Daily Agenda: Signs of Falling Demand in China

Moody’s puts Chinese SOEs on watch; Herbalife restates key metrics; former Chesapeake CEO dies in car crash; Jim Strugger on hedging the next shock.


Andrew Harrer

As investors continue to focus on contracting demand in China, fresh data on Thursday added more cause for concern. Caixin-Markit service-industry purchasing-manager data contracted for February with the headline index declining to 51.2 versus a prior 52.4. Meanwhile, one day after shifting the nation’s credit-watch rating from stable to negative, Moody’s Investor Services placed more than 30 Chinese state-owned firms under review for possible downgrade. According to the ratings agency, a combination of declining activity and capital outflows have left state-owned enterprises in a vulnerable position.

Food prices stabilize at multiyear low. In a report issued on Thursday, the Food and Agriculture Organization, a United Nations agency, released price-index levels for February that revealed a marginal rise for the month while headline prices remained nearly 15 percent lower than the same month in 2015. The index registered a seven-year low in January.

Herbalife restates data. In a regulatory filing issued on Thursday, Los Angeles-based Herbalife restated a metric called “active new members,” revising the figure downward to 3.2 percent year-over-year growth for the fourth quarter from nearly 17 percent. The specific measure was one of more than two-dozen figures restated by the company, which is currently under federal investigation for allegations that the vertical marketing dietary-supplement firm is, in fact, a pyramid scheme. Herbalife has been a short target for a number of years of activist investor William Ackman of New York’s Pershing Square Capital Management.

Former Chesapeake CEO dies. One day after the Department of Justice secured a grand jury indictment against him for fraud, former Chesapeake Energy Corp. chairman and CEO Aubrey McClendon died when the vehicle he was driving crashed into an underpass in Oklahoma. Remembered by industry insiders as a pioneer of hydraulic gas extraction or fracking, McClendon was 56.

Initial claims rise. Department of Labor data released this morning indicated that more US employees lost their positions during the week ended on February 27th than economists had expected. Initial jobless claims rose by 6,000 to 278,000 versus consensus forecasts for 271,000. Separately, full quarter data for unit labor costs showed that wages rose by 3.3 percent during the final three months of 2015 versus a prior pace of 4.5 percent.

Portfolio Perspective: An Odd Time to Talk About Hedging


It may seem odd to bring this up a day after the Standard & Poor’s 500 index (SPX, 1978.35) jumped almost 2.4 percent. On Monday, we published a note that recommended buying April tenor calls in exchange-traded funds that have outperformed in the rally so far and where implied volatility was still elevated enough to suggest ongoing momentum.

But the critical point to drive home is this decline in volatility is only cyclical. So once the VIX futures curve reaches a trough with spot in the 15-17 range and a gently upward-sloping curve with around a five-point spread between spot and the six-month future, the next shock shouldn’t be far off.

Our sense is that most clients have been too focused on navigating a rough first two months of the year to consider strategies systematically that exploit elevated volatility and managing risk of ongoing shocks. With that in mind, we generated a graph of the SPX versus the CBOE Tail Hedge Index and CBOE S&P 500 BuyWrite Index over the high-volatility period July 2007 to January 2013. Yes, there is some data bias embedded in the graph since tail hedges and buy-write strategies would logically outperform the index in a period that saw the SPX drop more than 50 percent. But that would be expected in any period of high volatility, including the current one.

Jim Strugger is a managing director and derivatives strategist for MKM Partners in Stamford, Connecticut.