Tuesday, October 16, 2018

Corporate debt growth has exploded - The added macro shock sensitivity creates real risks

There is no question that the explosion of corporate debt has caught the attention of many investors. This debt growth has been especially strong for BBB-rated companies which on the cusp between investment grade and high yield.  Yet, like the boy who cries wolf or the doomsayer who is predicting the end of the world, warnings of a credit crisis do not seem to have affected investor activity. Corporate spreads are still tight and the reach for yield has continued almost unabated. Investors have not been given reasons to care about this debt issue today and have pushed any risks into the future. 

The potential risk for credit is always front and center with any discussions about a new financial crisis but usually the conversation stops there. There is less discussion on what is going on under the hood with respect to credit markets. A recent Bloomberg story highlighted some of the issues that should frighten any investor, see "A $1trillion dollar powder keg threatens the corporate bond market". This article outlines one scary feature of the added debt; the junk bond leverage for some investment grade firms. This article suggests that rating agencies are not doing their job. We have seen this story before with rating agencies and structured finance. The story implies that when the next macro shock occurs, there are some very large issuers who will see significant declines. 

The size of debt may not increase the likelihood of a negative shock. The increase in debt changes the sensitivity to any credit or macro shock. The increased shock sensitivity is what should be feared. A simple walk through of some scenarios shows why investors should be concerned. A lot of this sensitivity spills over to equity markets, which will have a macro wealth effect.

The refinance effect - Much of this corporate debt will have to be refined in an environment that will have higher interest rates; consequently, the cost on firms will increase and push down earnings. Funds will have to be used to delever, or marginal companies may not be finance this new debt. Not a problem today but the earnings sensitivity to rates will increase in the future.  

The index cram down effect - With much of the debt being financed by BBB-rated firms, any downgrade will have costs for investors as portfolios will have to be restructured. Spreads will widen on the pushdown of debt that was investment grade but dropped to high yield indices. For some investors who have yield restrictions, there will have to be a sale of the debt which will have a flow effect.

The optionality (Merton) effect - Given the Merton liability model of the firm and optionality, equity is viewed as a call option on the value of the firm and debt is a short put option. An increase in leverage makes debt more sensitive to any increase in equity volatility. An equity shock will impact debt holders.

The leveraged equity effect - Leverage will increase the riskiness of the firm, which will impact stocks, if there is any macro shock given the costs of restructuring and bankruptcy. Marginal lending will not be available to these firms.

The covenant effect - The demand for debt allowed a reduction in covenant protections. The impact of covenant-lite bonds is straightforward. The covenants add warnings, early protections, and restrictions that all help bondholders. If these are gone, risk increases. While some empirical work suggests that there is no effect from fewer covenants. The testing has not been under stress scenarios. Regulators have asked banks to restrict covenant-lite lending, but the practice continues.

The shadow banking effect - The demand for credit has outstripped the supply available from banks, so hedge funds and private equity have moved into the lending space. The impact of these new players is unknown. My banking experience has always told me that one bank loan chews up the time and resources associated with underwriting many good loans. 

The overall effect of more leverage is that the next time there is a macro shock both equity and debt will be more sensitive to a downturn. Investors may not feel any impact today, but when it comes the effect on markets will demonstrable.

Monday, October 15, 2018

The Alternative Risk Premium Matrix - A good way to jumpstart a portfolio

An alternative risk premium (ARP) matrix is an effective way to start any portfolio construction exercise. A matrix divides risk premia through two criteria, asset class and style. We think in terms of a 5x5 style/asset class matrix. The asset classes include: equities, rates, credit, commodities and currencies. These asset classes have inherent differences that make them unique even when looking through an alternative risk premia lens. For alternative risk premia we include: value, carry, momentum/trend, volatility, and special situations. These styles are been well-defined and identify risk premia that can be exploited through forming long/short portfolios and are actively traded and structured through the bank swap market. 

The matrix can create a broadly diversified portfolio across style risk premia found for each asset class. Full diversification would include a range of styles across a broad set of asset classes. An allocation can be made to each of 25 buckets in a 5x5 construct. However, an asset class specific portfolio would diversify across styles and a style specific portfolio will invest that style across all asset classes. 

Investors can think in terms of specific asset classes or styles to form different portfolio combinations. For example, in the currency asset class, there are well-defined risk premia that include: value as defined through purchasing power parity; carry through long/short portfolios based on interest differentials; momentum and trend premia based on past price action; volatility premia based on option implied versus realized volatility; and special situations associated with curve plays and liquidity. 

A similar matrix exercise can diversify a given risk premia style across asset classes. For example, a portfolio focused on momentum and trend could include allocations in each of the five asset classes identified. 

Correlation or cluster analysis can be used to find risk premia, which are uncorrelated, in order to form a diversified portfolio but a risk premia matrix can serve as theoretical basis for portfolio construction. This approach is especially helpful as the set of risk premia expands.  

Nevertheless, the risk premia for specific styles and asset class across a number of bank swap providers may not be all the same. Banks which offer risk premia through swaps may create different portfolios to represent a given risk premia. Within a given style and asset class, there can be a cluster of banks that offer different risk premia products. Some may be closely correlated while other can be very different. For example, one bank may not define the alternative risk premia for rates carry the same way as another bank. Additionally, the markets included in the swap index for a given style/asset class combination may differ across bank providers. These swap differences for a specific ARP is a source of competition and differentiation across banks. 

The portfolio matrix and structures should account for the differences across ARP products within a styles and asset class bucket. This adds bank specific differences to our portfolio matrix but it does not change the overall story. This framework, albeit simple, provides a useful tool for creating a scaffold for forming a portfolio structure.

Saturday, October 13, 2018

Forward Guidance - When in Doubt, Expect a Cautious Fed

President Trump mused that it would be "crazy" for the Fed to raise rates in December, but his comments miss the point on how the Fed is operating. The continued themes through Fed forward guidance are caution and flexibility. Investors are looking for certainty about the policy path, but the Fed is only going to give fuzzy guidance. Policy will be adjusted slowly so as to not make a mistake. There will be no rules that will bind behavior. When in doubt, do not change from the status quo. We are still living a Yellen Fed world.

This was clearly stated a year ago at one of former Fed Chairman Yellen's speech at an ECB conference.

“In my experience, market participants are very interested in knowing what the path of policy will be and when changes will be made either in asset purchases or in the policy path. And that’s something that central banks are loath to provide."

 “Obviously there’s inherent uncertainty about the outlook for the economy and so the committee’s expectations for appropriate policy evolve in time and in line with the outlook. When that happens my experience is that market participants often feel they have been misled,” 

Names and faces may change, but the behavior of the Fed usually does not. If you are expecting something to change with a new Fed Chairman, you will be disappointed. See Chairman Powell's comments at the Jackson Hole conference. He is comfortable with a cautious Fed based on the old Brainard principle that when uncertain about the effects of policy move more conservatively.

"In retrospect, it may seem odd that it took great fortitude to defend “let’s wait one more meeting,” given that inflation was low and falling. Conventional wisdom at the time, however, still urged policymakers to respond preemptively to inflation risk even when that risk was gleaned mainly from hazy, real-time assessments of the stars."

However what is different is that some of the underlying guideposts such as r-star have been deemphasized.   Do not expect any short-term reaction to changes in macro data. Do not expect a reaction to the recent volatility in equity and fixed income markets. While there may be more focus on what the Fed might do, investors should work under a prior of no change from current policy. When in doubt, fade Fed action especially if the markets respond to data still in a broad range of tolerance.

Fuzzy criteria on what data will drive policy given it may be noisy, fuzzy models on what is the neutral rate of interest, and a fuzzy reaction function that does not bind the Fed to inflation, growth, or asset market behavior is still the order of the day.

Cliffwater state pension review - There is work to be done to reach expected returns

There are still significant funding challenges for state pension funds even with the bull market over the last decade. The  consulting firm, Cliffwater, analyzed state pension performance over the last decade in the recent review. State pensions have not been able to meet their actuarial return assumptions. This under performance places them further below their funding requirements. These funding shortfalls exist even though most funds beat a 70/30 stock bond benchmark. There is also strong return dispersion across states with the best states generating returns 25 percent over the median state return and the worst states over 30 percent lower than the median.  

The reasons for the under performance and the dispersion in returns is clear once we look at return dispersion around asset class benchmarks. States beat the 70/30 stock/bond benchmark, but that has not been good enough to generate an acceptable return versus actuarial assumptions. Actuarial assumptions, which averaged 7.79%, are going to have to come down although this is not a desired decision.

Portfolios saw significant absolute return drag from fixed income and absolute return strategies even if with benchmarks being exceeded. Only private equity median returns exceeded actuarial assumptions for the states. Non-US stocks were also a drag on performance.
So where are states going to get returns over the next few years to close the funding gap and hit actuarial assumptions? There may not be much room for extra return. Skill as measured by extra return versus a benchmark is possible, but the difference between median and benchmark is usually inside 100 basis points, so it is unlikely that pensions will be able to pick better managers to get more returns. 

There will be swings in asset class returns based on the economic and credit cycle, which is a key area for asset allocation advantage, but in a low growth and rates environment it may be hard to find an asset allocation mix to beat actuarial benchmarks. This will require tactical skill at changing the asset allocation. Given the size of these pensions, swings in allocation will not be easy to implement. 

Pensions handily beat absolute return benchmarks, but this could be related to the poor quality of the benchmark over management skill. Nevertheless, absolute return strategies may still be the best way to boost returns for pensions. Independent of the vagaries of the market cycle, these strategies generated median returns of just under 3.5 percent, a far cry from what is needed by pension, but this is an investment area that can allow for return consistency.  

Friday, October 12, 2018

Corporate spreads and carry versus volatility shocks - Risk potential higher

Volatility has spiked higher with the decline in equities, but there are also volatility effects on other markets. Using a Merton debt framework, corporate bonds can be thought of as a risk free bond and a short put position on the value of the firm minus its liabilities. Hence, if market volatility increases as measured by the VIX, there should be an increase in corporate spreads. Additionally, the spreads should increase more for highly levered firms or firms that have higher risk such as those represented in the high yield market. This increase in spreads is related to the increase in the volatility of the value of the firm and not the volatility of interest rates or call features which will be incorporated in the option-adjusted spread.  

Looking at the spread between high yield and BBB bonds through the BAML bond indices shows that recent volatility spikes have translated into wider spreads. This spread widening on spikes has generally been temporary and revert with volatility declines but longer-term increases in volatility do translate to higher sustained spread levels. Corporate credit may not be as safe as evidenced in recent data if volatility stays higher.

Thursday, October 11, 2018

The Post Financial Crisis Decade: Unusually low factor returns and an investment drag

The post Financial Crisis has been an unusual periods especially when measured by factor excess returns. Simply put, there were no traditional factor returns as measured by the classic Fama-French factors. A comparison across decades show that factor returns are variable but generally positive and average from 6+ percent to just under 14 percent. The average excess returns for Fama-French factors since 2010 have been less than 1 percent. If you tried to make money playing these risk factors you got paid nothing. Since factor investing is the bread and butter of equity hedge funds, this is a clear indication why hedge fund investing has under-performed or disappointed many investors over the last few years. Forget about alpha decay, there has been limited return from investing in risk factors. 

From the paper "The Promise and Pitfalls of Factor Timing", we can see that there has been a general compression of returns associated with factor investing. If an investor wanted to play the factor investing game over the last decade, using the standard models would not have gotten you much. (We will discuss factor timing as a way to improve performance in a later post.) This is only a generalization but it provides context on whether there has been a tailwind or headwind for factor investors.

So why has factor performance been so low?  Factor excess returns are usually associated with three reasons: compensation for risk, behavioral biases, and market frictions. These reasons may ebb and flow with changes in the business cycle, financial conditions, or valuations. There should be no expectation that these factors will be stable, but there is the assumption that the premia should be positive over a multi-year period. 

The current data suggests there is no excess return for risk, no behavioral bias or structural return associated with these factors. Could it be that too much money is chasing these risk factors? It is only clear that we do not fully understand the dynamics of these risk factors. 

Tuesday, October 9, 2018

10 Years After the Financial Crisis: What Have We Learned For Asset Management

Let's ask a simple question. After a decade, what are special lessons that money managers internalized from the Financial Crisis? If there was no financial crisis, money managers would have learned many of the concepts of behavioral finance. Investors would have learned the value of passive investing and ETFs. Asset manager would still have allocated to hedge funds, and diversification strategies would still be employed. Perhaps the Financial Crisis intensified these trends to alternative diversification strategies, but ten years after the crisis many of  the concerns, fears, and behavioral changes may have been lost in a bull market 

My view is that the lessons learned were limited and it will haunt investors when the next crisis arises. Here are some investment issues and my view of whether there were lessons learned.

  • Pain from diversification - "If there is no pain, there is no diversification." Diversification has a cost where the true benefit may only exist in a crisis When there are strong beta returns and asset bubbles, the cost of diversification is high based on under performance Many investors have forsaken diversification and the diversification engaged by many investors is likely to see correlation move to one. Lesson not learned by everyone.
  • Strategy diversification - This is a corollary to the non-diversification without pain argument. Investors still seem to chase returns through picking strategies that follow may follow market betas. Even if there is style diversification there can still be a significant increase in correlation during a crisis. Lesson not learned.
  • Risk factoring - Many investors are looking beyond asset classes and thinking about risk factors which focuses on the core components of risk. Lesson being learned.
  • Behavioral Biases - More investors can identify the behavioral biases but it seems as though the same biases from ten years ago can be seen with today's investors. Biases may be ingrained in the market even if many investors are more aware of their behavioral shortcomings. These biases are not going away. Lesson not learned.
  • Liquidity - Most will agree that we will have liquidity problems in the next crisis, but few have done effective liquidity assessments of their holdings. There will be a liquidity shortage in a crisis. Lesson partially learned.
  • Low confidence in ratings - Even triple-A assets were hurt during the Financial Crisis which made bond ratings suspect. There still seems to be a focus on ratings as a risk measure and the average ratings for corporations have been lowered. Lesson partially learned.
  • Confidence in policy-makers - The Fed has worked at trying to provide better forward guidance and transparency of systemic risk measures, yet clarity of central bank actions is still wanting. Central bank actions during a crisis are better defined through systemic risk assessments, but confusion and uncertainty should be expected.  Lessons partially learned, but not tested.  
  • Active versus passive investing - Active managers still underperform benchmarks and hedge funds have not hit their return expectation targets. Investors are getting the message that active management will not protect during a crisis, but ETFs may have a different set of problems. Lessons partially learned.
Everyone will tell you that they are better prepared for the next crisis, but asking for specifics will lead to mixed answers. Strategic crisis risk assessments should be done for all portfolios.

Monday, October 8, 2018

Long-term growth pessimism from Fidelity Investments - What should you do?

Fidelity Investments as come out with their long-term secular global growth prospects and it sobering tale of lower growth. (See Secular Outlook for Growth: The Next 20 Years.) With few exceptions, the growth for each of the countries studied will be lower. The exceptions are based on catch-up, the idea that very low productivity countries will increase productivity as they move closer to the rest of the world. These forecasts are not based on any exogenous events that will cause economic growth disruptions. They are only focused on demographics and productivity. Populations will be aging, growth rates will be slowing, and productivity is not expected to see any increases over current trends.

The conclusions from this type of forecast are very straightforward. Long-term real interest rates will be lower and there will be little tailwind for higher returns in equity. Beta trading or passive long-term investing will not receive any benefits. Expect less from your investment portfolio. Lower growth means more competition for existing firms as they fit over the sales and market share. 

But, like the frog cooked under slowing rising heat, this long-term secular trend may not be noticed in any given year. Except this myth as been debunked. Frogs will notice and react. Investors can do the same. Here are some simple suggestions:
  • Increase strategic allocation to emerging markets. This has been a well-discussed strategy although the failure of BRICS to perform over the last decade suggests that this is not a low risk proposition. 
  • Increase allocation to technology that may enhance productivity. Easy to say, but hard to implement given many technology companies may not have a direct link to overall firm productivity.
  • Increase allocation to those firms that have high research and development budgets. Some researchers have viewed this investment as a key value factor.
  • Look more closely at risk factor investing to move beyond simple market beta. This can be implemented today and have both short and long-term value.
  • Increase focus on alternative risk premia, which focus on long/short portfolios that invest in style specific relative risk. This will enable investors to exploit relative differences across firms and countries.
None of this action has to be taken immediately, but investors can start the discussion and make strategic directional changes to account for slower secular growth.

Saturday, October 6, 2018

Gold - Not be a strong link to inflation nor a strong relationship with real rates

We have written about the surprising lack of gold price gains with the surge in inflation. A reader has commented that it is the real rate of interest that is important, not inflation. Unfortunately, the data does not seem to show a close relationship.

If the real rate of interest is positive there is a cost with holding a non-interest bearing asset such as gold. Similarly, if the real rate of interest is negative, the opportunity cost of holding gold is diminished. A graph of the real rate in the US versus gold seems inconsistent with this opportunity cost story. While there is a relationship around some key periods, the gold real rate story is not strong in the short-run. In the longer-run, the surge in gold was tied to a decline in the real rate, but the relationship is not linear. There will be surges in gold prices during a crisis or when there is a decline in real rates below 1-2%. It is the surprise in inflation that matters.

The relationship between gold and the dollar is stronger as evidenced by the graph. The increase in the dollar more closely matches the recline in gold prices during the post Financial Crisis period. 

Gold is closely tied to expectations across a number of factors, and the emphasis on each factor is not constant.

Friday, October 5, 2018

The big equity return gap - Should we expect the "Great Convergence Trade"?

There is a large return gap in equities. The US and the rest of the world are living in two parallel equity investment universes. For the US, strong economic growth, loose monetary policy even with the current tightening, and pro-cyclical fiscal policies have proved to be a successful investment elixir. The rest of the world is facing slower growth, debt without gains, and an environment that has been filled with uncertainty. We are not arguing that the differential is unjustified. However, we are surprised by the length and size of the gap given the interconnectedness across markets especially in the developed world. This is not the equity diversification that investors expected or desired.

It was Aristotle who coined the phrase, "Nature abhors a vacuum". An investment equivalent is that markets abhor divergences, which leads to the "Great Convergence Trade" for equities. Unfortunately, convergence often does not play-out as expected. A classic convergence will be for US equities to decline after this period of overheating and the rest of the world to gain on the switch to cheap undervalued equities. Certainly, this may be a good time to selectively increase non-US equities. Nevertheless, investor could face two declining markets under this convergence scenario. A lesser of two evils convergence does not seem like a path to riches. Without a growth catalyst for the rest of the world, we expect this gap to be maintained. 

Thursday, October 4, 2018

r-star is out and bond trading is in!

There have been three important Fed guidance speeches in the last few weeks.  Investor should take note. As stated by Ian Fleming, “Once is happenstance. Twice is coincidence. Three times is enemy action”. There may not be a direct link with the current bond decline, but investors should expect more volatility and higher trading volume because r-star is out and a data dependent Fed is in. A data dependent Fed means bond trading is back.

NYFRB President John Williams stated in a speech last week that r-star is no longer relevant for policy guidance. r-star is the equilibrium or "neutral" rate of interest that should exist when there is full employment and the accepted rate of inflation. Williams, a key researcher on this topic, had staked his career on r-star as an important indicator of forward guidance. Now that we are close to r-star, he all but used  the New York phrase, "fuhgeddaboudit". It is of no use. 

From this speech, 'Normal' Monetary Policy in Words and Deeds, Williams make it clear that r-star is too uncertain to be a guide. "But, as we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur, reflecting the inherent uncertainty in measuring r-star." What provided a guide before is not a guide now. This turn-around in views has occurred in a matter of months.  

There is no doubt that when rates were at the zero bound everyone would agree that r-star was higher and the Fed would be raising rates to some neutral level. The direction of rates over the longer-run was clear. Now that the economy is closer to r-star or we have less certainty on r-star, its value is diminished. It may prove to be restrictive, and needs to be thrown out. There is clear that r-star uncertainty increases as we get closer to its true value, but now we may look like fools to have placed value on the Fed's r-star musings because now that rates are close to r-star, we are told it is irrelevant. It was relevant before because the Fed wanted it to be relevant. Now, things have changed.

This is consistent with the speech by Chairman Powell at Jackson Hole that the Fed is facing more uncertainty on what is the neutral rate. In his speech, Powell states "One general finding is that no single, simple approach to monetary policy is likely to be appropriate across a broad range of plausible scenarios."In fact, his speech was a signal for the more direct operational comments from FRBNY Williams. 

The speech by Governor Lael Brainard to the Detroit Economic Club on September 12th defines and defends the concept of the neutral rate but then concludes that uncertainty in its  measurement makes it risky to use and a gradual approach is better. "Beyond the near term, how much the neutral rate is likely to rise and whether it flattens or moderates further out will depend on a variety of developments--such as whether fiscal stimulus is extended or expires, whether foreign and trade risks grow or recede, and whether financial system vulnerabilities extend. As such, the gradual pace of rate increases implicit in the SEP’s median policy path incorporates a degree of caution, which is appropriate, in my view." 

Chuck that old forward guidance, the Fed does not want you to know what it is trying to do before it does it, nor does it want to be bound by star thinking. In the old world, it did not matter what any piece of information told us, it was the sum of the data in a forecast that would be the important variable. The new forward guidance is that the Fed will not give any guidance at least with reference to an economic star. The focus will be on current situations and data.

A cynic could say that the Fed guidance has been pretty poor to begin with, so let’s call an end to this forecast charade. Don’t tell investors anything about guidance because you may do more harm than good. If you look at the dot-plots, there is a disconnect between what the Fed wants, what it expects and what it gets from the market. 

The Fed is giving clear guidance of what it will not be following in the future. What this tells us is that fixed income trading based on macro data is back in vogue. Look at inflation. Follow the employment numbers. Discuss PMI. The Fed will be watching this stuff, and it will not be using any stars to help navigate, so you also better watch the data. You want to position on the data, because the next piece of information may be the one that drives policy. 

The changing language of data analysis - There is old school and new school

Language is dynamic, fluid, and evolving especially in fields of study that are going through significant transformation. This is especially true for data analysis. There also are fads and fashions in fields of study and this translates into changes in language and emphasis in study. The evolution of techniques and language means that terms and descriptors that were useful in the past do not have the same meaning or have been de-emphasized in importance. These changes in focus and language means that what was current a decade ago seems dated today. 

I have listed some of the language and focus changes that have occurred since I was a graduate school. These represent the topics or phasing of terms in the current market for data analysis. These new terms have deeper meaning than what we have used as contrast. In many cases, they are better descriptors. Nevertheless, these changes may give you pause and place a humorous spin on the current changes in data analytics.

Nobody studies statistics. We are all involved in data science. Using the term management science is dated. We are involved with business analytics. Forget about rules, we only follow algos. If you are using data, it better be "big data". Regression is for those with grey hair, everyone should be involved with supervised learning. Get with the language right and you will be cutting-edge.      

Hedge fund styles underperform - More risk-taking will be required to make positive returns

You would not think some hedge funds would be down so significantly for September returns given that the major stock index (SPX) moved higher, but upheaval in small cap, value and growth harmed the average equity hedge fund. There were some positive gains in relative value managers, but it was a generally a tough month for those trying to actively find returns.

With a quarter to go in 2018, there will have to be more aggressive risk-taking to get hedge fund managers in the black. While the average hedge fund may be dong better than long bond funds, most investors did not buy hedge funds as bond substitute but as alpha generators. Research on money managers show a change in behavior in the last months of the year based on relative performance. Winners will take risk off the table and losers may push their risk exposure.

Tuesday, October 2, 2018

Managed futures down for month but within the range of performance for other asset classes

Managed futures, as measured by the SocGen CTA index, showed a slight decline in return for the month, but this performance within the range of most asset classes with the exception of equities. Being long market beta is still king for the year with little absolute performance value from diversification. 

Managed futures, in general, may have been able to exploit trend opportunities in bonds, rates, and energy based on our assessment of market behavior in September; nevertheless, the mixed range of price action during the first half of the month may have limited return potential. Managed futures have shown similar performance against a diversified portfolio of risk premia which have suffered from the sharp corrections in volatility earlier in the year.

With only a quarter of the year left, strong positive gains for managed futures will be dependent on some form of market dislocation that will spill-over to the large traditional assets. While many have noted there are asset price excesses in both equities and bonds, there is limited information to suggest a market dislocation is imminent. 

Strong directional trends in bond, rates, and energy sectors

September was a slightly down return month for many trend-followers as the first half of the month was range bound. Our sector indicators showed most markets not having clear trends with only some slight directional tilts. During the month, the markets became more directional for bonds, rates and energy. The price action in these markets aligned with economic fundamentals. A combination of continued good economic news, higher inflation, and another Fed increase all point to negative fixed income markets not just in the US but across all developed markets. Equity market signals were less clear-cut as the combination of higher rates and strong economic growth generated crosscurrents that were less clear. Cash flows should be higher, but the discount rates are also higher. 

Energy markets moved higher across the board as both crude and natural gas are suggesting upward trends. The dollar has started to move higher based on rate differentials and growth. Metals and commodities show more mixed directional bets. Overall, trend opportunities in financials look to be positive for October.