Nick and Toni Tie Up The Summer
Welcome to the historically weakest month of the year.
With six daily index changes of 2% or more since early July-an occurrence that only happened twice from 2003-2006-the notion of slow, slithery sessions never came to fruition as anxious traders were chained to the tape.
And now, the most important-and historically weakest-month of the year is upon us, one that will separate the men from the boys and the women from the little girls. And yes, those lines of distinction will, in many cases, likely be blurred.
Welcome to September, a month we'll invariably look back upon as the most critical test of our frisky year. In addition to being the last month of the third quarter-important in the context of performance anxiety-it's also a stretch when credit markets will press the pedal and test the meddle of risk appetite.
During the Fourth of July holiday, I sat with a world-renowned short seller at the fantastic East Hampton eatery Nick & Toni's. At the time, wheels were wobbling on the financial markets and we offered our views on the state of the financial complex.
On August 4th, we revisited our dialogue to update our opinions. We spoke of market bottoms versus trading lows, coordinated agendas and the importance of syncing time horizon and risk profiles. We also communicated that I was "Nick" while "Toni" was my friend Doug Kass of Seabreeze Partners.
Last night, we reconnected on the heels of an all-too-quick summer to chat anew on the financial brew. The conversation went a bit like this:
Nick: Hello old friend, it's been almost a month since we last connected to talk about the state of the tape. During that discussion, we mused about the potential for near-term upside and the reality that a much broader, longer-term malaise would manifest before the legitimate foundation of an economic recovery takes root. Has anything meaningfully shifted from your side of the screen?
Toni: I would say so. While the markets have rallied modestly consistent with both of our views, two important developments have laid the backdrop for the markets in the months ahead. First, the price of oil dropped precipitously and that will act as a tax cut to the US consumer. Second, the political setting has changed and with it will come broad investment ramifications.
Nick: I agree that markets are multi-linear and we must constantly adapt our style to the tape. However, while a snapshot of the recent action suggests an inverse relationship between the price of crude and the direction of equities, there is virtually no historical evidence-a negative .041 correlation, to be exact-between those two asset classes over a ten-year period.
Further to that, while select sectors will be impacted by the next inhabitant of the Oval Office, the single biggest political issue is the economy. Through that lens, I view November as the "be careful for what you wish" election for both parties. In my view, we're in for a prolonged period of socioeconomic malaise and the next four years will be extremely challenging regardless of who wins.
Toni: I disagree with your first point and agree with your second-let me explain. Regardless of the historical R-Squared between oil and equities - the sheer magnitude of the rise in the price of oil has and will continue to have a profound economic impact. To be honest Nicky, I have found most forecasters of oil prices to be non-rigorous in their methodology and approach – so I don't want to be another member of that club!
That said, the $30+ drop in oil could be an unbelievable kick save by an NHL hockey goalie in triple overtime of a Stanley Cup Finals. At the risk of being another non-rigorous oil analyst, I suspect that the price of oil will stay down consistent with a broadening of global economic weakness.
The second factor, politics, will take on deeper meaning for the US stock market and I would like to know your view of its impact- I certainly have one, but you might be surprised of what it is!
Nick: I don't disagree with you thoughts on the Ice Capades. In fact, I wrote an article on Minyanville in July called Hanky Panky that spoke of the two-pronged agenda by Hank Paulson and his buddies on the Beltway.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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