In our last blog post we laid out our thoughts on some of the macro factors that have been driving market performance over the past several weeks. In particular we focused on what the potential impact of the Fed’s operation twist might be on the consumer and business sectors. The conclusion we reached then was that risk assets such as equities, commodities and assets linked to emerging markets would probably suffer as a result of the Fed’s action. This assessment has proven largely correct, however, the benefits of being on the right side of that trade have not made themselves apparent in the performance of Team McCombs.
Our experience points to a more pervasive dynamic gripping financial markets, a generalized lack of conviction that is causing investors to pinball from one data point to the next trying to stay ahead of, or at least in line with historically volatile financial markets. This so-called “risk-on / risk-off” trade has complicated the trading environment, day traders and storied investors alike are experiencing forced capitulation as they are flushed out of trades at disadvantageous levels before trends and fundamentals assert themselves. We saw this over the summer as George Soros who had been sitting with significant cash holdings decided to return outside money to his investors, a similar move came late last summer by Stan Drukenmiller, formerly of Soros. Other hedge fund luminaries have also encountered a bumpy road such as John Paulson and Louis Bacon of Moore Capital.
What lessons can we try to glean from these observations? Do we day trade around a certain trend that we think will bear itself out, or do we put on a position that we have conviction about and then ignore the day to day noise of the marketplace? There are no easy or right answers to these questions but the conclusion we have drawn is that we have no idea what the Troika will say tomorrow about the state of European sovereign debt, and we can’t anticipate whether or not fiscal austerity in the US will be so severe as to push us into recession, but we should take the trends we do see and take a position and hope that our analysis is correct.
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