Immediately after a agonizing stretch of 5 consecutive down months, September couldn’t appear rapidly sufficient for Horseman International, which we beforehand dubbed “the world’s most bearish hedge fund”, thanks to its publicity which, though fluctuating, has been net short for the past 6 decades and most not too long ago experienced a internet shorter placement of -47.33%, even additional bearish than it -43.5% web last month.
In September, the fund at last rebounded, soaring 1.8% – its to start with up month given that March – bringing its YTD return to -8.79%, with “gains coming from the very long reserve and the small ebook. The currency guide lost funds” according to CIO Russell Clark’s hottest monthly letter.
So following what is location up to be Horseman’s most painful year considering the fact that 2016 in which the fund lost 24%, is Clark all set to toss in the bearish towel, end “preventing the Fed”, and be a part of the a great number of ranks of momentum chasers?
Not at all. 1 month just after Clark wrote in his September letter to clients that he is assured the time for the upcoming huge small has arrive, the Horseman CIO says in the most recent letter to clients to “make no error, this fund is operate to make a positive return for traders. You may imagine with the fund staying internet small I am seeking to situation it as a hedge, or that I am tremendous careful, but this could not be more from the fact. Why not just get the sector, or obtain momentum then? Perfectly, my personal encounter of “obtaining assets that are heading up” has been decidedly combined. What I have observed actually works for me is accomplishing specific analysis of an business, functioning out what has to happen from essential small business and economic logic and obtaining positions in these areas, completely ready to just take gain of the final result.”
Unwilling to be part of the bullish crowd, Clark then explains his preferred system as follows:
The strategy is, while we are waiting for a downturn which I see as inevitable, these distinctive property will trade independently of just about every other, but ideally produce a small upward bias to the fund. Then when the unavoidable occurs, these beforehand uncorrelated property turn out to be correlated and the fund has a large go. It’s an odd strategy I know, but it does make it possible for the fund to operate net limited for prolonged durations of time.
This bearish strategy labored remarkably well for 4 many years – from 2012 to early 2016 – when even as global stock markets continued to rise, the fund which was working exceptionally internet short, and created beneficial returns yr just after calendar year (see table over). In accordance to Clark, this alpha “was the end result of do the job done in 2010 and 2011 as we labored out what was heading on in the Chinese metal marketplace and how its inevitable issues would have an impact on miners, Latin The united states, currencies and bonds.”
And following what the CIO claims was “a whole lot of difficult get the job done in 2017 and 2018” he eventually feels that he has “identified the mix of assets the two prolonged and brief that present the return profile that we want.”
So what is Horseman viewing?
In a phrase: oil. In 5 words and phrases: oil prices likely much higher.
As Clark wrote in his most latest Sector View letter, details from the EIA, price tag action of shares, and responses and money market place exercise “are all pointing to the oil market beginning to transfer absent from US onshore. Not in a huge way, but a bit,” he adds. On the lookout at the “brutal and unrelenting economics of US shale oil drilling”, Clark predicts that US oil manufacturing will sluggish and very potentially contract.
This is built even more likely in my perspective by the consolidation of significant shale drillers, who may perfectly really feel that it is in their self-desire to slow oil manufacturing and aid to push up WTI oil prices. Betting on self-interest, specifically when it arrives to Americans, has traditionally been a superior wager.
What takes place future could be a replay of the oil selling price shock noticed in the times just before the international economic disaster struck in mid 2008.
WTI charges have currently risen from 30 USD at the very low in 2016 to 74 USD nowadays. The last time US oil generation slowed, the price cut to WTI disappeared, and if that happened now it would transfer to 85 USD. Offered the present challenges with Iran, in anything at all but a recession, it is really really hard to see oil price ranges slipping.
Need to this thesis pan out, Clark predicts that the unexpected leap in oil prices would bring about US auto demand from customers to weaken, a sector that is previously falling and struggling from slowing demand in China and mounting commodity rates. Up coming, slipping vehicle desire would influence a semiconductor market place that is by now seeing stock builds and soaring opposition from China.
Apart from particular sectors, a slowdown in US oil generation and a increase in oil prices, would also have broader financial implictions and lead to a sharp slowdown in US expansion.
And offered that the US fiscal deficit is already at 4% of GDP, “even a minimal slowdown would cause this to widen significantly, very likely foremost to the US dollar falling, possibly due to variations in the expectation of Fed tightening, or concerns about the fiscal security of the US.” And as the distribute in oil selling prices closes, this also cuts down a large competitive advantage for the US.
A falling US dollar would feed into our quite brief USD forex guide and would support our substantial shorter positions in European and Japanese car companies and suppliers.
But what has Clark most thrilled about this sequence of bearish functions is that “all these different trades feed off of every other, and they are commencing to correlate. Substantially like in the interval from 2011 to 2016, as one region starts to function, we can move the fund to other parts as weak spot in one location bleeds into a further.”
As common, Clark’s letter finishes with his net positioning, which “continues to be brief formulated markets and long commodity related companies”, and nowhere is the fund extra shorter than tech…
… which is a internet -50% of the fund’s whole book.
We conclude with the parting phrases from his September letter, which we propose getting read in conjunction with his latest one:
2011 and 2018 are playing out extremely equally for me. Straightforward momentum trades of the previous yr are breaking down, and traders are herded from one particular place to an additional. While all the chat is of an emerging market disaster, the greatest emerging markets are all engaging in reform, whilst the made markets are however overly reliant on straightforward money. In 2011, marketing the then outperforming rising markets, and obtaining Irish personal debt was the correct trade. And in 2018, shorting developed marketplaces and obtaining rising marketplaces looks the right trade now.