This Week in the Market

With Scott McCaghren and Tony LaPorta

***It is crucially important to listen to the included audio portion of this week’s commentary with Tony LaPorta

 

The main takeaway from this week’s price action in the domestic equity markets…VOLATILITY. This volatility was due to the 2/10 yield curve officially inverting. Many people use that as a warning flag for economic recessive conditions 9-18 months out. We don’t think it is as cut and dry this time around.  While it has been 100% accurate in the past, the past was very different from today regarding monetary policy. Remember, while every recession was predicted by the yield curve inversion; a recession has not followed every yield curve inversion. This is not to say that we couldn’t have a recession, might even go so far as to say it’s about time. It really doesn’t matter for two reasons: 1. Much will transpire between now and then 2. We have an overall-game-plan. 

We have been stressing for months now about the distinct possibility for an August surprise. Well, we were right; and not only were we right, we were positioned for it appropriately. The VOLATILITY hedge that we implemented for the accounts made anywhere from 10-18%, thus protecting a vast majority of the other long holdings. Now we wait with cash on hand for two scenarios which are highly, highly, highly probable. We believe that these markets are going to move in a big way in the near future.  No one knows for sure which direction the indices will move, but we have a plan for either. We will be looking to either re-implement the hedge position after enjoying the recent nice return to protect against Sep-Oct or buying the markets at a deeply discounted price. Ideally, the stock market would have a short-term bounce to allow for the hedge acquisition then fall out of bed to allow for selling it then buying the market at a discount; essentially, double-dipping. I would like to stress the aforementioned “Ideally” as we all know that we don’t always live in an ideal world. It really doesn’t matter what scenario unfolds though because the corresponding game-plan is solid, well-thought-out and will be well-executed. 

If there are any complaints about the amount of cash we are currently holding, it will obviously be coming from someone that doesn’t read our commentaries. That cash is going to be absolutely crucial in completing the next re-balance which will ultimately lead to a huge advantage over rate of returns. As always, we continue to monitor all equity, treasury, commodity and currency conditions in order to efficiently deploy capital as well as protect invested assets.

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