All posts by Charlie Bilello

The Negative Yield Matrix: Red Pill or Blue Pill?

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Red pill or blue pill?

In the 1999 movie “The Matrix,” the main character Neo (Keanu Reeves) is faced with this choice. Take the red pill and face the “truth of reality” or take the blue pill and live the “ignorance of illusion.”

Morpheus (Laurence Fishburne) explains to Neo:

“This is your last chance. After this, there is no turning back. You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I’m offering is the truth. Nothing more.”

Neo takes the red pill.

In reflecting on the global economy today, most seem to be choosing the other path: the blue pill. And who could blame them?

The blue pill represents the dreamy idea that central bankers can save the world through easy monetary policies that force interest rates to 0% and even negative levels, artificially driving up asset prices. As long as asset prices are going up, the policies are deemed to be “working” regardless of the reality in the real economy. And as long as money is cheap, governments and consumers can continue to borrow and spend beyond their means.

On the other hand, taking the red pill would mean facing the truth that unending easy money policies only borrow from the future, and the virtuous “wealth effect” sold to the masses has yet to take place after six long years of unprecedented easing. The red pill means acknowledging that you have the slowest U.S. expansion in history, another recession in Japan, tepid growth in Europe, and the slowest growth in China since 2009. And that you have this backdrop in spite of (and perhaps, because of) record central bank easing and government borrowing/spending.

The red pill means merely considering the possibility, as Randall Forsyth wrote this past weekend in Barron’s, that artificially “low interest rates are backfiring,” forcing savers to save more as the income expected from a risk-free portfolio has been reduced to nothing. The red pill means perhaps trying to understand the comments of Stan Druckenmiller (bloomberg interview last week), who considers current 0% Fed policy a “job reducer” and an “economic reducer” that is a “terrible risk reward” in its sixth year.

Understandably, though, the blue pill is more appealing. The dream world matrix of negative yields throughout Europe is an easy choice over the looming reality of market-based yields in Greece.

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And so global policymakers and their minions have successfully convinced the intelligentsia that driving up asset prices (from a deflated bubble that they created in the last cycle) is all that matters and that there are no adverse consequences to their actions. To markets and the 0.1% dream world, perhaps this is true. But to the rest of us who live in the red pill reality, what’s going on today can only be described as madness.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Edward M. Dempsey Pension Partners New York

 

 

 

 

 

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

 

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Lumber, Gold, and Volatility in Equities

What do Lumber and Gold have to do with volatility in equities? As it turns out, more than you might think. In our third research paper which recently received the 2015 Wagner Award from NAAIM, we uncover a powerful intermarket relationship between these two seemingly disparate commodities and the environment for equities.

Lumber’s sensitivity to housing, a key source of domestic economic growth in the U.S., makes it a unique commodity as it pertains to macro fundamentals and risk-seeking behavior.  On the opposite end of the spectrum is Gold, which is distinctive in that it historically exhibits safe-haven properties during periods of heightened volatility and stock market stress.

When you look at a ratio of Lumber to Gold, it is telling you something about the risk appetite of investors and the relative strength or weakness in economic conditions. When Lumber is leading Gold, volatility in equities tends to fall going forward. When Gold is leading Lumber, the opposite is true, and equity volatility tends to rise. The difference in historical volatility at nearly 6% per year is substantial, and as we outline in the paper which will be released in May, it allows an investors to position offensively or defensively in advance.

S&P - 4-20

What is the relationship showing today?

Lumber has been falling precipitously since the start of the year and underperforming Gold significantly over the past three months.

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Historically, this has preceded higher volatility and more difficult equity markets looking ahead. U.S. stocks were roughly flat in the first quarter and volatility remains near historic lows. But the relationship between Lumber and Gold is suggesting that conditions may be changing.

We are perhaps seeing this already in the economic data with the Bloomberg Economic Surprise Index currently at its lowest level since March 2009. Economic data continues come in weaker than expected, with misses last week in Retail Sales, Industrial Production, Housing Starts, and Building Permits.

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Thus far, investors have shrugged this off as a positive for stocks because it means the Federal Reserve may be more patient in raising interest rates. Indeed, after the latest string of weaker data, expectations for the first rate hike have been pushed all the way back to December.

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This has provided much comfort to investors who have become increasingly dependent on a continuation of 0% interest rates (which will hit 7 years in December).  Should this weakness persist, though, it will likely become harder to dismiss regardless of how dovish Fed comments may be. At the very least, if history is any guide, we should be prepared for higher volatility ahead.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Edward M. Dempsey Pension Partners New York

 

 

 

 

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

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Hunting for Growth

In the past few months, we learned that 4th quarter S&P 500 earnings declined 14%, their worst year-over-year decline of the expansion.

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With growth harder to come by, investors have been actively bidding up growth names wherever they can find them.

The Russell 1000 Growth Index (IWF) has outperformed the Russell 1000 Value Index (IWD) by over 5% thus far in 2015. We have seen similar outperformance in small cap growth (IWO) over small cap value (IWN).

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Looking at the difference in sector weighting between Russell 1000 value and growth indices, we can see that growth has benefited from the outperformance in Tech and Consumer Discretionary with an overweight in those sectors. Growth has also been aided from an underweight in Financials, Energy, and Utilities as those sectors have declined thus far in 2015.

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Sector performance in the first quarter has largely followed revenue growth, with Tech, Consumer Discretionary, and Health Care posting above-average revenue growth while Financials, Utilities, and Energy have shown below-average growth.

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With the release of 1st quarter earnings in a few weeks, it will be interesting to see if the outperformance of growth over value persists. If growth remains scarce, we could see a continued widening in this relationship. On the other hand, if growth comes in stronger than expected, particularly in the “value” overweight sectors such as Financials and Energy, we will likely see a convergence in performance.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Edward M. Dempsey Pension Partners New YorkCharlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

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