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Tactical Asset Allocation Paper Receives Honorary Mention in 2012 Wagner Award

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May 152012

We were happy to receive news a while back that our paper, “Turning Beta Into Alpha – Credit-informed Tactical Asset Allocation” received an Honorary Mention from the 2012 Wagner Award competition of the National Association of Active Investment Managers (http://naaim.org). This represents the first time the committee presented this type of recognition.

In a nutshell, we outline how to use signals from the credit market to make equity market timing decisions. There is plenty more work to be done in this area, but we were honored to have our work recognized. The paper is available below the fold.

CNBC Appearance: Bearish Signal For Stocks

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Mar 292012

CNBC Fast Money Portfolio: Europe Watch

We were invited to discuss our views on European and US markets as part of CNBC’s Fast Money show today. The discussion was brief but premised on the fact that our insights into the credit-equity relationship was flashing a major warning light in Europe and in the US and while Apple was sustaining broad US equity markets, risk is rising dramatically for a much more broad sell-off that should be hedged to market-neutral or shorted outright. Video Link here.

Full notes below (please bear in mind these were notes for the interview and not meant for public dissemination).

Do High Yield Bonds Know Something Stocks Don’t?

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Mar 192012

High Yield has been underperforming significantly recently

As the S&P 500 reaches new multi-year highs and VIX touches multi-year lows, there is one rather large and risk-appetite-proxying market out there that is not as excited. The high-yield bond market has seen record in-flows dropping off recently and for the last four-to-six weeks high-yield spreads, yields, and bond prices have been very flat as stocks have surged ahead. Despite US earnings yields at near-record highs relative to high-yield bond yields, we see little pick-up in LBO chatter suggesting a notable preference for higher-quality junk credit (and/or lack of belief in sustainability of earnings yields) and the recent ‘dramatic’ outperformance in investment grade credit is a notable up-in-quality rotation (as well as early spread-compression reaction to Treasury weakness recently) that strongly suggests less risk appetite among real money managers (given how ‘cheap’ high-yield appears across asset classes). Lastly, the ratio of HY bond prices to VIX is near its extreme once again, something we saw occur before the risk flares of 2010 and 2011 surrounding the end of the Fed’s QE sessions.

CNBC: Signals From The Credit Market

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Feb 142012

Credit signaling concerns ahead for US and European stocks

Our recent work on the growing disconnect between credit and equity markets in recent weeks was picked up by our good friends Gary Kaminsky and Rick Santelli at CNBC today. Furthermore, the topic of the LTRO stigma that we have discussed for over a week is becoming increasingly a concern – especially to those LTRO-encumbered banks. While the disconnect in Europe has been increasing for over a week, we have now seen US banks and broad credit markets also deteriorating quite rapidly – as we pointed out here today. As Gary points out, when we have had troubles in the markets before, it has tended to start in the credit markets and migrated to equities as the more liquidity-sensitive and capital structure focused professionals derisk ahead of the more momentum and retail crowd overshooting in equities…

Calm Before The Storm? Credit Plunges As VIX Futures Jump Most In 2 Months

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Feb 102012

European Credit (Financials) were the initial canary and now high beta is below last week's pre-NFP levels

Credit markets are continuing the trend of the last couple of days with this afternoon seeing their underperformance accelerating. Major underperformance this week in investment grade and high yield credit markets relative to stocks (and as we noted this morning, we are also seeing financial credit in Europe notably underperforming) as Maiden Lane II assets are sold and high yield issuance peaks (and liquidity dries up). Adding to the concerns, VIX futures saw their biggest 2-day jump in over two months despite equity’s modest rally. On a day when Pisani tells us there was much to rejoice about, stocks managed only negligible gains (even with broad risk assets in risk-on mode, TSY yields up, FX carry up, Oil up) and while stocks are limping higher now (aside from AAPL of course) with financials underperforming, perhaps this week of notably higher average trade size in equity futures is the calm before the real storm gets going – as credit and vol seems to be hinting at.