​Betting Against the Stock Market?

Leo Kolivakis  |


Jeff Cox of CNBC reports, Coming off a Q1 loss, Third Point's Dan Loeb raises his bet against the stock market:

Hedge fund magnate Daniel Loeb is increasing his bets against a suddenly volatile stock market.

Following a quarter in which his two flagship funds posted losses, the head of Third Point said he is increasing short positions that proved to be profitable during an otherwise rough first quarter.

"An important shift in markets happened in the first quarter," Loeb said Thursday on an earnings conference call for Third Point Reinsurance, which posted a 26 cent per share loss for the first three months of the year.

"Investors have become increasingly concerned about multiples, particularly since after many years of low rates, there finally was an alternative to equities in the form of relatively riskless two-year money," he added.

Indeed, the quarter marked a number of changes, with rising bond yields being one of the biggest market movers.

In the years since the financial crisis, the search for yield had forced most investors into higher than normal stock allocations, fueling a nine-year bull market run that had seen few interruptions. However, major indexes have seen multiple dips into correction territory so far in 2018, and allocations to bonds have been rising as government yields have hit multiyear highs.

Loeb's major funds at Third Point posted losses for the first quarter. The Offshore Fund lost 0.6 percent and the levered Ultra Fund was off 1.5 percent, according to a letter he sent last week to clients.

The firm posted an 18.1 percent return for 2017, which was below the S&P 500's total gain of 21.8 percent.

In addition, he disclosed during the conference call that the reinsurance company's portfolio was off 0.2 percent for the first quarter, actually outperforming the S&P 500, which declined about 0.8 percent.

However, he said an equity short allocation returned 2.4 percent, "and we intend to further increase short exposure to fundamental single names and quantitative-derived baskets in 2018, and less on market hedges to dampen volatility and reduce net exposure."

Stock pickers such as Loeb generally like periods of market volatility as it presents pricing opportunities.

"Looking ahead, we still see S&P growth in the U.S. supported by fiscal stimulus in 2018," he said. "We remain focused on maintaining a portfolio that can deliver compelling risk-adjusted returns across market cycles and will opportunistically adjust the portfolio across expected further waves of volatility."

Loeb said the firm also is watching the economy "to see if a recession, which we don't think is close, might be getting closer."

Dan Loeb's Third Point isn't the only hedge fund shorting the market. Citing this Bloomberg article, Zero Hedge reports that Bridgewater, the world's biggest hedge fund, is derisking and shorting stocks.

It's Friday, time to relax a little and talk shop. And in my case, that means markets. Had a nice lunch with a futures trader who used to work at Lehman and now lives in Montreal. He told me he thinks we will retest the Trump rally starting point of 2150 on the S&P and that the 10-year US Treasury yield will touch 4%.

He thinks multiples will contract but added: "I don't know if we will touch 2900 on the S&P before 2150 but I really think we need to test that low."

He also told me: "Something changed in April. I had a great first quarter but my conviction level is low now and so I adjusted my positioning accordingly."

I told him I'm lukewarm on the S&P 500 (SPY)SPY, don't think it's the end of days for markets or sell in May and go away, but doubt we will make new highs this year (click on image):

Looking at the chart above, you can see the SPY remains above its 50-week moving average and is likely going to rally in the near term. That's my best guess; it might just go sideways here as volume dries up.

But I still doubt we will see new highs this year just like I doubt we will see 4% on the 10-year Treasury yield.

Admittedly, the yield on the 10-year is still hovering near 3%, which is why US long bond prices (TLT(TLT) remain range-bound, unable to take off in any meaningful way (click on image):

With oil prices around $70, mostly owing to geopolitical tensions, it's hard to see bonds rallying but US inflation pressures remain tame and I keep telling my readers to pay close attention to the US dollar (UUP(UUP) because if it rallies -- and I believe it will over the next two years -- it doesn't portend well for emerging market stocks (EEM(EEM) and commodities (DBC(DBC) in general (click on images):

Still, the good news is emerging market stocks and commodities might rally here if the US dollar stalls in the near term but I wouldn't bet on any sustained rally going forward.

I'm not exactly bearish or bullish on the market. The overall market is dominated by a few large stocks like Apple and Boeing and as I was telling another friend of mine today, I have more conviction on my individual stock picks than on the overall market.

So betting against the stock market isn't something I would do right now with a high degree of conviction, especially if the US dollar stalls here.

But with the US yield curve at its flattest since August 2017 and the Fed set to raise rates at least three more times (June is a done deal, after that, we shall see), I remain cautious and keep telling my readers not to ignore the yield curve.

Of course, opinions on the yield curve vary. In his weekly comment, Chen Zhao, Chief Global Strategist at Alpine Macro, thinks too much is being made of the flattening yield curve especially since the "resting spot for sovereign yield curves around the world has indeed become much flatter than before".

Take the time to read Chen's latest weekly comment, it's excellent. His main thesis is that a flat curve is not necessarily a bearish sign for the underlying economy or stock prices but he warns if the curve inverts, it's bearish for risk assets.

I don't have much to add this week in terms of markets. I remain cautious but see many opportunities trading individual stocks.

Below, stocks moving up and down on my watch list for Friday, May 11th (click on images):

Again, don't trade or invest in any of these stocks if you don't know what you're doing, you'll get clobbered. I'm just showing you there are ways to make money on the long and short side every single day. Follow me on StockTwits here where I try to post ideas on a daily basis.

On that note, wishing you all a great weekend and please remember to donate and/ or subscribe to this blog on the top right-hand side, under my picture.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
SPY SPDR S&P 500 276.40 -4.05 -1.44 134,801,533
dbc PowerShares DB Commodity Index Trac
EEM iShares MSCI Emerging Index Fund 39.30 -1.06 -2.63 107,132,510
uup iShares Commodities Select Strategy ETF

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Emerging Growth

CMX Gold & Silver Corp.

CMX Gold & Silver Corp is an exploration stage company. The Company is engaged in the acquisition, exploration and development of silver and copper/gold properties in the USA.