Smart Money

At this week’s close, the FANG stocks were valued at just under $1.2 trillion, meaning they have gained $450 billion of market cap or 60% during the last 11 months - even as their combined earnings for the September LTM period were up by only 13%. In a word, the gamblers are piling on to the last train out of the station. And that means look out below!

"From July through October, hedge fund favorite stocks posted their worst relative returns outside of 2008."

The Fed was out in force yesterday peddling some pretty heavy-duty malarkey about the up-coming rate liftoff at the December meeting..."If we begin to raise interest rates, that’s a good thing." That’s not a bad thing." Goldman is putting out the final mullet call for this Bubble Cycle because it knows that this bull is dying; that insiders still have massive amounts of stock winnings to unload; and that the clock is fast running out. The expiring clock is evident in the S&P 500’s one-year round trip to nowhere. Despite the fact that the Fed has ponied-up a stick save at every single meeting this year, the market’s 27 separate efforts to rally have all failed for the simple reason that the jig is up.

According to Bank of America, the smart money is taking advantage of this latest rebound in stocks to sell to who else: the traditionally biggest sucker in the room - retail investors.

It is not just shorts buying and insiders selling. One other, quite persistent force has reemerged and contrary to the speculation that corporations are currently in an stock repurchase blackout period, the reality is anything but.

It appears even Goldman Sachs was surprised by the recent rally in US equities - especially in light of the explicit hawkishness of The Fed yesterday. In a trading note this morning, the bank says that market risks are real and rising (but are not overwhelming) as it explains, we assume with no intent at humor or sarcasm, that they "prefer to think of the recent equity rally as 'macro-free' rather than 'low quality'," reiterating their view of the cycle and of markets as "fundamentally upbeat." They do, however, admit over the last month, the likelihood of a drawdown in the US equity market further increased, and remains at mildly elevated levels.

Back at the beginning of 2014 - when commercial traders were net long nearly 40,000 options and futures contracts on the US long bond - it marked the peak in yields and preceded a 13 month rally in bonds that took 30-year treasury rates from 4% to 2.25%. Now, as Gavekal Capital's Bryce Coward notes, the commercial traders, aka "smart money," were net long about 61,000 contracts, or 50% more contracts than the peak in 2014. If recent history is any guide then a 1 handle on the 30-year treasury bond could be a reality!

No, Ben S. Bernanke will be someday remembered as the world’s most destructive battleship admiral. Not only was he fighting the last war, but his whole multi-trillion money printing campaign after September 15, 2008 was aimed at avoiding an historical Fed mistake that had never even happened!

Every day when you flip on the media, there is someone telling you that now is the time to "buy" into the market. Of course, if you are buying, then who is selling? The only "net buyers" of equities this year have been "individuals," while "professional" firms have been "net sellers." This is the epitome of the classic "smart money/dumb money" analysis where individuals are used by institutions to offload positions that are no longer optimal. The question is with corporate profits and earnings declining, weak economic data, and the threat of tighter monetary policy - will individuals once again be left "holding the bag" while institutions derisk portfolios in advance of the next decline?

Last week, in the aftermath of dovish announcements by first the ECB and then the PBOC, the S&P500 jumped another 2.1% rising to its best level since early August. But who was buying? We now know who wasn't: according to BofA "BofAML clients were net sellers of US stocks for the third consecutive week, in the amount of $1.7bn. Similar to in the prior two weeks, institutional clients, hedge funds, and private clients alike were all net sellers."

Why is the deal particularly notable? Because Zell has traditionally had a very keen nose about such things as "market peaks": the 74 years old is credited with calling the top of the real-estate market in 2007, when he sold another of his companies, Equity Office Properties Trust, to Blackstone for $23 billion. Soon after, the commercial-property market crashed as prices fell and debt defaults surged when it became apparent that subprime was not contained.

Following the latest hedge fund underperformance, it is no longer possible to ignore the obvious:in the year in which central banks will unleash the greatest amount of liquidity in the "markets" in history, and where we have seen at least 77 easing steps taken by global central banks, hedge funds are poised to record their worst performance since 2011, according to JPM.

In August, hedge funds blamed risk-parity funds for their dramatic underperformance. In September, the underperformance continued however this time, with risk-parity funds supposedly buying stocks, one can't blame them. To be sure, some such as Ackman whose 20 million shares of Valeant are hurting badly, will blame the Martin Shkrelis of the world for the biggest biotech tumble in years, but others may have to bite the bullet and admit it is their own lack of ability to come up with alpha in a centrally-planned "market" that is the reason.

Since the 2008 crash there has been much talk about how the fundamentals have not been dealt with and the fact that the can has only been kicked down the road. Political mavericks and commentators such as Ron Paul have frequently pointed out that nothing has really changed and that we are heading for even bigger disasters ahead if we continue to play ostrich... The truth is that we never left the economic downturn – we are currently in a period of manipulation that’s sole purpose is to mask the fact that there has not been a boom (or recovery if you like) to trigger the next bust.