War Room 25 April 2013

Welcome Back Mr. Volatility

War Room•Monthly macro discussion

•Using tools in context

•Update on HiddenLevers Features

•Your feedback welcome

Welcome Back, Mr. Volatility

I. Return of Volatility

II. Correlation Breakdown

III. Commodities Secretly Crashing

IV. Scenarios + Macro Themes

HiddenLevers

RETURN OF VOLATILITY

Mr. Volatility – VIX at all time lows

I’m still goingstrong

source: HiddenLevers

7 news lows in 2013

VIX spike

false sense of security

Declining VIX not a

timing tool

# trueBull moves end

with VIX at demonstrably

low levels

# falseNew lows VIX predict market

top

S&P 5% drop

Mr. Volatility – Fake Tweet + Mini Crash

source: CNN Money

tweet = pin prick

Shows that markets are on edge

Rate of market tumble is key

Evidence of vulnerability

Nothing new about market rumors

1% dropFangs showing

Mr. Volatility – US Equities

just chillin’

on edge

source: HiddenLevers

Mr. Volatility – Global EquitiesVolatility higher outside US

• Peripheral EU most olatile

• Australia

• Russia

• Brazil

• India

• China

• Japansource: Barron's

Volatility higher outside US

Peripheral EU most volatile

Australia

Russia

Brazil

India

China

Japan

Mr. Volatility - Currencies

Japan QE = Hopium

Japan - decisive break with past is reason for USD strength

USD strength means anything priced in USD goes down

USD rising in weaker markets… and stronger markets?

USD index could touch 90

1 USD = 100 yen again

Yen/USD - 20% drop

source: HiddenLevers

Mr. Volatility: Event-Based News Cycle

China Hard Landing

Conflict in KoreaDomestic Terror Attack

Gold Crash

COMMODITIES SECRETLY CRASHINGHiddenLevers

Just look the other way

Weak Demand for OilOil has been below 100usd since April 2012.

New oil discoveries

Commodity funds and Exxon are not participating in S&P rally

USD up = oil down

resistance

source: HiddenLevers

1y-15%

Steel

Copper

Aluminum

Industrial Metals: Secret demise 1y

-68%

1y-20%

1y-11%

Wait, seriously?

source: HiddenLevers

Gold: The Wake-Up Call

Does this guy look smell

like smart money?source: HiddenLevers

Gold: Reasons for drop

USD inflows due to Yen

No gold pop on Cyprus

Hunger for Return/Yield

Inflation less a Worry

-3%

-13%

-35%

Gold Miners: Adding Insult to Injury

HiddenLevers

CORRELATION BREAKDOWN

Oil-Gold Ratio: Short + Long Term View

I’m still goingstrong

Oil/Gold

Historically this ratio doesn’t stay above 20 for long

YTD trend brings us back to average

Trend rarely stops there, has fallen to 10 many times

20

10

Downtrend has begun

long term

Short term

Bond Markets: Brain freeze after ZIRPee

I’m still goingstrong

Zero Interest Rate Policy

Treasury spreads dropping – sign of deflation?

Yet high yield bonds spreads have collapsed

Maybe both are impacts of QE!

source: HiddenLevers, Federal Reserve

Who knew ZIRPees could be so bearish?

High yield bonds acting like party is still going

S&P 500: Break with USD + Treasuries

I’m still goingstrong

source: HiddenLevers

After moving inversely for most of the decade, USD + S&P moving upward together

Yields + S&P were both part of risk-on trade, but are now diverging

It’s over

Euro + Copper + S&P 500: BFFs no more?

source: HiddenLevers

I’m still goingstrong

After moving together for most of the decade, Euro + S&P parting ways

Copper typically tracks global economic growth – it is now crashing while S&P rallies

Which asset class is getting it right?

• Treasuries

• Commodities

• Global equities

• Dollar Up

• US + Japan Equities

• High yield bonds

SCENARIOS + MACRO THEMESHiddenLevers

Gold Scenarios: Isolated Crash or a Harbinger?

• This scenario is 94% priced in

• Recent crash (S&P up, gold down) played out according to scenario

• Little incremental impact if this is bottom for gold

• A further crash in gold may represent coming deflation

• Silver more volatile and at-risk than gold

• A mild deflation pulse (even absent recession) could lead to normal S&P correction

ECONOMY

source: HiddenLevers

Commodities Crashing – China?

China GDP Growth has fallen below 8%

Scenario is currently 36% priced into market

Copper and Chinese shares moving down in tandem

China contributes 50% of world GDP growth – cooling there is difficult to ignore

source: HiddenLevers

HiddenLevers – Product Update

• Upmarket / Downmarket Analysis

• Portfolio Import – User Interface

• New Levers – CAPE, S&P PE Ratio

• Integrations – Pershing

Coming soon:1. Big announcement in early May

2. Call for feedback on Notifications