Quarter after quarter we would recap the hedge fund world's infatuation with one stock and one stock alone: Apple. This inverse-mormon love affair hit its peak in the quarter ended September 30, when a record number of hedge funds were invested in AAPL stock. This was also the quarter when AAPL hit its all time high price and has since proceeded to slump by nearly 40% in four short months. Which was to be expected: hedge fund hotels always become flaming death traps when the sucker rally finally ends and what so many mistook and goalseeked for fundamentals, ended up being merely euphoria and momentum chasing as one after another marginal buyer put their money into a stock that seemingly could do no wrong or so we were told day after day. As of December 31, AAPL is no longer the darling of hedge fund groupthink. In its place we have a new hedge fund hotel. Presenting: AIG, which with 80 hedge funds reporting it as a Top 10 holding (compared to GOOG with 73, and AAPL with 67), is now the stock that has suckered in the most hedge fund capital, and where any future growth will depend solely on pulling incremental dumb money in.
Rajoy Summarizes Overnight (And Recurring) Sentiment: "There Are No Green Shoots, There Is No Spring"Submitted by Tyler Durden on 02/20/2013 07:12 -0500
In the aftermath of yesterday's surge in German hopium measured by the ZEW Economic Survey which took out all expectations to the upside, it was inevitable that the other double-dipping country, France, telegraphed some optimism despite a contracting economy and would follow suit with a big confidence beat, and sure enough the French INSEE reported that February business sentiment rose from 87 to 90, on expectations of an unchanged number. And the subsequent prompt smash of investor expectations in Switzerland, where the ZEW soared from -6.9 to +10.0 tells us that something is very wrong in the Alpine country if it too is trying so hard to distract from the here and now. And while one can manipulate future optimism metrics to infinity, it is reality that is proving far more troublesome for Europe, as could be seen by the Italian Industrial Orders print which crashed -15.3% Y/Y on expectations of a smooth -9.5% drop, down from -6.7% previously. Since industrial orders are a proxy for future demand, a critical issue as Italy enters 2013 after six consecutive quarters of economic contraction and with no relief on the horizon, it is only fitting that Italy should shock the world with an off the chart confidence beat next.
It appears that not only we are tracking the phaseout in equity inflows, all of which are simply the reversal of the massive $220 billion surge in bank deposits in the month of December due to fears of Fiscal Cliff dividend and capital gains tax increases (explained previously), and which as today's ICI update indicates have trickled down to just $683 million - the lowest weekly inflow year to date. Among the others who are keeping track of the weekly reduction in inbound capital euphoria, in addition to the six companies which priced equity offerings on Monday as was shown previously, are these fine corporations and existing stakeholders, including Apollo, KKR, Carlyle, Blackstone, Thomas H. Lee, and Bain, who just can't wait to get out while the getting is good, split once again evenly between secondaries and follow ons.
Coffee is just that kind of market great for traders and well worth putting on your trading radar screens.
Turning your growth trade into a value trade is the quintessential sign of a losing trader on Wall Street.
If yesterday's indications of the near-record overweight net long positioning in Russell 2000 Futures & incredible net short VIX futures positioning, along with the extreme flows contrarian indication was not enough to concern investors that the 'money' is in, then the following four charts should cross the tipping point. Citi's Panic/Euphoria guage for US stocks has only been more euphoric on two occasions - Q4 2000 & 2008; Goldman's S&P 500 positioning has only been this extremely long-biased on two occasions - Q4 2008 & Q2 2011; and Barclays' credit-equity divergence has only been this over-bought stocks on two occasions - Q4 2008 & Q2 2012. It doesn't take a PhD to comprehend the extent of excess priced into stocks currently - no matter what Maria B tries to tell us.
From a valuation perspective, Chinese equities do not, at first glance, look to be a likely candidate for trouble. The PE ratios are either 12 or 15 times on MSCI China, depending on whether you include financials or not, and do not scream 'bubble'. And yet, China has been a source of worry for GMO over the past three years and continues to be one. China scares them because it looks like a bubble economy. Understanding these kinds of bubbles is important because they represent a situation in which standard valuation methodologies may fail. Just as financial stocks gave a false signal of cheapness before the GFC because the credit bubble pushed their earnings well above sustainable levels and masked the risks they were taking, so some valuation models may fail in the face of the credit, real estate, and general fixed asset investment boom in China, since it has gone on long enough to warp the models' estimation of what "normal" is. Of course, every credit bubble involves a widening divergence between perception and reality. China's case is not fundamentally different. In GMO's extensive discussion below, they have documented rapid credit growth against the background of a nationwide property bubble, the worst of Asian crony lending practices, and the appearance of a voracious and unstable shadow banking system. "Bad" credit booms generally end in banking crises and are followed by periods of lackluster economic growth. China appears to be heading in this direction.
There are some people who are very confused by last week's news of the "second highest inflow into equity funds on history." First and foremost, this is not "retail" capital reallocation, as EFSF/Lipper compile primarily institutional and ETF flow data. And indeed, as we reported earlier last week, the injection into the market, which also includes allocation to such vehicles as equity funds and ETFs by institutions, was driven primarily by a $220 billion surge in deposits in December, subsequently used by banks to reinvest said capital (most of which, ironically, coming from equity sales by retail investors as banks simply take the proceeds and reinvest into stocks). At the same time, retail investors [sic] continued to solidly pull money out of equity mutual funds. But while the source of funds was wrong, the use of funds was indeed accurate, and in the first week of the year there was a massive, $22 billion allocation to equities, second only to the $23 billion dumped into equity funds in the third week of September 2007. What happened the first time we such such an epic injection (whether it is from deposits, or from levered funding, or who knows what)? Brad Wishak of Newedge shows very clearly what happened then.
Yes, it comes straight from the dumb money portal and does not adjust for such things as "one time, non-recurring charges" and other things which have made AMZN's profit margin the biggest mathematical conundrum since the Riemann hypothesis, but it still is about the funniest thing we have spotted on today's so far painfully boring trading day.
I am not sure what to make of this tidbit of information, but it does point out how silly and fickle investors have become.
Who or what is going to "save" the markets from a long overdue correction? And what will be that catalyst?
Instead of uttering one more word in a long, seemingly endless tirade that stretches all the way to April 2009, we will this time let such dignified members of the credible, veritable status quo as Credit Suisse, who have released a two part primer on everything HFT related, with an emphasis on the broken market left in the wake of the "high freaks", which is so simple even a member of congress will understand (we would say a member of the SEC, but even at this level of simplicity its comprehension by the rank and file of the SEC is arguable). As Credit Suisse conveniently points out "market manipulation is already banned", but that doesn't mean that there are numerous loophole that HFT can manifest themselves in negative strategies that have virtually the same impact on a two-tiered market (those that have access to HFT and those that do not) as manipulation. Among such strategies are:
- Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
- Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
- Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
- Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.
Add extreme selling by corporate insiders to last week's list of worries.
The problem with this market is that it can't seem to sell off enough to produce a sustainable rally. There are not enough bears or bulls.
As we hear more and more pundits talk about the soaring consumer confidence, the "recovery", and how the fundamentals are improving, keep in mind that retail investors are still not in equities