Thanks for the post, Rich. I'm curious how you're thinking about adding convexity to your portfolio during this time. As you pointed out, the put/call appears very low and I believe Francois Trahan recently posted that the relative cost of a 95% 1 year SPX put is the lowest its been in 15 years. Do you think the capitulation just has too much room to run to where the timing is suboptimal and you'd prefer to cash in on 5% money markets?
Additionally, I think you've alluded to most active managers underperforming the index so far this year (your custom index on MF pain has gotten better but it's still not good) - which has lent itself to capitulation. Do you think there's an opportunity to capitalize on active managers effectively swinging for the fences in the back half of '23 as they try to catch the index? Or do you think active managers are just going to hug their benchmarks to avoid underperforming even more?
Noah - both great questions. I think it makes sense to add year end puts especially if one is invested in the market. I appreciate many could not take the underperformance anymore and have instead bought etf's and indexes. Perhaps some laggard themes (dividend aristocrats, value, profitability, energy, financials etc). If you are invested, given the relatively low level of VIX, adding year end puts will provide peace of mind. If you are in cash, earing 5%+ but not keeping up with the market, adding puts becomes a more tactical trade you do when the dominoes start to fall. If anything, a way to add convexity is to buy call options INSTEAD of investing in the market as a way to gain some low risk exposure to higher prices.
On the second question, that all comes down to the manager themselves. If they have been lagging for a few years and realize that one more year of underperforming will lead to large AUM outflow, I can easily see them pushing the chips all in. If it is a manager that has a better track record but is struggling this year, I can see them being more strategic and buying laggards that they can justify on a valuation basis that will also benefit from a Fed that may be stopping and an economy that may not go into recession. This is probably a more rational approach. However, if a manager is facing a more existential crisis, we can't assume rationality
Great write up as always! Regarding margins, do you think that if inflation reaccelerates to 4%+ in H2, can we see margins moving up or in other words is it safe to conclude that margins have bottomed?
Good question. Because there was cash in bank accounts, companies were able to hold onto pricing power as inflation accelerated before. This time around, I am not so sure companies can hold onto pricing. In addition, labor is seeking higher pay. Thus I think margins will atruggle most likely
Thanks for the post, Rich. I'm curious how you're thinking about adding convexity to your portfolio during this time. As you pointed out, the put/call appears very low and I believe Francois Trahan recently posted that the relative cost of a 95% 1 year SPX put is the lowest its been in 15 years. Do you think the capitulation just has too much room to run to where the timing is suboptimal and you'd prefer to cash in on 5% money markets?
Additionally, I think you've alluded to most active managers underperforming the index so far this year (your custom index on MF pain has gotten better but it's still not good) - which has lent itself to capitulation. Do you think there's an opportunity to capitalize on active managers effectively swinging for the fences in the back half of '23 as they try to catch the index? Or do you think active managers are just going to hug their benchmarks to avoid underperforming even more?
Noah - both great questions. I think it makes sense to add year end puts especially if one is invested in the market. I appreciate many could not take the underperformance anymore and have instead bought etf's and indexes. Perhaps some laggard themes (dividend aristocrats, value, profitability, energy, financials etc). If you are invested, given the relatively low level of VIX, adding year end puts will provide peace of mind. If you are in cash, earing 5%+ but not keeping up with the market, adding puts becomes a more tactical trade you do when the dominoes start to fall. If anything, a way to add convexity is to buy call options INSTEAD of investing in the market as a way to gain some low risk exposure to higher prices.
On the second question, that all comes down to the manager themselves. If they have been lagging for a few years and realize that one more year of underperforming will lead to large AUM outflow, I can easily see them pushing the chips all in. If it is a manager that has a better track record but is struggling this year, I can see them being more strategic and buying laggards that they can justify on a valuation basis that will also benefit from a Fed that may be stopping and an economy that may not go into recession. This is probably a more rational approach. However, if a manager is facing a more existential crisis, we can't assume rationality
Great analysis! I always appreciate your insights, thanks for sharing them.
Great write up as always! Regarding margins, do you think that if inflation reaccelerates to 4%+ in H2, can we see margins moving up or in other words is it safe to conclude that margins have bottomed?
Good question. Because there was cash in bank accounts, companies were able to hold onto pricing power as inflation accelerated before. This time around, I am not so sure companies can hold onto pricing. In addition, labor is seeking higher pay. Thus I think margins will atruggle most likely