After snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple Inc. to IBM Corp. just put on the brakes. Announced repurchases dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show. “If the only meaningful source of demand in the market is companies buying their own shares back, then what happens if that goes away?” asked Brad McMillan, CIO of Commonwealth “We should be concerned.”
One recurring question over the past few weeks has been "who is buying" stocks in a world in which not only the smart money, but everyone else too is selling. The latest Lipper data will not provide the answer because as BofA reports, in the latest week there was another $7.4bn in outflows (the 5th straight week) driven by $4.8bn in mutual fund outflows and $2.7bn ETF outflows, leading to a $44bn equity exodus past 5 weeks, which as Michael Hartnett points out is the "largest redemption period since Aug’11", or when the US downgrade sent US stocks into a bear market tailspin.
While company officers - who have given up on major stock upside as a result of busted M&A - and investment bankers are lamenting the bursting of the M&A bubble, some of the biggest losers are on the buyside, where merger arbs have seen billions in paper profits turn into billions in paper losses in moments upon the announcement of deal termination. Indeed, broken deals have whipsawed hedge funds that focus on merger arbitrage. As the NYT poetically puts it, according to one "arb" the current mood of the industry: "Every day is like showing up unsure of whether to wear a helmet or a diaper."
"Last week, during which the S&P 500 fell 0.4%, BofAML clients were net sellers of US stocks for the 15th week, in the amount of $1.3bn. This has been the longest uninterrupted selling streak in our data history (since ’08)—previously the longest streak (in late ’10) was 12 weeks."
The pain today is especially acute for a lot of hedge funds, because as Goldman reminds us after the spectacular blow ups of Valeant and Allergan, and recently, the plunge in uber hedge fund hotel AAPL, Endo itself is one of the stocks that has the highest hedge fund concentration in the S&P.
Despite an unprecedented amount of monetary easing taking place at the Bank of Japan, the yen has - since the middle of 2015 - been on a consistently strengthening trend versus the USD. As paradoxical as it may seem in a period when the Fed talked about, and then did raise interest rates coincident to the BOJ firing off ever more arrows, the strengthening yen has been the reality. That reality may be about to take a breather, though, as too many investors have moved to the same side of the boat in betting on yen appreciation while the “smart money” is net short the yen.
The pain for hedge funds is only just starting: Chris Ailman, who runs investments at CALSTRS, said in a Bloomberg Television interview from the Milken conference that the hedge fund industry’s two-and-twenty fee model is “broken” and “off the table” for large institutional investors. And then the latest blow to the suddenly struggling industry came overnight from none other than the firm which started the bailout regime, AIG, which following its earnings report announced that the insurer - burned by losses on hedge funds - has submitted notices of redemption for $4.1 billion of those holdings. “As of today, we have received $1.2 billion of proceeds from those redemptions."
"Last week, during which the S&P 500 fell 1.3% in its biggest weekly decline since early Feb., BofAML clients were net sellers of US equities for the 14th consecutive week, in the amount of $2.8bn. As we noted last week, this has been the longest uninterrupted selling streak in our data history (since ‘08)—previously the longest streak was 12 weeks (in late ‘10)."
"In April, the Sell Side Indicator — our measure of Wall Street’s bullishness on stocks — fell by 1ppt to 51.9, its lowest level in over a year. This was the indicator’s biggest one-month drop in the past two years, as the S&P 500 rallied 15% from the February lows through mid-April.... While sentiment has improved significantly off of the 2012 bottom, today's sentiment levels are still below where they were at the market lows of March 2009."
Courtesy of the latest report by JPM's Prime Brokerage, we now know two reasons why there was such a large move in April. Hedge funds accelerated the pace of ETF covering, only this time single stock names have also joined the party. In other words, ETF covering is removing hedges, and single stock covering is getting HF's into a net long position.
While one can blame algos and "macros" for snapping up oil the commodity, as Morgan Stanley did recently, another question is who is buying energy stocks to a level that makes little sense from a forward P/E multiple. The answer may have been revealed earlier today in Bank of America's breakdown of what smart money investors were doing. While we already reported that for the 13th, record, consecutive week, hedge funds, institutions and private clients were unloading risk exposure, one other group of client were buying energy stocks in record amounts: Pensions.
As BofA reported overnight when looking at the latest trading activity by its smart money clients, "BofAML clients were net sellers of US stocks for the thirteenth consecutive week last week—making it the longest uninterrupted selling streak in our data history (since 2008) as clients continued to doubt the market rally."