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Barclays Quant Commentary: Worst Returns Environment For Disciplined Stock Pickers In 60 Years

Tyler Durden's picture




 

We present another great review of market dynamics from the eyes of a quant, this time coming yet again Barclays' Matt Rothman. With Risk On, Risk Off the dominant regime since QE2 speculation, and likely to last into the end of the year, throw away all fundamental textbooks, and focus on what it is the momo machines are chasing. Which is simple: to outperform in this market, load up on high beta stocks and high short interest names. The rest is noise. Which means a bloodbath for "disciplined stock pickers" - as Rothman says "the investment managers who are suffering are the truly disciplined stock pickers. Those managers who are diligent about having no style tilts or theme tilts or sector biases are finding it nearly impossible to generate returns. There are no investment opportunities returns for these managers to capitalize on. There are no idiosyncratic  returns available in the market for them and the situation has, essentially, never been worse, anytime in the past 60 years." Then again, there are no traditional stock pickers left anymore - everyone now does the same as Pimco - stay one step of the Fed (and just imitate what everyone else is doing), or risk losing your job. In the meantime the biggest groupthink trade ever is getting bigger by the day, as everyone hopes and prays profit taking never occurs.

 

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Mon, 10/11/2010 - 10:46 | 640777 Racer
Racer's picture

When everyone is thinking it will never go down and all on the same side of the trade.. like oil at $135....

 

Mon, 10/11/2010 - 10:48 | 640780 redpill
redpill's picture

There's only one "stock" to pick, and that's frontrunning the Fed whenever and however.

Instead of lamenting the decline of stock pickers like a whining journalist waxing poetic about the good old days of investigative reporting, why not take the opportunity to focus on the fact that central banking/planning destroys the market's capability for price discovery and upsets the fair valuation process for every company.

Mon, 10/11/2010 - 10:52 | 640786 Tyler Durden
Tyler Durden's picture

It appears you may have missed the past 20,000 posts on Zero Hedge. Today is a slow news day - a good time to catch up.

Mon, 10/11/2010 - 11:57 | 640950 redpill
redpill's picture

My comments were directed at Barclay's, not ZH. Thanks for the junk anyway.

Mon, 10/11/2010 - 11:21 | 640839 Mercury
Mercury's picture

It's not exactly unrelated.  Because of central banking/planning, alpha is dead in this market.  Or at least micro alpha is dead - a.k.a "price discovery and...the fair valuation process for every company."

Mon, 10/11/2010 - 11:49 | 640931 buzzsaw99
buzzsaw99's picture

take the opportunity to focus on the fact that central banking/planning destroys the market's capability for price discovery...

you must be a newb. lulz

Mon, 10/11/2010 - 10:50 | 640782 Chemba
Chemba's picture

This is such a sad and pathetic situation.  Banana Ben and his Board of Fed Lackeys are almost single-handedly destroying the capital markets.  How the Fu#$ can he not see what he is doing to this country?  Capital formation is not going to happen in this environment.  Savers are ruined.  Investors and businesses want no part of Banana Ben's Banana Republic.  Fu$% Bernanke:  Arrest him.  He is a criminal.

Mon, 10/11/2010 - 10:56 | 640795 SheepDog-One
SheepDog-One's picture

Its utterly pathetic, now we're supposed to wait until December for the FED to deliver its gifts to the banksters, from us, as we have to sit thru daily headlines such as todays Yahoo!Finance 'Stock Rise on Renewed Hopes FED Does Something'. WTF

Mon, 10/11/2010 - 11:56 | 640855 AccreditedEYE
AccreditedEYE's picture

Chemba, did Lloyd fire you for spilling coffee on his lap? I'm sure the Squid is well positioned to make massive gains after it tells the Fed what they need to do on the 3rd.

PS- Newsflash: Capital formation has been on the decline in this country for years now. The way is shut... it was made by TPTB and TPTB keep it. The way is shut. Foreign markets will continue to attract IPO's.. especially as EM's influence continues to rise and the $ continues to suck.

Used to be able to say we had the fairest and most transparent market in the world. Not anymore.

Mon, 10/11/2010 - 13:18 | 641102 Chemba
Chemba's picture

Actually AccreditedEYE, I voluntarily left in 2006 after a 15 year career.  I had enough that it did not matter anymore.  Thanks for asking.

Mon, 10/11/2010 - 17:57 | 641863 Widowmaker
Widowmaker's picture

I agree with this post - savers are ruined, and being made to fill bonuses rewarded for failure while the US treasury is looted by investment banks trying to pose as banks.

Right Chemba?

 

Mon, 10/11/2010 - 10:52 | 640787 count_de_monee
count_de_monee's picture

In case no one is watching, I'd like to let the ZH community know that the political situation in Portugal is very tense at the moment. The current government has been in power for over 5 years and is increasingly weak and scandal ridden (check out this youtube video where an english businessman admits to bribing the current PM http://www.youtube.com/watch?v=2nmIcGdlZiM). The increasingly desperate government has a slim majority that is not enough to pass any of the announced austerity measures. Furthermore, there is a massive general strike being planned for early November in a country where over 60% of the population either works for the government or is dependent on government subsidies to survive.

But the real clincher is that the largest opposition party, the PSD, has so far refused to help the govt pass the austerity budget which is due to be voted on the 29th of October.

Without their support (see this article http://dn.sapo.pt/inicio/portugal/interior.aspx?content_id=1682921 in today's Diario de Noticias where the leader of the opposition says he will not vote favorably no matter how much pressure they put on him), the PM has already said he will resign. Throw in the fact that Portugal has presidential elections in early January which means parliament cannot be dissolved until spring 2011 at the earliest, and you have an explosive cocktail that most news outlets are either ignoring or know little about.

This could be the event that gets the default ball rolling again.

Mon, 10/11/2010 - 16:23 | 641586 VWbug
VWbug's picture

thanks for posting that count de m., very useful info.

I personally think it will have to be a euro lead disaster to get the ball rolling. The USD has to find a reason to rise in order for stocks to fall.

Hard to think of any reason for the dollar to rise, obviously.

End of this month is looking very very interesting huh? The elections you mention, US elections and FOMC shortly after...should be exciting.

 

Mon, 10/11/2010 - 16:28 | 641595 VWbug
VWbug's picture

-

Mon, 10/11/2010 - 11:13 | 640802 TumblingDice
TumblingDice's picture

Indeed the only times that the proportion of the idiosyncratic component was lower was in October 1987 and May/June 1962.

Back then it was the stock market that crashed; this time it's the dollar. Just goes to show that panic works both ways.

Mon, 10/11/2010 - 10:58 | 640803 wiskeyrunner
wiskeyrunner's picture

The insiders of the exchanges love these HFT guys they generate a lot of commissions. They would love for everyone to make millions of transactions daily. The exchange will even give you a spot below the main trading floor to hook up your mainframe so you too can get closer to the action.

I have an Apple Mac Pro can I play?

Mon, 10/11/2010 - 12:36 | 641024 trav7777
trav7777's picture

Yes.  The exchanges are in on the stealing pennies from millions of people con.

The only real traders are those holding lots of stock, aka mooch funds and pensions who are periodically rebalancing.  They're stealing the pennies of all the savers.

Eventually, those holding any shares won't be able to get out anywhere near the apparent bid, because that bid is merely a swarm of HFTs only looking to buy if they have a sale in the frontrun orderflow the next microsecond for .00000001 more.

HFTs ARE the exchange now

Mon, 10/11/2010 - 10:58 | 640807 michigan independant
michigan independant's picture

Indeed, thank you for for the conveyance.

"dispersion in some sectors is beginning to increase"

I agree with that evidence in emerging market funds. Since structual issue remain IMO.  

 

Mon, 10/11/2010 - 11:02 | 640813 fatdaz
fatdaz's picture

I hate to disagree but we are stock pickers and over the last four months I have averaged a 64/65% hit rate. Indeed I had a 73% sucess rate in september. We look at FTSE 350 and Top 300 European names play long or short as required & look for  3% a trade  and move on ,we use stop losses to preserve capital. We have  technical model as a frame work  &  stock selection process is discretionary/ overlayed with  technicals -its not easy t get it right but it is possible. to provide some context I  have made 77 recomendations in the last four months.

Mon, 10/11/2010 - 11:20 | 640860 matthylland
matthylland's picture

I think you may be missing the point though.

The point is not that one can not make money buying and selling stocks, but that fundamentals mean nothing.

What is your return vs. general market? What is your return vs. high beta names such as aapl, amzn, etc etc....?

 

The fact that you have been succesful is great, I wish I had that %...but there is a big difference between calling yourself a stock picker in this environment and just a buyer who is riding the wave. (Not that that is a bad thing, whatever gets you money).

 

Mon, 10/11/2010 - 11:24 | 640867 AccreditedEYE
AccreditedEYE's picture

What is your return vs. general market? What is your return vs. high beta names such as aapl, amzn, etc etc....?

And what about currency devaluation? (Unless you hedged...)

Mon, 10/11/2010 - 11:37 | 640898 fatdaz
fatdaz's picture

@ matthey land  re performance , not sure that fundametals have meant much since 2008 and surely its better to be right, than wrong for the right reasons.As to relative performance firstly many of these recommendations ( perhaps a majority as I am a bear )  have been made on short side so would suggest thats anything but riding  a wave , secondly we look  to make scaleable  systematic returns over the long term  I belive we have created  genuine alpha  and  hope to continue doing so.was not blowing own trumpet  but merely  wanted to pint out a disciplined stock picking approach can  still provide returns .Of course there will be individual stocks which will have  have ouit performed  but we are not trying to blow the doors off rather  to produce consistsent returns

Mon, 10/11/2010 - 11:07 | 640824 gwar5
gwar5's picture

Fed bubble. This one is intervention on steroids.

You know what they say about bubbles --it just takes a prick.

Mon, 10/11/2010 - 11:14 | 640841 BobWatNorCal
BobWatNorCal's picture

"...everyone hopes and prays profit taking never occurs."
It will.
I'm buying popcorn now in anticipation.

Mon, 10/11/2010 - 11:20 | 640857 Lucius Corneliu...
Lucius Cornelius Sulla's picture

As a small investor, I'll just wait for the envitable fire to break out in the casino.  When the market realizes that monetizing a mere $1Trillion will do nothing but make bread and fuel more expensive, look out below!

Mon, 10/11/2010 - 11:28 | 640880 kaiserhoff
kaiserhoff's picture

That's what we're seeing, isn't it?  Only Baldy Ben thinks there is some connection between the big banks and simpler things, like employment and small business.

Mon, 10/11/2010 - 11:44 | 640920 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Yep.  With wages stagnant and/or declining and prices for basic necessities rising, it may take food riots before he finally pulls his head out of his a**. 

Mon, 10/11/2010 - 11:59 | 640953 HarryWanger
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I can only imagine what you guys would have written in the '70's when inflation was out of control and it appeared to be "the end of the world". Thank god, the internet wasn't around then. Here we are 30 some years later and we're still moving right along.

Mon, 10/11/2010 - 13:04 | 641083 Lucius Corneliu...
Lucius Cornelius Sulla's picture

The 70s didn't have QE2.  However, staying on that 70s theme, the FED has not been this audacious since closing the gold window.  Sign of desperation?  Investing based on the guesses of what the unintended consequences of a government trying to hold up a gigantic pile of unservicable debt is not investing.  I'll stay away from this casino because I am just barely smart enough to know that the house always wins.

Mon, 10/11/2010 - 13:52 | 641164 blunderdog
blunderdog's picture

The QE2 was commissioned in '69.  Here we see it leaving the Hamptons with a few hundred zillion in bankster gold stores as ballast:

http://upload.wikimedia.org/wikipedia/commons/0/06/QE2_leaving_southampt...

Steaming off toward the paradisiacal utopia of Galt's Gulch...

Mon, 10/11/2010 - 14:11 | 641211 Lucius Corneliu...
Lucius Cornelius Sulla's picture

lmao

Mon, 10/11/2010 - 15:17 | 641386 kaiserhoff
kaiserhoff's picture

In the seventies, they had something called jobs, wanker, and we didn't have an affirmative action sabotuer in the White House.

Mon, 10/11/2010 - 11:25 | 640870 SheepDog-One
SheepDog-One's picture

Oh no, now the headline has been changed from 'Stocks up Nicely on Renewed Hopes the FED Does Something' to 'Stocks Struggle in 'Mixed Trading' Amid Hopes the Fed Does Something'.

How long must we sit thru this daily clown show?

Mon, 10/11/2010 - 15:27 | 641411 Saxxon
Saxxon's picture

Sitting for a long time . . . at least until Nov. 3.

Mon, 10/11/2010 - 11:26 | 640873 SheepDog-One
SheepDog-One's picture

BTW, why does the FED have to do something anyway? I thought the common knowledge was the economy is recovering swiftly? Hmmm, maybe not so much?

Mon, 10/11/2010 - 11:28 | 640881 SheepDog-One
SheepDog-One's picture

So now the FED and Gooberment has to in effect admit to 2 years of lying, while saying the first thing they did was a complete failure, but now obviously the solution is to do the exact same thing again except this time with far more Q/E? Its NOT a position I'd want to be in!

Mon, 10/11/2010 - 12:15 | 640987 Voluntary Exchange
Voluntary Exchange's picture

+1 In government nothing succeeds like failure.

Mon, 10/11/2010 - 11:31 | 640888 HarryWanger
HarryWanger's picture

Unless you were fortunate enough to get into some huge winners, I'd agree. However, THE most solid company on the planet is up about 60% this year. Apple alone has saved many "investors" since it's held by just about everyone. And with no competition to really speak of yet, it probably has another 30-40% return through 2011.

Neither high beta or a stock with big short interest, people tend to overlook a fundamentally strong company with a stock price to reflect that. It's the way all stocks should be. Investing in a company with great management and innovation with growth. It's still possible. 

Mon, 10/11/2010 - 12:20 | 641004 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

The problem there is that it's one stock, it's become a pile on due not only to winner momentum but indexing as well. It's fundamentals are ancillary to its moves now, IMHO.

When the hedge funds turn tail it is in for a drubbing (having nothing to do with the merits of the next iPad, FCF, etc.).

As a second aside, there are other leaders that have strong fundamentals. The problem is collecting enough companies right now to make a portfolio with proper diversification to satisfy a prudent man ... if do have done so, you are basically whipped up and down with Mr. Market.

Mon, 10/11/2010 - 12:24 | 641012 HarryWanger
HarryWanger's picture

AAPL is fundamentally an excellent stock. Hedge funds will only "turn tail" if something happens with growth and that would be justified in any stock. That's my point, it's still a fundamentally strong company with an outstanding outlook. You can still invest in solid companies like AAPL. They're out there and Mr. Market is no whipping them around.

Mon, 10/11/2010 - 16:40 | 641632 AugmentedFourth
AugmentedFourth's picture

"They're out there and Mr. Market is no whipping them around."

Really?! So when my stops were triggered on the day of the "flash crash", effectively selling off my entire position in AAPL for more than 10% less than what they were worth minutes later, that was based entirely on fundamentals right?

 

Mon, 10/11/2010 - 17:11 | 641730 Djirk
Djirk's picture

VMW was overdue for a snap back and WHAMO....I still think AAPL has some upside before it get ridiculously over priced.

There are some companies taking advantage of the downturn and grabbing market share. Some even pay a decent dividend....hmm tasty......stay alert!

 

Mon, 10/11/2010 - 12:41 | 641034 trav7777
trav7777's picture

ok, when the conmen destroy the stockmarket, and the whole thing goes no bid, the Fed is going to step in and buy the futures.

This is what will occur, and has occurred.  And they'll say "nobody could have foreseen this."

HFT is essentially riskless legalized stealing.  And the exchanges get a cut of it.  Eventually, all will get tired of being incessantly ripped off.

Is this what our country has become?  Pay the best programmers to write programs to rip fractions of pennies off from people?  This is all just more jew confetti for history's ashheap.

Mon, 10/11/2010 - 12:58 | 641062 Sherman McCoy
Sherman McCoy's picture

I gotta say, you are a perfect contrary indicator. Every time in the last 6 months you've printed a bearish piece about insider/retail selling, I bought stock. Sometime I bought fertilizer stocks, sometimes I bought metals miners. You've been so mono-maniacal in your bearish views that I've built up a substantial position. I went in to Friday leveraged long, and it was just awesome for me. I have no doubt that someday, your position will be vindicated, keep the faith - no matter how large your paper trading losses become.

Thank God for you Tyler Durden!

Mon, 10/11/2010 - 13:21 | 641112 homersimpson
homersimpson's picture

I guess your strategy is akin to playing poker and chasing down the 2-outer and hitting it on the river while you justify your play. More power to you because we can't tell if you're sarcastic or foolish (assuming you buy equities not related to Gold).

Tue, 10/12/2010 - 00:34 | 642519 Grand Supercycle
Grand Supercycle's picture

S&P500 Financials index has not been bullish for some time. This is a warning.

http://stockmarket618.wordpress.com/2010/09/27/mon-sept-27

Wed, 10/27/2010 - 08:14 | 680019 daniel
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