Peak "Portfolio Manager Frustration": Goldman Weekly Chartology Update

It must come as music to every fundamental analyst's ears to learn that, as Goldman's David Kostin puts it in the his latest weekly chartology, "Frustration is clearly evident across the portfolio manager community. The S&P 500 has returned 3.0% YTD compared with 2.7% for  the typical large cap core mutual fund and 1% for the average hedge fund." It gets worse: "Investors of all styles are lagging their benchmarks. With just a week to go before mid-year, 78% of the large cap growth mutual funds are lagging the 3.6% return of the Russell 1000 Growth Index by a median of 150 bp. Similarly, 63% of large-cap value mutual funds lag the Russell 1000 Value index. Just under half (49%) of core funds are underperforming the S&P 500." It is stunning how when the levered beta tide goes out, i.e., the only strategy that has been working for everyone, that we learn point blank how asset managers are nothing but levered lemming with access to a repo desk and a 200/20 record net leverage exposure (not to mention a penchant for investing in Chinese fraud companies without any diligence). It gets even worse: "The levered investment community is faring no better than long-only institutions. The typical hedge fund has returned roughly 1% YTD. However, capital is still flowing into absolute return strategies as evidenced by our conversations with pension funds, endowments, and family office representatives attending two recent Goldman Sachs Capital Introduction events in New York and Rome. In contrast, mutual funds have experienced outflows totaling cumulative $6 billion during the past two months." Odd, it seems like only yesterday that Zero Hedge was warning about the combustible effects of mixing 8 weeks of consecutive outflows and a near record margin debt exposure. And lucky for these same leveraged, and long-only critters, the pain has yet to unfold. The 20% drop in the S&P which has to happen for Operation Twist 2 is inevitable and will put many of them out of business. As such we hope Kostin revisits the them of portfolio manager desperation in a few months.

The key chart from Kostin's presentation:

Charts 6.25

Comments

[plocequ1]

Time for operation "Gringo"

[Highrev]

Here's some stuff I've come across this weekend that might be of interest.

Taken from Doug Noland’s article entitled Red Alert

With limited time to write, I chose brief comments over "just the facts."

The week provided added confirmation of the bear thesis, although with interesting twists. While Greece Prime Minister Papandreou's government survived a no-confidence vote, this positive development provided little reprieve for the marketplace. Contagion jumped the fire line thought to protect Spain, as Italy arose as a cause for concern. Yesterday, Moody's lowered its outlook on 13 Italian banks and warned that 16 others were vulnerable to Credit ratings downgrades. The Italian bank sector was pummeled today, with some of the leading stocks down as much as 5.0%. Credit default swap (CDS) prices spiked dramatically throughout the Italian banking sector the past two sessions. In reference to signals of financial stability, ECB President Trichet admitted things had turned to code "red". The eruption of systemic risk within Italy should be viewed as a serious debt contagion escalation.

Following last Friday's warning of a possible sovereign debt downgrade, Italy's 10-year sovereign yields jumped 16 bps this week to 4.97%. Yields were up 35 bps in three weeks to the highest level since early March. Perhaps more noteworthy, Italian 2-year yields spiked 24 bps in the past two sessions to 3.27%, the high since late 2008. The price of Italy CDS jumped 34 bps in two days to surpass 200 bps for the first time since January. Spain's 2-year yields jumped 21 bps this week to 3.66%, the high since early January. Ireland saw its 10-year yields jump 57 bps to a record 11.72%, as Portuguese yields surged 50 bps to a record 11.11%.

Greek contagion fears now cast quite a pall. There were indications of ongoing de-risking and de-leveraging. The energy and commodities sectors suffered another tough week, and the leveraged players certainly can't feel better about the world. And it is an important part of the thesis that a debt crisis-induced tightening of financial conditions will particularly weigh on those economies suffering structural short-comings. Italy fits the bill. Read more

New Stock Bear? by Adam Hamilton

Armada of Black Swans Hitting U.S. Economy and Financial Markets, Gold Breakouts on QE TO INFINITY by Jim Willie

And the chart of the week for you from yours truly.

More interesting and novel charts: http://chartramblings.blogspot.com/

Add: Trying to be as balanced and objective as I can with my selection here as there are two sides to every coin, or trade as it were. ;-)

[Oh regional Indian]

There is a writing on the wall. Game is up.

Only die-hards, bottom-fishers and the one's with nowhere else to go are still in the game.

Just look at the signs. 

Next week looks really slippery. 

Perhaps silver to moon? Or six feet under? 

ORI

http://aadivaahan.wordpress.com/2011/06/21/thunder-perfect-mind/

[BobPaulson]

The next step requires all outsiders to be shanked. Until full capitulation hits and the sheep sell low, they won't be ready for the surprise uptick that the insiders will have all bought the day before.

[BobPaulson]

Sorry, did I say "day before"?. I meant millisecond before.

[achmachat]

yes... But you can't honestly say then that it came as a big surprise.
I declare the market as an official giant game of "trying to stay in as long as possible but the last suckers die".
Is there another name for that game?

[cosmictrainwreck]

it's called "chicken". originated with wild-ass teenagers driving head-on towards each other.....

[Oh regional Indian]

True actually. But being that large systems, teetering on the brink tend to go unstable in a binary fashion, perhaps no giant uptick is left, or possible.

Also, these scum make money going either way, ne?

Just smells bad, like all those smooth, predictable manipulation lines got all crossed.

ORI

[monkeyshine]

They are all invested in the same stocks. You know them. GOOG, AAPL, MO, and the big scompanies of the S&P et al.  These have had great performance for years, and again from 2008-2010 but in 2011 have all stalled.  The market has rolled from 12,000-12,800 for 6 months, and there are very few standouts.  Hedge Funds used to Hedge to protect wealth and maybe make money on the rare big move, now they leverage like everyone else in the same stocks as everyone else. Hell, they all eat at the same restaurants and participate in the same conferences and phone calls, they can't beat each other when they  literally act as a team.  Somewhere they went from being competitors to realizing it is safer to work together.

So it is a surprise that they can't beat the market?  Especially when some of them still have money in lower perfoming bonds, and/or actually do sell against their profits with hedges?

Now will it be a race to the exit?  Deflation or Inflation?  No more free money, so do they hoard or do they yank the chain to get the Helicopter pilot fed chairman back in the air? 

[kito]

we need poor earnings for the s&p to drop 20 pct. and so far, we dont have poor earnings.

[ZeroPower]

Ah yes, the earnings excuse. What are firms doing with their excessive cash balances? Nothing.

Ideally, we'd like to see CapEx - but thats just not happening.

[lizzy36]

Nah firms are using excessive cash balances to buy back stock and increase dividends. Also borrowing cheap money to do the same.

Some M&A to buy revenue, rationalize costs (fire people) increases short term profitability.

CapEx not so much. Unintended consequences of ZIRP and QE infinity is lack of confidence in the future.

[rocker]

Not all firms are buying back shares. Companies like Danaher, Cliffs Natural, Equity Lifestyle properties, Arch Coal, Spectra and the famously good AIG have been diluting share holders. Why do they need more money with their share prices up. Hmmmm. Talk about mismanaged companies. It is truly a mine field out there. Many financials are doing the same thing. America has to have the worst accounting standards in the world. Balance sheets are full of fraud and can not be trusted.  

[css1971]

Ah. Fundamentals.

LOL.

[knukles]

Daddy, would you please tell me what fundamentals are again and why they were so important a long time ago?

[Caviar Emptor]

Step one: hit the energy stocks. Check. That was the intended side-effect of the SPR release. 

[slewie the pi-rat]

it is soo thoughtful of this goldman guy--showing sympathy for those less fortunate than he.

this is a tough time for people to make money w/out using a gun. 

please be advised.

[css1971]

Bloody amateurs... No, wait, I'm the amateur.

What are these guys being paid for again?

[and so on...]

The S&P 500 has returned almost zilch YTD (about -0.27%), definitely not the 3.0% that Goldman is saying.

[css1971]

Hysterical, they are neutral on financials.

[knukles]

Jesus H Fucking Christ. 
Reminds me of the story about the chimp in the bar who swallowed the cue ball, was thrown out and couple of months later is back with his owner, takes a cherry, sticks it up his butt then swallows it.

Bartender asks what the fuck that's all about 'specially given last time he was in was thrown out for swallowing the pool table's cue ball.

To which his owner replies that after having so much trouble passing the cue ball, he now measures everything before he swallows it.

The world is falling apart at the fucking seams and they're writing shit like this?
There truly is a cause for divine intervention.

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