Crescat Capital Commentary

Crescat Capital commentary for the third quarter ended September 30, 2018; titled, “October Off To A Roaring Start.”

As September ended, so did the third quarter with diverging global financial markets: US stock indices marched to new highs while global stocks ex-US headed sharply downward. Emerging market currencies also faltered. 2018 is looking like a year of increasing market jitters in a tired US economic expansion cycle at record global leverage. We also have rising geopolitical tensions as the trade war between the Trump administration and China risks morphing into a full-blown cold war. Now more than ever, prudent investing requires finding opportunities through calculated research, a consistent forward-looking view and a commitment to time-tested investment processes. You will find our thought-provoking macro themes in our most recent quarterly letter, “The Hamstrung Fed” which has garnered rave reviews:

Q3 hedge fund letters, conference, scoops etc

In our portfolios, we continue to focus on our three highest conviction macro ideas:

US Equities: Risky late-cycle economic conditions and historic overvaluation
China: The early stages of a financial crisis unfolding with negative implications for its currency
Precious Metals: Unloved at historic deep value; timing looks highly favorable given both haven demand and likely new inflationary pressures featured in our quarterly letter

US Equities

We believe it is time for investors to become increasingly defensive. US stock price valuations are stretched to historic levels. Many economic growth indicators have overheated creating the dual risk of rising inflationary pressures and the bursting of an equity bubble. In our hedge funds, Crescat remains positioned to capitalize on a cyclical equity market downturn. Despite hitting record high US index values in the third quarter, weakening market internals emboldened us to stay net short in our hedge funds all year. Weak internals have included: 1. An increasing number of NYSE new 52-week lows year to date; 2. The Dow Jones Industrial Average hitting at an all-time high as recently as October 3, but the Smart Money Flow Index flashing a bear signal since February; and 3. As of the end of September, 17% of the components of the S&P 500 Index were down 20% or more from their 52-week highs; while 43% were down at least 10%. Our fortitude in staying net short has already been paying off strongly in October. By investors needing to become more defensive, we do not mean that it’s time to buy utility stocks. Utilities are the worst scoring sector in our fundamental model today due to bloated balance sheets, negative FCF, and over-valuation. Being defensive to us means that one should consider an allocation to a global macro and/or long short hedge fund manager with a proven track-record of capitalizing on varying market cycles including downturns. We believe that global investors have far too much long US equity exposure today.


Our negative sentiment regarding China has grown stronger. China’s manufacturing activity grew at the slowest pace in more than a year in August, with export orders shrinking for a fifth …read more

Source:: ValueWalk


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