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US equity market looks increasingly vulnerable

If you are ‘looking to time the market and looking to position for these sort of things…I think the last few weeks [was] probably a good time to take a lot of chips out’: Joe Basset – Renegade Capital in the US.

HENRY BIDDLECOMBE: We are chatting to Joe Bassett this morning, manager of the Renegade Capital Global Macro Fund. He’s coming to us live from Carolina in the USA, where it’s half-past midnight right now. Joe, thanks for staying up for us. I always enjoy reading your market updates. You’re never afraid to express a view. 

A couple of weeks ago you sent out a note entitled Time to Pay the Piper – an ominous title if there ever was one. I think it’s true that there’s always something to worry about in the capital markets but, as you point out right now I think it’s fair to say that there are a number of factors that seem to point to a US equity market that’s looking increasingly vulnerable. So Joe, why don’t you talk us through some of what has you concerned at the moment? 

JOE BASSETT: Hi, Henry. Thanks for having me. I read the letter; I think I sent it on September 2 to clients. I feel like we are really at a major inflection point where you’ve just had every single bit of ammo thrown at the market and everything is kind of starting to fall away. We’ve had the greatest expansion in the history of monetary policy and you’ve got all the big boys coming in and saying that they’re going to wind that down – that’s the Fed, the ECB (European Central Bank). And when we have a coming up onto year-on-year contraction in that sort of expansion in money supply, I think there’s no question that the market’s going at least struggle at the very least to go up; it’s more likely to come under pressure. And that’s kind of exactly what’s happened over the last couple of weeks. I think we’re as of this morning about 5% off the highs already. 

And then also you’ve got some potential big-picture effects out of things like Evergrande in China, which are starting to potentially shake some feathers loose in the market.

HENRY BIDDLECOMBE: Yeah. It looks like we’re starting to see some real capitulation on that side this morning. But when I read your notes, a lot of what you’ve mentioned is widely known, right? The efficient market guys will argue that it’s more or less all in the price, so where do you think the shocks are going to come from over the next couple of months or the next 12 months?

JOE BASSETT: That’s a good question. The hardest aspect to this market for long-short managers, guys who are not long-only, but are actively positioning the markets and really also trying to protect clients from the downside in equity markets, is that there’s been very little that’s fallen. So anything that was a hedge as a short has pretty much been a loser for the last little while. It’s been very difficult to try to get any sort of pull-back in equity markets. Whether that’s market or single stock alike, it’s been very difficult. 

I just think it’s different right now because, when you look at the positioning in markets, the divergence in the breadth was just horrifying. We were making multi-year lows and stocks below 200-day moving average in the Nasdaq, for instance, and we were making new highs for two-and-a-half months while we were making three/four-year lows in total stocks trading below 200-day-moving averages. Any time that you kind of see that sort of breadth in the market coupled with a massive shift in monetary policy, I think that the old alarm bells are really going off. The difficult part is to really time that to the sort of day or week. But generally, when you look back and look at it in the rearview mirror, you think, hey, that should have been pretty easy to catch. Meanwhile, it carried on for two weeks extra, which is not a lot of time. In the big picture but in the short term it feels like it was really hard to capture. 

I think if you’re in my shoes and you are somebody who’s looking to time the market and looking to position for these sort of things, whether to capitalise on it or to protect your capital from the downside in the market, I think the last few weeks is probably a good time to take a lot of chips out.

HENRY BIDDLECOMBE: Right. With that said, how are you positioned for this fund?

JOE BASSETT: Well, I positioned the fund that short as of the distribution of that letter to clients. We’ve been short some things like the German Dax, short a couple of stocks – specifically we are short of Peloton going into earnings; that worked out really well until fell apart about 20%-odd after earnings. Now – it’s a clothing line – they regained all that, but it’s kind of come back off the last few days, closer to the lows. 

I’ve got a few others on as well, but really just kind of taking down exposure in some of the long names that I do like, and adding some opportunistic shorts. I actually shorted a little bit of Facebook last week, just trying to capture some of that downside beta that I think maybe coming in the Nasdaq, and some of the high flyers, which haven’t started to break at all yet.

 So I’m watching those closely and I’ll wait to see if momentum starts to fall over and then maybe I’ll look to take advantage of some of those as well.

HENRY BIDDLECOMBE: Oh, that’s interesting. Well, thanks, Joe. We’ll have to leave it there. That was Joe Bassett from Renegade Capital.

Listen to Monday’s full MoneywebNOW podcast here.



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The equities markets the world over are on the brink of giving way, big time.

First it happens slowly, then quickly and then it is like catching a falling tractor.

End of comments.



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