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When 'Sneaky' Long Isn't So Sneaky
Via Peter Tchir of TF Market Advisors,
I’m back from the snow and am wondering where all the bears went? I cannot find more than one person willing to be outright bearish. What is particularly strange is that the reasons most people are bullish seem to have little, if anything to do with fundamentals – either macro or micro. The reason for being long that is closest to being “fundamental” is that Europe is muddling through. I’m not sure Europe is muddling through, but in any case, wasn’t the bullish case for US stocks that we were decoupling? Conspicuously absent as a reason to be long is earnings.
It seems as though everyone is reasonably long (though not fully committed), but thinks everyone else is underweight. It really feels like the “consensus” is that everyone else is underweight so you better be long for when that money comes into the market.
Where is this “money on the sidelines”? Maybe we get it. Maybe that flow comes, but from where?
Most hedge funds are now long. They can always get longer by deploying their remaining cash, or by leveraging up (becoming increasingly common in High Yield as the only way to generate 10% after fees is through leverage or buying real story credits). Hedge funds also always act as though they are fully leveraged, they have limited tolerance for losses and cut on any down move. To the extent they have caught most of this year’s rally they have room to buy on dips for now, but most funds seemed to miss some of the early strength and only got fully committed once SPX broke 1300, so they aren’t sitting on much of a cushion.
So hedge funds, can always get longer, but it seems as though they are all long and are extremely sensitive to returns as they attempt to grow AUM and the start of the year will be key.
What about retail? Won’t the fund flows reverse? There is a great deal of conviction that retail will reverse their trend of selling equities and actually start buying. Maybe the 1% doesn’t actually know anyone named “retail” but I don’t get a sense that anyone out there is going to be chasing returns. There are 3 key reasons that I don’t see this coming back any time soon.
Retail is sick of the market. Retail doesn’t trust the market and they are smart enough to know that it is being propped up by governments and central banks – they don’t know exactly how it is being propped up, but they know it is artificial and aren’t about to chase something that requires that much government support to stay up.
The traditional allocation model that Wall Street has peddled for years is flawed. The weighting for stocks was always too high (70% or 80% allocation recommendations were common) and what was considered investible money had little to do with savings (no focus that investible assets should have been assets minus debt).
Why would an investor go back to 70% or 80% in stocks? In terms of building a reasonable portfolio, bonds were always underweight. Part of the problem is the difficulty in managing a bond portfolio. Mutual funds were the primary way to get access to the bond market. While mutual funds remain a good way for retail to invest in bonds, the credit ETF’s have made it far easier for investors to allocate money to fixed income. It seems like there are about 20 people pitching “dividend champions” for every person pitching high yield which is just too high. Yes, the dividend stocks have more upside, but they also have more downside. Not only can the dividend change, but the equity is subordinated to debt. Stocks (including dividend stocks) have a place in any portfolio, but bonds do too. Bonds provide a stream of income at a senior level of the capital structure. Whether the allocation should be more towards sovereign debt, investment grade, or high yield, will change over time, but I believe the allocation to fixed income products is permanent. It isn’t just performance chasing, or risk aversion, it is smarter diversification (at least for investors ). After the experience of QE and non-stop talk about money printing, commodities have earned a place in investor’s portfolios. Again, the mix will change between hard and soft commodities and precious metals, but the reality is these belong in investor’s portfolios and I don’t see the allocation returning to where it was (basically 0). So the asset allocation has changed, but in spite of all the crying that investors are fleeing stocks, and will regret it, I suspect that the allocation model of smaller portion in equity with meaningful, permanent allocations to fixed income, and to a less extent commodities, is here to stay as it actually makes sense.
The other change is that small investors are fully aware of the pain of debt. A couple of years ago, someone with $50,000 in “savings” and $20,000 in credit card debt would put 80% of the 50k into stocks. Why was their “investible” savings ever considered 50k and not 30k? Who knows, but investors are much more aware of their debt obligations and are either paying that down or keeping much more cash on hand than in the past so they can weather any storm. Again, this makes perfect sense to me and is how it should have been all along. I don’t see people ignoring debt obligations any time soon, so what people consider “investible” assets has decreased.
I think it is taking time for this allocation process to play out. There will be swings in both directions, but there has been a long term shift in what investors consider assets that can be invested, and how those assets will be invested. Retail investors may pile back into stocks, but they will likely want to see real signs of sustainable growth and not feel like they are being pushed into some artificially manipulated game they can’t understand or can’t win at.
Finally there is all this cash on corporation’s balance sheets. Balance sheet repair and record amounts of cash on corporate balance sheets are a constant refrain. My concern with this argument is that the cash is not evenly distributed. A large portion of the cash is sitting on the balance sheets of large cap tech companies. Figuring out how they will use it is important, but at the same time, pretending the cash is available across all industries is wrong. It is also worth noting that companies like MSFT have been issuing bonds steadily since 2008 and even Google decided to borrow money. Net cash isn’t as strong a story as cash, and the fact that the cash is relatively concentrated in a few companies, and in many cases offshore, makes the potential for this money to help the broad market less likely than may already be built in.
The other consensus trade had been that the US would decouple from Europe. Back on December 15th we first wrote that everyone seemed to be bullish the US and bearish Europe and wondered if it wasn’t time to Go Long Europe, Short US?
Since then the trade has been up and down but is currently up by 2.5% to 3% depending on whether you took currency risk. Not a great performer, but on the other hand given how convinced everyone seemed that the US would outperform it is worth paying attention to, especially as everyone now seems to be getting long.
Will the real bear please stand up? If you look around your trading floor and ask anyone who isn’t at least 50% long to stand up I think you will see a lot of people remain seated, wondering why more people aren’t standing up. The conversations are far more bearish than the positioning.
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Sneaky bastages.
The jig is up....it's QE to infinity.
If you think that, you should be long equities.
For a brief time....then you'd want to pivot into gold.
That's if you can make the move fast enough. Why not just go straight to gold?
Guilty as charged....quite some time ago in fact.
Sufficient gold gets you into the tax radar.
ASE is liquid and you can just pile em up or cash em almost at whim as long you keep in mind your low and high minus costs.
Exactly, who actually thinks theyre smarter and faster than Eccles supercomputers and the central banksters? People should be taking this move and selling hard into any strength....only a jackass holds a 20% market upswing against all reality on zero volume and holds on for more.
The bears will be in permanent hibernation until the Fed is abolished.
All bad news is priced in, all good news is not. Welcome to the new free market.
I think there are just as many bears but most feel the game is rigged.
What do you mean think!
If the FED were abolished they would just have to invent something else to do their bidding.
Fundamentals is like reading a turd.
THe market makers want to make it bullish. They need the capital, they want to restore confidence to sell more suckers in. They may trying to kill off more hedge funds to become the pack leaders, of a smaller pack, where they won't give two shits if there are retail investors or not.
indeed. when your only tool is a hammer, every problem is a nail.
think about this and place your bets: how will a paniced central bank behave? they certainly can print to infinity and run the real risk of letting the inflation genie out of the bottle. imagine zirp, floods of liquidity, and commodities going north faster than stocks. to curb a scenario, rates go up and banking sector cant 'earn' their spread.
first deflation then hyperinflation then supercrash. different investments will go well at different times.
disinflation helps me forget about loosing money
...and basic Englsh vocabulary.
VIEW FROM THE SIDELINES:
I'd rather just pay somebody to beat me over the head with a lead pipe than to buy even one share of ANY equity...
I'm bearish. Make that two.
How can everyone even be underweight? The aggregate number of 'risk-on' shares is more or else constant, and they all belong to somebody. The only thing that changes is the price per share and cash parked on the sidelines.
I'm short and getting my ass kicked, 3 more weeks at this rate and my retirement will be wiped out.
What pisses me off is it's gubbermint bailing out others at my expense causing the losses .
You were expecting something different?
Well... as soon as you're wiped out and on the streets... The jackboots will be along to round you & the other dregs of society up and send you off to a FEMA camp...
So you have THAT to look forward to!
Uhhh... isn't your "investment strategy" the reason for the losses?
Nope, wouldn't be losses without govt interventions.
But I do take responsibility for the results, it's just some of us are more equal than others know what I mean?
Sorry to hear dude, sorry to hear.
And I feel your pain as well - cash CD rates are down, and good quality corporate bonds are excessively overpriced now. And how do you justify investing in a market where the fundamentals don't match the share price?
Can you at least get into a new income source for your retirement?
"how do you justify investing in a market where the fundamentals don't match the share price?"
Exactly, ever since late 2008 markets have been dominated by worldwide govt manipulations.
"Can you at least get into a new income source for your retirement?"
I'm still full time emloyed but was planning on semi-retirement in a few months.
I still have some strategies for when volatility spikes up, hopefully I can capitalize on them when it does.
It's all the theta burn marks on my ass from holding SDS so long.
The dreaded Burn Marks
DONT ever hold Levered for more than a week. When you see a profit TAKE it
And to the poster above you, i Had to much skin in this game that now i'm a Cenobite......
Good luck...
I think I'm more of a trilobite.
It looks like the best trading strategy is really the one Tyler mentioned the other day. Long gold (or silver) daytime (US), short overnight; use the timing of market-rigging to your advantage.
Or was it short daytime, long overnight? Anyhoo, like any strategy, it will stop working when enough punters pile in.
Hey, Petey...as the Italians say in these here parts: "how u doin"? Anywho...the strategy put forward by Uncle Salami was about as straightforward as they come: the biggest counter-cyclical fiscal play since George Washinton crossed the Deleware! I must say compared to that disaster this one looks pretty good. Still...anemic is the best that can be said...and it starts at the top! Tome Keene pointed it out since day one: "there's no focus on jobs here???!!!" In other words "hey, phuckers! you 'saved us from the Great Depression' now you don't care one phuckin' bit about jobs???!!!" That's how i would have put it (since they did not save "us" from the Great Depression at all of course.) having said that..."i have a handicap." people are still wondering "is it his brain or his mouth?" but with me there's nothing lost in translation...at least not anymore. so we have the wonderfully put "jobless prosperity" of David Rosenberg fame. obviously investors will take that! the question you need ask Pete is "how will the voter react" and far more importantly "the military." the USA is not merely "on the road to war"--we're carreening wildly towards it. if not for General Petraeus and the Joint Chiefs this is what American foriegn policy would look like:
http://www.youtube.com/watch?feature=player_detailpage&v=9tgxIWgJ_DE
What are you going to do hold a gun to a corporation and say, "HIRE or I SHOOT"?
No Demand = No Jobs. You first have to have demand and how you gonna get that when so many are in debt?
Do away with the FICA tax and make up some of the difference with more taxes on the rich. They have been skating by for too long. Then when people are more comfortable with the debt load they have they will spend more and the hiring will begin.
Have a rifle ready for the bears. Always.
http://maxkeiser.com/2012/01/24/so-this-deal-amounts-to-a-transfer-from-pension-funds-and-other-fixed-income-investors-to-the-banks-at-the-administration%e2%80%99s-instigation/
and, once they get the pensions, they raid bank accounts! it's no accident the FDIC raised deposit insurance! hint, hint!
We are out of the FDIC shit.
Now the Credit unions.... They are being good to us.
Man, its like deja vu all over again.
Ive been saying forever that ALL theyre doing is setting up pension and 401K's and all of it to seize it all one morning when everyone is lulled into total complacency by the apparently bulletproof kevlar markets. One morning its going to be real ugly around this place. And if people think that surely cant happen, just look at MF GLobal.
People should be selling equity and bond paper, all worthless, while they still can and buying what they need...not sitting and counting in more gains for themselves thats just jackassery.
There will be no stock market collapse as long as Plunge Protection Team has still money in the sack or the selling will overwhelm the PPT.
You make it sound like theres some kind of mighty battle going on. I dont think so at all, they will raise it, and they will pull the rug out whatever morning they feel like it. I mean seriously we've had at least 1,500 DOW points on zero volume in the last few months....who do we think is doing that, housewives buying MOMO stocks with their leftover butter money?
Oh agree. They have a finite amount of money. Operationally seems that the primary dealers do this work the first 45 minutes and last 45 minutes. Six freaking times so far they sold at 1300 and put a floor at 1100. But this time I'm affraid that there's not many idiots to sell the holdings to, since as you said volume has been horrific.
That is a scary reality that all the uberbulls should be very concerned about....who exactly do they think theyre going to sell to in an empty market?
They may keep buying just hoping suckers will arrive. Look at BAC and other financials. BAC has gained 40% in 4 weeks. Stop and think, the crapppppppppppppppiest bank in the globe, gained 40% in 4 weeks.
I think they're about to run out of money because like this they will end up owning all the market and you know, it becomes bottomless if only few are buying everything and nobody to sell to. Remember after Lehman?
Peter you ever consider its not organic 'buyers and sellers' out there in the no-volume market, but simply the FED doing most all of the lifting?
'Bears and bulls' discussion today is just silly.
The markets are controlled by the big money with their connection to political leaders. It's up to the average investor and hedge fund manager to know what the others are up to.
Reasons for being bullish the last few years had nothing to do with fundamentals but rather the amount of money being printed or the amount of accounting standards being changed to make balance sheets look bullish.
This whole charade is to mask the death spiral that the US and European economies are experiencing.
Remember folks, we are still in bizarro land with no light at the end of the tunnel.
Thanks to ZH we can know what the others are up to.
Isn't this what a bubble looks like?
"Don't fight the Fed" is about more than interest rates. Looks like we're gonna have to suit-up here.
"Retail is sick of the market. Retail doesn’t trust the market and they are smart enough to know that it is being propped up by governments and central banks – they don’t know exactly how it is being propped up, but they know it is artificial and aren’t about to chase something that requires that much government support to stay up."
Amen. My feeling since 2010. And worse still - what haven't governments taken into account while propping it up?