Monthly Letter June 2013

During the past few months we have been engaged in numerous discussions and arguments with market par cipants on how asset prices would react once the Federal Reserve indicated an end to their asset purchases. In June the Fed gave a clear meline on this. At Madrague we had a plan (as you should of course) on how to act when the Fed’s inten ons became clearer. However, things do not always go according to plan. As Mike Tyson said ahead of one of his ghts; “Everybody has

a plan un l they get punched in the face”. Well, China punched both us and the market in the face. Let’s start with the Fed since the tapering discussion is a pre y interes ng one. That the world has been on a liquidity binge the last couple of years is something most would agree on. The ar cially low rates have resulted in a global search for yield. In the equity market we have noted the outperformance of “bond-like equi es” that have re-rated drama cally versus more the cyclical equi- es. This theme has been touched upon in several of our previous newsle ers.

The Fed had previously stated they would not start tapering un l they saw an improvement in the incoming data, i.e. an improving economy => good news. The argument that the Fed tapering would be bad for equity markets hinges, mainly,
on the assump on that good news can at mes be bad (or that the Fed is mak-
ing a policy mistake, which of course is possible). We at Madrague prefer not to overcomplicate ma ers: good news is good and bad news is bad.

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