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One Eyed Deer Blog - 12th October 2023

Updated: Oct 19, 2023

Beware of falling Rates

It feels that equity markets are champing at the bit for any “go” signal to appear and set off a run to new highs. Fast money is being touted as “record” short, and the looming (or is it here already?) “squeeze” alarm is blaring.

As noted recently even we have reduced our short positioning for this very event, based on NDX and SPX chart levels. I would, however, lean towards using this ammunition as fade capital if and when the squeeze stampedes through the weak shorts, assuming the shorts are indeed weak. Perhaps they are quite healthy and any squeeze momentum may be soaked up quickly.

Equity markets are like twitchy teenagers. They seem unable to simply sit still. If they are not going up, then look out, they are going down. And when that is overdone, look out again or you will suffer a “face melting” rally. The clickbait is strong among the stonks crowd, so maybe we should look to our more staid bond market brothers for a lead.

Well, the current “meta”, as the kids say, is that as bond markets are apparently failing and rates are moving inexorably, higher equities face crippling funding costs and bloated risk premia. In the last few days, the mild capitulation in rates (where the tens were threatening 4.90) had equities hitting support levels and everything poised to “crack”. We are now sitting in the relief period after that event which brings me back to my opening warning. Do softening rates really equate to the “go” signal?

Consider where NDX was placed as bonds were melting down. Zooming out to a medium timeframe shows clearly that the big end of equity town was CLOSE TO ITS HIGHS. Sure, crappy stocks, KRE and the like, we/are wallowing, but the NDX is acting like a safe port in the bond storm. What really might be going on here is significant flow out of bonds and into not just money market funds, but mega cap tech. Big corps who actually make more net interest income with higher rates and will be considered sticky retail spend.

Hence my warning to be wary of softer rates. What if bonds HAVE bottomed for now? What if lower rates are simply the result of flow back to bonds? The ten year bond has the luxury of, wait for it, being able to SIT STILL and still be useful. If the bond market suddenly looks cheap (spoiler alert; it DOES), and stable, then the allure of those big expensive equities will dull.

Chart Lab

Of course, the ten year is pulling back from 5% will get everyone hot under the collar and short term squeeziness and a sense of relief will push everything back up again. But where to? We are ready to fade old highs again as all the problems of this disorderly unwind remain.

Gold vs Silver subplot

The ratio is still sitting there at 85, allowing you to do as much as you want. And that’s how much you should do. Put it on, set a filter to tell you when it’s 75 and just wait. Keep some ammo for a spike out above 90.

Equity/Convertible Issuance

Don’t want to admit you can no longer raise debt, but need cash? Do what Rivian(RIVN) did. Issue an old fashioned convertible. I do keep pushing a bit of a line that the debt window is closed for a lot of corporates, and here’s an example, and if hedge fund and CTA shorting is not enough downward pressure, then corporate issuance will be.

Convertibles are equity. All the salesmen will tell you it’s debt, but when you really need it to be debt, guess what, it’s equity. So, you have to enter the position considering it as equity, because that’s probably what you are going to get. That small issue last week cost the stock 20%, and more are coming. As the enormous fuming pile of maturity approaches more and more frozen corporates are going to first try convertibles and then will be forced to do straight equity. It’s coming.

Trade/Position Summary

  • One-eyed deer: Gold/Silver ratio (sell). @85 and one of our biggest positions.

  • Runner up: Fade equity squeeze at old highs, buy TLT.

  • Honourable mentions: Short banks.

Wrapping Up.

  • We are less short on equities (looking to fade)

  • long cash, short GSR

  • Bonds however need to be on your radar. Even if you feel they are risky, keep in mind that the asset class is hated.

  • I am a little concerned that TLT call option buying is at records, but remember that they can all still lose their money if bonds simply sit still here. If they sit still, and rates remain the molasses that we all have to wade through, then corporate’s remain hobbled and bond holders simply collect.

  • The bond-cheap vs stock-expensive jaws of death should close, one way or another.

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