To The Moon

In the last week of August, the US stock market started in a hawkish mood, the decline of the previous friday continues, with $NASDAQ(.IXIC)$ index fell 2.13%, $S&P 500(.SPX)$ index fell 1.76%. There is another thing that investors worries.

The Feds "accelerates" balance-sheet run off in September.

As we know, the Federal Reserve officially started the balance-sheet off in June, with the monthly limit of 47.5 billion US dollars before August. In June, the US stock market fell for three consecutive weeks after a rebound at the end of May. Coupled with the unexpected CPI, market is freaking out.

Starting from September, the balance-sheet runoff sdoubles, and the upper limit will be raised to 95 billion US dollars, including 60 billion US Treasury bonds and 35 billion mortgage-backed securities (MBS).

However, we need pay attention

First, the Fed does not want to intervene in short-term market liquidity.

The runoff is mainly on mid and long-term treasury bonds, the purchasing power of short-term treasury bonds remains basically unchanged. By the end of August, the size of securities held by the Federal Reserve was 8.33 trillion US dollars, a decrease of 61.9 billion US dollars compared with 8.39 trillion US dollars at the end of May. Among them, long-term bonds decreased by 73.6 billion US dollars, inflation-protected bonds TIPS decreased by 6.1 billion US dollars, while MBS, on the contrary, increased by 18.5 billion US dollars.

The reduction of long-term treasury bonds mainly affects the interest rate curve, but does not affect short-term treasuty bills, so the impact on the secondary market with more sensitive liquidity will not be particularly great.

But when investors are sensitive, it still works.

Second, MBS purchase is lagging behind, Q3 shall be the first quarter lowing down.

There is a time lag between principal payment and settlement in MBS, which is generally 3 months. Therefore, the increase from June to August actually reflects the data before June, and it will be reflected on the balance sheet in September after the contraction begins.

However, the MBS held by the Federal Reserve accounts for 21% of the total stock, so the reinvestment scale dropped significantly, and the upper limit was raised to 35 billion US dollars in September, which has a greater impact on liquidity than the national debt market.

Third, financing costs rise.

An important reality of the second round of scale reduction is to recover the "water" released after the epidemic step by step, which will also lock the liquidity of US dollars in the medium term and increase the financing costs of enterprises and financial institutions.

For the stock market, companies that cannot obtain stable cash flow in operation or rely on external financing may have greater pressure. For example, companies whose profits have fallen rapidly, companies that need to burn money for a long time, and high-yield bonds issued by some companies.

In case you need hedging

1. The risk exposure of directly naked stocks is huge.The general corporate events of a single company can also greatly affect the stock price trend, so unless you are very sure to look down on this company, you should be more cautious.

2. Protective options are better way to obtain alfa returns in the short term.As the interest rate rises (the risk-free interest rate also rises), the implied volatility of options will also rise, which is equivalent to increasing the cost of option buyers in disguise, and as option sellers, they can get higher royalties. Improve the cost performance of Covered CALL.

Especially in the market retracement environment, in the case of holding positive shares, selling parity and in-price call options as covered options is also an option that can be considered.

3. Buy the PUT of market index instead (or the PUT of index ETF).Compared with individual stocks, the volatility of the market is not too intense, and it is not easily affected by the corporate events of one or two companies, but it reflects the overall market sentiment (trend) at the current stage.

Common index options include SPX and IXIC, etc., whose PUT is relatively high, or through their corresponding ETFs, such as$SPDR S&P 500 ETF Trust(SPY)$And$Invesco QQQ Trust(QQQ)$You can save some costs. Of course, you can also choose a wider range of$iShares Russell 2000 ETF(IWM)$And$iShares Russell 1000 Growth ETF(IWF)$PUT, the volatility of growth stocks is generally relatively higher.