Having thrown in his bearish towel in December, the self-proclaimed “last bear standing” has had a tough January. His plan, to “just be long pretty much anything” appears to have back-fired (for now) as Eclectica reports a 3.6% loss in January – the worst month since the Fund’s inception.
His largest loss was on a long Japan theme (leveraged) and that was somewhat offset by gains in his short emerging markets and short China themes.
It appears nothing hs changed from Hendry’s December perspective of the inexorable melt-up in developed markets thanks to central bank largesse (247% of NAV exposed to stocks) though he does note “renewed turmoil” which, we suppose, merely supports his thesis longer term.
January witnessed renewed turmoil in emerging market equities and currencies. The Fund profited from positions within our Short Emerging Markets and Short China themes (+0.9%).
FX positions within these themes generated a positive return of +0.3% as our “good versus bad EM” FX basket posted gains, largely driven by shorts against the Turkish lira and the Russian ruble. Equities provided an additional +1.4%, led by short exposure to Chinese and EM indices. These gains were partially offset by losses on curve steepeners in Australia and Korea, which were closed out during the month.
Developed market equities suffered sharp sell-offs over the course of the month as emerging market woes spilled over into global risk assets. The Fund’s core Long Developed Markets theme suffered as a result (-2.0%). Developed market equities cost the fund -1.7%, led by weakness in internet and robotic stocks. Additional call option exposure to US and European indices cost a further -1.3%. Equity losses were partially offset by gains in front-end rates in the Euribor and Short Sterling curves, generating a positive contribution of +0.8%.
The largest detractor to performance came from our Long Japan theme (-3.0%). Losses on Nikkei call options were the single biggest drag on performance during January (-2.2%), as the underlying index fell -8.5%. Cash equity positions in Japanese brokers and property shares cost a further -0.8%.
From Hendry’s December letter…
Last bear standing? Not any more…
I know what you are thinking. You are thinking that the last bear is capitulating. It isn’t a good sign. Maybe it is that simple. But I think it is a little more complicated. We, and I accept we aren’t the first here, sense that US monetary officials may now be willing to subordinate the demands of their own economy to the perils confronting emerging market economies. If that is the case, the great peril is not that the Fed finally tightens monetary policy and US stock prices suddenly tumble from what are very obviously overpriced levels. Would that it were – our curmudgeonly portfolio structure (think dynamic volatility targeting and stop losses) works well with big stock market reversals. Instead the greater peril is that the current backdrop will turn out to mark a rapid acceleration in the ongoing move to the upside. A hint that this might be the case comes from looking back through the 113 years of price data for the Dow Jones Industrial Average. We have done this (so you don’t have to), searching along the way for the comparable periods that fit most tightly to the last 500 trading days. What is clear is that periods of trading similar to the one we have seen over the last two years don’t often seem to end quietly: they boom big time or they crash. Which is it to be this time? Looking at the markets of 1928, 1982 or even 1998, all of which have scarily similar looking historical charts to today’s, we wonder if it won’t be both. Starting with the boom bit.
Let’s look at what happened in 1998. All sorts of market moving events were shifting the sands. There was the fall out from the Asian Tiger crisis. There was Russia’s local currency default. And there were the event risks of the collapse of LTCM and the Y2K scare. Together these things ensured that US monetary policy was set far too loose for the US economy itself. And the result? A parabolic trend to the upside in equities that destroyed anyone who chose to stand in its way. This is what I fear most today: being bearish and so continuing to not make any money even as the monetary authorities shower us with the ill thought-out generosity of their stance and markets melt up. Our resistance of Fed generosity has been pretty costly for all of us so far. To keep resisting could end up being unforgivably costly.
As a reminder, here is Hendry’s conclusion from his December letter:
Just be long. Pretty much anything.
So here’s how I understand things now that I am no longer the last bear standing. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should buy shares if you put a higher probability than your peers on the odds of a European democracy rejecting the euro over the course of the next few years. You should be long risk assets if you believe China will have lowered its growth rate from 7% to nearer 5% over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan (which it probably won’t). Hey this is easy…
And then it crashed
I have not completely lost my senses of course.