Active managers are now more exposed to beta than they have been since 2008. And with the rally off of February’s lows driven largely by cyclical reflation plays, cyclical vs. defensive sector exposure is now the highest we have seen since 2012.
July may have been a good month for the S&P 500, which is up over 3.5%, generating more than half of the S&P's entire YTD 2016 return (6.4%) in just one month, but it was another painful month for the active investing "smart money" - of the roughly 40 (rotating) marquee names in our hedge fund tracking universe, only one is beating the broader market this month.
The slow motion LBO of the market by the market continues, as more debt is issued fund stock buybacks and push stocks briefly, and artificially, higher, even as corporations lever themselves up to all time highs now that the even the merest risk of rising rates has been buried for years to come.
For the rates market, the significance of this acceptance phase by pensions cannot be understated, in our opinion. A $3 trillion industry running a $500 billion funding gap and a significant duration gap waking up to reality is likely to have major implications for the market. In the extreme case, entire pensions could be offloaded from corporate balance sheets to insurance companies (increasingly like the UK, Exhibit 1)–generating significant demand for long-end duration during such transactions.
While we sarcastically pointed out back in 2013 that with the Fed (and now every other central bank) as the market's Chief Risk Officer, there is no longer a need for anyone to do fundamental analysis, this has not only come true but the outcome is now is far worse. Because it confirms what we have said all along: not only is there no market left aside from what Central Banks decide will happen to "risk assets" on any given day, but the smart money- both hedge and mutual funds - have now completely lost the plot.
The new normal sure is strange: with the S&P flirting with all time highs, not to mention staging another dramatic V-shaped comeback from the post-Brexit crash which saw S&P futures trade limit down a week ago, investors keep on selling. According to Lipper data, U.S.-based stock mutual funds, which are held by retail mom-and-pop investors, posted cash withdrawals of $2.8 billion over the weekly period ended Wednesday; this was the 16th consecutive week of outflows.
BofA's "smart money" clients returned to selling US stocks last week, after a week of net buying. They have been sellers in 19 of the last 20 wks. Net sales soared to $3.8bn last week - the largest since mid-April, with selling led by institutional clients. Net sales of single stocks were broad-based across sectors; ETFs, meanwhile, saw net buying.