Here Are The "Costanza Trades" Of 2019

After a wild 2018, Mark Orsley - Head of Macro Strategy for Prism (and formerly with RBC), is out with a review of his 2018 "Costanza Trades," while offering his comprehensive thoughts for next year.


Its that time of year again. Stockings, dreidels, Festivus poles, and, of course, the inevitable truckload of bank 2019 Year Ahead pieces cluttering your inboxes which are about as attractive as getting coal in your stockings. However, these pieces are useful in some regards, as they are very good at nailing the consensus themes and are excellent counter-indicators. Long time readers will know that The Macro Scan takes another twist at year end, to present next years top Costanza Trades.

For those of you not familiar with George Costanza, his character on the sitcom Seinfeld could do no right when it came to employment, dating, or life in general. In one episode, George realizes over lunch at the diner with Jerry that if every instinct he has is wrong, then doing the opposite must be right. George resolves to start doing the complete opposite of what he would do normally. He orders the opposite of his normal lunch, and he introduces himself to a beautiful woman that he normally would never have the nerve to talk to. "My name is George, he says, I'm unemployed, and I live with my parents." To his surprise, she is impressed with his honesty and agrees to date him!

I find employing the Costanza method to trading an interesting exercise. Ask yourself this: what are the trades that make complete sense and all your instincts say are right? Now consider the opposite. Basically what you end up constructing is an out of consensus portfolio.

Employing the Costanza method can identify interesting, non-consensus trade ideas that could kick in alpha. Last years top 7 Costanza trades netted 5 of 7 WINNERS (some with huge gains), and past years have all been successful: 2017 had 5 of 6 winners (and 1 tie), 2016 had 7 of 10 winners, and 2015 had 7 of 10 winners. Lets quickly review last years trades…

2018 Costanza Trades:

  1. Long UST 10yrs = trying to work now but a loser as yields were 35bps higher
  2. Long Bunds = winner as yields were 18bps lower
  3. Long EUR/USD = worked early in the year but turned loser, -5%
  4. Short EEM = huge winner, EM crushed 19%
  5. Long IG protection (IG spread wideners)/Short LQD = another huge winner, IG CDX 44bps wider (doubled)
  6. Short Euro Stoxx and Nikkei = both big winners; each index was down 15%
  7. Short Bitcoin vol = worked well all year but has risen recently, still 50-day is 22 vols lower

Bonus: Long active/short passive = going to put this as a tie. Passive won out most of the year, but is currently getting crushed/about to get absolutely rinsed. Also, in a classic bottom signal, active Hedge Funds/PMs were shuttered around the street in Q4 at the absolute worse time. Active is now starting to have its day, and the passive tsunami is receding.

Last years list was one of the most difficult to develop. Going into 2018, the market was divided between those who thought risk assets had gone too far and were due for a correction, and those who believed the economy is booming so let the good times roll. To be fair, both turned out to be true at different points throughout the year.

This year is a piece of cake, as sentiment for risk assets ...

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