Quick Note/Play-by-Play on the markets to expand on liquidity-led sell-offs
Dear LPs:
I wanted to send a quick note re: the September selloff that affected our portfolio, alongside a live example of what I meant by liquidity-led broad selloff. That will possibly expand some into why I am confident in our positioning.
Since the end of last month last Friday (which is the date for which you received your monthly report), we're up over 15% as of this writing (10% YTD). Which means 10% of the losses YTD have been recovered in just 4 days. The reason I mention that is to expand upon the idea that things come up quickly when they go down for liquidity-led reasons. Specifically, this week, some jobs numbers and unemployment statistics came in lower than the market expected, which led them to price in a slightly less-hawkish Fed, which is why almost everything in the world rallied on Monday and Tuesday, with Dollar falling.
Tomorrow there's an employment report due that the market has been expecting would show cooling off in job creation for the month of September. If that is indeed the case, the rally will continue and we'll be on a much quicker pace to recover our losses from last month. If the employment numbers are better than the market is pricing in, it could lead to a sell-off again with Dollar being the only gainer. This is a prime instance of what I mean by liquidity-led selloffs. I of course hope that the numbers are on the lighter side, so the markets price in a less-hawkish Fed, but I don't know for sure.
The point of this note is in no way to suggest that we're fully out of the woods yet, but to present a live example of how these bipolar extremes occur in the markets during moments of low liquidity. And to explain why I remain put even though sometimes I can anticipate unpleasant moments of stress.
Finally, owing to the slightly upward trajectory since last Friday, our margin maintenance figures have also improved substantially thereby putting fears of forced liquidations further away. In general, whether up or down, please do not read too much into these monthly reports since they're a random snapshot in time. The more important thing is whether the macro movements are happening per the strategy, since they typically forward lag their corresponding price movements. The former is indeed working per our strategy (oil is rallying with more-than-expected OPEC+ cuts yesterday, metals ban from Russia, recent analyst recommendation on Chinese recession ending this quarter, Morgan Stanley going overweight on U.S. semiconductors for 2023, oil-backed reserve currency talks to limit Dollar's rise among Saudis, Russia, China, even India, etc.). The price action will follow soon enough as well.
Fingers crossed! Hope this has been slightly illuminating.
Sincerely,
Pranjit Kalita
Chief Investment Officer