Crescat Capital performance estimates for the month of March 2017.

2016 Hedge Fund Letters

When the Fed raised rates yesterday, the S&P 500 rallied, US Treasury 10-year notes rallied, and gold rallied all in a more than one-standard-deviation move. These are not moves that typically occur in sync! Therefore, it was perverse market action to say the least and it is a significant warning signal. Why? Because the last time all three of these benchmarks rallied more than one standard deviation on a single day was December 4, 2015. Wall Street was not prepared. After that day, China’s currency started its second surprise decline of that year, a mere 3% devaluation from December 4, 2015 to January 7, 2016. Crescat was ready for it.

Crescat Capital

Crescat Capital

From the December 4, 2015 close to February 11, 2016, only about two months:

  1. The iShares China Large Cap (FXI) declined 22.2%!
  2. The S&P 500 declined 12.2%. In other words, the up day on 12/4/2015 was a head fake for stocks!
  3. The gold move of 12/4/15 was correct and gold continued to rally another 13%.
  4. The 10-year UST also continued to rally from a yield of 2.27% to just 1.66%!
  5. Crescat’s hedged and diversified global macro hedge fund climbed approximately 6.8% net.

That was also the period of the first Fed rate hike. After the damage, the Fed had to pause for an entire year, cancelling their plans for three hikes in 2016. However, nothing will repeat exactly.

The long Trump trade is long in the tooth. It is the longest equity rally on record of any political party regime change rally after Election Day. The S&P 500 is up 25.0% in the trailing twelve months! That could be the punctuation mark on a market top after an eight-year bull run. Regime changes aren’t always bullish. Consider President Nixon’s first term which featured the Vietnam War and 1969-70 bear market or perhaps Nixon’s second term leading to his impeachment after the 1973-74 bear market. These were rough bear markets for equities and bonds. They were good years for gold.

Equities at large are not cheap today. There are still some decent values in individual equities and we own those that are flagged by our model and supported by our macro views. We are late in the cycle at best. We are still long-term bulls on the US economy and on US equities, but we are short-term and cyclically very cautious. We have some long hedges in late-cycle cyclical stocks including technology stocks, homebuilders, airlines, and financials in all of our strategies that are supported by our fundamental model, but we may also have a quick trigger finger on some of these names. And in our hedge funds, we have a full equity short book to counter our longs.

Our short-term outlook for US Treasuries has changed recently as the 10-year Treasury short became an over-crowed trade per Commodity Futures Trading Commission (CFTC) data. We actually reversed our position as a result and have been long 10-year USTs in our global macro fund. This is a hedge to our peak-deflation-themed shorts in foreign sovereign bonds. Money managers today are also over-crowded into long crude and copper per CFTC data. This goes counter to a potential China blow up. It could be an ugly unwinding. Further, we believe money managers are still too heavily invested long in emerging markets.

Today, Wall Street could again be wrong-footed like in 2015. The world is simply not prepared for the bursting of the China currency and credit bubble. Yes, we strongly believe that China is still in a bubble and that it has not burst yet. It began to burst in June 2015, but it has been on reprieve for the last year as the Fed went on sabbatical from its rate hikes. Guess what? The Fed is hiking again and more determined than ever to continue!

At Crescat, we have a complete macro worldview. We apply our macro themes across all of our strategies. We think that all of our strategies are great! We test all of our themes with the realities of the unfolding world and markets. Some themes stick and some fade away.  We press on, continuing to map our worldview while striving to deliver industry-leading net long term risk-adjusted performance. Our strategies have some of the best long-term net performance track records of any money manager over their entire time frames. We have audited track records to prove it. Our track records include managing money through the tech bust and the global financial crisis. We have managed money through it all and our track records have been continuous. Check out our long-term performance in the attached links. We strongly believe some of our best absolute and relative returns are still ahead of us.

Mid-Month Performance Update

March Mid-Month Net Performance Estimates (through 03/15/17)

Crescat Global Macro: 0.3%

Crescat Long/Short: -0.6%

Crescat Large Cap: -0.1%

February performance reports are now available for download from our website or via the buttons below. Be sure to add [email protected] to your address book in order to ensure delivery of all investor communication.

Sincerely,

Crescat Capital