Sometimes it takes a stock market flushing to shake out the weak hands, which is what happened in October, says Balyasny Asset Management.

October saw “huge position washouts” that appeared indiscriminate and spread across most asset classes and strategies, according to a monthly investor letter and transcript of a recent conference call reviewed by ValueWalk. But then the huge really in U.S. equities saw a sharp trend in a falling yen, euro and commodities. Stocks in Europe continued to underperform along with emerging markets while interest rates remained generally range bound, the letter observed, saying these trends are likely to continue. This said, the Balyasny team has a concern.

 

Balyasny’s Global Macro View

In a letter dated November 11 sent to investors on global macro views, a copy of which was reviewed by ValueWalk, Colin Lancaster, a senior managing director at the fund, notes “disinflation” continues to spread as seen in items such as real wages and crude oil. The fund notes a continuation of global trends that has lead to disappointment in regions other than the U.S, which leads Europe and parts of Asia in economic growth “by a fairly wide margin.”  China’s Shanghai index, the letter points out, is up over 14 percent year to date, something that would have surprised Lancaster at the start of the year.

The letter said conditions for a strong dollar are like a “near perfect storm,” as positive economic numbers bolster a U.S. Federal reserve confident in its tapering moves.  Lancaster said it “appears that we have entered into a new round of currency wars,” pointing out that the appreciation in the U.S. dollar and the relative fall in the Euro and Yen.  He questions if this is coordinated central bank action – “some sort of reverse Plaza Accord deals” – and says if coordination were in place it would imply the U.S. could tolerate a much stronger dollar than present.

When looking at the European Central Bank and their relatively opaque quantitative easing plans, Lancaster analyzes the market reaction and notes what is known of the current policy is thought not to be enough to get the job done. With his tongue in cheek, he says current indiscernible ECB messaging might be best summarized as: “If things get bad, although we will not tell you what bad is, we will do something, although we will not tell you what something is.”

One item not on the markets radar yet that should be is the Swiss Gold Referendum, he says. The referendum mandates Swiss gold reserves be stored in Switzerland, does not allow the government to sell its gold and requires the Swiss central bank to more than double its gold reserve. Lancaster thinks this could lead to volatility in spot currency trading and people might not care much until the vote nears.

While it is improbable that a country go entirely on a “gold standard” for its currency, a country that has its currency backed by a known percentage of gold could weather currency wars and a debt crisis to a much greater degree. Colin states:

It certainly appears that we have entered into a new round of currency wars.  The best thing that the floundering economies of the world have going for them is recent price action in FX.  And, this needs to continue in order for momentum to build.

Looking at Japan, Lancaster thinks the quantitative easing program, which involves permanent QE until 2 percent inflation is reached, is “really quite radical,” something that “not even the Fed wanted to do.” Looking at the big picture of what is uncharted monetary policy, Lancaster notes  Japans QE adventure is “the biggest experiment in central banking history that just got a bit bigger.”

In regards to the drop in crude oil, Lancaster notes the same supply and demand factors being bandied about by many economists, but then takes a look at the political strategy behind a lower price for oil. He estimates the cost of extracting oil from U.S. shale basins to be “in the high $70s” and there could be a low priced oil strategy in place designed to derail U.S. shale oil production.

BALYASNY

In the U.S., Lancaster is keeping his eye on retail sales. With lower gas prices, consumers might have more money in their pockets for the coming holiday season, making this a season with decent retail sales.

Balyasny’s Atlas Global Investments up 5.32% YTD

For Balyasny’s Atlas Global Investments this resulted in an October loss of -1.93 percent, up 5.32 percent year to date. In the Atlas enhanced fund the loss was more significant, down -3.37 percent on the month but still up 10 percent on the year. All this has been achieved with generally low volatility. Most of the monthly loses came from the long/short relative value equity strategy with their credit strategy down slightly. The best performing segment was found in long industrial plays while event driven stocks, healthcare, REITs, tech and utilities were more problematic.

Balyasny raises the question: At what point do the benefits of weaker currencies in Europe and Japan become liabilities? Is currency devaluation the answer to sick, anemic growth? “Can the long-term, structural problems of countries really be overcome by, mostly, just devaluing their currencies?” And at what point does commodity weakness and strong dollar headwinds impact the U.S.?

Balyasny’s view on the forthcoming market environment

These are the questions that Balyasny’s risk managers are asking as they view the forthcoming market environment with a degree of trepidation.

The hedge fund thinks, while markets are setting up well for 2015, there might be more opportunity on the short side they can leverage.  They note that as the U.S. Fed set to hike rates for the first time, the hedge fund expects less multiple expansion in stocks and “more stock-picking alpha particularly on the short side.” The fund notes they are already seeing some examples in large tech companies that lowered guidance, which was followed by the stock price getting hammered. This, the fund concludes, would not have happened a year ago, indicating a market environment shift.

Balyasny going high on assets and headcount

Once again the investor letter mentions the hedge fund’s growing assets and headcount. The firm’s assets have grown by $1.1 billion in a period of six months to end Q3 at $6.6 billion. It seems that Balyasny is making efforts to limit capital inflows, the letter said, “we are optimistic that the recent market volatility will translate to increasing trading opportunities in the months ahead and are currently accepting limited capital.” BAM is looking to sign up new investors till year-end, staying true to the goal it set earlier this year. Balyasny said that as other hedge funds are struggling, BAM is equipped and ready to increase talent in its offices. He said that BAM’s aim is to become world-class in every respect .

BAM launched a new share class, AEF Strategic, which provides more liquidity for a lower management fee. The firm also recently hired Mitesh Parikh, who was previously head of Goldman Sachs European spot forex trading.