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Confirmed Positions + Expected Catalysts
Week 18 2022 proved challenging for Equities and Fixed Income, both finishing the week in the red. Our Alpha Strategy fared well in this context, ending the week flat. Our positions in Commodities performed strongly; however, our Gold exposures dragged on the portfolio. Our hit remained level, holding at 52%:
Turning to next week, our systems now have confirmed positions for the next week:
The Prometheus Alpha Strategy is LONG: S&P 500, Consumer Staples, Materials, Energy, BCOMTR, WTI, Brent Crude, Heating Oil, Gasoline, Copper, USDMXN, and SHORT: Communications. Keep in mind; Equity positions are currently sized minimally, given the high noise to signal we are currently witnessing. Our Beta Rotation Strategy is currently LONG: Commodities. A Market Regime Portfolio would be allocated to Stocks & Credit: 2.7%, Commodities: 56.9%, Treasuries & IG Debt: 0%, Gold & TIPS: 0%, Cash: 40.6%.
With regards to economic data, here are the data points most relevant to our systematic tracking of economic conditions:
Monday: Wholesales Inventories, Wholesale Trade Sales
Tuesday: NFIB Small Business Survey
Wednesday: MBA Mortgage Applications, Average Hourly Earnings, CPI
Thursday: Jobless Claims, PPI
Friday: Michigan Surveys
CPI & PPI data will be particularly important and incrementally update our system’s expectations for the future inflation path. Heading into next week, our High-Frequency Inflation Impulse measure has recently shown a significant re-acceleration which could point to further resilience in CPI. We wait and watch:
In this context, it’s worth thinking about the relative value opportunities created by high inflation. Equity beta isn't a place to be right now. However, relative value does exist between different sectors. One instance is Energy vs. Consumer Discretionary. The current dynamic of extreme inflation favors commodities (and their producers) relative to discretionary spending.
Additionally, by our measures, Energy has a 17% expected return in the current regime, and its performance YTD has been true to form. In contrast, Consumer Discretionary has an expected return of -7%. Long/short pairing can neutralize some of the pain in beta:
Finally, a deluge of FOMC members will be speaking this week. While we aren’t experts in analyzing the nuances of “Fedspeak,” we will carefully be watching for further information on balance sheet reduction, especially for any messaging around the outright sale of mortgages. For a more thorough dissection, check out our recent note on QT here:
We remain in a challenging market environment, where active management is key to avoiding drawdowns. Stay nimble!