00:00So you make the interesting point in your notes that, you know, it's not that the market is trading the
00:05war right now.
00:06They're actually just trading oil. And I mean, when you take a look at what's going on in the energy
00:11space right now, what signal does that send?
00:14Well, I think there's both actual levels that matter and psychological levels that matter.
00:18I think today with Brent pushing back up toward 85, which is about the high that we've seen since the
00:25strikes occurred over the weekend.
00:27I think that's sort of psychology kicking in. Anything that looks like it's it's shooting closer to 100, I think,
00:35would become very problematic for the overall equity market, but also the economy.
00:41And I just continue to think that the feeder through to day to day kind of action in the market
00:46will be not so much oil prices broadly, but Brent specifically.
00:51And someone made an interesting comment to us on the close in the past couple of days that you think
00:55about oil.
00:55It's really the only truly global asset class there is. It has ramifications for every economy.
01:02And I want to talk about that one hundred dollar level because it seems like it keeps coming up.
01:07Is there anything magical about that level or is it just that it's very high and it's a big round
01:13number?
01:14It's probably more the latter two things that you said.
01:17But that's where psychology kicks in around numbers tends to impact psychology and it's just an easy reference point to
01:25use.
01:26I think the other thing that's important is understanding the not just the the oil price, but oil price sensitivity.
01:33And you see much higher oil price sensitivity outside the United States, particularly in areas like Asia that not only
01:43have had their energy sources be often directly from Iran,
01:47but a lot of that energy, both on the LNG side and on the on the oil side, goes goes
01:54through the Strait of Hormuz.
01:56We obviously over the past several decades as the United States have become energy independent.
02:03Essentially, we're a net exporter of oil. That's why you see the spread between Brent and WTI.
02:09So I think there was the immediacy of sort of self first in the aftermath.
02:14And now it's more targeted to figure out who is most vulnerable as it relates to a global metric like
02:22Brent oil.
02:23Well, to that point, it seems like one of the consensus items that has emerged is that this will be
02:28more felt in Europe than it will be in the U.S.
02:31for some of the factors that you mentioned, especially when it comes to the fact that the U.S. does
02:35have this position as a net exporter of oil.
02:39And with that in mind, I'm curious what this means for the sort of global rotation trade, broadening out trade,
02:45whatever you want to call it,
02:46that we've seen over the past year or so.
02:49The fact that Europe, over a lot of time periods, has been outperforming the U.S.
02:54Do you think that this potentially bedevils that?
02:57Well, I think, you know, rotation continues to be the momentum trade.
03:01And we can we can attach fundamentals to it.
03:04We can attach narrative shifts to it, you know, inclusive of the fact that U.S. has been outperforming non
03:10-U.S.
03:11since the since the strikes in stark contrast to the dramatic outperformance of non-U.S.
03:18relative to the U.S., particularly Hidart, obviously, is South Korea in the KOSPI.
03:22But I think what really comes into play in terms of the speed of shifts in these moves and the
03:29magnitude of the moves has to do with positioning.
03:32So you can look at gross positioning, whether it's across asset classes like U.S. equities versus emerging market equities
03:38versus IFA.
03:40You can look at it within the U.S. market at the sector level, at the sub-industry level.
03:47And it's about positioning.
03:48So you can look at gross exposure, but you also need to look at net exposure.
03:52So we see a lot more short attention span money, both playing the long side of many of these trades
03:58and the short side of many of these trades.
03:59They get maybe to a positioning extreme.
04:02You get, you know, a quick narrative change and then you see the pressure in the opposite direction and you
04:07get these massive countertrend moves.
04:09Really tricky environment other than for the most adept, consistently adept traders.
04:15I think for individual longer term individual investors, don't try to play the short term trading game.
04:21I think reattaching yourself to long term fundamentals and time horizons makes the most sense.
04:27Well, it's really interesting.
04:28I mean, as you mentioned, there's a lot of volatility when it comes to what's happening under the surface.
04:33But then you take a look at the S&P 500, for example.
04:36We've seen a lot of day to day volatility, but you zoom out a little bit.
04:41I mean, for the week, we're only down about seven tenths of a percent or so.
04:45And I'm wondering, you know, is that sort of the new normal?
04:48You see these sort of restrained moves at the benchmark, but then you boil down to the single stock level
04:55and it's a different story.
04:56Oh, it sure is.
04:57So the S&P at the index level has only had a three percent maximum drawdown year to date, trading
05:03fairly close to all time highs.
05:05The Nasdaq at the index level has had a bigger drawdown, but still sub sub correction level at negative six
05:12percent.
05:13But where the numbers are more interesting is under the surface.
05:16So more than 50 percent of the constituents within the S&P have had at least a correction level drawdown
05:23this year, meaning more than 10 percent.
05:25In fact, the average member maximum drawdown is 13 percent within the S&P.
05:30It's more dramatic for the S&P.
05:32I mean, for the Nasdaq, almost 80 percent of the constituents within the Nasdaq have had at least a 10
05:38percent drawdown.
05:39And the average member maximum drawdown within the Nasdaq is negative 26 percent.
05:45So resilience at the cap weighted index level, but a tremendous amount of churn and rotation going on under the
05:51surface.
05:52I think that backdrop probably persists for a while.
05:54Yeah, absolutely. Well, we'll also see how long what exactly is happening with Iran lasts as well.
06:00But I do want to get your thoughts on what's going on in the bond market, because you take a
06:04look at yields over the past week.
06:05It's a different story than equities because the direction of travel has been much clearer.
06:10The trade has been to send yields higher.
06:12And I wonder, you know, what what takeaways you take from that, especially as you relate it back to this
06:17equity market?
06:18Yeah, so I think there's a push and pull.
06:20And it's not just happening within the bond market is happening within the equity market, depending on the moment in
06:25the day or day to day as to whether things like bond yields are keying off of domestic economic trends.
06:33The fact that we have seen this pick back up in inflation, we saw the ISM prices paid measure really
06:40surge.
06:41You've got the inputs now, most of them into PCE.
06:44That's suggesting it's going to be a little higher.
06:46You're pushing rate cuts further out into the calendar year.
06:50So that's sort of the domestic traditional market forces having an impact.
06:55But then you have the flight to safety side that comes when you have geopolitical concerns and a military event
07:02like we have had.
07:04So it really depends on the day and the narrative of the moment as to what is driving action, both
07:11on the bond market side of things and within the equity market.
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