THE VELOCITY OF CHANGE

Many times, I have commented about the velocity of change.  Newswires are suggesting “one of the greatest hidden fortunes amounting anywhere from $5 to $15 billion” was wiped out in a number of days, the result of quintuple secret leverage, defined as borrowed money that margined concentrated options and derivative positions.  It works great until it does not.  I rhetorically ask how many other Archegos are there?   There were many “micro Archegos” with the GameStop fiasco.

Speaking of the speed of change, the very popular strategy that bets past winners will keep winning, the momentum trade, was completely eviscerated during the last five months.  It is now reviving, in part because value stocks are now becoming the new momentum stocks.  Quant value funds are having the best performance since 2000 when the Dot.Com bubble imploded.

A major issue at hand and one that has been discussed many times, is the massive capitalization of yesterday’s momentum issues.  The proverbial distribution cycle can take years.  If this is indeed the case, the indices may languish but the typical stock may flourish, the inverse of the last five to seven years.

The selloff in the Treasury market is continuing with yields broaching 14-month highs.  As also discussed many times, yields are coming off such absolute lows that any increase is significant, an environment amplified by the unknown use of leverage in many trading strategies.

Commenting about yesterday’s market activity, equities were nominally lower.  Treasury yields closed around 14-month highs as the market weighs the consequences of more stimulus and Treasury supply from the Biden Administration.

Last night the foreign markets were down. London was down 0.23%, Paris down 0.24% and Frankfurt down 0.01%.  China was down 0.43%, Japan down 0.85% and Hang Seng down 0.70%.

The Dow should open mixed as the President is about unveil an economic plan that includes a $2.25 trillion infrastructure boost and perhaps the greatest tax increase in history.  What impact will it have upon inflation, interest rates, earnings and economic activity?

Many in the Administration and Congress believes there is a proverbial free lunch, partially under the misguided economic theory of MMT  (Modern Monetary Theory which essentially says a sovereign country can borrow without impunity as long as the borrowings is in their own currency).   The introductory paragraph was about Archegos which used massive leverage, believing risk can be controlled.  Will Washington reign in some of its prolific spending?  Unfortunately, at this juncture no.

The 10-year is off 5/32 to yield 1.73%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.