Tuesday, January 17, 2017

Going After the Hedgies

The hedge funds are having a hard time of it so far this year.  As a group, they are short bonds, and long the dollar.  Both are moving massively in the other way, with bonds squeezing shorts hard since the last week of December, and the dollar getting wrecked since the first week of January.  There is a bit of an unwind of the Trump trade as they reflect on his lack of details on economic policy and his infighting with Congressional Republicans about corporate taxes.

These are your pre-inauguration jitters, and the uncertainty is being priced into crowded trades.  However, the S&P 500 has been resilient, hardly flinching as other macro bets go awry for the hedgies.  I do believe that the hedgies will be getting relief soon, when Trump starts going into specifics on his tax cuts.  That is the main piece of the Trump trade.  Blowing out the budget deficit with huge fiscal stimulus in the form of tax cuts and a little infrastructure spending, benefiting stocks and killing bonds.

The action so far in 2017 shows how tenuous these Trump trades are.  They are based on a belief that Trump will deliver everything that he talked about on the campaign, but now the uncertainty is starting to creep in and that requires adjustments in prices.  I still believe that we will get to a point in the first quarter when the hedge fund managers really push hard with the long dollar, long US stocks, and short bonds trade.  Right now, they are taking their foot off the gas a bit, waiting for Trump to reveal more concrete details of his economic policies.  Even though Trump is not the smoothest communicator out there, he does have a habit of wanting to get things done his way, which would mean really large tax cuts, and a total disregard for the deficit.  That is stock heaven in the short term.

The S&P 500 continues to bore us, and there is no need to force trades in these situations.  But I would rather buy dips than short rallies from here.


MM111 said...

Still think we sell into inauguration?

Market Owl said...

I think we sell after inauguration now that we're not selling off here.