Macro Recap - 2024-07-15
CPI
The inflation number on Thursday much better than expected. Y/Y basis, we saw headline fell 30bps to 3% (est at 3.1%) and core fell 10bps to 3.3% (est at 3.4%). There wasn’t much movement in equities immediately following the number but it did dip pretty hard the rest of the day. I have more to say on that below in the '“Quant Quake” section. Bonds did move up (TLT up 1%) and Fed odds for a September rate cut pretty much hit 100% from 80% before the number.
Next up, the market will be focusing on the Q2 earnings. This week we already have some Banks along with industrial supplies producer Fastenal reporting. I think earning seasons are very noisy in general so I don’t think any conclusions can be drawn right at the get go. I did go through Fastenal’s earning transcript and they continue to see a slow manufacturing environment. All this just further confirms growth is slowing. The question is how much will growth slow? I’ll be focusing very much on keeping tabs on the consumers and how they are spending money.
My modus operandi hasn’t changed but I’m not gonna lie that things look a little stretched. Especially given Thursdays price action….
Quant Quake
Thursdays price action showed a glimpse in to the positioning of some major long short equity players this past several months. There were obvious signs along the way given the relentless outperformance of Mag 7 and their peers relative to the more esoteric small cap stocks. Some numbers: IWM yesterday closed up 3.59% while the QQQ closed down -2.19%. That is a 5% reversal. SPY closed down - 0.88% while the Equal weight version (RSP) was up 1.21% . That is a 2% reversal. What does this mean historically?
The red line shows the 0.001 percentile move as a reference of the severity. Now I’d like to add that most of these long short shops are levered up at least 5x so depending on how aggressive they are, they are at least looking at a double digit single day drawdown.
What does this mean? This abrupt rotation just shows how fragile the positioning is. It shows a lot of people holding the same position. As we move further up, I’d argue that liquidity will get more scarce. When the piano stops playing, everyone will rush out the door at once. Hedging is rather cheap right now so it doesn’t hurt to put some on just in case.