Red Alert! Well done Washington – May 26th 2023

We mentioned market fatigue and dislocations as correlations were breaking down over the last few weeks. Well, this not only continued, but this morning I received an AI stock pick from a barista rocking a killer mustache…talk about a real life head and shoulders pattern (still, I’m not one to short a good stache or an innovative US leading co and clear untouchable force in this wild market environment). Perhaps the short and what few speak about are the millions of jobs AI and related technologies are about to overhaul in our economy. More to follow on this…

What few have discussed amidst the turmoil are the lurking signs of contango appearing in commodity markets. Given low or ever-decreasing inventories levels and assuming minimal carry costs for these, the upward sloping forward curves suggest that future prices (inflation expectations) will remain elevated and/or that supply disruptions are on the horizon (further supporting the Feds case for additional rate hikes). It’s worth noting that supply side economics are not typically resolved by central bank intervention; but by policy, capex, incentives, efficiency, trade, infrastructure and regulation (or de-regulation in some cases). As of now, the only card in play is demand destruction (which is causing pain but no obvious gain).

Lastly this week, Washington’s theatrics on political sausage making led rating agencies to put the US on high alert and spook investors even further, giving room for front end rates to unwind at least one rate cut that was priced in for Dec 2023 and keeping 300 single name stocks (only 15% of weight!) of the S&P500 pinned in the red zone for the year.

** Thoughts on RCG Portfolio Positioning
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** Dynamic Macro Strategy
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This strategy relies on historical data and quantitative techniques to detect statistical disparities and make predictions in global markets using liquid ETF’s.

“Weaker data pours out of the UK as inflation shows stubbornness and SONIA terminal rates hit highs. Cost of living increases and expiring mortgages forced to refi at higher levels will continue to pressure gilts and the pound . We expect similar effects but to a lesser magnitude out of the EU as economic turbulence persist. We liquidated UK exposures a few weeks ago and continue risk reducing in the Eurozone.” – Nick Diaz

** Inflection Strategy
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The strategy takes positions in highly out of favor US equities which we believe are inflecting due to changing fundamentals/events.

“With companies in the Energy sector having categorically improved their financials over the last decade, along with macro factors continuing to reflect an undersupplied oil market, we expect higher capital inflows and greater exposure in this sector within the S&P 500, supporting our overweight positioning. Fundamentally and in my view, the Energy sector is once again an investable area in the market in spite of recent heightened volatility. Our names are able to perform well and generate FCF with $70/barrel in WTI.” – Stefan Lingmerth

** Safe Haven Strategy
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This strategy protects capital during inflationary environments and seeks to maximize yield using fixed income instruments and defensive assets. PM – Nick Diaz

“Another big move in US rates this week as 2y notes hit 4.5% while the rest of the curve finally begins to price in term premia. 5s, 10s and 30s are all very near a 4 handle while 2s10s flattened to ~ -70bps.The threat of a US default certainly helped get to these levels quickly and as suggested last week, we began lifting some 2yr paper at this level with plenty of buying power should better opportunities present themselves. Volatility aside, I expect debt ceiling negotiations to be a non-event over the next few days.“- Nick Diaz