It's moving day. People moving in, people moving out. And, either in anticipation of the new family living in that big old neoclassic home, or suffering the aftereffects of an extended hangover from a rally that seems to have ended ages ago, equities have been edging lower since the year began, mothballing the Dow 20,000 countdown clock. The 10-year, on the other hand, is on its way to round-tripping its record-breaking sell-off with yields again climbing as the economic data continues to showcase a strengthening economy and a more hawkish Fed.
In concert with the January rally in U.S. Treasurys has been the profit-taking in financials despite strong earnings reports and forward guidance. While this may have been the trigger, jettisoning some bank positions that rose 20 percent over two months after lagging the market for a decade should be no more of a surprise than Angelina Jolie letting go half her position in Brangelina. To me, though, that's shortsighted. Why pay the taxes on the trade when you are only going to reposition the stocks as rates climb and the curve steepens. I get it — they won't ever have the earnings power that they did but they don't need it to trade higher from current levels.
So the week has been — well, kind of boring. One of those weeks when you don't bother to look at your screen all that often; when you spend your time putting together the decision tree based upon varying scenarios, each dependent upon how the new administration moves forward. Sure there were some things to do but nothing had moved all that much — aside from the 10-year — that would motivate me to drastically reposition or add exposure.
Well, not entirely true. Against my better judgment, I initiated a small trading position in Macy's and traded steel on the short side. Why to both? Likely because it has been a while since I have done something really dumb and wanted to get back in touch with my inner self. It's a pair trade, I guess: M is over-hated (with a 5 percent yield) while X is over-loved with a valuation that is unjustified, a domestic infrastructure plan that won't happen so quickly, a strong dollar, Wilbur Ross speaking of tariffs that already exist and China's inability to fund more infrastructure. I may be out of the trades by the time you read this.
In terms of positioning, hedge funds had a modest decrease in net exposure coming into 2017 and an increase in overall gross. The industrial, energy and tech trade was alive and on the other side, health care and retail continued to look for friends in a hostile environment. (Addendum: I covered X and remain long M. It has been a day and a half so chill.)
OK, I fess up. I can't avoid it anymore. Should have addressed it upfront. I've been hiding. Took a break from writing the weekly over the last month or so. Been maniacally focused and incredibly busy as we launch a new fund — most attractive profile I've seen (only for accredited investors). Plus, I didn't have all that much additive to say because — well, how could I? There weren't any substantive new inputs; just the election-era ones being recycled. But now is when the rubber begins to hit the proverbial road. And there should be no doubt that President Trump — he has been sworn in as of this writing — is going to hit the road in fifth gear.
Investors will too. While most outwardly reflect cautiously upon the market's valuation, perhaps equally uncertain of the ability of a Washington newcomer to execute on truly bold plans, they also understand that another year of ceding performance to passive investing brings them one step closer to forsaking stock trading for trading down from the Tesla to the Chevy Volt.
