Market Commentary.

Insurance is cheap . . . for now

June 2024

Equity markets in June continued their positive momentum despite a flat final week. The S&P 500 index advanced 3.59%, MSCI-ACWI was up 2.23%, US 10-year bond yields slipped by 2.28%, GSCI was up 1.43%, DJ Real Estate index rose 2.02%, and the US Dollar was up 1.14%.

Equities, and other risk assets, continue to ride a wave of excess liquidity, the difference between real money growth and economic growth. The rally in US equities has been matched with strong earnings growth.

The Fed's preferred measure of underlying inflation decelerated in May, bolstering the case for lower interest rates later this year. Core PCE price index increased 0.1% from the prior month, the smallest advance in six months.

We can expect some sort of pullback in the short-term, with markets overbought and well above their moving averages, 50, 100, and 200. Medium-term, liquidity suggests we "stay the course,” as deep sell-offs are unlikely.

With the VIX as low as it is, it might make sense to take advantage of the cheap downside protection. One-month realized volatility dropped from 10.9 to 7.4 as demand for hedges remained muted throughout the month. Implied volatility as measured by the VIX Index dropped from 12.9 to 12.4.

We are pleased to announce that our Multi-Asset strategy has completed its eleventh year of performance and, by all major metrics, sits at the top of its class. Protected Global Equity Plus completed its first year of performance in line with expectations.

Oingo Boingo

(“thinking while dancing”)

May 2024

Equities recovered all of April’s losses and then some, resulting in the third best May in nearly two decades. The S&P 500 index began the month at 5035 and ended at a high of 5277. The rally caught many by surprise, as pundits turned cautious on the April weakness and the conditioned response to sell in May.

Twenty-one day realized volatility dropped from 13 to 9 over the course of the month as options volumes remained muted with no major catalyst. Average daily equity and index volume hit its lowest monthly level in 2024, according to Bloomberg. Implied volatility dropped from 15.3 to 13.9. We attribute this to lower demand for downside protection.

MSCI-ACWI was up 4.06%, US 10-year bond yields retreated 3.53%, GSCI was down 1.90%, DJ Real Estate index rose 4.94%, also recovering from severe losses from April, and the US Dollar was down 1.46%.

PCE (Personal Consumption Expenditures) data showed little improvement in inflation in the month of May, which suggests that the Federal Reserve will continue to keep rates where they are for longer. In general, first-quarter earnings exceeded expectations, providing support for US stocks amid growing complexity for the Federal Reserve. It is worth noting that investors were especially harsh to those companies that missed earnings expectations.

"Present fears are less than horrible imaginings"

- William Shakespeare

April 2024

April was the worst month of performance this year for equities and bonds and the first down month for all three major US equity indices since October 2023. The S&P 500 index started at 5254 and ended at 5035, down approximately 4%. MSCI-ACWI was down 3.30%, US 10-year bond yield jumped 11.41%, GSCI rose 1.16%, DJ Real Estate index fell 8.20%, and the US Dollar was up 1.66%. Twenty-one day realized volatility rose from 8% to 13% over the course of the month. Implied volatility (VIX) rose from 13.01 to 15.65.

Interestingly, the selloff was a slow grind lower with no real panic or fear and no lasting effect on volatility. Equities rose in the latter half of the month on the back of good earnings, albeit within a rather choppy market. Volatility risk premium also compressed as implied volatility declined from an intra-month high of 19.23 on April 15.

In summary, a combination of hot US inflation data and strong Q1 US GDP fueled market fears of higher for longer interest rates. April saw the repricing of the Fed easing cycle, as investors remain wary that inflation might reaccelerate.

Is the Future More or Less Certain?

March 2024

Global markets continued their advance in March. The S&P 500 gained 3.10%, MSCI-ACWI gained 3.14%, US 10-year bond yields retreated by 1.17%, GSCI rose 4.73% (led by crude oil and gold), DJ Real Estate index was up 1.76%, and the US Dollar was up 0.32%. There was broader US equity strength with Cyclicals, Energy, and Materials benefiting from higher commodity prices.

Volatility remained subdued as the Fed signaled that rate cuts were firmly on the table. Greater predictability from the Fed led to a drop in 21-day realized volatility from 13.2 to 9.5. Implied volatility ("VIX") dropped from 13.4 to 13.0. ICE BofAML Move Index, the fixed income equivalent of the VIX, dropped by 20.8%. Put/Call Skew, the expectation of how options will perform in relation to their current price and an indicator of investor sentiment, remains at multi-year lows. This shows continued lack of fear of downside equity movement and strong bullish sentiment.

In April, with more inflation data in hand, volatility and tensions are rising as the markets start to question whether deflation, rather than inflation, is transitory. In other words, if the inflation picture changes, which is contrary to the Fed’s current plans, this will lead to a volatility spike and downside protection, puts, to be bought.

February Market Commentary

February 2024

Investor Confidence Remains Impressive

The S&P 500 index (Total Return) began the month of February at 4845.65 and ended at a high of 5096.27, a 250-point jump (5.34%). MSCI–ACWI was up 4.29%, US 10-year bond yield jumped 8.63%, GSCI rose 0.87%, DJ Real Estate index rallied 2.12%, and the US Dollar was up 0.85%. Without a meaningful catalyst for a selloff, risk assets rallied. The Dual Goldilocks scenario, where the economy is neither too hot nor too cold, and the return of the YOLO (“you only live once”) retail trade helped lure retail traders into the rally as analysts frantically upgraded their year-end targets.

Realized volatility, as measured by 5-day volatility, dropped from 13.2 to 4.9. This is a meaningful move that impacted implied volatility, as measured by the CBOE Volatility Index (“VIX”), which dropped from 14.3 to 13.4. The ICE BofAML MOVE, fixed income equivalent of the VIX, was stable over the course of the month. Put/Call Skew, the expectation of how options will perform in relation to its current price and an indication of investor sentiment, widened ever so slightly intra-month but remained near historical lows, signaling little or no fear. Investors poured into equity ETFs that sell options, which is a big bet on equity markets remaining calm for the foreseeable future.

January Market Commentary

January 2024

  • January Markets
  • Fed's Job is Complicated
  • Options Impacting Stocks

January 2024 Markets

The S&P 500 index was up 1.68% in January. Implied volatility rose from 12.07 to 14.38. Skew widened a bit but remained near historical lows. MSCI – ACWI was up 0.59%. The 10-year bond dropped 0.50%, commodities with GSCI Index rallied 4.47%, DJ real estate index dropped 4.90% and the dollar was up 1.92%.

The Cone of Potential Outcomes has Widened for the Fed

We have started the year with favorable economic conditions and a robust equity market. The prospect for a rate hike, rather than a rate cut, is now back on the table, leading to a more complicated path for the Fed. The expected short-term fix, soft landing, for the Fed is fading away. The direction of the economy is also uncertain, with a combination of stickier prices impacting inflation expectations and the start of layoffs. Inflation-linked assets have caught “a bid.” This may lead to a hold or re-pivot on interest rates. Investors will need to consider whether the bear market in bonds is actually over.

We addressed the prospect of higher rates for longer in several of our publications last year. We may get higher rates for even longer now.

A Little Bit About Options

Options have become an important tool for investors' portfolios. We have seen substantial growth among options-based investment strategies as well as the usage among retail investors and trading firms. The impact of this growth varies by product. The liquidity of Index Futures and Options has allowed Index Options to be a more robust and consistent risk tool, while the growth of Single Stock Options has been used more for speculation. It appears that certain Single Stock Options can impact the price of a stock much more than outright stock buying. A recent example of this is Super Micro Computer, Inc (SMCI). This raises the question: can options market technicals have a greater impact on a stock price than the fundamentals?

December Market Commentary

December 2023

  • Passaic's long-term objectives.
  • What were the expectations for 2023?
  • How important is liquidity?
  • What are the expectations looking into 2024?

More than a decade ago, we set out to challenge conventional wisdom in asset management by improving outright and risk-adjusted performance, liquidity, and fees of both traditional and non-traditional asset classes. After 2023, we can add 'reliability' to the list of performance objectives/accomplishments.

In 2023, the VIX was largely unfazed by a US equity market dominated by big, disorderly gap moves to the upside and small orderly down moves. Despite these circumstances, our Protected Equity strategies performed well within expectations while maintaining protection. Our risk premia equity strategies (Ironbound) capitalized on the anemic volatility environment and elevated short-term interest rates. The Ironbound strategies continued to serve as a favorable replacement for high-yield bonds. Finally, our liquid macro strategy (Multi-Asset), which continued to serve as a superior alternative to risk parity, tactical asset allocation, and trading, captured moves in gold and equities, and posted another strong year of results.

What were the expectations for 2023?

Consensus expectations for global stocks entering 2023 were negative, with most analysts favoring defensive, high quality, and widespread diversification to protect against high volatility and an impending recession. Conversely, global bond market expectations were positive, favoring intermediate and longer maturities, a strong hedge against higher equity volatility. Active was generally favored over passive in both. Low net exposure and low correlation strategies were the broadly favored non-traditional strategies. The hope was that volatility would lead to dispersion, and bonds and commodities would trend. What happened instead? The Magnificent Seven drove equity indices to outperform all other asset classes. And for good reason as these are good companies, with good balance sheets, that make a lot of money.

Expectation 2023 Passaic Partners

How Important is Liquidity?

The California State Teachers' Retirement System (“CalSTRS”) recently approved a plan to temporarily borrow as much as 10% of their $318 billion portfolio to pay benefits, avoid forced selling, opportunistically invest, and rebalance the portfolio. The fund currently leverages 4% of their portfolio. California Public Employees Retirement System (“CalPERS”) made a similar move in 2021 with the explicit goal of investing in riskier alternative investments. CalSTRS annualized target return is 7% and CalPERS annualized target return is 6.8%. The past decade has seen exceptional growth in private assets across institutional investors. Allocations have nearly doubled.

In recent years, liquidity has become a concern across portfolios driven by slowing exits, distributions, and performance below expectations. Further, there has been a significant drop in re-ups and an increase in secondaries inventory. We believe that these circumstances along with a sustained higher interest rate environment and strong performance outlook for public markets will lead to a shift away from private investments back to liquid investments.

What are the expectations looking into 2024?

We all should take comfort in the fact that we navigated three difficult years, and global events have become clearer today than they were in the last few years. We know that there is a war of attrition in the Ukraine, a highly sensitive conflict in the Middle East, and tensions between China and Tiawan. We know that the U.S. economy has absorbed higher interest rates, and the Fed is prepared to pivot. We know that the coming U.S. political campaign and elections will be excruciatingly painful for all of us. We do not know what will come of these circumstances, but the initial shock has come and gone, and the cone of outcomes continues to narrow with each day. At Passaic, we believe that in 2024 rates will remain higher for longer than expected, interest rate volatility will drop, equity volatility will remain subdued. Therefore, we remain constructive on equity markets. We will continue to be curious, disciplined, and committed to research so that we are prepared for any potential outcome and remain reliable stewards of our clients' investments.

Options Tasseography

November 2023

  • Don't get too worked up about zero-date options.
  • Zero-date options do not mute the VIX.
  • What are the tea leaves telling us?

Zero-date Options

There has been a lot of hype around zero-date options. The hype should not be disregarded, just put into a bit of perspective. Zero-date options (“0DTE”) are contracts that expire within a day. It's true, all options contract eventually becomes zero-date and exchanges have offered shorter and shorter expiration instruments since 2005. By shortening the time to expiry, one eliminates the very features that make options unique and instead, turns them into turbo-charged futures contracts. At Passaic, we do not use zero-date options because we are investors, not speculators and we believe that, for options to be most effective, they need time to cure, like a fine wine. And we almost always close out our position before they expire (zero-date).

Zero-date Options and the VIX

When 0DTE options were introduced, it was feared that they would increase volatility. Today, certain investors believe that 0DTE options are responsible for muting volatility. Neither critique is valid as their respective durations are very different. 0DTE options are ultra-short-term and the VIX is the market's best estimate of SPX volatility over the coming 30-days. The most misguided argument is that zero date options are so important because they are 40% of the daily options volume. While this is true, it is also true that historically 40% of the daily volume was already in options expiring in five days or less. And, in fact, 0TDE options may have stabilized traditional options by attracting the speculators. The use of options broadly has grown and will continue to grow as investors recognize their benefits. It is important to remember that options are not an asset class; they are a tool to manage risk and glean insight into the market.

What are the Tea Leaves Telling Us?

Let's do a speed test in options. Both the VIX and skew are low. Investors are buying calls to express upside positions because they don't believe in the rally! Fixed income volatility remains high in the back end because there is uncertainty about supply and overall debt issues. We expect back end fixed income volatility to be driven by non-US debt in 2024. Japan and Europe have a lot more to figure out than the US. US rate volatility is heading in one direction, lower. This will support the markets. We expect commodity volatility to continue to be inflated as investors maintain long exposure through calls. In fact, upside is so expensive in some commodities that their skew is inverted - when upside volatility is higher than downside. We are also seeing Currency volatility remaining high, e.g., the Japanese Yen.

Coincidence or not?

A few steps from our office, a bull was found wandering on the tracks of Newark Penn station. Is a bull market lurking in plain sight?Chart 1One final comment on the VIX. The VIX is low because realized volatility is low. VIX is 12, 10-day realized is 7 and 30-day realized is just above 10, and we're heading into the holidays.

Speaking of that, Happy Holidays to all!

Where have all the sellers gone?

October 2023

  • The MOVE informs us the bond market is actively undergoing repricing.
  • Equities will remain unguided until bonds return to harmony.
  • It is a trader's market.
  • When was the last time we saw an equity market without clear and defined sellers?

One big influence on the markets this year has been elevated fixed income volatility (as measured by the “MOVE” index). The MOVE has been much higher than normal. The interesting part is that last year, the MOVE was driven by the front end of the fixed income curve, driven by Fed rate hikes. This year, the MOVE is driven by the back end of the curve, a supply and demand dynamic, not the Fed. It's safe to say that supply has had a role in pushing interest rates higher. In effect, investors demand higher returns to absorb the new issuance, which is putting pressure on the longer end of the yield curve. As this repricing takes place, it creates uncertainty in long-term bonds, driving the MOVE higher with the 'knock on' effect of making it more difficult for equity investors to buy stocks with confidence. While we have seen positive returns in the equity market this year, it is mainly due to “The Magnificent Seven”. It is also remarkable that the Nasdaq has outperformed the Russell 2000 Small Cap index by 42% this year.

Some folks refer to this as a stock picker's market, we, instead, refer to it as a trader's market. Positioning, rather than security selection, is what's really driving market moves. For example, when hedge fund net positioning in equities was light, in January, we rallied. When hedge fund net positioning was heavy, at the end of June, we sold off. We saw this repeat in October, light positioning led to a strong rally. From an options perspective, we have experienced something this year that we haven't had since 2009, a lack of an aggressive move in volatility or aggressive put option buying, when the market sold-off. Why is this historical reference important? Because investors reduced equity exposure at the end of 2022, just like in 2008. In 2023, investors continue to reduce equity exposure as bond yields have increased. We believe investors are underweight public equity and therefore there is not as much of a need to hedge a position if you are underweight stocks. This means no forced selling on the way down, but a lot of forced buying on the way up. If we head into a recession, we certainly expect to see the markets fall. How much? It is difficult to say without a clearly identified set of forced sellers.

Passaic Partners update:

Take Comfort in the new “New Normal”
and Fear the Unknown!

September 2023

The new “New Normal” in Equities

Post Global Financial Crisis, the phrase “the New Normal,” attempted to define a market with lower equity returns and a flatter risk profile. Instead, the New Normal became lower interest rates, low inflation, and a twelve-year bull market in equities. Last month, investors realized that it was time to change a decade of conditioning to a new “New Normal”, with the 10-year Treasury at 5%. Time to let go of the belief in a temporary rise in interest rates and to acknowledge how sticky this bout of inflation has become. This means interest rates will remain higher, for longer. Now that the low interest rate tailwind is gone, we believe that equity markets will still see long-run growth, but at a far more moderate pace and with moderate risk. 

Fear the Unknown

There is an undercurrent of leverage in private markets that may not be observable from public market data – the focus of the Fed. Private market leverage will increase as floating rate debt increases, we approach the 2024/2025 wall of corporate refinancing, exits for private companies fall to its lowest level in years, funds reach the end of their extensions, and re-ups slow. Leverage is inflationary. Part of the Fed's goal, with quantitative tightening, has been to remove leverage from the system. They have largely accomplished that goal in the public markets. The Fed is now fighting inflation brought on by stimulative fiscal policy decisions, which will continue until the elections, and private market leverage, which will continue until returns erode. 

Today, we are faced with an equity market with moderate growth potential and a risk-free rate at 5%. The first solves for growth and the second solves for a recession. Don't Fight the Fed! In the New Normal, the Fed was asking us to take risk. In the new “New Normal”, the Fed is asking us not to take risk. Said another way, it may be a good time to reduce esoteric risk and simplify your portfolio.

Effective Risk Management

August 2023

How Do You Lose Money Owning Puts when the market is down?

  • Ignoring the first 5% down 

  • Buying Insurance at the Wrong Time 

  • Buying the Wrong Kind of Insurance 

Ignoring the first 5% down

Over the past fifty years, the S&P 500 index was positive 63% of the months and negative 37% of the months. Over the past decade of mostly low volatility, the S&P 500 was positive 70% of the months and negative 30% of the months. Over the past twenty-five years, the MSCI ACWI was positive 60% of the months and negative 40% of the months. Over the past decade of mostly low volatility, the MSCWI ACWI was positive 66% of the months and negative 34% of the months. 

The above data shows that equity markets go up more than they go down. However, when the S&P 500 does have down months, the following table bands these negative monthly occurrences. 

Note: “S&P 500” refers to S&P 500 Total Return index and “MSCI ACWI” refers to the MSCI ACWI – ND. 
Source:  Bloomberg. 

To consistently outperform the equity market (outright or risk-adjusted), participating in positive occurrences is important. Equally as important is protecting against the most common negative occurrences, down 0% to 5%. A strategy with these characteristics will smooth returns, reduce the impact of market timing, and improve beta selection - the most important driver of returns according to Myron Scholes. 

Buy Insurance at the Wrong Time 

Buying downside protection after a down month is like buying insurance after a hurricane. As demand and volatility increase, the cost of protection has to increase. In August, holding an out-of-the-money put added to losses and increased portfolio volatility. By way of example, holding the 4425 put (down-5% put) lost money and increased downside volatility. This type of scenario, a strong downward move followed by a similar upward reversal, happens quite often.    

Buying the Wrong Kind of Insurance 

For those of you who have met with Passaic in the past, you may have heard us say that we, “buy insurance and sell reinsurance.” This is a metaphor for two parts of our downside protection strategy. In a low volatility environment, we seek to protect the most common negative occurrence, the down-5% month. In a high volatility environment and only when the market presents this opportunity at a fair price, do we incorporate protection on the less common risk (tail risk). 

A word of caution. Leading up to the GFC, the largest supplier of credit insurance was AIG – who was bailed out by the Federal Reserve. In 2020, Allianz, who ultimately pleaded guilty to securities fraud in the management of Structured Alpha, was the largest supplier of tail-hedges. Sellers of tail-hedge risk have learned from these situations and, today, price this risk protection accordingly. 


One, we believe that protecting the down-5% month, in a low volatility environment, is a more effective risk tool than protecting the down-10% month, because it actively protects the most frequent occurrence. Two, providing consistent downside protection smooths returns and improves the beta without introducing diversifying assets. Three, the S&P 500 monthly return was down more than 10%, only nine times in the past 50 years and once in the past decade. Similarly, the MSCI ACWI monthly return was down more than 10% only six times in the past 25 years and once in the past decade. Paying high premiums for infrequent occurrences creates real dollar losses in a single line-item over a market cycle. Finally, today, tail-risk is priced for perfection, with a lower risk of loss by the sellers. 

Please click the strategy name to access the strategy fact sheet. Protected Global Equity Plus is available upon request. 

The Train has Left the Station!

July 2023

The use of equity options has increased substantially in the last several years. In this piece, we will look at some of those trends.

  • Priced for Perfection
  • It's All Downhill from Here
  • Velocity of trading options has accelerated

In my early days of investing, I learned a valuable lesson the hard way. When the train has left the station, don't chase it, wait for the next one.


Perfection, today, is an adequate reduction in inflation resulting in the end of the hiking cycle, a reasonable and sustainable adjustment to a higher interest rate environment, housing stability, low unemployment along with no major hiccup from the commercial real estate sector.

“It's all downhill from here!” This idiom has two distinctly different interpretations, feel free to choose the adventure that best fits your view.

Scenario 1

The hard work is done - a soft or no landing is imminent. The Fed resolves the inflation crisis brought on by a decade of stimulative fiscal and monetary policy, an economic war with China is averted, partisan politics subsides, the US consumer conservatively walks the line of spend vs save, rate sensitive investments adequately adjust, the case for A.I. is real and actionable, and unused commercial real estate transforms into housing or storage.

Scenario 2

Perfection is seldom permanent. History tells us that inflation could bounce back, China is unpredictable and is currently battling deflation, fiscal policy stimulus will wrestle with monetary policy tightening until after the 2024 elections. The US consumer has rarely been conservative, and A.I. turns out to be less impactful than the automobile, the computer, the laptop, the cell phone, etc. Further, we have no historical context for the shadow banking system in a sustained higher rate environment or a wholesale shift in commercial real estate usage. In the short term, Q3 earnings will dictate the direction of the equity market and, if they come in below expectations, will likely expose underlying credit issues going into year-end.


In our July Cross Asset Volatility piece, we stated that, after maintaining a bearish view on equity volatility for the first half of the year, we believe that the markets are now transitioning to a higher interest rate and equity market volatility environment. It's not because we are boorishly negative on the market or rabidly long volatility, we simply feel that markets are currently ahead of themselves and are facing several unanswered questions noted in Scenario 2 above. This view is supported from a technical perspective. Options practitioners spent the first half of the year protecting against a strong upside move by buying out-of-the-money calls. This has changed in recent weeks with active put buying as investors are now willing to pay the premium to hedge against a meaningful downturn.

The next train may only be a few minutes away. Allow the train to enter the station, let passengers off, and then climb aboard for a safe ride to your destination. Passaic Partners strategies will get you there safely, on time, and with a smoother ride.

Volatility moves like an ocean wave; it rises and falls in a reasonably continuous pattern. The market becomes obsessed with strategies that are long volatility, when volatility is high (i.e., tail hedging) and short volatility, when volatility is low (i.e., iron condors, circa 2017). When the VIX dropped below 20 in recent months, we experienced a resurgence in short volatility strategies, which pushed the VIX to 12 in June. We have pointed to a lower volatility regime in our Monthly Commentaries since Q4 2022. Now that we are here, how long will it last, a month, a year, 5 years? It depends on your view of the market. If you believe that the market rally is sustainable with higher rates and P/E multiples, then steer clear of short volatility investments. Conversely, if you believe that equities will be facing headwinds in the near to medium term, then low volatility investments may be the place to be -- particularly with risk assets at 8.5% and short-term assets at 5%. This scenario provides a synthetic tail hedge which also pays decay, as opposed to an actual tail hedge!

Special Anniversary Edition!

June 2023

  • Multi-Asset turned 10
  • U.S. Hedged Equity turns 10
  • Global Ironbound (GRPE) turned 5
  • Volatility waves

Ten years ago, U.S., U.K., and German unemployment rates were 7.7%, 7.5%, and 5.2% respectively. U.S., U.K., and German inflation was 1.5%, 3.0%, and 1.4% respectively. The S&P 500 (SPX) closed the year at 1,848 and the MSCI-ACWI closed the year at 408. Things have certainly changed over the last ten years, but our rules-based strategies have stood the test of time!


For the past decade, the Multi-Asset strategy has provided investors with a well-diversified portfolio with exposure to liquid real assets and inflation hedging. Multi-Asset has substantially outperformed Risk Parity Vol 10% and TAA, both outright and risk-adjusted, producing 250 basis points of risk-adjusted annualized alpha over TAA. This product is built as an all-weather strategy, designed to consistently outperform similar tactical products, regardless of the economic environment.

U.S. Hedged Equity

U.S. Hedged Equity was originally designed to replace a core equity long/short hedge fund portfolio providing better risk-adjusted returns, daily liquidity, and lower fees. Accomplishing those goals, the strategy has become a permanent fixture as a defensive equity strategy. U.S. Hedged Equity has outperformed the S&P 500 on a risk-adjusted basis (Sharpe) and downside deviation (Sortino), producing 96 basis points of risk-adjusted annualized alpha over the S&P 500. As of June 30, the strategy has fully recovered from 2022 drawdown, while the S&P 500 and Bloomberg U.S. Aggregate remain well below a net new asset high (eVestment). US Hedged Equity is designed to provide excellent downside protection without sacrificing upside potential, especially in an environment dominated by higher equity valuations and elevated rates.

Global Ironbound

Global Risk Premium is an enhanced yield strategy which benefits from higher rates and the spread compression between implied and historical volatility. This strategy replaces high yield bonds and complements a 50/50 portfolio. Global Ironbound has outperformed a balanced portfolio of MSCI-ACWI and T-bills, outright and on a risk-adjusted basis, producing 158 basis points of risk-adjusted annualized alpha over MSCI-ACWI. As of June 30, the strategy has recovered from 2022 drawdown, while Global High Yield, Global Aggregate, and 50/50 ACWI/T-bills remain well below a net new asset high (eVestment). The present and potentially sustained higher rate environment favors this strategy.

Volatility Commentary

Volatility moves like an ocean wave; it rises and falls in a reasonably continuous pattern. The market becomes obsessed with strategies that are long volatility, when volatility is high (i.e., tail hedging) and short volatility, when volatility is low (i.e., iron condors, circa 2017). When the VIX dropped below 20 in recent months, we experienced a resurgence in short volatility strategies, which pushed the VIX to 12 in June. We have pointed to a lower volatility regime in our Monthly Commentaries since Q4 2022. Now that we are here, how long will it last, a month, a year, 5 years? It depends on your view of the market. If you believe that the market rally is sustainable with higher rates and P/E multiples, then steer clear of short volatility investments. Conversely, if you believe that equities will be facing headwinds in the near to medium term, then low volatility investments may be the place to be -- particularly with risk assets at 8.5% and short-term assets at 5%. This scenario provides a synthetic tail hedge which also pays decay, as opposed to an actual tail hedge!

Is it not about Alpha?

May 2023

I had the pleasure of listening to Nobel Laureate Myron Scholes before speaking at the Nuclear Decommissioning Trust conference in Los Angeles a few weeks ago. As an option practitioner and University of Chicago alum, I owe a lot to his collective effort with Robert Merton and Fischer Black. In his presentation, Mr. Scholes made a very telling statement, “beta is what matters.” This statement was made in the context of portfolio management. While there are many creative ways to produce alpha, beta is what drives portfolio returns. This may be why investors are struggling to identify persistent alpha.

In this month’s Cross Asset Volatility Commentary, we spoke about the historical correlation between bonds and equities. While this was not meant as an attack on 60/40, it was meant to draw attention to the future relationship between bonds and equities in a higher inflation and higher rate environment. So, while we all observe that correlations among asset classes are not static, the notion that stocks and bonds are negatively correlated certainly has not played out over recent times.

To us, this begs the broader portfolio management question, is utilizing correlation the most effective tool in managing diversification and would it be more effective to simply seek a better beta? A beta that adjusts to the market environment. Said our way, manage RISK to match the market environment.

This Month in Volatility?

The VIX hovered near ‘hiking-cycle’ lows over the course of May and continued this same path into June. As noted in our February 2023 Cross Asset Volatility Commentary,” MOVE-ing on up!”, the MOVE and VIX have a close personal relationship. The MOVE has normalized to pre-SVB levels, which will continue to put downward pressure on the VIX unless the Fed does something out of character, which is unlikely, or the weathering of higher interest rates leads to the erosion of corporate earnings, also unlikely.

As we move toward the fiscal year-end for a lot of investors, the market continues higher and the VIX remains subdued. It is typical that bearish investors emphasize how cheap the VIX is, while bullish investors ignore the VIX completely. The following image sums it up!

It's 2005?
It's 2008?
It's 2023!

April 2023


In our most recent Cross Asset Volatility piece (delivered May 5), we cautioned against buying volatility at these levels. The VIX is a tradable instrument, that functions as a forward-looking short-term indicator into the behavior of the volatility of the large-cap stocks over the weeks, not months, ahead. While we don't trade this instrument, we utilize volatility as an indicator in all of our strategies, even Multi-Asset, to roll (re-hedge) monthly, appropriately positioning the portfolios for the current market environment.


The current market environment has been compared to 2005 and 2008. While most investors think of these two years as being very different, we believe that similarities exist, most interestingly in the relationship between credit and equities. In 2005, the stock market performed well (+10%), driven largely by big-cap equities. The VIX remained calm, while certain sector-specific bankruptcies weighed heavily on credit markets. Hybrid instruments like convertible bonds suffered significant losses and only recently attempted a comeback.

In the summer of 2008, the VIX hovered around 15, between the Bear Stearns and Lehman Brothers collapses. In September of 2008, equities sold off, credit spreads blew out, and the VIX spiked. Many widely held credit instruments like CDO2 and MBS fell much further than the equities. Since 2009, equities have substantially outperformed the broader credit market. Credit, as we have learned, is generally less volatile and less liquid, but also suffers a more prolonged recovery. In our view, a higher risk-free rate will impact public and private credit more than large-cap public equities.

Now, in 2023, large-cap stocks are healthy and have thus far adapted to a higher inflation and rate environment. Disfunction exists in regional banks, which is starting to weigh on credit and private credit, e.g., Commercial Mortgage-Backed Securities (CMBS). If there is a systemic dislocation related to regional banks, we believe that large-cap equities will be impacted by market technicals rather than fundamentals and recover more quickly. This is because large-cap equities are profitable and have strong cash flows.

With that, we believe that the best positioning is to move towards being defensive in equities, the best position for risk premium is equity volatility risk premia, and the best diversified inflation protection is multi-asset. But of course, you would expect us to say that … but that doesn't make it any less true!'

The Fed has a Heart.

March 2023


It took the financial markets a bit of time to digest that Chairman Powell and his colleagues on the Federal Open Market Committee have sufficient data or empathy to pare back on tightening. While companies will have to remember how to produce earnings in a higher nominal rate environment, we see that the Fed has not completely extinguished the prospects for economic growth. There will undoubtably be some additional casualties in banking, commercial real estate, and investment strategies dependent on low rates. We believe that this will start to surface in the second quarter. But, overall, we think the Fed will be less aggressive in raising rates as the credit contraction does much of the job for them.


Skew is starting to steepen as equity volatility, which is still high in historical terms, trends lower for longer. Price action points to market participants implementing more volatility-neutral hedges, as opposed to just being long the VIX. While we would like to show conviction and commit to a breakout from the current range, either up or down, we are not quite there yet. For the S&P 500 to make a run at 4400, we will need to see strong corporate earnings growth as credit contracts over the coming months. Conversely, to break through to the downside of 3800, we will need to see a meaningful slowdown in consumer spending accompanied by a noticeable credit contraction. And going back to commercial real estate, it is not out of the realm of possibility to see yields on CMBS at 15%. Let's think about that for a minute.

There's a little bit of Bonds in Everything we do!

February 2023


It takes a good old-fashioned run on the bank to remind us how correlated all investments have been to bonds. Last year, bonds almost broke the UK pension system. This year, bonds have led equities up and back down, led banks to insolvency, and led to pressure on private assets, whose profits are largely dependent on ‘cheap money'. Pundits and politicians alike can blame the Fed, but bonds are simply a tool, and the real blame lies in poor risk management. The Fed has made their intentions eminently clear; it is the decision of risk managers/supervisors to act or, in the case of SVB, ignore those risks.


In February, equity volatility, as measured by the VIX, held within the range of 17.5 to 22.5. With the onset of SVB et al, the VIX hit an intra-day high on Monday, March 13 of 30 and settled at 26. The swift action or intention of the trifecta of government agencies (Federal Reserve, FDIC, and Treasury) has calmed the nerves of investors. As things settle down, we anticipate that the VIX will return to the aforementioned range and the Fed will get back to the business of quelling inflation.

Nobody Beats The WIZ!

January 2023


What a January. 2022 was forgotten, with the S&P up over 6%, the Nasdaq 100 up over 10%, EM equities up over 9%, and Global equities up over 7%. As the Wizard of Oz said, “pay no attention to that man behind the curtain!” Morgan Stanley publishes a momentum index based on long/short equity momentum trades. That index was up more than 36% in 2022. In January, it was down over 16% because it entered the year, long oil and value stocks, short growth tech stocks. Momentum got absolutely hammered in January as most everything reversed course. What is this telling us? Is this the start of a new bull market? Is this a short covering bear market rally? Our view remains the same that the S&P 500 is in a range from 4250 to 3750. In order for the market to breakout of this range, we believe that the data needs to improve. We would like to see stronger earnings and greater certainty in short-term credit. Until that time, momentum, trading, and algorithmic strategies will continue to have a much bigger impact on the market than fundamentals.


The VIX is hovering around 20, which we think is a fairly valued in the current market. In fact, we believe a reasonable trading range for the VIX would be 17.5 to 22.5, barring any unforeseen circumstances. The adjustment to a lower range is driven by a drop in fixed income volatility as the FED reaches its terminal rate. Importantly, investors are starting to believe in the range trade. Moreover, in our opinion, the market is being over-traded. Eventually, as traders buy enough tops and sell enough bottoms, they run out of leash. This circumstance will lead to a VIX closer to 15 and the aftermath of the over-trading environment we experienced in 2010 and 2011 will happen again. A lower volatility regime would make trading difficult in 2023. Conversely, investment strategies that do well in a range and manage risk, may perform the best.

1000 basis points!

December 2022

We don't often boast about our results, but 2022 was unique in many ways. Our Hedged Equity strategies (U.S. and Global) outperformed their respective benchmarks (S&P 500 and MSCI ACWI) by more than 1000 basis points, blended portfolios (60/40) by more than 800 basis points, the CBOE put-buying strategy (PPPU) by more than 1200 basis points, and the CBOE tail-hedging index (PPUTM) by almost 1000 basis points. Our Beta One Equity strategy outperformed the S&P 500 by more than 300 basis points. While we pride ourselves on our upside capture, how our strategies behave in a bear market can be an important factor that differentiates us from our competitors. We believe our ability to adapt to, tactically adjust, and manage risk through changing market conditions has enabled us to outperform our competitors. Please see our monthly fact sheets for long-term performance information and the associated disclosures.


December was a difficult month for U.S. equities in large part due to broad risk reduction and tax-loss harvesting by many market participants. U.S. technology stocks took the brunt of the hit, with the Nasdaq down more than 9%. Tesla weighed down the S&P with a 36% loss. The 10-year Treasury Bond moved from 3.61% to 3.87%, Oil was flat, Silver was up over 10%, the U.S. Dollar fell over 2% as the ECB became more hawkish while the Fed hinted at backing-off. The one market that continued to be positive was China. Looking back on the year, investors and managers alike are relieved that 2022 is over; equity and bond managers are happy to start fresh and most macro/trading shops, having had a very strong Q1 & Q2, are happy to have not given it all back. There is still some denial on private valuations but that should work itself out by Q2.


Owning outright puts was not an effective way to hedge this year. The VIX averaged ~25, which is well above the historical average of ~15. While markets have been choppy and produced some big moves, it was not enough to pay for those puts. Part of the reason that owning puts was not profitable this past year is that the cost of implementing out right puts has gone up as there are fewer sellers in this market as result of the downdraft in 2020 where tail hedgers won and those issuing the insurance lost. This has naturally led to fewer sellers of insurance, and thus, higher prices to those who want to buy it. We believe that a tactical hedging strategy is more effective than a one-size-fits-all swing for the fences approach. We would rather be roughly right than completely wrong.

Keep Calm and Stay Alert

November 2022


It was a heck of a month to be investing cautiously in global equities. MSCI ACWI was up 7.60%, led by emerging markets which were up 14.64%, EFA (developed markets outside U.S. and Canada) were up 13.17% and the SPTR was up 5.59%. A large part of this rally was led by a selloff in the U.S. Dollar as the DXY was down 5% in the month of November, which is a big move in the currency markets. We finally saw bonds move higher with the 10-year Treasury future up 2.37% on the month. We believe that markets started pricing-in the end of the Fed tightening cycle. Whether you believe that we will reach an end to higher rates early next year or not, the market is telling you that that is the current course. We continue to believe that we are range bound until we see concrete evidence that earnings can continue to rise. Keep in mind, bonds are rising because the fixed income market is pricing an economic slowdown in the second half of next year. This is not bullish for equities. We expect a rangebound year for SPX, somewhere between 3750 and 4250. And by the way, we are still bullish Gold and Silver.


The VIX continues to be a depressed asset, falling from 25.88 to 20.58 by the end of November. While this is primarily driven by the equity rally and a less hawkish Fed, the other variable driving the VIX is lower realized volatility. Except for the Fed announcements and inflation news, markets have been in a holding pattern. In our October 2022 commentary, we wrote about the increase in trading of one- and two-day options. It has paid to be short volatility and to use one- or two-day options to “hedge” the Fed announcements and inflation news - - similar to how single name options trade on earnings days or a biotech trades on drug trial results. This trade has worked very well for the better part of the year, but we believe that once the Fed finds its “happy place,” this will change. We continue to believe that equities are range bound until market participants get a better feel on earnings within a higher rate environment. We also see the 10-year Treasury moving into a range between 3.25% and 4.50% and we expect the dollar will be more stable as the ECB is now more hawkish than the Fed. Our conclusion: trade the range next year, sell volatility, and keep a close eye on earnings.

The Fed will succeed.

October 2022


Dispersion abounds. While U.S. and European equity markets produced a strong recovery in October, Asian and the broader emerging markets lagged substantially. Similarly in the U.S., the Dow Jones Industrial Average was up just under 14% while the Nasdaq 100 was up less than 4%. Earnings in the old economy stocks, led by JP Morgan and Exxon Mobil, substantially outperformed the likes of Microsoft and Amazon. S&P 500 P/E has firmly established a low at ~15 with the “E” is moving markets higher. All of this good news for the equity markets occurred as the Fed reaffirmed its commitment to stomp out inflation and as the US Aggregate Bond index sunk lower to finish the month down 1.3%.

A lower CPI number and a meaningful number of lower real estate transactions showed that the Fed's efforts are starting to have their desired impact. One metric that remains strong is employment. This will allow the Fed to continue to move terminal rates above 5%. We certainly didn't expect equity markets to hold up this well given the speed and ferocity of the rate rise. Should a soft-landing not happen, we can all take comfort in the fact that rates above 5% will afford the Fed sufficient ammunition to fight a recession. So, we expect the Fed to speak softly while they continue to wield their big stick.

Another interesting phenomenon is the dollar weakness, largely driven by the Fed hinting at a terminal rate. The DXY was down 0.53% in October. We believe that dollar weakness and reevaluation of crypto will lead to a rally in the most hated asset in recent history, gold. Drop the mic!


Working toward stability.

  1. VIX continues to grind lower. Implied volatility is pointing to a more stable market environment for equities. Moreover, as the Fed's hiking begins to subside, stabilizing the rates market, investors who have been underweight equities will likely become buyers who aid the VIX's continuing decline.
  2. Downside is limited because the Fed's ability (dry powder) and willingness to change direction. If the Fed believes that it has gone too far too fast, we believe it will make the appropriate adjustments. Reenter the Fed Put. Before that happens, we expect to see bad actors and unprofitable growth businesses exposed. We do not anticipate a V- or U-shaped equity market recovery, but rather a sideways market with an upward trend over the next 12-24 months. Aligning with above point, we anticipate that the VIX will migrate below 15 in 2023.
  3. Bad behavior in the options market. Currently, 40% of the SPX volume is in 1- and 2-day options. As longtime option practitioners, we view this as gambling, not investing. We do not believe that this is a sustainable investment strategy. As these temporary entrants go away, again, the VIX will continue lower.
  4. Tiptoeing backwards out the door. Having failed at a ground war, a draft, a reengagement, and drone attacks, Russia is shifting its attention to its only remaining leverage over the U.S., Brittany Griner. In thinking about possible tail events that could jolt the VIX, we do not expect Russia to engage with nuclear weapons, nor do we anticipate an invasion of Taiwan by China. If either of these happen, the shock to the VIX will be the least of our worries.

Stickier than any of us thought.

September 2022


Inflation is stickier than any of us thought, and the Fed is determined to wipe it away. Traditional inflation-linked assets are not serving as a proper hedge. Last month, gold was down 3.14%, oil was down 11.23%, TIPs (ETF) were down 7.91%, and REITs (IYR ETF) were down 13.62%. U.S. equities (S&P 500) had the worse month of the year, down 9.34%. Bonds continued to provide no protection with 10-year note futures down 4.14% and 30-year bond futures down 6.95%. As noted in our April 2022 Commentary, and again in our May 2022 Commentary, a 4% 10-year treasury yield would make for a very interesting environment . . . and that is where we are. Since the GFC we have kept rates low, afraid of repeating the mistakes of the 1930s. Today, post the pandemic stimulus, we are raising rates to prevent the mistakes of the 1970s. We continue to believe that strategies that benefited from low to falling rates are going to have issues: growth tech in public equity and risk parity funds in fixed income. What is the next shoe drop? It is difficult to say. Who expected LDI issues in the UK pension fund market? The key question is, what is the driver of outperformance? If there is leverage, where does it come from and does it make sense to continue to invest that way? Will investors accomplish their investment goals with higher rates? One last thing, if Yellen is talking about liquidity of treasuries, please think about liquidity across all asset classes and investments. We believe that investors should trade when you can, not when you have to!


We are not big believers in equity tail hedges. If you are one of the select few that owned tail hedges on bonds and currencies in September, kudos! We are now seeing implied volatility in currencies and bonds in the top 10% of historic levels. The result of unwinding fifteen years of bullish Central Bank policy. Now, where do we stand? We are much more constructive on U.S. equities with the SPX at 3600, P/E of 15, 10-year yield at 4%, and the VIX at 32. Looking back at the 1994 through 1995 Fed actions, yields had dropped from 8% to 5%. In 1994 the Fed raised rates which brought the 10-year back to 8%. In 1995, the FED lowered rates to 6%. Why is this important? At that time, the SPX P/E was 15, granted we had just come out of a nasty recession prior to 1994 and things were looking up. What we find most interesting, is that during this time the VIX was 12-13 and skew was incredibly flat. Consider this in comparison to the current environment, VIX at 32! Said a different way, we are still committed to the theory that equities will remain in a range, at least for the short term. The economy is still cooking and while I write this, we are seeing good earnings in old economy stocks, not semi-conductors, but staples. If the E in P/E doesn't come down, like many are expecting, equities will likely see significant upside because so many large pools are very underweight in public equites. I think that there is a good chance that this year may be followed by a 1995 style rally. In fact, it may have already started!


August 2022


This year continues to be demanding, with extreme moves across all markets. At its highest point in August, the SPX was up 4.5%. It sold off almost 9% from there, to finish the month down 4.2%. This followed a 9% up move in July and 8.4% down move in June. What is telling is that the SPX hasn't really gone anywhere since the major sell-off in April. While the SPX has been volatile and it has been a challenge to manage risk, the SPX hasn't really given up much in the way of level since the middle of the second quarter.

Following a big move in March and April, the 10-year note is hovering around 3%. We have seen yields as high as 3.5% in June and as low as 2.5% in August. Our view is that 2.75% - 3.25% is a reasonable range for the foreseeable future.

Commodities continue to struggle as gasoline futures dropped 25% in the month of August. Comparisons have been made to 2008, where a recession led to a commodity sell off. We don't think that will be the case this time. In fact, we believe that it is simply the end of the summer travel season and don't expect demand to pick up anytime soon, as folks are committed to working from home at least part time and limiting business travel as part of our new realty.

Lastly and most importantly, the dollar continues to go higher, up 2.64% against the DXY basket on the month. We continue to believe that the dollar strength comes from the U.S. exporting energy. We are sticking with view that the fourth quarter will continue to be a roller coaster across equity and fixed income markets, though we may end up in the exact same place that we start.


Everyone is asking, why doesn't the VIX go higher?

First, this is a market about positioning and not fundamentals. In other words, we go higher when investors must buy, and we go lower when investors must sell. Investor's positioning, both gross and net, continues to be light. We experienced this in 2009. If investors are light on positioning, they don't need to buy insurance, since they have very little to insure.

Second, the realized correlation within the SPX is very low, i.e., energy vs tech. The way this works: as the price of oil increases, oil stocks rise, bonds fall, and the dollar strengthens. This has been broadly negative for tech stocks. Conversely, as the price of oil decreases, oil stock falls, bonds rise, and the dollar weakens. This has been broadly positive for tech stocks.

Third, realized volatility is not that high. The 100-day is 26.36, the 50-day is 19.60, the 30-day is 19.64, and the 10-day is 17.50.

Finally, we haven't had any issues in the credit markets, to date. In our opinion, it is difficult to justify a VIX above 26, with relatively stable credit markets.

So, why all the equity volatility in the first place? In a word, trading. This is a trading market. The best performing funds this year are CTA, Macro, and multi-strategy trading funds. These strategies have attracted new money, which means more trading. Based on our experience as traders, and the current VIX, our belief is we are moving into a wide range. Yes, a range. The equity premium will not see the quick reset most market participants are expecting, SPX 3000, but more a range for longer than many anticipate. This will take equity risk premium down. The VIX will continue to fall as trading groups get chopped up trying to trade trends, buy highs and sell lows. One of the many things that we observed on the trading desk when our team was on the sell side was investment strategies that did the most future/ETFs trading volume in a one-year period struggled and even closed its doors the next year, without the sustained market volatility. That is where we are now.

Well That Fixes the June Problem

July 2022

The S&P closed the month of May at 4132.15 and the month of July at 4130.29, with plenty to see in between, and with the VIX hardly at zero! It's been a wild ride. In the short-term, I believe we have reached a top in commodity prices and inflation. The 10-year Treasury has found a “happy place” between 2.75% and 3.25%, and as discussed last month, earnings have not been as bad as many anticipated. The last few months have been a trader's market, and not an investor's market – and certainly not for the faint of heart. I believe we will drift around here with an upward bias until we have better visibility into the fourth quarter. I also believe that the fourth quarter will be one direction, up or down. Funny thing, at this point, I am leaning more bullish and could easily be convinced of an S&P at 4600 at year end, largely due to the new mixture of growth and value in the S&P today. I am still negative on growth tech and poor cash flow companies >> that check has not been cashed.


Currently, the VIX remains above 20, which is understandable and reaffirms that there is sufficient uncertainty to once again say that we are in a trader's market rather than an investor's market.

The MOVE index, fixed income's version of the VIX, fell from 150 to 120 in July. This is a significant, as the market is telling us that it is comfortable with the current path of the Fed and sees more certainty in the rates market going forward. The most telling metric continues to be the CSFB Fear index, which measures the market for skew. It started the month of July at 16.65 and ended the month of July at 16.79. This means that investors are not buying downside protection. In my opinion, this is resulting from a combination of two things: Investors remain underweight in their equity exposure but are now buying upside calls to synthetically increase market exposure. My experience has shown that while bullish, this is a very low conviction trade. Nobody is convinced that this rally will continue!

No Place to Hide

June 2022


Diversified portfolios had another horrible month, the S&P was down 8.25%, the Barclays [Bloomberg] Agg was down 1.73% and GSCI was down 7.64%. The one major asset class that was positive on the month was the U.S. dollar. The DXY was up 2.88% on the month and, on the year, the DXY is up 9.42% with the Dollar/Euro moving towards par. I think this is a meaningful development as folks seek to resurrect the 1970s-style stagflation conversation. In my view, there are two major differences between today and the 1970s. First, in the ‘70s, we had recently moved off the gold standard. Eliminating the peg drove the dollar much lower against other world currencies. Second, at that time, the U.S. was a net importer of commodities (especially oil) and was dealing with the newfound might of OPEC and thus weakness in the dollar had a major impact on inflation. Certain commodity prices are spiking again but this time, we are a net exporter, and the case can be made that the that the US dollar is benefiting from higher oil prices. Another important factor is that earnings are transitioning from New York and San Francisco to large oil-producing states like Texas and North Dakota. The pundits seem anxious to call a recession when, in fact for the time being, we are dealing with a war launched by a Petrostate and adjusting to a world of higher interest rates and more expensive capital. As for a recession, that remains to be seen.


Volatility has not been moving higher as the markets sell off. The CSFB index was trading below 16 just prior to month end, which means that investors are selling puts. Skew, the difference in implied volatility between out-of-money calls and out-of-the-money puts, as reflected in the CSFB index, has only been lower when we hit rock bottom in 2008 and 2020. The challenge with this “rock bottom” thesis is that the VIX was close to 80 during those times, not 30! Another meaningful observation is that the correlation between equity asset classes has been very low, with value and growth moving in different directions, Energy and Tech are the obvious example. This has been slightly different with Energy stocks selling-off with oil and credit is finally starting to show signs of weakness. If we continue to see follow through in these areas, we expect volatility to push higher. Said another way, we expect credit to take the lead of the near-term direction of the market.

Finally, I am genuinely concerned about the market pundits' commitment to recession. While there are some unusual behaviors in the market, in my view, the bad news is largely reflected in the equity market pricing, and I am genuinely constructive if credit stands its ground. However, if credit weakens, I see the VIX escalating, and equity market exposed to further downside. The fourth quarter is going to be very interesting!

May, a Month to Remember

May 2022

May was a month to remember. The 20th marked the low in the S&P 500 futures at 3807, down almost 8%. The futures then rallied all the way back to finish the month unchanged. Nasdaq's trough was significantly worse with a myriad of high flying Covid tech names getting destroyed. The recovery in the Nasdaq fell a little short of getting the index back to unchanged. Fixed income, which has seen incredibly high volatility this entire year, settled down with the Fed seemingly finding a ‘happy place' with 10-year Treasury rates floating between 2.75% to 3.25%. Given the choppy equity markets, I suspect that we will see some very differentiated returns among managers this month.

What does this mean? If we hold here, shy of 4% in the 10-year, the market will maintain a downward range. 3800 to 4400 is a reasonable expected range with 4275 as single point of reference. If inflation continues higher, pushing the 10-year to 4%, all bets are off until we hit 3400, the pre-Covid high.

The one thing that is making the ole market maker nervous is liquidity. In their last meeting notes, the Fed expressed concerns about liquidity in Treasuries. As the saying goes, if the Treasury market catches a cold, the equity market could get pneumonia. 50- to 100-handle days in the S&P are not healthy for markets or investors. Electronic markets and regulation have significantly reduced the number of capital providers and market-makers. Market-makers will not provide the liquidity advertised during periods of high market volatility, particularly outside of the top fifty single-name stocks and when investors need it most. Should the summer prove to be less volatile, it may be the right time to think about improving the liquidity of your portfolio. Is there sufficient liquidity to add risk? In this type of market, Liquidity should trade at premium and Illiquidity should trade at a discount. But that is just one person's opinion.

And The Hits Just Keep on Comin'

April 2022


In April, the S&P 500 Total Return index was down 8.72% and the AGG bond index was down 3.95%. Derivatively, a 60/40 portfolio is now down 11.61% on the year. While not news, it is the worst four months of performance for a 60/40 portfolio in decades. As we have forecast, we are now seeing bonds and equities with strong positive correlation. It is also safe to say that the bull market in bonds, which has existed since 1982, is now over. This is not going to change anytime soon as the Fed and the marketplace deal with negative real rates. This extreme circumstance is also prevalent in developed countries in Europe and Japan. I find one of the most interesting barometers has been the Yen. Dollar/Yen was up 6.57% in April, following a move of up 5.83% in March which is a massive move in a developed currency. For a country that imports all its commodities in dollars, that is going to create huge inflationary pressure. Point being, as bad as inflation is in the US, it is significantly worse in Europe (Ukraine war) and now Japan. The days of low inflation and interest rates are over and now we'll see if central banks willing and capable to deal with it. More importantly, are investors' portfolios ready for this significant change? Is the move in 60/40 and the high correlation of equities to bonds just the beginning of things to come?


We typically focus on what is happening with equity volatility and, to a lesser extent, other asset classes. 2022 is proving to be a year where focusing across asset classes and regions is becoming more relevant. For now, let's look at interest rate volatility in the U.S. The “MOVE” is a volatility index created by B of A and ICE that tracks 1-month treasury volatility over a 2-, 5-, 10-, and 30-year treasury options. Above, we discussed how bonds are now in a bear market. The MOVE index confirms, like with equities, that as bond prices have gone down, the volatility of bonds has gone up substantially. The MOVE index was up 10.43% in Jan, up 17.92% in Feb, up 6.45% in March, and up 20.13% in April. While we are seeing uncertainty in equities with a higher sustained VIX, the increase in Treasury volatility is showing even more uncertainty in the rate market. With the 10-year hovering around 3%, market uncertainty, as seen through option volatility, has increased substantially. Our view, as stated last month, if we can hold 3%, the equity market will likely continue to trade in a downward trending range. If it looks like the 10-year is moving more towards 4%, the equity markets could get very ugly.

After Three Decades

March 2022


March was one of the more interesting months I have experienced in my three-decade career. The war in the Ukraine has created major supply issues in commodity markets, outside of just oil. While most investors were focused on oil, nickel was the real surprise. The London Metal Exchange shut down nickel futures trading due to a short squeeze caused by one large producer. This situation undoubtedly warrants more attention than a simple commentary. My view is that market oversight of the EV related commodities will have to be more stringent, particularly as their impact on global economies will eventually become as important as oil.


Market volatility remains high. Market participants do not want to be short volatility, with the war in Ukraine, despite the Fed's ambition. The Fed has now formally introduced the “Fed Call,” as I described in my last piece. The Fed Call and the well marketed “Fed Put” are going to keep the market in a range. The Fed will continue to raise rates to lower inflation; they will also attempt to manage volatility to help to calm investors' nerves. Unless the Fed loses control of this narrative and rates exceeds 3%, the market will remain in a range. I expect this range to be slightly downward trending, unless a more significant rate hike is required. We are not naive to the fact that there are many factors influencing this story, but the Fed, currently, is the most important factor when it comes to the VIX.

February 2022 - Monthly Update


It is difficult to talk about volatility markets with what is going on in the world today. My hope is the war comes to a peaceful solution quickly and we can look back at all of this and think it was just a bad dream. With that hope, it appears that the market dynamics have become more complicated. In addition to the war, we can now say that we are in a much higher inflation regime and that rates really have only one way to go, which is up. That doesn't leave the Fed much of a put anymore. We can also say the peace dividend of the 1990s is now gone. This likely means the PE ratio of markets will have to go lower. We can see in gross and net numbers of hedge funds that managers are not just reducing net exposure, but also gross. This shows itself in the options market through the skew numbers or the CSFB. As I write this, the CSFB is in the mid-20s. In other words, as people take off risk, they are reducing hedges. You don't need a hedge if you have less exposure or are in cash. My thinking is we are in a bear market with some violent bear market rallies. With the VIX already high, I think the selloff will be more drawn out than we are accustomed to in a typical bear market. And one school of thought is that we need a good case of fraud for any bear market to end, so I am waiting for that! 2022 is likely to prove to be a tough year.