a global macro investment newsletter by Neil Azous Morning Edition | October 29, 2018 Risk-Adjusted Return Monitor CROSS-ASSET FOREX FIXED INCOME EQUITIES COMMODITIES THEMATIC PAIRS South Korea 10-Yr CAD/MXN South Korea 10-Yr India SENSEX Palladium China Exposure EU Cyclicals vs Defensives Japan MOTHERS AUD/NZD German-Eur Buxl Japan MOTHERS Natural Gas None EU Long/Short 12M Momentum * Highlights the largest overnight positive and negative risk-adjusted returns across 160+ market proxies Summary & Views Contents If Markets Fade The Keyboard Warrior, Retreat Fast Summary & Views Top Observations . Update – S&P 500 Tracking Portfolio . Help Me, Obi-Wan Kenobi. You’re My Only Hope Economic Data . Two Negative Headlines Ignored Last Friday . Regime Shift Takes One Step Forward On The Charts . Tracking Portfolio – Performance – October 26, 2018 COB: WTD +0.93%, MTD +2.19%, +6.21% YTD net Tracking Portfolio Tracking Portfolio Admin – Schedule Twitter @sbstimestamp Bloomberg MCRO <go> The next edition of Sight Beyond Sight will be delivered on Wednesday. Any updates to the tracking portfolio will be sent via Twitter (@sbstimestamp) or Links Bloomberg (MCRO<go>). Subscribe Now! Newsroom View Archive Permissions/Reprints Connect Twitter @neilazous Update – S&P 500 Over the weekend, the “keyboard warriors” were out in full force. Anyone who writes for a living, but does not manage money, are strongly advocating for a bounce in risk assets. Anecdotally, the decibel level was so high that earplugs were required. Two other supporting catalysts, both worthy of respect, are receiving airplay. After a 20-30% drawdown in cloud stocks, the news flow that IBM is set to acquire Red Hat for a +60% premium is welcome. At the same time, the idea that Google will be the biggest loser in that deal because it solidifies them as the #4 player will keep i-Bankers busy. Considering that type of money is pocket change for Google, if they let that happen without a fight or another purchase that will expose their lack of growth plans or commitment to the space. Worded differently, this space just became off-limits from the short-side. The next section is on buybacks. It is self-explanatory. The high of 2947.00 in S&P 500 futures (ESZ8) was made September 21st. The low-to-date was last Friday at 2627.25. The 23.6% Fibonacci level is 2702.75. A break of that resistance, especially on a closing basis, opens the move up to 2736.44, the 55-week moving average, or the level that crystalized the medium-term trend change. Traders will continue to trade Fibonacci aggressively because it has been the best technical during this correction and the last one in February. However, we sense that investors have little desire to be involved between the 55- week MAVG and last Friday’s low. There are just too many catalysts to handicap between today and November 9th. Help Me, Obi-Wan Kenobi. You’re My Only Hope Like last February, the market is hoping that corporate stock buybacks will be the catalyst for a recovery in share prices. Below are various illustrations for corporate buybacks from Deutsche Bank, UBS, and Jefferies. They all point to an acceleration over the next week to peak repurchases in mid-November. All we are doing is aggregating the information. See the left chart below from Deutsche Bank that shows Google search trends for the buyback blackout. We find it concerning that Main Street is searching for “buyback blackout” to this degree. Said differently, retail investors are just as “hopeful” as Wall Street that they will be bailed out. Rareview Macro LLC | Soundview Plaza, 1266 E. Main Street, Suite 700R, Stamford, CT 06902 Page 2 Copyright © 2018 Rareview Macro LLC. All Rights Reserved. According to UBS, buybacks don’t typically peak until around mid-November. They see rebalancing as providing key support combined with ~$170bn of buybacks + dividends over the next month (vs. $47bn last 4wks). According to Jefferies, based on current stock price and Daily Allowable Limit within 10b5-1, buybacks can represent up to $32.7bn of notional buying power per day if no company is in a blackout period. Right now, $13.2bn or 40% of the daily notional buying power is blacked out. $7.5bn of notional buyback re-enters the market by the end of next week (11/2) and an additional $2.7bn by 11/9. The top 10 largest company’s in terms of daily notional buyback re-enter the market before 11/9. As a reminder, 384 companies in the S&P 500 have an approved buyback of $1.2T in aggregate. Two Negative Headlines Ignored Last Friday Throughout October, in some shape or form, the market received positive news flow that President Trump and President Xi would meet at the G20 Buenos Aires Summit on November 30th. Despite that event being far away, market participants viewed the meeting as an incremental positive step. Last Friday, the market largely ignored news flow that the US is considering removing trade from the Trump-Xi meeting agenda. A Bloomberg story cited the White House saying: G-20 meeting is still in planning stages; but White House is considering excluding trade from the agenda of a meeting between President Donald Trump and China’s Xi Jinping but likely won’t cancel it altogether, said 2 sources. Secondly, last Tuesday, the Chairman of the House Ways and Means Committee, Rep. Kevin Brady, said the committee would be working with President Trump and his team on the design of the next round of tax cuts. Despite that a 10% cut for the middle class needing to go through the legislative process, the market understood the reduction in the capital gains tax as only requiring an executing order. Meaning, that is something President Trump could initiate before the Mid-Term Elections to give his party a boost. Last Friday, on CNBC, Brady said: “We expect to advance this in the new session of Congress if Republicans maintain control of the House and the Senate,” In so doing, Rep Brady acknowledged that it is unlikely to be on the agenda for the post-election lame duck session, even if President Trump has signaled otherwise. (Source: Roll Call, Article) Rareview Macro LLC | Soundview Plaza, 1266 E. Main Street, Suite 700R, Stamford, CT 06902 Page 3 Copyright © 2018 Rareview Macro LLC. All Rights Reserved. Regime Shift Takes One Step Forward On The Charts Two large structural positions – Amazon Inc. (AMZN) and US fixed income flattener – closed offsides on a weekly basis last Friday. We view these structural positions as the same trade. Value has a very high positive correlation to the yield curve, and momentum a high negative correlation. As the yield curve steepens, value relative to momentum should outperform. This relationship took a step forward on the charts last Friday. AMZN closed below its 200-day moving average and 23.6% Fibonacci retracement level for the first time since early 2016. Put another way, this is the first time a chartist could link a technical observation to AMZN since they became the most important company in the world. The 5/30yr US Treasury yield curve closed above 40 bps last Friday, a pivotal level throughout 2018. More specifically, the 5/30yr US Treasury yield curve is “bull steepening.” Meaning, the 5yr is rallying the most on the curve in a sign the Fed is “done” raising interest rates. The best way to see this is to look at the US Treasury 2-5-30 year butterfly (the “fly”). The “fly” has fallen ~35 bps from its peak in May, indicative of the 2-5yr part of the curve flattening and the 5-30yr part of the curve steepening. For example, the 2-5yr part of the curve – a direct linkage to future rate hikes – closed within 0.5 bps of a cycle low on Friday. This degree of outperformance by the 5-year to the “wings” near the end of a tightening cycle is indicative of the market pricing the Fed being done raising interest rates in the very near term. Note, back in 2006, the same observation was made, and the Fed was done raising interest rates within three months. Rareview Macro LLC | Soundview Plaza, 1266 E. Main Street, Suite 700R, Stamford, CT 06902 Page 4 Copyright © 2018 Rareview Macro LLC. All Rights Reserved. Another way of observing this shift is the 3m-10y Treasury spread (not shown), which closed at ~75 bps on Friday, roughly equivalent to the end of August when it closed at 72 bps, the prior low, which caused all the angst about the yield curve. This is the Fed’s “preferred measure” of recession risk and is trading the same “policy error.” If the Fed is “done” in the near term, there is plenty more room for the 5yr to outperform and drive further technology/momentum/growth underperformance. [Back to top] Top Observations Markit Tidbits . Good Question: What if the domestic credit market reaction to CNY weakness tightens Chinese financial conditions less than everyone thinks and the US equity market reaction to US tariffs that counter CNY weakness tightens US financial conditions more than everyone thinks? (Source: Karthik Sankaran) o S&P500 vs. China A-shares: Is this the part where we say "no one wins a trade war"? (Source: Callum Thomas) . Great Line: “The only way we find a bottom is if the FOMC signals they may tactically pause and reassess the economy in the first half of 2019, after the December move, and if Trump and Xi come to a comprehensive agreement in principal at G20 when they meet at the end of November,” said Barry Bannister, head of institutional sales strategy at Stifel Nicolaus in Baltimore.