One of the more prevalent myths in recent weeks is that just because everyone who manages money hates Europe, which recently entered a triple-dip recession if one excludes the "contribution" to GDP from hookers and blow, then it must be a good buy. After all, the only strategy that has worked like a charm under central-planning is BTFD, no further comment necessary. In fact, it was JPM itself that two days ago gave the world 5 reasons to buy Europe [9] and Sell the US (the main of which was hope that the ECB would finally start buying everything that isn't nailed down at something more reasonable than the €3Bn/week snail's pace of covered bond monetization).
Which is why the BTFDippier of the fast money is already rotating into a long-Europe mode: their entire thesis is that sooner or later the whales will have no choice but to follow the momentum chasers right back into Europe, because where else are they going to go: in the "safety" of the S&P's 19x GAAP P/E?
In theory this would be a great strategy, if only in a world in which nobody actually does any fundamental homework and the only thing that matters is frontrunning the next great sucker. In practice, it is fatally wrong.
As the following observation from hedge fund Lyxor shows, while CTA and momentum strats have indeed bailed on Europe in recent months, the so-called smart money, the "global macro" funds never left.
Dispersion among strategies remains high, with CTAs leading the pack. In terms of positioning, momentum players recently turned short European equities (see chart). This is in stark contrast with discretionary managers, which remain long European equities. But the underperformance of Global Macro managers versus CTAs this year does not bode well for European equities.
L/S Equity is the worst performing strategy. Most of the disappointment came from European funds which suffered from their short exposure on energy services names (see page 4). US managers fared better as they held onto their long positions on retailers before Black Friday. Despite this, they failed from fully capturing the market rebound on the back of their low exposure to the energy sector, which experienced an unexpected rebound this week.
So all those momos hoping that just because they are doing what nobody else has possibly thought of, i.e., investing in beaten down markets, in hopes of frontrunning bigger investors, we have bad news: the only thing momo traders will be frontrunning is each other. And that, as CYNK most recently showed, always ends in tears.
