Going into 2023 fully hedged

Equity and other markets review 03.01.2022 - 06.01.2022

General overview: Pardon me, still in a holiday mood. What can you do, I am European and we tend to take advantage of those. Thank god the market was in a lullaby sang by the JPM fund which pinned it to 3835. On a move up, dealers had to sell futures to adjust delta and on a move down, they had to buy for the same reason making those who are not drinking and eating asking philosophical questions about the meaning of life.

But as all good things come to an end, so did the pin and the end of holidays. The only thing that stuck out besides all the tax loss selling tickers (RIVN, TLRY, etc.) and the window dressing in energy ($XLE, $U.UN) was the continuous advancement in the long-end rates. While it might not sound like a lot, 15 bps rise in rates on a weak equity market in an appalling year did sweat a lot of guys picking up tax loss names in the credit space, including me.

It is still very far from where it was at as of now does not look scary, but the development in rates is definitely the first thing I check when I wake up these days. I am not too sure what drives the long end now. Could be repatriation of capital due to monetary policy changes in Japan and Europe, could be another hope for a softish landing. Currently, I do not know. Another interesting observation is the recent development in the eurodollar futures market where the December 23 and December 24 contracts have been selling since for 2 consecutive weeks, signaling the ’higher for longer’ might be finally getting priced by the market. Higher rates are not really what the equity market looks for.

I really do not know how the week would turn up but as long as SPX keeps 3800 I am cool keeping my tactical longs.

As for the dollar, I do not think it is worth mentioning as nothing really happens there. Every other PM is betting on a strong Yen in 2023 and how the DXY cycle strength is over. Do not have a strong opinion on this, but I am rather surprised how weak it trades.

Sector overview and potential trades: I do not believe much has changed since our last post. The window dressing should be over, but for that were in love with XLE should remain so. And those pumped about uranium should be even more. The final close for 2022 was a monster breakout above all substantial moving averages. Fundamentals are aligned too and lots of people have probably lost hope for a run and dumped their holdings, meaning they will be chasing on the way up in case it continues.

Another thing that caught my eye is the ratio between the junior and the larger gold miners, GDXJ and GDX, respectively. With all the strength gold is showing, I think the juniors have a decent chance of outperforming if things keep going in the same direction. My feeling is that in 2023 gold has a very good chance of surprising on the long side.

Current positions: We are long a bunch of CEFs, BDCs, PFF and …TSLA. On the other hand, those are fully hedged by either QQQ, SPY, VSTOXX futures or HYG. We are also long g-spread trades (long treasuries and short cash bonds) and we have a half short position in AGNC through puts.

Long TSLA - we are long TSLA 130-140 Jan 13 call spread for the obvious reasons of being oversold, because of margin calls, tax loss selling and pure momentum on the downside. Strikes were chosen significantly out of the money (at entry, underling was around 110$) as some nice squeezey bounce was expected.

Short AGNC (half position) - we are short AGNC through long March 11$ bought for 1.09$. At the time of entering (last Friday), the extrinsic value in those (after taking out 3 dividends of 12c each) was really small. The company trades quite steady compared to other mortgage related tickers in the space (PMT, BXMT, CIM, NYMT). Given the dark clouds above the sector this cheap play deserves a try.

Conclusion: I am going into the first week of 2023 with tons of tax-loss selling tickers and some other equity exposure. My book is fully hedged as I do not want to be surprised in a nasty way by taking a directional bet. I prefer to simply take advantage of what was price insensitive selling.