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Ripe for a Sustainable Bullish Turn?
It was a hot and beautiful day in Montreal. I met up with my former supervisor at the Caisse, Mario Therrien, who last year was appointed Senior Vice-President, Fund Management, with the Private Equity group.
It
had been almost seven years since I last saw him, and I was glad to
hook up with him again to talk markets, alpha, hedge funds and private
equity. Mario is a smart guy who reads a lot on markets and politics. He
understands alpha and he's very well connected with key players around
the world. Talking markets with him is always fun.
Mario also
offered me one of the most exciting jobs I've ever had. I was
responsible for a portfolio of directional hedge funds (L/S Equity,
global macros and CTAs) and learned a lot conducting investment,
operational and risk management due diligence. But what I truly loved
was sitting down one on one with top hedge fund managers and picking the
minds on everything from which sectors they're investing in, to where
they think bond yields are heading, to which trends they're following.
The
toughest part of that job was the grueling travel schedule, not having
full control of the portfolio, having to trust your managers when things
were shaky, and knowing when to pull the plug when performance was
simply not up to par. But it was an incredible experience and if I had
to do all over again, I wouldn't think twice about it. Of course, with
my MS progressing, crazy travel schedules are not easy. That part of it I
don't miss.
Anyways, Mario gave me a lot of food for thought. We
talked about how crazy things got in the last few years, the "new
normal" and how the landscape has changed for hedge funds, private
equity funds and pension funds.
On pension funds, I told him the Fed has no choice but to bail them out
and he told me that the "trend towards immunization among G7 pension
funds" has contributed to lowering bond yields to historic lows.
"Pension funds are lowering their beta, cutting exposures to equities,
shifting assets into bonds, liquid hedge funds, and some private equity."
[Note: I agree with Mario,
illiquid, hard to understand hedge fund strategies, including black box,
super funky quant strategies, are out. Investors are increasingly
demanding that managers explain the rationale behind positions, and
they're not going to pay 2 & 20 for leveraged beta.]
Why are pensions immunizing their portfolios? According to Mario, "Most
mature pension plans are suffering severe pension shortfalls. They
simply can't afford to be ravaged by another bear market which will
force them to increase contribution rates. A lot of pension funds are
now focusing more on protecting downside risk."
Post 2008, the mindset has
changed and big players are focusing more on risk management, especially
managing liquidity risk. Michael Sabia, the Caisse's President &
CEO, talked a lot about risk management on numerous occasions and the
Caisse devoted an entire section on it in its 2009 Annual Report.
Unfortunately, Mr. Sabia and his senior managers still have to deal with petty Quebec politics. The Caisse recently had to categorically deny misleading allegations by one of Quebec's powerful public sector unions who questioned the Caisse's mid-year stellar results.
But
one thing that worries me is that all this focus on risk management,
immunization, is leading pension funds to not take enough risk, and many
of them will be caught off guard. Remember, when everyone is hunkering
down, worried about the next Black Swan, then you have the potential for
a sharp rally.
I am wondering if this is happening right now.
Too many pension funds and other institutional investors underweight
equities might suffer another bout of severe performance anxiety
and are then going to scramble chasing stocks higher. I spent the last
couple of weeks going over what the top hedge funds were buying and
selling in Q2, and something tells me they're well positioned for any
sharp, bullish reversal.
On this last point, read Chris Ciovacco's latest market comment, Markets Appear Ripe for a Sustainable Bullish Turn. I quote the following (but read his entire comment carefully):
Early
September is very important for the financial markets; especially for
the bulls. Numerous elements are in place for a rally to take hold now.
The markets have been weak and the bears have been in control. If the
bulls cannot make a stand soon, it will be a bad sign for risk assets.
The good news for the bulls is several factors, across numerous markets
and asset classes, are pointing to a possible rally in risk assets:
- Bearish sentiment is high at the moment. Sentiment, especially as it approaches extremes, can serve as a contrary indicator.
- The
Fed has signaled they are willing to print more money if needed.
Right, wrong, or indifferent, the markets are anticipating more quantitative easing
from the Fed. The Fed's next meeting is only three weeks away.
Markets look forward. A rally in risk assets for a few weeks is not out
of the question.
- Currency and
interest rate markets are acknowledging the possibility of the Fed
cranking up the printing presses. In recent weeks, the U.S. dollar and
the 10-Year Treasury have been firmly in the bears' camp, but they are
sitting near logical points of reversal. Recent rallies in the
10-Year Treasury have been showing signs of fatigue, which also points
to a possible reversal in interest rates.
- Better
than expected manufacturing data from China and better than expected
growth in Australia have been reflected in the copper market.
Emerging market stocks closed yesterday at a logical point of reversal;
this morning's news from China and Australia could spark a rally.
- Despite
weeks of disappointing news on economic progress in the United States,
the S&P 500 and Dow have yet to revisit their June lows, which is
hard to believe given the recent lack of interest from buyers. When
markets do something you do not expect, it is time to pay attention.
- Monday's
sell-off appeared to be a win for the bears, but unlike recent down
days for stocks, total market volume contracted relative to the volume
during Friday's Fed-induced and broad-based rally. The S&P 500 and
Dow have both held at logical reversal points.Since
a picture is worth a thousand words, we can show most of these
concepts on the charts below. When you examine the charts, ask
yourself, "Based on the actions in the past from market participants,
is it logical for this market to reverse near current levels?" If the
answer is yes, then the next thing to look for is some confirmation
from the markets, which can come in the form of market breadth
(advancing issues vs. declining issues), volume, and whether or not a
broad cross section of markets are moving in the same direction
(stocks, commodities, interest rates, currencies, etc). This analysis
was completed after Tuesday's close (8/31); so none of Wednesday's (9/1)
gains are reflected.
Finally, let me thank Mario again for lunch and his book recommendation, Steve Drobny's The Invisible Hands: Hedge Funds Off the Record. My recommendations to him and my readers are Yves Smith's ECONNED and Graham Turner's No Way to Run an Economy.
Both books are excellent and well worth reading and they remind us that
financial and economic risks don't just happen by accident - more often
than not, they're the product of defunct economic theories.
»
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+1000. Leo is trying, but is coming up short on his analysis. Sorry Leo, there is too many economic forces of reality that are going to drag things down for a long while.
I am so sick of this trash analysis that argues that the Fed is going to buy everything in sight.... and that markets have held key support levels, which is bullish. NO SHIT. The two are completely linked at the hip. If they want it to go down, it will, up, it will. This nonsense of straddling the fence whereby you recognize the Fed is buying everything, but make some "insightful" comment about market action, is foolish child's play. The Fed is the market. Just say it and stop pretending to have some higher knowledge.
Sustainable may be the deal breaker in your post. Sharp up turns? Why not? Look at the charts of the 1930s. The retail market is wary and broke. Maybe the Government and the Banks can get rich doing each other.
Good post Leo...
Never mind the haters - some people just can't handle more than one point of view.
Corrected:
Most people just can't handle more than one point of view
so that's what keeps you constantly optimistic
I'm not constantly optimistic.
Being constantly pessimistic is unrealistic.
I can handle as many as I am paid to handle - at the same time even.
Tyler,
Suggestion: Use Geometric Mean to calculate the star rating average of articles.
WORTHLESS READING!
NOTHING OF SUBSTANCE!
Leo's stupid lemming followers demand no substance postings from Leo the permabull 'tard.
you bearshitters just don't understand the environment we're in - its called a f-ing range, jackwagons. Bottom was pounded repeatedly - got oversold and it bounced. This isn't rocket science. holy f*ck how stupid can people be.
LOL, you conclude a 1 day insanity bounce that even have the pump monkeys scratching their heads over based on equaly head scratching obviously fake data signal a confirmed rebound to you? Wow you Leo minions are real dumbasses.
so you're completely unaware of the other times we have bounced hard from the 1040 level?
there's a surprise.
jesus i didn't think anyone alive still hadn't heard about the 1040 resistance
maybe you should read something other than zh once in a while? might help stem the losses
Actually, the uptrend has been in place since Friday of last week.
Or do you watch the news, or read quotes?
There was a down day, after the first bounce took place. The down day was to test to see if the uptrend was legit or not.
It is.
And you base that conclusion on a one day bounce???
With all the market/economic/business funadmentals in the proverbial shitter, and you have the audacity to post that , .... here?
How f-ing ignorant can you be? Do not tell me how to run my money with an attitude and economic amnesia coupled with market dementia that you exhibit.
How stupid can YOU be?
stupid would be pretending to be a trader and not understanding when someone tells you we are RANGE trading. Sorry if you are unfamiliar with the term.
it's ok though, someone has to sell at 1040 and buy at 1150.
Apparently, pretty stupid, E-Man.
I hear ya Ned.
Leo, could you post one chart for me? Here is the link:
http://dshort.com/charts/Consumer-Metrics-Growth-Index.html?Consumer-Met...
No comment, picture = 1,000 words.
Leo talks about fundamentals on up days, and QE and the FED on down days.
Can't have it both ways, Leo
Keynesianism says you can.
Leo, good post - validated move today. Up we go to top of the range.
That is an industry euphemism for "getting investment tips".
Panic to get in looks to me more like a bear market rally then the start of a new bull market.
In terms of pure price action this might be a pause in a bull market with now the trend resuming. Everything else looks more like a bear market. In a typical bull market volume increses with price (to see that on a chart go back to before 2000) moreover, there are slow and cotinous moves up and few sharp moves down, the Dow/gold-ratio increases and bondholders get a fair return, corporations have solid and honest accounting and make profits while expanding. All that is missing.
The market is range bound. We got to the bottom of the range at the same time the STO bottomed.
Now, the trend is up. When we get to the top of the range, we'll see what happens.
On a side note, it almost seems like we've made an H&S bottom in the indexes recently. If we break out from the diagonal resistance from the April highs, we can make new highs pretty easily.
I think that a lot of signs point to bullishness.
We've been going down because the market sees six months ahead. Those six months, mild double dip and all, are upon us. The six months that follow will see pick up in the pick up in the economy.
I think that we can dip, or even slow down without going into recession, but that it will be mild and lead to better pastures.
WW III, IV and V are all priced in.. market to the moon!!
Hey Leo.. did Mario say anything about ABL strategies?
PS- Your ENER got hammered today... in case you didn't notice! :)
Got hammered? Down 5% after a huge runup the prior day. Big deal. ENER is good for trading, but keep an eye on it, Caxton and other top hedge funds bought some positions in Q2.
ENER up 5% today
"A rally in risk assets for a few weeks is not out of the question."
Why only a few weeks? And why you call them risk assets? Next you'll be calling government bonds risk free.
"Recent rallies in the 10-Year Treasury have been showing signs of fatigue, which also points to a possible reversal in interest rates."
Why? The last 'boom' coincided with very little 'reversal' in 10yr yields, hardly a run. I see no reason why 'a rally in risk assets' & government bonds is mutually exclusive.
Fascinating...
Isn't it? Totally amazing, WB.
You must be a wiz at the Roulette table.
I saw Leo at Woodstock 2.
I saw Leo at Denver Pop ('69). He helped me over the fence at Bear Stadium, a tear gas canister landed on his nicely faded jean jacket and burned a big hole it. I still feel responsible. He was also in the elevator at the Holiday Inn when my buddy sold Hendrix a couple tabs of very good orange sunshine.
I seen Leo at Burger King.
I seen Leo at Burger King.
I seen Leo at Burger King.
And he was eatin'.
(What?)
He was eatin'.
(Oh.)
A Whopper.
(yo)
A Whopper with cheese.
(uh)
A Whopper with cheeeese minus mayo.
(bam)
Where's the lettuce?
(why?)
Special orders don't upset us!
Praise Bob.
Kathy is that U ?
I saw Leo at Woodstock 1.
I saw Leo at Woodstock.
Leo, go fuck yourself, you fucking retard.
ENOUGH !!!!
And to all those who say you bring "balance" to this site, fuck them too.
How the fuck do you bring balance by spewing the same "We're in recovery", "buy the dips", "buy solars" RUBBISH day in and day out, CONTRARY to every fucking indicator out there.
Fuck you Leo, and your fucking moroning posts on here. FUCK YOU.l
taraxis...STANDING OVATION!! BRAVO!! And I dont mean Leo's ZH alter ego Johnny Bravo!
Noted.
now go take a shower
The terrible thing is that he may well be right - there are no fundamentals, the data is all lies, the recovery is Goebbels-style propaganda of the crudes sort ...
And Yet, Propelled by an endless supply of Zero-Interest FED money, stocks will rally like frogs in a lake full of dynamite!
The indicators are useless because there is no market, it is all intervention now.
'Endless supply'? Dream on, idiots!
Ok then - limited by the number of distinct quantum states that can exist in the universe, assuming that every USD printed must be unique in order to be genuine!
taraxias,
Your constant bearish attitude is not only why you don't make money, but it is probably a sign of a deeper held negativity that permeates your life.
Why not try to see the good in things and people? I'm sure you'll feel better as a person.
I truly hope that you can get over whatever makes you so cranky, be it the sand in your vagina, or the stick in your ass.
Live and let live, buddy.
You knew that Leo's post was going to be bullish, first from the TITLE, and second, because it's Leo.
It's like me knowing that a gold thread is going to be filled with end of days scenarios from revelations and gold to 54000 predictions.
Why even come?
I've realized that arguing with goldbugs, no matter how wrong they are, is foolish.
Maybe you should realize that arguing with people who are bullish won't change their minds as well.
Insulting somebody never changed anybody's mind.
I've resolved to try to alter the way I act. Maybe you can follow in my footsteps, since you're obviously so much older and wiser than me.