By Peter Tchir of Academy Securities
There are a few things that I knew about the military before I joined Academy Securities:
While having nothing to do with war, I’ve found that over time (as a contrarian):
We will explore this topic (briefly), but if it isn’t your cup of tea or if you want to really focus on the current geopolitical landscape, please read this month’s Around the World where the Geopolitical Intelligence Group provides their latest insights on:
Academy had a busy media week where we got to discuss our market outlook for the coming weeks.
On Bloomberg TV they distilled our view to the simple headline – Commercial Real Estate to Squeeze Higher. The full interview starts at the 7:40 mark and talks about credit and central banks in addition to our broader market outlook.
Our view that high yield will continue to surprise to the upside was articulated in this piece. On this topic we have been fighting consensus because too many people are bearish. Also, we try to point out how expensive it is to short credit. We almost dragged out some examples showing how easy it is to conflate charts that show credit spreads widening and making money by being short. The historical spread charts tend to make it look easier to make money being short credit than it really is. Of note, the cost of carry, rolling down the curve, etc. are all “kind of” boring, but real when trying to time “credit crashes”. The BBB tranches of ABX CDS Indices were an incredibly unique opportunity (small spreads and 0 recoveries when they went).
This article captured some of the “don’t fight consensus” view that we currently have. It highlights both the enthusiasm and many of the risks/dangers facing the market. I wholeheartedly agree with the risks (especially with jobs at the forefront), but I’m not willing to fight it for now. Basically, the views put forth in Ch-ch-ch-ch-Changes seem even more relevant today than they did last weekend (when I also thought that they were quite relevant).
This brings me to another central theme.
We wrote Central Banks Taking a Backseat on Thursday morning and thestreet.com picked up on it. It is something that we repeated in other reports, but the main theme is:
The BOJ almost upset the apple cart as we got to discuss on Asia Daybreak (12:35 mark) on Thursday evening. Thursday’s sell-off seemed overdone as chatter circulated that the Bank of Japan would ease back on bond purchases and target higher yields across the curve. Yes, higher Japanese bond yields should put pressure on global bond yields (some Japanese buyers who bought foreign denominated bonds and hedged out the FX risk will just buy yen denominated bonds, but that seems like a relatively minor change in the grand scheme of things). If anything, Thursday’s sell-off gave bears a chance to reset shorts, which if I’m correct, will help fuel the next legs of this rally.
I cannot say that I like valuations, that consensus hasn’t turned bullish, or that recession risks are being too readily dismissed. However, I can say that right now doesn’t seem to be the time to fight it.
Market resiliency will force the last bits of money on the sidelines into the markets (and I think that many will chase the laggards more than the Magnificent Seven).
Look for rates volatility to decline and 2s vs 10s to become less inverted (mostly through 2-years rallying).
Credit should grind tighter. I want out of that trade. It has been a good one, but I think that August could see another leg tighter given a lack of supply, too many bears, and lower volatility across asset classes.
Sticking with long the laggards and a marginally overall bullish bias on equities.
Stay cool, hydrate, and wear sunscreen (a fun graduation speech/song).