In this crazy, topsy-turvy interest rate and low volatility scenario few anticipated, one could break things down by what is in favor versus what is out of favor.
Favor can be synonymous with fad or latest trend. The absence of volatility in the eyes of many became a trend that investors had to learn to deal with as it caught many off guard including the big macro firms.
Out of favor are macro-based hedge funds versus M&A hedge funds. Part of the reason is how much cash is sitting on many corporate balance sheets doing little or nothing. In recessions cash becomes king in many quarters. Risk-reward ratios change.
This is another form of active or activist-based investing that the public, as is usually the case, was slow in recognizing. It's also a bit mystifying. But as we keep saying floating crap games float. Like prostitutes they head to where the money can be made.
Active versus passive is another area or way of putting it as investors pulled in their risk antlers in what might turn out to be a huge paradox if for no other reason than false perception. Passive may not be so passive in the end with any untoward surprises.
Passive in brief is a rejection of alpha, at least for the nonce. Alpha has its costs. It's that so-called extra for-a-fee oomph that professional management is reported to add to investor returns. Economists practically everywhere besides stilted, obtuse language love index investing. It's the one-size-fits-all-you-don't-have-to-think-anybody-can-do-it-it's the-easy-road to investing success.
Another group out of favor, small cap equities, particularly in the face of potential rising interest rates started the year on a tear in what many believed was going to be a straight forward recovery where interest rates went up, bond yields declined, cyclicals rebounded and the sun shined everywhere.
The other side of that same small cap coin is large, dividend paying companies that provide a feel good quality. They too can go down but the perception is if they do it will be less than their small cap brethren owing to those dividends.
Still another recent favorite owing in part to low volatility has been what some call event-driven. Tax inversions all the controversy of late are just one example. A lot of money got arbitraged on the Pfizer-Astra Zenica deal that failed, though Pfizer's CEO recently said he's still on the prowl. Since then others like Medtronic's have captured the headlines.
Argentina's bond default is another event-driver especially with certain hedge funds tossing money into Argentina stocks and the prospect of the upcoming election there will bring a more responsible government to power. Out of favor now might become in favor soon.
From last week's action it looks as if high-yield bonds and emerging markets just made the out-of-favor list after defying and mystifying pundits for most of the year. Yield-starved is yield starved. For the Taoist it is what it is until it isn't.
With the loving the punch bowl crowd inflation or the sniff thereof was out of favor. These were the deflation lovers. For bears and economic recovery hopefuls and those who bet big on rising interest rates it was just the opposite. For these people pricing power via higher wages still appears out of favor but that might be changing soon.
Energy prices have been playing the out-in-out favor game much of this year. With the recent pull back in U.S. crude to below $98 a barrel, its lowest level since last February, it looks out of favor again. And that's why we favor it.
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