Key points
- Charlie believed US equities would be the last domino to fall and for weeks his fund had been short Dow Jones Index Futures and NASDAQ Index futures.
- Volatility will remain elevated, but another 1100-point intraday trading range in the Dow is unlikely.
- Australian-based investors in Australian equities have already taken the hit, and now’s the time to add high-quality companies.
I’ve worked in markets for 22 years and I’ve seen things this week I’ve never seen before.
As a new fund manager, it has certainly been a baptism of fire in terms of what the world has thrown my investment team and me, but I’m pleased to report that we have broadly protected our unit holders’ capital with the fund down less than -1% for the month. Our MSCI World Index benchmark is -10.5%.
Down is up
It’s very rare that I would write I am pleased with the fund being down at all, but under the extreme market duress and volatility of the last week, I am calling it a good result.
In these notes I had warned about a Wall St correction. I had believed US equities would be the last domino to fall and for weeks my fund had been short Dow Jones Index Futures and NASDAQ Index futures. These short US futures position were held as protection against investments in Australian and New Zealand yield stocks, most notably, Telstra, the banks and Goodman Group.
On Monday night I was expecting a weak opening on Wall St due to Chinese led Asian weakness. Mondays tend to be bad on Wall St after a weak Friday because investors have time over the weekend to assess what happened on Friday and look at their portfolios. People with margin loans also get a call from their friendly broker.
As a global fund manager, I have all the portfolio management and execution systems set up at home, to make sure we can trade if we need to trade during the northern hemisphere session.
When I logged into the Bloomberg system, I thought I was misreading the screens. I genuinely had to do a double take. The NASDAQ 100 futures I was short were limit down -5% and curbs had been enforced to stop them trading. The Dow Jones futures were down 850pts and even traded down 1100 points for a fleeting moment. JP Morgan shares and GE shares opened down -20%. It was stunning.
I truly couldn’t believe what I was witnessing. It was a genuine crash or “flash crash”, as we tend to call them nowadays. The “machines” had gone crazy and I even saw the VIX index spike to an incredible 58.
Sense prevails?
However, the US markets started quickly recovering from their opening lows and Apple’s Tim Cook spoke, reassured Apple investors about Apple’s Chinese sales, and the greatest rally I have EVER seen in my career then started, led by Apple. The Dow Jones Industrial Average rallied 1000pts to be down just 110pts, but then succumbed to close down 550pts. It was the all-time record intraday points range in Dow history.
It was the most remarkable session I had ever seen. Remarkable or ridiculous? Probably a bit of both.
After Monday night’s antics on Wall St I obviously had to stay up for Tuesday night. The Dow opened up 400pts, traded very steadily around that level for a few hours and tired old Charlie decided that it all seemed a bit more stable tonight and went to bed.
I then got up at 5am to watch the last hour of Wall St trading, because in the last hour there always tends to be action, to watch the Dow drop 600pts in an hour. It closed down 200pts, the Dow futures then fell another 200pts in early Asian trading, then bounced 450pts in Asian trading to be up 250pts.
Last night the Dow was hovering around +200pts, Europe was down, then in the last hour the Dow added +400pts to close up 600pts!
It’s been like watching some crazy poker machine but this is the world’s largest and most important equity market.
Obviously, as a fund manager and commentator, I take no pleasure in these market events. While I forecast a Wall St correction, I never expected it to be as violent and quick as this. The only solace I take is my fund lost significantly less money than most, but it’s still a bad event for people like me even though I can limit the portfolio damage by shorting index futures. Nobody likes seeing stuff like this.
The worst should be over
My view from here is you have seen the worst of this crazy volatility. Volatility will remain elevated, but I’d be very surprised if you saw another 1100-point intraday trading range in the Dow.
On that basis I have covered my shorts in US index futures and am now slowly deploying some cash in the US, Europe, Asia and Australia. I am not looking for a V-shaped recovery in markets, probably more like a W, where there will be further swoons and tests of confidence.
However, you have to think and position six to 12 months out and I think after the global correction we’ve seen, investors are being paid to take risk in the right equities. That statement will prove true when volatility eases a notch or two over the coming months.
For Australian-based investors in Australian equities, I think you’ve already taken the hit. Now is not the time to sell in my opinion, it’s the time to add to high quality companies.
I personally think the S&P/ASX 200 bottomed on Monday under 5000 and I actually put on a “bull collar” in S&P/ASX 200 Index Options, where I sold a November put and bought a November call on the view the market will recover to around 5300 by later in the year.
As I keep writing, in volatility there is opportunity. My investment team and I are researching numerous potential new investments in this period of extremely volatility.
Buy the dips
The question obviously is: is this just a correction, or the end of the 5-year bull market? I believe, and am positioning my fund for, it to be nothing more than a traditional 10-15% correction. Yes, in this world of high frequency trading, these corrections play out in days rather than months, but it would be a major mistake to confuse a correction for the end of the bull market.
After telling you last month to “keep your powder dry” I am now encouraging you to be a little braver. Don’t be like a deer in the headlights: make sure you buy something of quality in this correction. Keep it large cap, keep it liquid, keep to high quality.
This has been a major test of my friend Peter Switzer’s “buy the dip” approach to markets. I just wanted to end today by agreeing with Peter’s view. It’s been one big dip, but I believe buying this dip in high-quality global and local equities will prove the right medium-term strategy.
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