how ETF flows are interacting with bond market liquidity. Baljé also unpacks what needs to be on trading desks’ radar coming up to year-end and going into 2025—including what he sees as the biggest game changer for European markets. This Week is supported by Cabrera Capital Markets and MTS Markets. Subscribe to the weekly show here: https://lnkd.in/ey5ZNUPn #Trading #yearend #thisweek #capitalmarkets

40

4 Comments

Our latest Risk HQ summary is out from Justin P., and includes macro insights, recent rating portfolio performance trends, and forward-looking portfolio outlooks by sector. The turn of the global monetary policy cycle this year has been a significant contributor to investor confidence and a fairly benign global credit environment. But geopolitical and political risks, deflationary pressures in China and capital market volatility risks persist, and our base-case economic forecasts include deceleration of US and Chinese economic growth in 2025. Key risks to global credit outlined in the report have been updated to reflect the latest macroeconomic data, ratings trends and capital markets activity but remain broadly the same. These risks include Capital Market and Funding Instability, Geopolitics, Governance and Policy, and China Macro and Real Estate. Summary at https://lnkd.in/eJFFqAut, and the full report online at https://lnkd.in/gauF6VA, both free-to-air. As ever, the full report is downloadable as a PDF by subscribers from https://lnkd.in/er4-ijej #fitchoncredit #macro #creditratings #interestrates #keyrisks #riskmanagement 

32

Does it matter if the Fed is committing a policy error? The question that investors are struggling with is whether we are witnessing the Fed committing a policy error, and if we do, does it matter? First, there appears little doubt that the Fed’s hyper data-dependent policy framework is forcing it to excessively rely on flawed and backward-looking signals (from OER to cars and insurance prices, financial sector inflation to industrial age labor statistics), thus potentially setting itself up for a policy error. In addition, the infamous dots further amplify volatilities. This is one of the worst inventions from the Bernanke era. Dots are not co-ordinated with the rest of the Fed policy apparatus and represent nothing more than personal views of governors, some voting and some not. However, dots have become so intertwined into the market that getting rid of them might cause even greater volatility than dots themselves generate. This feels like a less than efficient decision-making and communications framework. However, are investors right to discount these negatives? Surprisingly, the answer is, yes. Why? Even if the Fed commits a policy error, it can unwind it in seconds. First, we live in a world of abundance not shortage of capital. The cloud of finance has grown over the last three-to-four decades from less than 2x to anywhere between 5x and 10x GDP, depending on how one values derivatives and off- balance sheet commitments. Pricing signals do not function well in a world of abundance. While making it harder to tighten, this surplus capital cushions the real economy, explaining why spreads are falling (even as the Fed tightens) as surplus capital feverishly circulates looking for new, though diminishing, opportunities. Second, another reason why spreads are falling (even for commercial real estate and CCC debt) is that the Fed is now rolling out dedicated rescue policies at a warp speed (usually over the weekend). Hence, why should spread widen, when in due course, there probably will be dedicated policies for commercial real estate, private capital or anything else that might be systemic (a la SVB or repos). Do we pay a price for such deep penetration of the markets? Yes, risks never go away, they just migrate – from stable markets to volatile neutral rates, unpredictable style rotations, social polarization, unorthodox electoral outcomes, campuses on fire and geopolitics. But deflating asset bubbles or deleveraging are not on the menu. Views expressed are my own and do not reflect views of my employer.

93

10 Comments

Just released a new paper "Empirical Model of VIX Volatility and SPX Variance" on how one can relate VIX skew with that of SPX skew. https://lnkd.in/ekn_ZqxE

17

1 Comment