Every week I get an analysis from HOSIX manager with great risk-adjusted performance since inception.
Below is what he publish last weekend.
Geopolitics dominated the investment tape this week as the U.S. and Israel attacked Iran bringingsignificant volatility to markets. Equity indices were weak, corporate spreads widened, and crudespiked to 92$ per barrel. If that wasn’t enough, the market had to absorb a very weak non-farm payrollreport on Friday. The U.S lost 92 thousand jobs in the month of February – expectations were for again of 55 thousand. Much of the losses were in the private sector. This takes the 3-month averagepayrolls gain to 6 thousand per month and brings a discussion of near-term economic contraction to theinvestor table. We have stated on numerous occasions that we believe we are in a late-cycle economy which doesn’tguarantee a recession in the next twelve months but makes the economy more susceptible toexogenous events. With the onset of a potential protracted war in Iran, we may very well have such anevent. The most ominous market reaction to the news is the performance of the world’s safehaven,U.S. Treasuries. The flight-to-safety trade was virtually non-existent as yields rose all week andaccelerated higher even after the non-farm payroll report. 5-year inflation breakeven rates were up 20bps on the week meaning TIPS outperformed fixed-rate debt by a lot. Recall, we have mentioned therelative value in TIPS for awhile now and this remains the case in our view. A stagflationary economy puts the Federal Reserve in a difficult situation. Continued employmentlosses against the backdrop of accelerating inflation and higher commodity prices will force them tochoose between their dual mandate. We believe they will choose to bolster growth rather than fightinflation. As such we think that further curve steepening is in the cards. The 30-2 curve steepened 5bps in response to the weak payroll numbers on Friday. We would be remiss to not mention the elephant in the room – high yield. High yield spreads are stillvery tight historically and have quietly erased their year-to-date gains. Leveraged loans, meanwhile,have been exhibiting weakness for the last six months. The Chart-of-the-Week plots high yield spreadsversus the leveraged loan price index (inverted). As you can see there has been a wide divergencebetween these two asset classes. We believe there will be significant “catch-up” in the near termimplying considerable weakness in the high yield market is ahead. We have been paring back our highyield exposure for the last 18 months and the bulk of it is in oil & gas, utility retrofit, agriculture, andmilitary spending. We like these industries in this environment
