Dear Investors, Partners, and Friends,
Inflation statistics continued to drive market performance in November with a benign Consumer
Price Index (“CPI”) reading leading to a strong mid-month rally. However, the details of the
announcement, combined with the prospect for upcoming difficult year-over-year inflation
comparisons, may paint a much different picture. The mere prospect of a Federal Reserve
(“Fed”) “pivot” that would cease rate hikes and Instead, cutting rates, has fueled further
speculative behavior in markets. The S&P 500 Index (“S&P”) rallied +5.6% in November,
continuing its strong ascent from mid – October lows.
One statistical measure that can have an influence on the option spreads employed in the
Hyperion Fund is called Skew. The CBOE Skew Index is a measure of potential risk in the
financial markets and can be a proxy for investor sentiment and volatility. In early November,
that index dropped to its lowest level since March 2003, and as the Index climbed, the quality of
option spread opportunities improved dramatically. However, the S&P did not have any material
declines after the mid-month positive CPI announcement, eliminating those expected
opportunities and leading to a smaller profit for the month due to the debit costs of expired
options.
The Tactical Program was able to identify an increasing number of attractive trading
opportunities in November. The level of volatility in U.S. equities has remained muted, with the
CBOE Volatility Index (“VIX”) returning to its lowest levels of the year. It is yet to be seen
whether these low levels can be sustained or if this is setting the stage for a new bout of market
excitement. The program was able to somewhat take advantage of these opportunities but
some hedging costs reduced the overall return.
The difficult conundrum for the Fed in its attempt to find a “soft landing,” is hiking rates enough
to tamp down inflation but not so much as to cause a recession, this looks to be an ever more
daunting challenge. The labor market, so resilient for the last few years post the COVID-induced
layoffs, has recently started to show weakness. Many large tech firms have announced hiring
freezes and job cuts, and these companies may be the “canary in the coalmine” and act as
indicators of weakness in the broader economy. Higher interest rates are the likely culprit as
many firms have relied on cheap funding to fuel rapid growth, and those higher rates now are
unsurprisingly having effects that spread from the job market, to home purchases, and to
consumer spending habits. As the Fed has continued to broadcast that it expects rates to be at
these levels, or higher, for a considerable time, the ripple effects of companies adjusting their
business models has likely just begun.
As always, thank you for supporting Le Mans Trading and entrusting us with your investment
capital. If you would like to learn more or have any questions, please feel free to reach out via
the contact information below.
