#weekly commentary

January 17, 2017

Time for the new White House and Congress to put pen to paper. While the equity markets have sustained their high levels, intra-day volatility in currencies, bonds and equities have surged as those markets attempt to react to every rumor and tweet out of Washington and Trump Tower. While many investors think that they know the direction of this new government, we don’t have a gauge on the magnitude of Fiscal Stimulus, Border Taxes, Corporate Income Taxes, Obamacare ‘Repeal and Replace,’ and across-the-board Government Deregulation that will be put into place. So much uncertainty—which will create opportunity for some and pain for others in the short term. The road ahead will be bumpy, so try and look for the big themes that you can grab onto and own through, what will no doubt be a rough ride over the next few months.

Good charts showing the recent lift in Forex and Bond market volatility…

Stocks definitely act volatile on an intra-day basis, but are still lacking meaningful day-to-day moves as sell-offs get bought and rallies get sold.

(KKRinsights)

Food for thought on the daily chop…

“No one makes money in the chop,” said the CIO. “People make money on big moves.” Trump held his press carnival, markets swung wildly. “The Yen was at 117 two days ago. Now it’s 114. Tomorrow it may trade 117. Will anyone make money?” A few will, most won’t. “Nearly 100% of trading returns last year were made between November 8th and December 15th.” The dollar rallied 13% versus the Yen in that time. Ten-year treasury yields jumped 80bps. The Russell 2000 jumped 18%. Markets trended in uninterrupted fashion; a perspiration-free ride for the well-positioned. “Those kinds of big moves are mandatory for hedge funds to make real money.” A few people profited from Japanese interest rates last year. Some nimble punters made money on Brexit. Trump provided the third real opportunity. “You can’t make money in this business slicing nickels, you need to find $1,000 bills. Because prudent risk management precludes you from running positions at 100% of your fund assets, which means that even if you catch a 10% move, maybe you make 2% or 3% returns.” When you get really lucky, a Trump trade comes along, you’ve got the right positions, they correlate highly and you collect a few 2-3% profits at the same time. “So the only question that really matters in this business is this: What’s the next big move?” he explained. “It’s probably a continuation of the Trump trade,” he said, pausing, considering the pain of 2016. “Last January, people were convinced the renminbi would blow up.” But it promptly rallied +3%, stopping most people out. If you held tough, or re-engaged the trade, you made a fortune. The renminbi fell -8% from those highs. “The thing is, consensus trades have a nasty habit of working, just not exactly when you want them to.”

(Eric Peters/Wknd Notes)

No need to look far for reasons for the daily chop with seismic valuation shifts from industry to industry on every tweet and interview…

President-elect Donald Trump told companies they will have to shift manufacturing to the U.S. in order to do business here, in a series of comments indicating a tough posture toward U.S. trade partners.

“Car companies and others, if they want to do business in our country, have to start making things here again. WIN!,” Mr. Trump wrote on Twitter on Sunday. The comments came as Mr. Trump reiterated in an interview with a German newspaper that his administration would levy a 35% import tax on autos built in Mexico for export to the U.S.

In comments published by German tabloid Bild, Mr. Trump singled out German premium car makers BMW AG and Mercedes-Benz, saying automotive trade between the U.S. and Germany was a “one-way street.”

“When you walk down Fifth Avenue, everybody has a Mercedes-Benz parked in front of his house,” Mr. Trump said, according to a Wall Street Journal translation of Mr. Trump’s comments that appeared in German in Bild. Addressing the Germans, he was quoted as saying: “You were very unfair to the U.S.A. It isn’t mutual. How many Chevrolets do you see in Germany? Not many, maybe none, you don’t see anything at all over there. It’s a one-way street.”

(WSJ)

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Which I'll be calling Zoneception from now on because it's shorter.