Takeaway: Use our quantitative signals below to help guide your thought process on what are currently macro’s most challenging questions.
Last week was a really interesting week for us. Specifically a number of important developments occured that were either directly counter to our existing macro themes, or generally outside the scope of those themes, including but not limited to:
In the context of all that, I had an extremely thoughtful discussion with an even more thoughtful portfolio manager late in the week. The discussion centered on the following questions:
Obviously these are very difficult questions and we won’t even pretend to claim we have all the answers readily available. What we do have are robust quantitative tools to guide our internal discussions and workflow. In the context of the aforementioned deluge of puts and takes, we thought we’d share some of those signals with you.
Looking to our Tactical Asset Class Rotation Model (TACRM) we see that:
Looking to our S&P 500 Industry Divergence Monitor:
Again, we thought we’d share these nuggets not as conclusions, but as perspective into our evolving thought process. Signals like these will continue to guide our interpretation of the fundamental data, as well as our expectations for said fundamentals.
It’s worth noting that have not changed our fundamental views; nor are we looking to do so at the current juncture. If, however, we were to do so in the coming months, that process would undoubtedly start with a deeper understanding of the answers to the aforementioned questions.
Lastly, for those of you looking for fundamental analysis with respect to the aforementioned questions, we highly encourage you to review the following research notes:
As always, please feel free to reach out with any follow-up questions and we’ll be more than happy to help. Have a great evening,
Associate: Macro Team
On Thursday, August 21st, we hosted a call with Judith Ganes-Chase, founder and president of J. Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001. A replay link to the call is included below with a brief summary:
Judy acknowledged that Brazil has a cyclical pattern of coffee production (one year up, one year down). However the scale of Brazil’s shortfall in the coming years will be unprecedented: She emphasized that this is the first time we are looking at a two-year production deficit.
Judy proceeded to outline three unusual weather scenarios that occurred earlier this year:
Please feel free to reach out with additional questions.
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Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning For Commodities in the CRB Index: The U.S. Commodity Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday afternoons. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close). The table below includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large positions.
2. Spot – Second Month Basis: Measures the market expectation for forward looking prices in the near-term.
3. Spot – 1 Year Basis: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
Lean hogs spot prices have already retreated ~-27% over the last month and are expected ~-18% lower in 1-year. We highlighted the recent developments of a potential game-changing vaccine to the PEDv virus that affected an estimated 5,000 farms in 30 states across the country. A link to that article from July 31st is included below:
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as the total sum of “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. A majority of the open interest is created from large speculators or participants who are either: 1) producers/sellers of the physical commodity hedging their cash market exposure or 2) large speculators who are directionally-biased on price.
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