Snapshots is wondering why the old market saying of “sell in May and go away and come back on St Leger Day” is still around

Data mining

This is because historic simulations show it is statistically not significant. In the words of Ron Burgundy it’s a case of “60% of the time it works all the time”.

On a more serious note in the world of big data, machine learning and systematic trading, if a simple seasonal pattern existed it would be arbitraged out very quickly.

50 cent and the VIX

The same logic holds for recent financial analysis of the VIX falling below 10%.  The sample set of observations is low and there is no clear pattern of what the market does 1/3/6/12 months later.

The falling VIX has led to reports of large losses for a buyer of VIX calls nicknamed ‘50 Cent’ because the calls were purchased for around 50 cents per contract.  The media has reported that the buyer has spent approximately $120mn in option premium on these calls.

We note that Ruffer which has been identified as the buyer behind these calls manages $20bn.  While we cannot comment on their underlying investments, they have spent approximately 60bps of AUM on hedges.  This is in line with what we would expect from a macro overlay hedging strategy.

Trump Slump

The markets have been in consolidation and correction mode this week.  This has been attributed to worries about a Trump impeachment.   We don’t view this as a major concern for the market. Like Frank Underwood, there are plenty of politicians in the corridor of power who would be happy to see Trump fall on his sword and take on the mantle to push through tax reforms.

We think a more likely explanation is US macro and inflation surprises which have rolled over albeit from high levels.  There is also some uncertainty about how the Fed will start “balance sheet normalization” operations which are being considered at the end of the year.

US CPI and telecom price wars

On the subject of falling inflation surprises in the US what really caught our eye was the collapse in wireless telephone service CPI.  Wireless operators are pushing heavy discounts on unlimited data plans which is creating a price war.  Moody’s has lowered its outlook on the US telecom industry as a result of this.

Top line revenues are expected to decline 2% at a time when the industry has been leveraging up via the debt markets to be at the forefront of the technological convergence between internet, television, cable and wireless.  Stories of rising debt and falling revenues are always worth watching closely.

UK consumer finance

Another price war that has caught our attention is in UK consumer finance.  This price war on the high street has been led by the use of interest free holidays to entice borrowers to move their credit balances.  Personal loans rates (unsecured credit) have fallen below the standard variable rate for mortgages (secured credit). Pause for a moment as you think about the implications of this.  And does the use of interest free (teaser rates) sound familiar?

By Asif Godall
Deputy CIO