Crescat Capital May letter

All three Crescat strategies finished in the black in May.

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There are major cracks in the market that most investors are ignoring, likely to their peril. Quarter to date, oil is down 4.4%, the dollar is down 3.1%; copper is down 2.5%; bank stocks are down 3.4%; retail stocks are down 2.2% (the SPDR S&P Retail Index ETF which includes Amazon); Treasury bonds are up 2.7%; and gold is up 1.6%. Not one of these moves is typical of a bull market. In fact, the combined move is typical of a significant bear market and recession. As proof, the last time all of these instruments finished a quarter with a more than 2% move in the direction they are moving now, the S&P 500 Index finished the quarter down 14.7%. This was the third quarter of 2001 and we were in the middle of the tech bust and a recession.

But the S&P 500 is still up 3.6% quarter to date.  Either the combined move in oil, the dollar, copper, banks, retail stocks, gold, and Treasury bonds is wrong, or the S&P 500 Index move, being propped up by a narrow group of large tech stocks, is wrong. One simply cannot have it both ways. Macroeconomic divergences get resolved. The quarter is not over yet. How will the June month and quarter finish? We will soon find out. We are the most short we have ever been, and while staying within our risk constraints, we intend to capitalize. As the month of May shows, there has not been much downside risk being record net short with the market going up because the market is already crumbling beneath the surface. 

And why shouldn’t it be? The Federal Reserve is raising interest rates at a record rate of change late in the business cycle in the cursed first year of a Republican president. This is a combination throughout history that has led to credit crisis, stock market crash, and recession. Sure, this time could be different, but we strongly believe it won’t be. The stage is set. China is also tightening credit late in the business cycle in what in our analysis is unquestionably the biggest macro bubble of our lifetimes. 

We manage real hedge funds that do real shorting of stocks. We have long positions too. Most hedge funds today are hardly even hedging; they are record net long equities in our analysis. We run a macro hedge fund that is based on macroeconomic themes developed by extensive fundamental analysis. These themes apply to all of our strategies, not just our macro fund. Our macro fund trades multiple asset classes and includes a significant long/short equity component. We are a value-oriented shop with a systematic fundamental equity model that applies to all three of our strategies too. We have been successfully applying our model for more than 18 years to deliver high alpha and low correlation compared to the market and other managers across these three products. These are the only three products we have ever managed. They have continuous track records of strong long-term net performance. We strongly believe some of our best absolute returns and out performance is directly ahead of us.

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