AUTOCALLABLE ETF!

I was travelling last night, when I suddenly got an email from an old client, and Whatsapp from my niece highlighting I was quoted by Matt Levine of Money Stuff and Bloomberg fame. Matt was talking about a new issued autocallable ETF -and was quoting from a FT Alphaville article from 2022.

If you want to know more about autocallables, here is a link to my research on it. Matt does a good job of explaining it - basically you get a high yielding product and as long as you don’t have a deep recession of financial crisis, you will do fine. You are basically taking equity risk and credit risk for a yield pick up. I don’t like them as basically everyone that has ever issued them or been heavily involved with them as had huge problems with them. In recent years, Natixis was a big player, being involve heavily in the Korean market. Various losses weighed on its share price, until it was finally bought by BPCE (another French bank in 2021)

French banks loved structured products, and is one of the reason banks like BNP and Soc Gen struggle to trade above book in my view. Like all sort of insurance products, they have a long tail of contingent liabilities, which makes it difficult to know how to price these companies. If I thought markets were about to plunge, then banks like BNP and Soc Gen would make good shorts for this very reason. Could a bear market breakout? I have no idea - given the concentration of market into the Mag 7, and the increasing overlap in business caused by the AI boom, a price war, could or could not break out at any moment. Or maybe Big Tech work to keep pricing strong - who knows. But what I can do is tell you how autocallable markets are positioned so you know the risk to them if something does go wrong. I have found that markets are least risky when Koreans (the biggest players in the autocallable market) has seen net issuance collapse. That is currently not the case.

For reasons I explain elsewhere - for an autocallable market to exists you also need a dividend future market. Basically you want dividend futures to be rising as this is supportive of autocallables. S&P dividend futures have been sideways for 18 months.

Another way of looking at this is to take the dividend future and divide it by the S&P 500 to create a forward yield. This makes the S&P 500 looks unattractive in my view.

Finally autocallables are volatility selling products. I think they do best when long dated volatility is falling. UX8 which is generic 8 month VIX seems to be trending higher to me.

Autocallables are also credit products. Current credit spreads seem a touch low to me.

Finally, my last point on autocallables is that they make the cost of insurance (VIX) is this case artificially low, as investors become guaranteed sellers of volality. You can see this clearly with the Write Put Index - which is the return from selling puts on the S&P 500. Normally a good strategy, for the last 10 years, it has underperformed cash, due to VIX being structurally under-priced in my view.

If all of this is too complicated - don’t worry about it. It is all a long way of saying that we have not had a real US recession since 2008, so risk is basically priced like we will never have a recession again. I can see reasons for a why that may make sense, and why that is also totally crazy. If you are bullish, then buy the S&P 500 - playing around with autocallables seems like an expensive way to express bullishness - but then again I am a simple man that likes simple products.