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Divergences of Belief and ExpectationsThis is an excerpt from MACRO BRIEF: Divergences of Belief & Expectations originally published on March 26, 2019. Trends in energy prices are likely to stick around leading into the summer, but it should be pointed out that another divergence is forming: inflation expectations and eurodollars. This particular divergence is interesting because the complete capitulation to end monetary tightening puts Powell in a tough(er) place. Although treasuries should be reacting to the rate of change in inflation, the primary cause of alpha has been the Fed's stance to end tightening, and this is going to cause problems if higher inflation expectations continue higher leading into a rebound in CPI, PPI, etc. The catch 22 is that the relaxation is the policy stance gave way to asset inflation which gives the false pretense of economic stability. It could give way to higher inflation expectations that will intimately pay off of energy prices. That will continue to pinch consumers and increase business input costs - if the trend continues. Powell has effectively taken the Fed off the playing field, so if there were a rebound in inflation it may get to the point that it begins to deter what little economic growth is left. If the Fed has to step back in, that will certainty open up the Pandora's box of volatility. Ironically, if the pragmatic Powell put wasn't enacted in December, the U.S. could have been on the verge of a credit event. (Remember, we are removed from whether it was his job to do so. People still blame Ben Bernanke for not acting to prevent the sub-prime mortgage crisis). Link to original post: bit.ly
Q
by TheMacroStrategist
Why The Yield Curve Matters To Utilities & Other Bond ProxiesThis chart of the U.S. 10s/2s curve and the SPDR S&P Utilities Sector ETF (XLU) is interesting. A few days ago, I was reading a blurb by a well-known outlet about utilities getting "smoked" during the Q4 equity route. Like above, performance is relative to time frame. Additionally,  you have to have a deeper understanding about what XLU is and what it can do. It's not enough to just assume utilities as "defensive" thus it protects you from a broad equity sell-0ff. This also coincides with some questions I get from subscribers: why advocate holding XLU and TLT? Yes, XLU is a bond proxy but it is not a bond. Its underlying is composed of equities. The TLT is composed of U.S. 7-10 year treasuries. They both perform well under low interest rate environments when yields trend lower. However, keep in mind that the XLU is still equity-based and won't protect you fully. Notice, XLU didn't blink until the 10s/2s began to steepen. It's been gung-ho since the curve flattened out. And if we went back through periods were the curve began to steepen, it effected other bond proxies much more dramatically like REITs. Flattening of the curve isn't the issue unless you're financials. It's the massive steepening caused by the Fed cutting interest rates that kill markets.
TVC:US10Y
by TheMacroStrategist
THE WEEK AHEAD: HAND SIT ON PREMIUM SELLINGAlthough VIX finished the week above the low volatility environment zone (<15) at 16.48, not much is enticing here from a premium selling standpoint at first glance. Earnings announcements are now down to a trickle, with the next quarter's announcements coming into range in the May cycle, militating in favor of putting on earnings-related volatility contraction plays closer to announcement since implied will in all likelihood expand running into them. ASHR (50/29), GDXJ (44/27), GDX (35/24), TLT (36/10), XLB (33/19) round out the top five exchange-traded funds sorted by rank; EWZ (12/38), XOP (26/32), OIH (27/32), ASHR (50/29), and USO (14/28) when sorted by 30-day implied, all below the >50/35 metrics I like to see out of these to put plays on, although I will continue to sell a bit of XOP premium here, since it's 30-day implied is nearly twice that of SPY's at the moment: the May 17th 30 short straddle's paying 2.99 (.75 at 25% max), nearly 10% of the Friday close share price of 30.06. On the majors end of the stick: SPY (28/16), QQQ (23/20), DIA (22/17), and IWM (19/21) -- all at the low end of their 52-week volatility ranges.
AMEX:ASHR
by NaughtyPines