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July 7, 2015, 12:24 p.m. EDT

Greece is the Fed's jackalope

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About Michael A. Gayed

Michael A. Gayed, CFA, winner of the 2014 Dow Award, is chief investment strategist and co-portfolio manager at Pension Partners, LLC., an investment advisor which manages mutual funds and separate accounts according to its ATAC (Accelerated Time and Capital) strategies focused on inflation rotation. Prior to this role, Gayed served as a portfolio manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. From 2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered investment advisory firm that managed equity portfolios for large institutional clients. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Follow him on Twitter @pensionpartners and YouTube

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By Michael A. Gayed

"Expect the best. Prepare for the worst. Capitalize on what comes." - Zig Ziglar

The mythical jackalope is a fearsome animal hybrid in North American folklore. More dangerous than Chuck Norris in the most violent of fights, the jackalope is legendary not only because of its ability to gore the unsuspecting, but also because it mimics the human voice. While the jackalope doesn't exist (as far as we know), it is not uncommon to find taxidermy heads of the fictional animal in bars across the country. After all, nothing impresses people more during a drunken night of storytelling than how a particular hunter risked his or her life to kill the notorious creature.

Today's equivalent of the fabled jackalope is Greece, which is as fearless and as dangerous as the hybrid animal. When you have nothing left to lose, you have all the power. Greece /zigman2/quotes/208159440/composite GREK +1.53%  is in that position now. An exit from the eurozone, once deemed unthinkable, is now the base case for many. The S&P 500 /zigman2/quotes/209901640/composite SPY +0.19%  never priced in such a scenario, despite it being talked about continuously for the past several years.

I would argue the stock market still doesn't believe that this scenario is highly probable. An exit by Greece is mythical, spoken of by many greats in the investment management business with hypothetical thought experiments on what happens upon such a monumental event. Yet, despite all the talk, the jackalope is more a point of conversation than something to get your hunting gear ready for.

However, the bond market doesn't seem to think the jackalope of Greece leaving the euro is so fictional after all.

Take a look below at the price ratio of the iShares Barclays 20+ Year Treasury Bond Fund ETF /zigman2/quotes/206026314/composite TLT -2.35%  relative to the Pimco 7-15 Year U.S. Treasury Index ETF . As a reminder, a rising price ratio means the numerator/TLT is outperforming (up more/down less) the denominator/TENZ. This is an important intermarket relationship documented in the award-winning paper I co-authored .

Long-duration Treasurys have only just begun to gear up, prepping for a potential Greek exit and severe volatility that could come in the lead up. This is no longer just a hypothetical scenario, but a very real one that has the potential to gore unsuspecting bulls who think the jackalope doesn't exist in real life, despite all of our awareness of the animal around us.

For the Fed, Greece is the jackalope they don't want to find out is real. Any kind of disruption in Europe will make it unlikely the Fed raises rates anytime soon. For those awaiting normalization in interest rates, good luck should Greece exit. We can no longer just talk about a Greek exit and talk about how dangerous it is. We can no longer just joke about Europe's dysfunctionality relative to the U.S. which has been resilient to volatility overseas.

Is 2015 the year of the jackalope ?

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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