31 Mar 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%.